Feb62016

Weekend Update – February 7, 2016

Weekend Update

If the recently deceased Harlem Globetrotters’ great player, Meadowlark Lemon had been alive today and helping the equally great band, The Byrds, re-write their classic song, it would likely get a new title.

The title would perfectly describe what this past week was a all about.

“Spin, Spin, Spin.”

Whether it was post-Iowa Caucus result speeches by the candidates or President Obama’s comments in the aftermath of Friday’s disappointing Employment Situation Report and downward revision to the previous month, it’s easy to see the spin going around and around.

No wonder the stock market is getting dizzy and dizzier, despite its heights getting lower and lower.

With confusion coming from Iowa regarding the definition of “winning” from both sides of the aisle you could easily be excused for shaking your head as the week started.

Then, when a picture of decreasing employment numbers alongside increasing jobless claims numbers was painted as reflecting an increasingly robust economy you could have been further excused for shaking your head into the week’s end.

Politicians who want an opportunity to create a legacy, as well as lame duck politicians who want to cement a legacy are very adept at spin and the ability to portray everything in terms of black and white.

The other side is always wrong and the facts are as portrayed and not as fact.

For stock investors life was much easier when only having to deal with the paradoxical association between oil and stocks.

You simply awoke in the morning and saw where West Texas Intermediate was trading and knew that the stock market would go in the same direction.

Now they’re back into having to decide whether news they hear is good or bad and whether to react appropriately to that news or paradoxically.

Of course, that would be easier if news was really presented on a factual basis and not so quickly subjected to overwhelmingly sanctimonious spin.

With the notion that evidence of a slow down in the economy would make the likelihood of further Federal Reserve rate hikes less, bad news was once again being taken as good news. The predominance of oil, however, as a factor in the market’s direction may have been obscuring some of that newly rediscovered fractured thought process.

With the market having spent the week going back and forth with numerous large intra-day moves and some large daily moves, it all came down to Friday’s trading to determine the fate of the DJIA for the week, as it had only been 34 points lower heading into the final day of trading. That week included one day with a loss of 290 points and the following day with a gain of 193 points.

If you were among those for whom confidence could have been inspired by those kind of movements, then any kind of upcoming spin could have led you in any direction.

Of course, the direction also depended on whether you are now of the increasing frame of mind that good news is bad news.

While we awaited Friday morning’s Employment Situation Report release and the DJIA had been down only 0.2%, the broader indexes weren’t faring quite as well.

The S&P 500 had already been 1.3% lower on the week and the NASDAQ 100 was down 2.6%.

With Friday morning’s release, the data, while disappointing was likely not weak enough to give cause for much celebration for those looking for good reason to dismiss the possibility of future interest rate hikes in 2016.

What may have cast a pall on the market was the Presidential spin that focused on the 4.9% jobless rate and wage growth.

If you were among those interpreting bad news as being good, you had to interpret that kind of spin as being good news.

And that can only be bad as the FOMC had certainly not closed the door on further interest rate increases in its recent statement.

While the DJIA lost an additional 1.3% to end the week, the NASDAQ 100 tacked on an additional 3.4% to its already sizable loss for the week, while the S&P 500 lost an additional 1.9%.

Good luck trying to spin that as we begin to prepare for the coming week.

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

Having suffered the direct blow from decrease oil prices and the indirect blow from what those decreasing prices have wrought upon the market, it’s not easy to consider adding another energy position.

Who can begin to count the number of times over the past 15 months that it didn’t look as if we had hit a once in a generation kind of rock bottom bargain price for a barrel of oil?

With ConocoPhillips (NYSE:COP) having just slashed its dividend, you do have to wonder whether British Petroleum (NYSE:BP) could be next.

WHile its dividend this week is presumably safe, it’s harder to make that case for the remainder of 2016 if rude prices continue to test lows. In its defense, British Petroleum is better diversified than ConocoPhillips is after having spun off its refining assets a few years ago, but the risk of insufficient cash flow is still there.

What is also there is a very nice option premium in reflection of further risk.

Looking at the option premiums, I am inclined to look at more than a weekly option contract, as is normally my approach for positions going ex-dividend during the week.

The exaggerated volatility of the past 2 weeks is really enhancing the premium and the dividend is extraordinary, while likely having more safety than the option market may be surmising.

Also ex-dividend this week are DuPont (NYSE:DD) and International Paper (NYSE:IP).

While DuPont has gone considerably higher in the past two weeks, I believe that in the absence of general market weakness it can recapture much of what had been lost following the announcement of a complex deal with Dow Chemical (NYSE:DOW).

With some strength also seen in Dow Chemical recently, I took the opportunity to sell calls on uncovered shares and is a portion of the strategic theme for this week, I used an out of the money strike price and a longer term time frame than I would normally consider in an effort to lock in some higher volatility driven option premiums and to regain lost share value.

The same approach holds for if considering a purchase of International Paper.

While it’s recent earnings report exceeded expectations and met whisper numbers, its stock price trend for the past year has been decidedly lower and lower, even in the absence of structural or operating issues.

While its payout ratio is getting uncomfortably high, the generous premium should continue to be safe and I might consider locking in the premium for a longer term, perhaps to even encompass an additional ex-dividend date in May 2016, although upcoming earnings would also have to be considered if doing so.

For that reason, I might even consider going out to a July 2016 expiration in the anticipation that some of that lost luster in its price will be regained by then,

Although not ex-dividend this week, EMC Corporation (NYSE:EMC) is among some of those fallen angels in the technology sector and which are beginning to celebrate their newly found volatility with some enhanced option premiums.

Somehow lost in the story with EMC is that there is a buyout offer that appears to be on track for completion and at a price that is substantially higher than Friday’s closing price.

I’m not one to play in the same arena with those expert in the science and art of arbitrage, but this one seems to offer some opportunity, even as the deal isn’t expected to close until the end of the year.

While there may still be regulatory hurdles head, EMC appears to be a willing partner and while awaiting a decision, there are still some dividends to be had.

For that reason, I might consider buying shares and selling a longer term and significantly out of the money option contract. Since I also already have existing shares at $30, I might consider combining lots and selling calls at a strike below the cost of the original lot, not counting accumulated premiums and dividends.

Finally, I just don’t think that I can any longer resist buying shares of eBay (NASDAQ:EBAY) at this level.

eBay was one of my more frequent holdings until the announcement of its definitive plan to spin off its profitable PayPal (NASDAQ:PYPL) unit.

What could be more appropriate when talking about the week’s spin than to look at a post-spin eBay?

For years I loved holding eBay as it made little net movement, even as it had occasional spikes and plunges usually earnings related. All that meant was that it had an attractive option premium, with relatively little risk associated with it, as long as you didn’t mind those occasional plunges that were inevitably reversed.

WIth no real challenge ahead of it other than market risk in general, eBay is now at its post spin-off low and is offering a great option premium for what I perceive to be low risk.

WIth those premiums so attractive, but mindful that there may be near term market risk, I would probably think in terms of selling longer term and out of the money call contracts on any shares that I purchased.

While the market could continue to be further dragged down by declining oil prices and while games are still being played with what economic data really means and how it should be interpreted, you do have to wonder how any of that impacts eBay.

I know that I do.

Traditional Stocks: eBay, EMC Corporation

Momentum Stocks: none

Double-Dip Dividend: British Petroleum (2/10 $0.59), DuPont (2/10 $0.38), International Paper (2/11 $0.38)

Premiums Enhanced by Earnings:

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.

Jan302016

Weekend Update – January 31, 2016

Weekend Update

 

 Whether you’re an addict of some sort, an avid collector or someone who seeks thrills, most recognize that it begins to take more and more to get the same exhilarating jolt.

At some point the stimulation you used to crave starts to become less and less efficient at delivering the thrill.

And then it’s gone.

Sometimes you find yourself pining for what used to be simpler times, when excess wasn’t staring you in the face and you still knew how to enjoy a good thing.

We may have forgotten how to do that.

It’s a sad day when we can no longer derive pleasure from excess.

It seems that we’ve forgotten how to enjoy the idea of an expanding and growing economy, historically low interest rates, low unemployment and low prices.

How else can you explain the way the market has behaved for the past 6 months?

Yet something stimulated the stock market this past Thursday and Friday, just as had been the case the previous Thursday and Friday.

For most of 2016 and for a good part of 2015, the stimulus had been the price of oil. but more than often the case was that the price of oil didn’t stimulate the market, but rather sucked the life out of it.

We should have all been celebrating the wonders of cheap oil and the inability of OPEC to function as an evil cartel, but as the excess oil has just kept piling higher and higher the thrill of declining end user prices has vanished.

Good stimulus or bad stimulus, oil has taken center stage, although every now and then the debacles in China diverted our attention, as well.

Every now and then, as has especially been occurring in the past 2 weeks, there have been instances of oil coming to life and paradoxically re-animating the stock market. It was a 20% jump in the price of oil that fueled the late week rally in the final week of the January 2016 option cycle. The oil price rise has no basis in the usual supply and demand equation and given the recent dynamic among suppliers is only likely to lead to even more production.

It used to be, that unless the economy was clearly heading for a slowdown, a decreasing price of oil was seen as a boost for most everyone other than the oil companies themselves. But now, no one seems to be benefiting.

As the price of oil was going lower and lower through 2015, what should have been a good stimulus was otherwise.

However, what last Thursday and Friday may have marked was a pivot away from oil as the driver of the market, just as we had pivoted away from China’s excesses and then its economic and market woes.

At some point there has to be a realization that increasing oil prices isn’t a good thing and that may leave us with the worst of all worlds. A sliding market with oil prices sliding and then a sliding market with oil prices rising.

It seems like an eternity ago that the market was being handcuffed over worries that the FOMC was going to increase interest rates and another eternity ago that the market seemed to finally be exercising some rational judgment by embracing the rate rise, if only for a few days, just 2 months ago.

This week saw a return to those interest rate fears as the FOMC, despite a paucity of data to suggest inflation was at hand, didn’t do much to dispel the idea that “one and done” wasn’t their plan. The market didn’t like that and saw the prospects of an interest rate increase as a bad thing, even if reflecting improving economic conditions.

But more importantly, what this week also saw was the market returning to what had driven it for a few years and something that it never seemed to tire of celebrating.

That was bad news.

This week brought no good news, at all and the market liked that.

Negative interest rates in Japan? That has to be good, right?

A sluggish GDP, oil prices rising and unimpressive corporate earnings should have sent the market into a further downward spiral, but instead the idea that the economy wasn’t expanding was greeted as good news.

Almost as if the Federal Reserve still had some unspent ammunition to throw at the economy that would also serve to bolster stocks, as had been the case for nearly 6 years.

It’s not really clear how much more stimulus the Federal Reserve can provide and if investors are counting on a new and better high, they may in for a big disappointment.

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

I’m a little surprised that my brokerage firm didn’t call me last week, to see if I was still alive,  because it was the second consecutive week of not having made a single trade.

Despite what seem to be bargain prices, I haven’t been able to get very excited about very many of the ones that have seemed alluring. Although this coming Monday may be the day to mark a real and meaningful bounce higher, the lesson of the past 2 months has been that any move higher has simply been an opportunity to get disappointed and wonder how you ever could have been so fooled.

I’m not overly keen on parting with any cash this week unless there some reason to believe that the back to back gains of last week are actually the start of something, even if that something is only stability and treading water.

Building a base is probably far more healthy than trying to quickly recover all that has been quickly lost.

With weakness still abounding I’m a little more interested in looking for dividends if putting cash to work.

This week, I’m considering purchases of Intel (INTC), MetLife (MET) and Pfizer (PFE), all ex-dividend this coming week.

With the latter two, however, there’s also that pesky issue of earnings, as MetLife reports earnings after the close of trading on its ex-dividend date and Pfizer reports earnings the day before its ex-dividend date.

MetLife has joined with the rest of the financial sector in having been left stunned by the path taken by interest rates in the past 2 months, as the 10 Year Treasury Note is now at its lowest rate in about 8 months.

It wasn’t supposed to be that way.

But if you believe that it can’t keep going that way, it’s best to ignore the same argument used in the cases of the price of
oil, coal and gold.

With MetLife near a 30 month low and going ex-dividend early in the week before its earnings are reported in the same day, there may be an opportunity to sell a deep in the money call and hope for early assignment, thereby losing the dividend, but also escaping the risk of earnings. In return, you may still be able to obtain a decent option premium for just a day or two of exposure.

The story of Pfizer’s proposed inversion is off the front pages and its stock price no longer reflects any ebullience. It reports earnings the morning of the day before going ex-dividend. That gives plenty of time to consider establishing a position in the event that shares either go lower or have relatively little move higher.

The option premium, however, is not very high and with the dividend considered the option market is expecting a fairly small move, perhaps in the 3-4% range. Because of that I might consider taking on the earnings risk and establishing a position in advance of earnings, perhaps utilizing an at the money strike price.

In that case, if assigned early, there is still a decent 2 day return. If not assigned early, then there is the dividend to help cushion the blow and possibly the opportunity to either be assigned as the week comes to its end or to rollover the position, if a price decline isn’t unduly large.

Intel had a nice gain on Friday and actually has a nice at the money premium. That premium is somewhat higher than usual, particularly during an ex-dividend week. As with Pfizer, even if assigned early, the return for a very short holding could be acceptable for some, particularly as earnings are not in the picture any longer.

As with a number of other positions considered this week, the liquidity of the options positions should be  sufficient to allow some management in the event rollovers are necessary.

2015 has been nothing but bad news for American Express (AXP) and its divorce from Costco (COST) in now just a bit more than a month away.

The bad news for American Express shareholders continued last week after reporting more disappointing earnings the prior week. It continued lower even as its credit card rivals overcame some weakness with their own earnings reports during the week.

At this point it’s very hard to imagine any company specific news for American Express that hasn’t already been factored into its 3 1/2 year lows.

The weekly option premium reflects continued uncertainty, but I think that this is a good place to establish a position, either through a buy/write or the sale of puts. Since the next ex-dividend date is more than 2 months away, I might favor the sale of puts, however.

Yahoo (YHOO) reports earnings this week and as important as the numbers are, there has probably been no company over the past 2 years where far more concern has focused on just what it is that Yahoo is and just what Yahoo will become.

Whatever honeymoon period its CEO had upon her arrival, it has been long gone and there is little evidence of any coherent vision.

In the 16 months since spinning off a portion of its most valuable asset, Ali Baba (BABA), it has been nothing more than a tracking stock of the latter. Ali Baba has gone 28.6% lower during that period and Yahoo 28% lower, with their charts moving in tandem every step of the way.

With Ali Baba’s earnings now out of the way and not overly likely to weigh on shares any further, the options market is implying a price move of 7.6%.

While I usually like to look for opportunities where I could possibly receive a 1% premium for the sale of puts at a strike price that’s outside of the lower boundary dictated by the option market, I very much like the premium at the at the money put strike and will be considering that sale.

The at the money weekly put sale is offering about a 4% premium. With a reasonably liquid option market, I’m not overly concerned about difficulty in being able to rollover the short puts in the event of an adverse move and might possibly consider doing so with a longer term horizon, if necessary.

Finally, there was a time that it looked as if consumers just couldn’t get enough of Michael Kors (KORS).

Nearly 2 years ago the stock hit its peak, while many were writing the epitaph of its competitor Coach (COH), at least Coach’s 23% decline in that time isn’t the 60% that Kors has plunged.

I haven’t had a position in Kors for nearly 3 years, but do still have an open position in Coach, which for years had been a favorite “go to” kind of stock with a nice dividend and a nice option premium.

Unfortunately, Coach, which had long been prone to sharp moves when earnings were announced, had lost its ability to recover reasonably quickly when the sharp moves were lower.

While Coach is one of those rare gainers in 2016, nearly 13% higher, Kors is flat on the year, although still far better than the S&P 500.

While I don’t believe that Coach has turned the tables on Kors and is now “eating their lunch” as was so frequently said when Kors was said to be responsible for Coach’s reversal of fortune, I think that there is plenty of consumer to go around for both.

Kors reports earnings this week and like COach, is prone to large earnings related moves.

With no dividend to factor into the equation, Kors may represent a good  opportunity for those willing to take some risk and consider the sale of out of the money puts.

WIth an implied move of 8.5% next week, it may be possible to get a 1.1% ROI even if shares fall by as much as 11.3% during the week.

A $4.50 move in either direction is very possible with Kors after having dropped nearly $60 over the past 2 years. However, if faced with the possibility of assignment of shares, particularly since there is no dividend, I would just look for any opportunity to continue rolling the short puts over and over.

If not wanting to take the take the risk of a potential large drop, some consideration can also be given to selling puts after earnings, in the event of a large drop in shares. If that does occur, the premiums should still be attractive enough to consider making the sale of puts after the event.

 

Traditional Stocks: American Express

Momentum Stocks:  none

Double-Dip Dividend: Intel (2/3 $0.26), MetLife (2/3 $0.38), Pfizer (2/3 $0.30)

Premiums Enhanced by Earnings: Michael Kors (2/2 AM), Yahoo (2/2 PM)

 

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.

Jan232016

Weekend Update – January 24, 2016

Weekend Update

With the early part of the Republican primaries having focused on one candidate’s hair, it reminded me of that old complaint that people sometimes made that their hair had a mind of its own.

For better or worse the political hair jokes have pretty much finally run their course as the days tick down to a more substantive measure of a candidate’s character and positions on more weighty matters.

While it was nice seeing some gains for the week and finally having some reason to not curse 2016, there’s no mistaking the reality that the stock market hasn’t had much of a mind of its own after the first 14 trading days of the new year.

Bad hair days would have been a lot easier to take than the bad market days that have characterized much of the past  6 weeks.

The combination of China and the price of oil have led the market down and up on a daily basis and sometimes made it do flips during the course of a single trading day.

With the price of oil having climbed about 23% during the week from its multi-year lows, the market did what it hadn’t been able to do in 2016 and actually put together back to back daily gains. Maybe it was entirely coincidental that the 48 hours that saw the resurgence in the price of crude oil were the same 48 hours that saw the market string consecutive gains, but if so, that coincidence is inescapable.

While that’s encouraging there’s not too much reason to believe that the spike in the price of oil was anything more than brave investors believing that oil was in a severely over-sold position and that its recent descent had been too fast and too deep.

That pretty much describes the stock market, as well, but what you haven’t seen in 2016 is the presence of those brave souls rushing in to pick up shares in the same belief.

Of the many “factoids” that were spun this week was that neither the DJIA nor the NASDAQ 100 had even a single stock that had been higher in 2016. That may have changed by Friday’s closing bell, but then the factoid would be far less fun to share.

Instead, oil has taken the fun out of things and has dictated the direction for stocks and the behavior of investors. If anything, stocks have been a trailing indicator instead of one that discounts the future as conventional wisdom still credits it for doing, despite having put that quality on hiatus for years.

That was back when the stock market actually did have a mind of its own. Now it’s more likely to hear the familiar refrain that many of us probably heard growing up as we discovered the concept of peer pressure.

“So, if your best friend is going to jump out of the window, is that what you’re going to do, too?”

With earnings not doing much yet to give buyers a reason to come out from hiding, the coming week has two very important upcoming events, but it’s really anyone’s guess how investors could react to the forthcoming news.

There is an FOMC announcement scheduled for Wednesday, assuming that the nation’s capital is able to dig out from under the blizzard’s drifts and then the week ends with a GDP release.

With a sudden shift in the belief that the economy was heading in one and only one direction following the FOMC’s decision to increase interest rates, uncertainty is again in the air.

What next week’s events may indicate is whether we are back to the bad news is bad news or the bad news is good news mindset.

It’s hard to even make a guess as to what the FOMC might say next week.

“My bad” may be an appropriate start with the economy not seeming to be showing any real signs of going anywhere. With corporate revenues and unadulterated earnings not being terribly impressive, the oil dividend still not materializing and retail sales weak, the suggestion by Blackrock’s (BLK) Larry Fink last week that there could be layoffs ahead would seem to be the kind of bad news that would be overwhelmingly greeted for what it would assuredly represent.

When the FOMC raised interest rates the market had finally come around to believing that a rise in rates was good news, as it had to reflect an improving economic situation. If the next realization is that the improving situation would last for only a month, you might think the reception would be less than effusive.

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

Last week was the first week since 2008 or 2009 that I made no trades at all and had no ex-dividend positions. No new positions were opened, nor were any call or put rollovers executed.

Other than a few ex-dividend positions this week, I’m not certain that it will be any different from last week. I haven’t opened very many new positions of late, having to go back nearly 2 months for a week with more than a single new position having been opened.

Unlike much of the past 6 years when market pullbacks just seemed like good times to get good stocks at better prices, the past few months have been offering good prices that just kept getting better and better.

If you had been a buyer, those better and better prices were only seen that way by the next series of prospective buyers, who themselves probably came to bemoan how less they could have paid if only they waited another day or two. 

The gains of the final two days of last week make me want to continue the passivity. Anyone having chased any of those precious few days higher lately has ended up as disappointed as those believing they had picked up a bargain.

At some point it will pay to chase stocks higher and at some point it will pay to run after value.

I’m just not convinced that two days of gains are enough to  signal that value is evaporating.

The biggest interests that I have for the week are both earnings related trades. Both Apple (AAPL) and Facebook (FB) report earnings this week.

If you’re looking for a stock in bear market correction over the past 6 months, you don’t have to go much further then Apple (AAPL). Along with some of his other holdings, Apple has punished Carl Icahn in the same manner as has been occurring to mere mortals.

Of course, that 21% decline is far better than the 27% decline fro just a few days ago before Apple joined the rest of the market in rally mode.

Interestingly, the option market doesn’t appear to be pricing in very much uncertainty with earnings upcoming this week, with an implied move of only 6.2%

Since a 1% ROI can only be achieved at a strike level that’s within that range, I wouldn’t be very excited in the sale of out of the money puts prior to earnings. The risk – reward proposition just isn’t compelling enough for me. However, if Apple does drop significantly after earnings then there may be reason to consider the sale of puts.

There is some support at $90 and then a few additional support levels down to $84, but then it does get precarious all the way down to $75.

Apple hasn’t been on everyone’s lips for quite a while and we may not get to find out just how little it has also been on people’s wrists. Regardless, if the support levels between $84 and $90 are tested after earnings the put premiums should still remain fairly high. If trying this strategy and then faced with possible assignment of shares, an eye has to be kept on the announcement of the ex-dividend date, which could be as early as the following week.

While Apple is almost 20% lower over the past 6 months, Facebook has been virtually unchanged, although it was almost 30% higher over the past year.

It;s implied move is 6.8% next week, but the risk – reward is somewhat better than with Apple, if considering the sale of puts prior to earnings, as a 1% ROI for the sale of a weekly option could be obtained outside of the range defined by the option market. As with Apple, however, the slide could be more precarious as the support levels reflect some quick and sharp gains over the past 2 years.

For those that have been pushing a short strategy for GameStop (GME), and it has long been one of the most heavily of shorted stocks for quite some time, the company has consistently befuddled those who have had very logical reasons for why GameStop was going to fall off the face of the earth.

Lately, though, they’ve had reason to smile as shares are 45% lower, although on a more positive note for others, it’s only trailing the S&P 500 by 2% in 2016. They’ve had some reasons to smile in the past, as well, as the most recent plunge mirrors one from 2 years ago.

As with Apple and Facebook, perhaps the way to think about any dalliance at this moment, as the trend is lower and as volatility is higher, is through the sale of put options and perhaps considering a longer time outlook.

A 4 week contract, for example, at a strike level 4.6% below this past Friday’s close, could still offer a 3% ROI. If going that route, it would be helpful to have strategies at hand to potentially deal with an ex-dividend date in the March 2016 cycle and earnings in the April 2016 cycle.

One of the companies that I own that is going ex-dividend this week is Fastenal (FAST). I’ve long liked this company, although I’m not enamored with my last purchase, which I still own and was purchased a year ago. As often as is the case, I consider adding shares of Fastenal right before the ex-dividend date and this week is no different.

What is different is its price and with a 2 day market rally that helped it successfully test its lows, I would be interested in considering adding an additional position.

With only monthly options available, Fastenal is among the earliest of earnings reporters each quarter, so there is some time until the next challenge. Fastenal does, however, occasionally pre-announce or alter its guidance shortly before earnings, so surprises do happen, which is one of the reasons I’m still holding shares after a full year has passed.

In the past 6 months Fastenal has started very closely tracking the performance of Home Depot (HD). While generally Fastenal has lagged, in the past 2 months it has out-performed Home Depot, which was one of a handful of meaningfully winning stocks in 2015.

Finally, Morgan Stanley (MS) is also ex-dividend this week.

Along with the rest of the financials, Morgan Stanley’s share price shows the disappointment over the concern that those interest rate hikes over the rest of the year that had been expected may never see the light of day.

This week’s FOMC and GDP news can be another blow to the hopes of banks, but if I was intent upon looking for a bargain this week among many depressed stocks, I may as well get the relationship started with a dividend and a company that I can at least identify the factors that may make it move higher or lower.

Not everything should be about oil and China.

 

Traditional Stocks: none

Momentum Stocks:  GameStop

Double-Dip Dividend: Fastenal (1/27 $0.30), Morgan Stanley ($0.15)

Premiums Enhanced by Earnings:  Apple (1/26 PM), Facebook (1/27 PM)

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.

 

Jan232016

Weekend Update – January 24, 2016

Weekend Update

With the early part of the Republican primaries having focused on one candidate’s hair, it reminded me of that old complaint that people sometimes made that their hair had a mind of its own.

For better or worse the political hair jokes have pretty much finally run their course as the days tick down to a more substantive measure of a candidate’s character and positions on more weighty matters.

While it was nice seeing some gains for the week and finally having some reason to not curse 2016, there’s no mistaking the reality that the stock market hasn’t had much of a mind of its own after the first 14 trading days of the new year.

Bad hair days would have been a lot easier to take than the bad market days that have characterized much of the past  6 weeks.

The combination of China and the price of oil have led the market down and up on a daily basis and sometimes made it do flips during the course of a single trading day.

With the price of oil having climbed about 23% during the week from its multi-year lows, the market did what it hadn’t been able to do in 2016 and actually put together back to back daily gains. Maybe it was entirely coincidental that the 48 hours that saw the resurgence in the price of crude oil were the same 48 hours that saw the market string consecutive gains, but if so, that coincidence is inescapable.

While that’s encouraging there’s not too much reason to believe that the spike in the price of oil was anything more than brave investors believing that oil was in a severely over-sold position and that its recent descent had been too fast and too deep.

That pretty much describes the stock market, as well, but what you haven’t seen in 2016 is the presence of those brave souls rushing in to pick up shares in the same belief.

Of the many “factoids” that were spun this week was that neither the DJIA nor the NASDAQ 100 had even a single stock that had been higher in 2016. That may have changed by Friday’s closing bell, but then the factoid would be far less fun to share.

Instead, oil has taken the fun out of things and has dictated the direction for stocks and the behavior of investors. If anything, stocks have been a trailing indicator instead of one that discounts the future as conventional wisdom still credits it for doing, despite having put that quality on hiatus for years.

That was back when the stock market actually did have a mind of its own. Now it’s more likely to hear the familiar refrain that many of us probably heard growing up as we discovered the concept of peer pressure.

“So, if your best friend is going to jump out of the window, is that what you’re going to do, too?”

With earnings not doing much yet to give buyers a reason to come out from hiding, the coming week has two very important upcoming events, but it’s really anyone’s guess how investors could react to the forthcoming news.

There is an FOMC announcement scheduled for Wednesday, assuming that the nation’s capital is able to dig out from under the blizzard’s drifts and then the week ends with a GDP release.

With a sudden shift in the belief that the economy was heading in one and only one direction following the FOMC’s decision to increase interest rates, uncertainty is again in the air.

What next week’s events may indicate is whether we are back to the bad news is bad news or the bad news is good news mindset.

It’s hard to even make a guess as to what the FOMC might say next week.

“My bad” may be an appropriate start with the economy not seeming to be showing any real signs of going anywhere. With corporate revenues and unadulterated earnings not being terribly impressive, the oil dividend still not materializing and retail sales weak, the suggestion by Blackrock’s (BLK) Larry Fink last week that there could be layoffs ahead would seem to be the kind of bad news that would be overwhelmingly greeted for what it would assuredly represent.

When the FOMC raised interest rates the market had finally come around to believing that a rise in rates was good news, as it had to reflect an improving economic situation. If the next realization is that the improving situation would last for only a month, you might think the reception would be less than effusive.

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

Last week was the first week since 2008 or 2009 that I made no trades at all and had no ex-dividend positions. No new positions were opened, nor were any call or put rollovers executed.

Other than a few ex-dividend positions this week, I’m not certain that it will be any different from last week. I haven’t opened very many new positions of late, having to go back nearly 2 months for a week with more than a single new position having been opened.

Unlike much of the past 6 years when market pullbacks just seemed like good times to get good stocks at better prices, the past few months have been offering good prices that just kept getting better and better.

If you had been a buyer, those better and better prices were only seen that way by the next series of prospective buyers, who themselves probably came to bemoan how less they could have paid if only they waited another day or two. 

The gains of the final two days of last week make me want to continue the passivity. Anyone having chased any of those precious few days higher lately has ended up as disappointed as those believing they had picked up a bargain.

At some point it will pay to chase stocks higher and at some point it will pay to run after value.

I’m just not convinced that two days of gains are enough to  signal that value is evaporating.

The biggest interests that I have for the week are both earnings related trades. Both Apple (AAPL) and Facebook (FB) report earnings this week.

If you’re looking for a stock in bear market correction over the past 6 months, you don’t have to go much further then Apple (AAPL). Along with some of his other holdings, Apple has punished Carl Icahn in the same manner as has been occurring to mere mortals.

Of course, that 21% decline is far better than the 27% decline fro just a few days ago before Apple joined the rest of the market in rally mode.

Interestingly, the option market doesn’t appear to be pricing in very much uncertainty with earnings upcoming this week, with an implied move of only 6.2%

Since a 1% ROI can only be achieved at a strike level that’s within that range, I wouldn’t be very excited in the sale of out of the money puts prior to earnings. The risk – reward proposition just isn’t compelling enough for me. However, if Apple does drop significantly after earnings then there may be reason to consider the sale of puts.

There is some support at $90 and then a few additional support levels down to $84, but then it does get precarious all the way down to $75.

Apple hasn’t been on everyone’s lips for quite a while and we may not get to find out just how little it has also been on people’s wrists. Regardless, if the support levels between $84 and $90 are tested after earnings the put premiums should still remain fairly high. If trying this strategy and then faced with possible assignment of shares, an eye has to be kept on the announcement of the ex-dividend date, which could be as early as the following week.

While Apple is almost 20% lower over the past 6 months, Facebook has been virtually unchanged, although it was almost 30% higher over the past year.

It;s implied move is 6.8% next week, but the risk – reward is somewhat better than with Apple, if considering the sale of puts prior to earnings, as a 1% ROI for the sale of a weekly option could be obtained outside of the range defined by the option market. As with Apple, however, the slide could be more precarious as the support levels reflect some quick and sharp gains over the past 2 years.

For those that have been pushing a short strategy for GameStop (GME), and it has long been one of the most heavily of shorted stocks for quite some time, the company has consistently befuddled those who have had very logical reasons for why GameStop was going to fall off the face of the earth.

Lately, though, they’ve had reason to smile as shares are 45% lower, although on a more positive note for others, it’s only trailing the S&P 500 by 2% in 2016. They’ve had some reasons to smile in the past, as well, as the most recent plunge mirrors one from 2 years ago.

As with Apple and Facebook, perhaps the way to think about any dalliance at this moment, as the trend is lower and as volatility is higher, is through the sale of put options and perhaps considering a longer time outlook.

A 4 week contract, for example, at a strike level 4.6% below this past Friday’s close, could still offer a 3% ROI. If going that route, it would be helpful to have strategies at hand to potentially deal with an ex-dividend date in the March 2016 cycle and earnings in the April 2016 cycle.

One of the companies that I own that is going ex-dividend this week is Fastenal (FAST). I’ve long liked this company, although I’m not enamored with my last purchase, which I still own and was purchased a year ago. As often as is the case, I consider adding shares of Fastenal right before the ex-dividend date and this week is no different.

What is different is its price and with a 2 day market rally that helped it successfully test its lows, I would be interested in considering adding an additional position.

With only monthly options available, Fastenal is among the earliest of earnings reporters each quarter, so there is some time until the next challenge. Fastenal does, however, occasionally pre-announce or alter its guidance shortly before earnings, so surprises do happen, which is one of the reasons I’m still holding shares after a full year has passed.

In the past 6 months Fastenal has started very closely tracking the performance of Home Depot (HD). While generally Fastenal has lagged, in the past 2 months it has out-performed Home Depot, which was one of a handful of meaningfully winning stocks in 2015.

Finally, Morgan Stanley (MS) is also ex-dividend this week.

Along with the rest of the financials, Morgan Stanley’s share price shows the disappointment over the concern that those interest rate hikes over the rest of the year that had been expected may never see the light of day.

This week’s FOMC and GDP news can be another blow to the hopes of banks, but if I was intent upon looking for a bargain this week among many depressed stocks, I may as well get the relationship started with a dividend and a company that I can at least identify the factors that may make it move higher or lower.

Not everything should be about oil and China.

 

Traditional Stocks: none

Momentum Stocks:  GameStop

Double-Dip Dividend: Fastenal (1/27 $0.30), Morgan Stanley ($0.15)

Premiums Enhanced by Earnings:  Apple (1/26 PM), Facebook (1/27 PM)

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.

 

Jan162016

Weekend Update – January 17, 2016

Weekend Update


The world is awash in oil and we all know what that means.

From Texas to the Dakotas and to the North Sea and everything in-between, there is oil coming out of every pore of the ground and in ways and places we never would have imagined.

Every school aged kid knows the most basic law of economics. The more they want something that isn’t so easy to get the more they’re willing to do to get it.

It works in the other direction, too.

The more you want to get rid of something the less choosy you are in what it takes to satisfy your need.

So everyone innately understands the relationship between supply and demand. They also understand that rational people do rational things in response to the supply and demand conditions they face.

Not surprisingly, commodities live and die by the precepts of supply and demand. We all know that bumper crops of corn bring lower prices, especially as there’s only so much extra corn people are willing to eat as a result of its supply driven decrease in price.

Rational farmers don’t plant more corn in response to bumper crops and rational consumers don’t buy less when supply drives prices lower.

Stocks also live by the same precepts, except that most of the time the supply of any particular stock is fixed and it’s the demand that varies. However, we’ve all seen the frenzy around an IPO when insatiable demand in the face of limited supply makes people crazy and we’ve all seen what happens when new supply of shares, such as in a secondary offering is released.

Of course, much of what gains we’ve seen in the markets over the past few years have come as a result of manipulating supply and artificially inflating the traditional earnings per share metric.

When a deep Florida freeze hits the orange crop in Florida, no one spends too much time deeply delving into the meaning of the situation. The price for oranges will simply go higher as the demand stays reasonably the same, to a point. 

If, however, people’s tastes change and there is suddenly an imbalance between the supply and demand for orange juice, reasonable suppliers do the logical thing. They try to recognize whether the imbalance is due to too much supply or too little demand and seek to adjust supply.

Whatever steps they may take, the world’s economies aren’t too heavily invested in the world of oranges, no matter how important it may be to those Florida growers.

Suddenly, oil is different, even as it has long been a commodity whose supply has been manipulated more readily and for more varied reasons. than a farmer simply switching from corn to soybeans.

The price of oil still lives by supply and demand, but now thrown into the equation are very potent external and internal political considerations.

Saudi Arabia has to bribe its citizens into not overthrowing the monarchy while wanting to also inflict financial harm on anyone bringing new sources of supply into the marketplace. They don’t want to cede marketshare to its enemies across the gulf nor its allies across the ocean.

With those overhangs, sometimes irrational behavior is the result in the pursuit of what are considered to be rational objectives.

Oil is also different because the cause for the imbalance says a lot about the world. Why is there too much supply? Is it because of an economic slowdown and decreased demand or is it because of too much supply?

Stock markets, which are supposed to discount and reflect the future have usually been fairly rational when having a longer term vision, but that’s becoming a more rare phenomenon.

The very clear movement of stock markets in tandem with oil prices up or down has been consistent with a belief that the balance between supply and demand has been driven by demand.

Larry Fink, who most agree is a pretty smart guy, as the Chairman and CEO of Blackrock (BLK) was pretty clear the other day and has been consistent in the belief that the low price of oil was supply, and not demand driven. He has equally been long of the belief that lower oil prices were good for the world.

In any other time, supply driven low prices would have represented a breakdown in OPEC’s ability to hold the world’s economies hostage and would have been the catalyst for stock market celebrations.

Welcome to 2016, same as 2015.

But world markets continue to ignore that view and Fink may be coming to the realization that his voice of reason is drowned out by fear and irrational actions that only have a near term vision. That may explain why he now believes that there could be an additional 10% downside for US markets over the next 6 months, including the prospects of job layoffs.

That’s probably not something that the FOMC had high on its list of possible 2016 scenarios.

Ask John McCain how an increasing unemployment rate heading into a close election worked out for him, so you can imagine the distress that may be felt as 7 years of moderate growth may come to an end at just the wrong time for some with great political aspirations.

The only ones to be blamed if Fink’s fears are correct are those more readily associated with the existing power structure.

Just as falling stock prices in the face of supply driven falling oil prices seems unthinkable, “President Trump” doesn’t have a dulcet tone to my ears. More plausible, in the event of the unthinkable is that it probably wouldn’t take too much time for his now famous “The Apprentice” tag line to morph into “You’re impeached.”

So there’s always that as a distraction from a basic breakdown in what we knew to be an inviolate law of economics.

With 2016 already down 8% and sending us into our second correction in just 5 months so many stocks look so inviting, but until there’s some evidence that the demand to meet the preponderance of selling exists, to bite at those inviting places may be even more irrational than it would have been just a week earlier.

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

One stock that actually does look like a bargain to me reports earnings this week. Verizon (VZ) is the only stock in this week’s list that isn’t in or near bear correction territory in the past 2 months.

Even those few names that performed well in 2015 and helpe
d to obscure the weakness in the broader market are suffering in the early stages of 2015.

Not so for Verizon, even though the shares have fallen nearly 5% from its near term resistance level on December 29, 2015, the S&P 500 fell almost 9% in that time.

While there is always added risk with earnings being reported, Verizon and some of its competitors stand to benefit from their own strategic shifts to stop subsidizing what it is that people crave. That may not be reflected in the upcoming earnings report, but if buying Verizon shares I may consider looking beyond the weekly options that I tend to favor in periods of low volatility. Although I usually am more likely to sell puts when earnings are in the equation, I’m more likely to go the buy/write route for this position.

The one advantage of the kind of market action that we’ve had recently is the increase in volatility that it brings.

When that occurs, I start looking more and more at longer term options. The volatility increase typically means higher premiums and that extends into the forward weeks. Longer term contracts during periods of higher volatility allow you to lock in higher premiums and give time for some share price recovery, as well.

Since Verizon also has a generous dividend, but won’t be ex-dividend for another 3 months, I might consider an April 2016 or later expiration date.

One of the companies that is getting a second look this week is Williams-Sonoma (WSM), which is also ex-dividend this week and only offers monthly options.

Shares are nearly 45% lower since the August 2015 correction and have not really had any perceptible attempt at recovering from those losses.

What it does offer, however. is a nice option premium, that even if shares declined by approximately 1% for the month could still deliver a 3.8% ROI in addition to the quarterly 0.7% dividend.

Literally and figuratively firing on all cylinders is General Motors (GM), but it is also figuratively being thrown out with the bath water as it has plunged alongside the S&P 500.

With earnings being reported in early February and with shares probably being ex-dividend in the final week of the March 2016 option cycle, there may be some reason to consider using a longer term option contract, perhaps even spanning 2 earnings releases and 2 ex-dividend dates, again in an attempt to take advantage of the higher volatility, by locking in on longer term contracts.

Netflix (NFLX) reports earnings this week and the one thing that’s certain is that Netflix is a highly volatile stock when reporting earnings, regardless of what the tone happens to be in the general market.

With the market so edgy at the moment, this would probably not be a good time for any company to disappoint investors.

The option market definitely demonstrates some of the uncertainty that’s associated with this coming week’s earnings, as you can get a 1% ROI even if shares drop by 22%.

As it is, shares are down nearly 20% since early December 2015, but there seem to be numerous levels of support heading toward the $81 level.

If shares do take a plunge, there would likely be a continued increase in volatility which could make it lucrative to continue rolling over puts, even if not faced with impending assignment.

Of some interest is that while call and put volumes for the upcoming weekly options were fairly closely matched, the skew was toward a significant decline in shares next week, as a large position was established at a weekly strike level $34 below Friday’s close.

Finally, last week wasn’t a very good week for the technology sector, as Intel (INTC) got things off on a sour note, which is never a good thing to do in an already battered market.

Seagate Technology (STX) wasn’t spared any pain last week, either, as it has long fallen into the same kind of commodity mindset as corn, orange juice and even oil back in the days when things made sense.

Somehow, despite having been written off as nothing more than a commodity, it has seen some good times in the past few years. That is, if you exclude 2015, as it has now fallen more than 50% since that time, but with nearly 35% of that decline having occurred in just the past 3 months.

I usually like entering a Seagate Technology position through the sale of puts, as its premium always reflects a volatile holding.

For example the sale of a weekly put at a strike price 3% below Friday’s closing price could provide a 1.9% ROI. When considering that next week is a holiday shortened week, that’s a particularly high return.

Seagate Technology is no stranger to wild intra-weekly swings. If selling puts, I prefer to try and delay assignment of shares if they fall below the strike level. Since the company reports earnings the following week, I would likely try to roll over to the week after earnings, but if then again faced with assignment, would be inclined to accept it, as shares are expected to be ex-dividend the following week.

The caveat is that those shares may be ex-dividend earlier, in which case there would be a need to keep a close eye out for the announcement in order to stand in line for the 8% dividend.

For now, Seagate does look as if it still has the ability to sustain that dividend which was increased only last quarter.

 

Traditional Stocks: General Motors

Momentum Stocks: Seagate Technolgy

Double-Dip Dividend: Williams-Sonoma (1/22 $0.35)

Premiums Enhanced by Earnings: Netflix (1/19 PM), Verizon (1/21 AM)

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a sh
are 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.