Daily Market Update – November 11, 2014

 

  

 

Daily Market Update – November 11, 2014 (9:00 AM)

Yesterday, in what is otherwise a slow week, so much attention was placed on the Alibaba manufactured holiday called “Singles Day.”

It’s a day that single people are supposed to take the time and present a gift to themselves. Of course there are those who might believe that being single is gift enough, but nonetheless, it is a perfectly materialistic occasion that would have the leaders of the 1948 Revolution apoplectic.Having actually celebrated a 30th wedding anniversary yesterday, coinciding with Singles Day, somehow I didn’t receive anything for my troubles, so maybe I should have just following the crowd and gifted myself.

Today, in the United States, it is Veterans Day, where we honor those who gave the gift of freedom rather than honoring ourselves with a gift.

I’m not quite certain why stock markets are open, as the bond markets and banks are closed.

But they are and on those few days a year that the credit markets are closed and stocks do trade, those are usually fairly slow trading days.

The morning’s futures seem to be following the same path as yesterday’s, as that listless opening was the pattern throughout the day.

The only thing of note yesterday was the marked reversal in energy prices in the late morning which eliminated the sizeable gains in the sector with moderate losses. Insofar as energy is a significant portion of the S&P 500 it again limited those gains. Since the slide in energy started sometime in July 2014, the DJIA and S&P 500 have performed identically, gaining 3.1%, with the S&P 500 being held back due to its heavier energy representation.

In the meantime, any benefit to be gained from lower energy prices won’t really become apparent until the next quarter’s earnings are reported.

For now, ever since Goldman Sachs’ call for $75 crude, the markets have been relatively stable and I think may have bottomed, although there are further calls going as low as $50.

As an unusually early start to winter begins to sweep across parts of the nation the excess supply over demand may shift a little bit, but at these prices there is also bound to be those seeking bargain pricing and speculating on an eventual rebound.

Ordinarily, the thinking would be that low energy prices would spur other businesses to ramp up their activity, seeing it as a perfect time to be able to increase their margins.

That would usually lead to increased employment, increased spending and increased earnings.

But that doesn’t appear
to be happening yet.

Maybe businesses are skeptical of low energy prices remaining low and continue to be cautious, but the reality is that the markets and the economy tend to do better when oil prices are increasing, as long as that increase is demand driven.

Maybe they just don’t see consumer demand increasing for discretionary items.

Now, we’re in the unusual position of having too much energy and not enough demand. Hopefully, whatever is saved in gas prices and heating prices will become part of an increase in discretionary spending.

We’ll find out later this week whether retailers have received any benefit at all from the increasing employment statistics over the past 3 months, but despite good numbers for the past year, there has continued to be a reluctance to spend.

Something is just qualitatively different about this recovery and the typical patterns just aren’t materializing or are just taking much longer to become evident.

Hopefully retail will bring some good news this week and energy pricing will moderate as consumer demand leads to greater overall economic activity.

 

 

 

 

 

 

 

Daily Market Update – November 10, 2014 (Close)

 

  

 

Daily Market Update – November 10, 2014 (Close)

Last week there was plenty of reason to believe that the market would do something to make either bulls or bears happy.

There were potentially 3 big stories for the week, each of which could have moved the market in a big way. As it would turn out the market didn’t care very much and did little of anything, other than acted a little surprised by the election results that were very widely expected.

This week there’s very little on the economic calendar that could potentially move markets and as unpredictable as the world has always been, there doesn’t appear to be any particular flash point this week, as some signals being sent on Friday regarding a Russian incursion into Ukraine haven’t been validated.

So, logic might suggest that this morning’s listless futures trading would characterize the week ahead, but that kind of logic didn’t fare too well last week and there’s not much reason to ever expect that quiet futures trading has any great predictive power.

For now, that doesn’t really matter too much.

Ultimately, what forms action is the availability of cash, the need to raise cash or the need to preserve cash.

The reality is that the market is still at new highs and the momentum has clearly been in a single direction for the past 3 weeks, although it did slow down just a little bit last week. Historically, the last 2 months of the year outperform the preceding 10 months, especially in years that hedge funds are likely to be trailing the broad market, as they are again this year.

Today would end up just adding to those new highs. Not by much, but still, a little higher than ever before.

With little to lose, especially if investing other people’s money and not their own,  I expect that hedge funds may fuel that momentum, just as I think they have been already causing the options market to see less volume, as they take hedges off in an effort to go for the fences.

With some more cash in hand after some assignments last week I’m not  opposed to adding new positions in order to take advantage of any potential continuation of the upward momentum, but I would still like to be able to generate whatever income possible from additional call sales, despite the realization that it may continue being more difficult to rollover positions as sellers are fewer or asking relatively exorbitant premiums as trying to close out positions near the week’s end.

With a few positions scheduled to expire this and the same next, the low volatility makes it unlikely that I would be looking at expanded weekly options unless there is an earnings report or a dividend involved.

That was definitely the case with the purchase of Mattel today and the use of the December and may be reason to rollover the additional Sinclair Broadcasting option sold today on the new shares picked up.

I expect this week to be relatively light in personal trading, but fortunately there are some dividends this week as well. One of those, International Paper, may be at risk for early assignment, but is also a potential choice for addition of a new position this week. I may look at opportunities to roll that existing position over in order to keep the dividend, but like Intel the previous week the traders just weren’t there to make a deal. With International Paper there will still be two more days to try and get a trade done, but the participants are few and far between as are the spreads.

As long as it takes 2 parties to complete a trade that’s an obstacle that I hope won’t last very long.

 

 

Daily Market Update – November 10, 2014

 

  

 

Daily Market Update – November 10, 2014 (8:45 AM)

Last week there was plenty of reason to believe that the market would do something to make either bulls or bears happy.

There were potentially 3 big stories for the week, each of which could have moved the market in a big way. As it would turn out the market didn’t care very much and did little of anything, other than acted a little surprised by the election results that were very widely expected.

This week there’s very little on the economic calendar that could potentially move markets and as unpredictable as the world has always been, there doesn’t appear to be any particular flash point this week, as some signals being sent on Friday regarding a Russian incursion into Ukraine haven’t been validated.

So, logic might suggest that this morning’s listless futures trading would characterize the week ahead, but that kind of logic didn’t fare too well last week and there’s not much reason to ever expect that quiet futures trading has any great predictive power.

For now, that doesn’t really matter too much.

Ultimately, what forms action is the availability of cash, the need to raise cash or the need to preserve cash.

The reality is that the market is still at new highs and the momentum has clearly been in a single direction for the past 3 weeks, although it did slow down just a little bit last week. Historically, the last 2 months of the year outperform the preceding 10 months, especially in years that hedge funds are likely to be trailing the broad market, as they are again this year.

With little to lose, especially if investing other people’s money and not their own,  I expect that hedge funds may fuel that momentum, just as I think they have been already causing the options market to see less volume, as they take hedges off in an effort to go for the fences.

With some more cash in hand after some assignments last week I’m not  opposed to adding new positions in order to take advantage of any potential continuation of the upward momentum, but I would still like to be able to generate whatever income possible from additional call sales, despite the realization that it may continue being more difficult to rollover positions as sellers are fewer or asking relatively exorbitant premiums as trying to close out positions near the week’s end.

With a few positions scheduled to expire this and the same next, the low volatility makes it unlikely that I would be looking at expanded weekly options unless there is an earnings report or a dividend involved.

I expect this week to be relatively light in personal trading, but fortunately there are some dividends this week as well. One of those, International Paper, may be at risk for early assignment, but is also a potential choice for addition of a new position this week. I may look at opportunities to roll that existing position over in order to keep the dividend, but like Intel the previous week the traders just weren’t there to make a deal.

As long as it takes 2 parties to complete a trade that’s an obstacle that I hope won’t last very long.

 

 

Dashboard – November 10 – 14, 2014

 

 

 

 

 

SELECTIONS

MONDAY:  A quiet futures trading session to begin a week that has little scheduled on the economic front and with earnings winding down should mean a sedate kind of day, just like last week’s series of events should have meant a boisterous week.

TUESDAY:     .Another day that looks to follow yesterday’s relatively listless trading, perhaps even more so as banks and bond markets are closed in honor of Veterans Day

WEDNESDAY:  The market appears to be a loittle more negative than the past 2 days, as trading is getting ready to begin, but still nothing to fan flames in either direction is on the horizon this week

THURSDAY:    Wal-Mart, Macys, JC Penney give mixed results. It’s not just about profits, but revenues as well and revenues are universally increasing, even as profits may be higher, leading to questions of consumer participation and the underlying strength of the economy

FRIDAY:  Another quiet day to end a very quiet week, that still somehow made new records, appears to be today’s fate

 



 

                                                                                                                                           

Today's TradesCash-o-Meter

 

 

 





 “SNEAK PEEK AT NEXT WEEK” APPEARS ON FRIDAYS

Sneak PeekPie Chart Distribution

 

 

 

 

 

 

 

Weekly Summary

  

Weekend Update – November 9, 2014

Pity the poor hedge fund manager.

For the second consecutive year hedge fund managers are, by and large, reportedly falling far short of their objectives and in jeopardy of not generating their performance fees. 

We all know that those mortgages aren’t going to pay themselves, so their choices are clear.

You can close up shop, disown the shortfalls and try to start anew; you can keep at business as usual and have your under-performance weigh you down in the coming year; or you can roll the dice.

In 2013 it may have been easy to excuse lagging the S&P 500 when that index was nearly 30% higher while you were engaging in active management and costly complex hedging strategies. This year, however, as the market is struggling to break a 10% gain, it’s not quite as easy to get a bye on a performance letdown.

The good news, however, is that the 2014 hurdle is not terribly far out of reach. Despite setting new high after new high, thus far the gains haven’t been stupendous and may still be attainable for those hoping to see daylight in 2015.

The question becomes what will desperate people do, especially if using other people’s money knowing that half of all hedge funds have closed in the past 5 years. Further more funds were closed in 2013 and fewer opened in 2014 than at any point since 2010. It has been a fallow pursuit of alpha as passivity has shown itself fecund. Yet, assets under management continue to grow in the active pursuit of that alpha. That alone has to be a powerful motivator for those in the hedge fund business as that 2% management fee can be substantial.

So I think desperation sets in and that may also be what, at least in part, explained the November through December outperformance last year as the dice were rolled. Granted that over the past 60 years those two months have been the relative stars, that hasn’t necessarily been the case in the past 15 years as hedge funds have become a part of the landscape.

Where it has been the case has been in those years that the market has had exceptionally higher returns which usually means that hedge funds were more likely to lag behind and in need of catching up and prone to rolling the dice.

While the hedging strategies are varied, very complex and use numerous instruments, rolling the dice may explain what appears to be a drying up in volume in some option trading. As that desperation displaces the caution inherent in the sale of options motivated buyers are looking at intransigent sellers demanding inordinately high premiums. With the clock ticking away toward the end of the year and reckoning time approaching, the smaller more certain gains or enhancements to return from hedging positions may be giving way to trying to swing for the fences.

The result is an environment in which there appears to be decreased selling activity, which is especially important for those that have already sold option contracts and may be interested in buying them back to close or rollover their positions. In practice, the environment is now one of low bids by buyers, reflecting low volatility but high asking prices by sellers, often resulting in a chasm that can’t be closed.

Over the past few weeks I’ve seen the chasm on may stocks closed only in the final minutes of the week’s trading when it’s painfully obvious that a strike price won’t be reached. Only then, and again, a sign of desperation, do ask prices drop in the hopes of making a sale to exact a penny or two to enhance returns.

So those hedge fund managers may be more likely to be disingenuous in their hedging efforts as they seek to bridge their own chasms over the next few weeks and they could be the root behind a flourish to end the year.

Other than a continuing difficulty in executing persona trades, I hope they do catch up and help to propel the market even higher, but I’m not certain what may await around the corner as January is set to begin.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. 

I already own shares of Cypress Semiconductor (CY) and am continually amazed at the gyrations its price sees without really going very far. In return for watching the shares of this provider of ubiquitous components go up and down, you can get an attractive option premium that reflects the volatility, but doesn’t really reflect the reality. In addition, if holding shares long enough, there is a nice dividend to be had, as well. Selling only monthly call options, I may consider the use of a December 2014 option and may even consider going to the $11 strike, rather than the safer $10, borrowing a page from the distressed hedge fund managers.

I had my shares of Intel (INTC) assigned early this week in order to capture the dividend. I briefly had thoughts of rolling over the position in order to maintain the dividend, but in hindsight, having seen the subsequent price decline, I’m happy to start anew with shares.

Like the desperate hedge fund managers, I may be inclined to emphasize capital gains on this position, rather than seeking to make most of the profit from option sales, particularly as the dividend is now out of the equation.

I may be in the same position of suffering early assignment on existing shares of International Paper (IP) as it goes ex-dividend this week. With a spike in price after earnings and having a contract that expires at the end of the monthly cycle, I had tried to close the well in the money position, but have been faced with the paucity of reasonable ask prices in the pursuit of buying back options. However, even at its current price, International Paper may be poised to go even higher as it pursues a strategy of spin-offs and delivery of value to its investors.

With decent option premiums, an attractive dividend and the chance of further price appreciation, it remains a stock that I would like to have in my portfolio.

Mosaic (MOS) is a stock that I have had as an inactive component of my portfolio after having traded it quite frequently earlier in the year at levels higher than its current price and last year as well, both below and above the current price. It appears that it may have established some support and despite a bounce from that lower level, I believe it may offer some capital appreciation opportunities, as with Intel. As opposed to Intel, however, the dividend is still in the equation, as shares will go ex-dividend on December 2, 2014. With the availability of expanded weekly options there are a mix of strategies to be used if opening this position.

It seems as if there’s barely a week that I don’t consider adding shares of eBay (EBAY). At some point, likely when the PayPal division is spun off, the attention that I pay to eBay may wane, but for now, it still offers opportunity by virtue of its regular spikes and drops while really going nowhere. That t
ypically creates good option premium opportunities, especially at the near the money strikes.

I currently own shares of Sinclair Broadcasting (SBGI) a company that has quietly become the largest owner of local television stations in the United States. It is now trading at about the mid-point of its lows and where it had found a comfortable home, prior to its price surge after the Supreme Court’s decision that this past week finally resulted in Aereo shutting down its Boston offices and laying off employees, as revenue has stopped.

Sinclair Broadcasting will be ex-dividend early in the December 2014 option cycle and offers a very attractive option. It reported higher gross margins and profits last week, as short interest increased in its shares the prior week. I think that the price drop in the past week is an opportunity to initiate a position or add to shares.

Mattel (MAT) is a company that I haven’t owned in years, but am now attracted back to it, in part for its upcoming dividend, its option premium and some opportunity for share appreciation as it has lagged the S&P 500 since its earnings report last month.

However, while holiday shopping season is approaching and thoughts of increased discretionary consumer spending may create images of share appreciation, Mattel has generally traded in a very narrow range in the final 2 months of the year, which may be just the equation for generating some reasonable returns if factoring in the premiums and dividend.

Twitter (TWTR) continues to fascinate me as a stock, as a medium and as a source of so many slings and arrows thrown at its management.

Twitter has always been a fairly dysfunctional place and with somewhat of a revolving door at its highest levels before and after the IPO. While it briefly gained some applause for luring Anthony Noto to become its CFO, the spotlight heat has definitely turned up on its CEO, Dick Costolo.

Last week I sold Twitter puts in the aftermath of its sharp decline upon earnings release. While the puts expired, I did roll some over to a lower strike price as the premium was indicating continued belief in the downside momentum.

This week I’m considering adding to the position, and selling more puts, especially after the latest round of criticisms being launched at Costolo. At some point, something will give and restore confidence. It may come from the Board of Directors, it  may come from Costolo himself or it may even come from activists who see lots of value in a company that could really benefit from the perception of professional management.

I’m not certain how many times I’ve ended a weekly column with a discussion of Abercrombie and Fitch (ANF), but it’s not a coincidence that it frequently warrants a closing word.

Abercrombie and Fitch has been one of my most rewarding and frustrating recurrent trades over the years. At the moment, it’s on the frustrating end of the spectrum following Friday’s revelations regarding sales that saw a 17% price drop. That came the day after an inexplicable 5% rise, that had me attempting to rollover an expiring contract but unable to find a willing seller for the expiring leg.

Over the course of a cumulative 626 days of ownership, spanning 21 individual transactions, my Abercrombie and Fitch activity has had an annualized return of 32% and has seen some steep declines in the process, as occurred on Friday.

This has been an unnecessarily “in the news” kind of company whose CEO has not weathered well and for whom a ticking clock may also be in play. Over the past years each time the stock has soared it has then crashed and when crashing seems to resurrect itself.

Earnings are expected to be reported the following week and premiums will be enhanced as a result. While I currently have an all too expensive open lot of shares I’m very interested in selling puts, as had been done on nine previous occasions over those 626 days. In the event assignment looks likely I would attempt to rollover those puts which would then benefit from enhanced premiums and likely be able to be rolled to a lower strike.

However, if then again faced with assignment, I would consider accepting the assignment, as Abercrombie and Fitch is due to go ex-dividend sometime early in the December 2014 option cycle. However, I would also be prepared for the possibility of the dividend being cut as its payout ratio is unsustainable at current earnings.

 

 

Traditional Stocks:  Cypress Semiconductor, eBay, Intel, Mattel, Mosaic, Sinclair Broadcasting

Momentum: Abercrombie and Fitch, Twitter

Double Dip Dividend: International Paper (11/13)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.