Jan92016

Weekend Update – January 10, 2016

Weekend Update

new year starts off with great promise.

If seems so strange that the stock market often takes on a completely different persona from one day to the next.

Often the same holds true for one year to the next. despite there being nothing magical nor mystical about the first trading day of the year to distinguish it from the last trading day of the previous year.

For those that couldn’t wait to be finally done with 2015 out of the expectation conventional wisdom would hold and that the year following a flat performing year would be a well performing year, welcome to an unhappy New Year.

2015 was certainly a year in which there wasn’t much in the way of short term memory and the year was characterized by lots of ups and downs that took us absolutely nowhere as the market ended unchanged for the year.

While finishing unchanged should probably result in neither elation nor disgust, scratching beneath the surface and eliminating the stellar performance of a small handful of stocks could lead to a feeling of disgust.

Or you could simply look at your end of the portfolio year bottom line. Unless you put it all into the NASDAQ 100 (NDX) or the ProShares QQQ (NASDAQ:QQQ), which had no choice but to have positions in those big gainers, it wasn’t a very good year.

You don’t have to scratch very deeply beneath the surface to already have a sense of disgust about the way 2016 has gotten off to its start.

There are no shortage of people pointing out that this first week of 2016 was the worst start ever to a new year.

Ever.

That’s much more meaningful than saying that this is the worst start since 2019.

A nearly 7% decline in the first week of trading doesn’t necessarily mean that 2016 won’t be a good one for investors, but it is a big hole from which to have to emerge.

Of course a 7% decline for the week would look wonderful when compared to the situation in Shanghai, when a 7% loss was incurred to 2 different days during the week, as trading curbs were placed, markets closed and then trading curbs eliminated.

If you venture back to the June through August 2015 period, you might recall that our own correction during the latter portion of that period was preceded by two meltdowns in Shanghai that ultimately saw the Chinese government enact a number of policies to abridge the very essence of free markets. Of course, the implicit threat of the death penalty for those who may have knowingly contributed to that meltdown may have set the path for a relative period of calm until this past week when some of those policies and trading restrictions were lifted.

At the time China first attempted to control its markets, I believed that it would take a very short time for the debacle to resume, but these days, the 5 months since then are the equivalent of an eternity.

While China is again facing a crisis, the United States is back to the uncomfortable position of being the dog that is getting wagged by the tail.

US markets actually resisted the June 2015 initial plunge in China, but by the time the second of those plunges occurred in August, there was no further resistance.

For the most part the two markets have been in lock step since then.

Interestingly, when the US market had its August 2015 correction, falling from the S&P 500 2102 level, it had been flat on the year up to that point. Technicians will probably point to the fact that the market then rallied all the way back to 2102 by December 1, 2015 and that it has been nothing but a series of lower highs and lower lows since then, culminating in this week.

The decline from the recent S&P 500 peak at 2102 to 1922 downhill since then is its own 8.5%, putting us easily within a day’s worth of bad performance of another correction.

Having gone years without a traditional 10% correction, we’re now on the doorstep of the second such correction in 5 months.

While it would be easy to thank China for helping our slide, this past week was another of those perfect storms of international bad news ranging from Saudi-Iran conflict, North Korea’s nuclear ambitions and the further declining price of oil, even in the face of Saudi-Iran conflict.

Personally, I think the real kiss of death was news that 2015 saw near term record inflows into mutual funds and that the past 2 months were especially strong.

I’ve never been particularly good at timing, but there may be reason to believe that at the very least those putting their money into mutual funds aren’t very good at it either.

If I still had a shred of optimism left, I might say that the flow into mutual funds might reflect more and more people back in the workforce and contributing to workplace 401k plans.

If that’s true, I’m sure those participants would agree with me that it’s not a very happy start to the year. For those attributing end of the year weakness to the “January Effect” and anticipating some buying at bargain prices to drive stocks higher, that theory may have had yet another nail placed in its coffin.

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

2015 turned out to be my least active year for opening new positions since I’ve been keeping close track. Unfortunately, of those 107 new positions, 29 are still open and 15 of those are non-performing, as they await some opportunity to sell meaningful calls against them.

If you would have told me a year ago that I would not have rushed into to pick up bargains in the face of a precipitous 7% decline, I would have thought you to be insane.

While I did add one position last week, the past 2 months or so have been very tentative with regard to my willingness to ease the grip on cash and for the moment there’s not too much reason to suspect that 2016 will be more active than 2015.

With that said, though, volatility is now at a level that makes a little risk taking somewhat less of a risk.

While volatility has now come back to its October 2015 level, it is still far from its very brief peak in August 2015, despite the recent decline being almost at the same level as the decline seen in August.

Of course that 2% difference in those declines, could easily account for another 10 or so points of volatility. Even then, we would be quite a distance from the peak reached in 2011, when the market started a mid-year decline that saw it finish flat for the year.

The strategy frequently followed during periods of high volatility is to considering rolling over positions even if they are otherwise destined for assignment.

The reason for that is because the increasing uncertainty extends into forward weeks and drives those premiums relatively higher than the current week’s expiring premiums. During periods of low volatility, the further out in time you go to sell a contract, the lower the marginal increase in premium, as a reflection of less uncertainty.

For me, that is an ideal time and the short term outlook taken during a period of accelerating share prices is replaced by a longer term outlook and accumulation of greater premium and less active pursuit of new positions.

The old saying “when you’re a hammer, everything looks like a nail,” has some applicability following last weeks broad and sharp declines. If you have free cash, everything looks like a bargain.

While no one can predict that prices will continue to go lower as they do during the days after the Christmas shopping season, I’m in no rush to run out and pay today’s prices because of a fear that inventory at those prices will be depleted.

The one position that I did open last week was Morgan Stanley (NYSE:MS) and for a brief few hours it looked like a good decision as shares moved higher from its Monday lows when I made the purchase, even as the market went lower.

That didn’t last too long, though, as those shares ultimately were even weaker than the S&P 500 for the week.

While I already own 2 lots of Bank of America (NYSE:BAC), the declines in the financial sector seem extraordinarily overdone, even as the decline in the broader market may still have some more downside.

As is typically the case, that uncertainty brings an enhanced premium.

In Bank of America’s case, the premium for selling a near the money weekly option has been in the 1.1% vicinity of late. However, in the coming week, the ROI, including the potential for share appreciation is an unusually high 3.3%, as the $15.50 strike level offers a $0.19 premium, even as shares closed at $15.19.

With earnings coming up the following week, if those shares are not assigned, I would consider rolling those contracts over to January 29, 2016 or later.

At this point, most everyone expects that Blackstone (NYSE:BX) will have to slash its dividend. As a publicly traded company, it started its life as an over-hyped IPO and then a prolonged disappointment to those who rushed into buy shares in the after-market.

However, up until mid-year in 2015, it had been on a 3 year climb higher and has been a consistently good consideration for a buy/write strategy, if you didn’t mind chasing its price higher.

I generally don’t like to do that, so have only owned it on 3 occasions during that time period.

Since having gone public its dividend has been a consistently moving target, reflecting its operating fortunes. With it’s next ex-dividend date as yet unannounced, but expected sometime in early February, it reports earnings on January 28, 2015.

That presents considerable uncertainty and risk if considering a position. I don’t believe, however, that the announcement of a decreased dividend will be an adverse event, as it is both expected and has been part of the company’s history. WHat will likely be more germane is the health of its operating units and the degree of leverage to which Blackstone is exposed.

If willing to accept the risk, the premium reward can be significant, even if attenuating the risk by either selling deep in the money calls or selling equally out of the money put contracts.

I’m already deep under water with Bed Bath and Beyond (NASDAQ:BBBY), but after what had been characterized as disappointing earnings last week, it actually traded fairly well, despite the overall tone of the market.

It is now trading near a multi-year low and befitting that uncertainty it’s option premiums are extraordinarily generous, despite having a low beta,

As is often the case during periods of heightened volatility, consideration can be given to the sale of puts options rather than executing a buy/write.

However, given its declines, I would be inclined to consider the buy/write approach and utilize an out of the money option in the hopes of accumulating share appreciation and dividend.

If selling puts, I would sell an out of the money put and settle for a lower ROI in return for perhaps being able to sleep more soundly at night.

During downturns, I like to place some additional focus on dividends, but there aren’t very many good prospects in the coming week.

One ex-dividend position that does get my attention is AbbVie (NYSE:ABBV).

As it is, I’m under-invested in the healthcare sector and AbbVie is currently trading right at one support level and has some additional support below that, before being in jeopardy of approaching $46.50, a level to which it gapped down and then gapped higher.

It has a $0.57 dividend, which means that it is greater than the units in which its strike levels are defined. While earnings aren’t due to be reported until the end of the month, its premium is more robust than is usually the case and you can even consider selling a deep in the money call in an effort to see the shares assigned early. For what would amount to a 2 day holding, doing so could result in a 1.2% ROI, based upon Friday’s closing prices and a $55 strike level.

Finally, retail was especially dichotomous last week as there were some very strong days even during overall market weakness and then some very weak days, as well.

For those with a strong stomach, Abercrombie and Fitch (NYSE:ANF) is well off from its recent lows, but it did get hit hard on Friday, along with the retail sector and everything else.

As with AbbVie, the risk is that while shares are now resting at a support level, the next level below represents an area where there was a gap higher, so there is really no place to rest on the way down to $20.

The approach that I would consider for an Abercrombie and Fitch position to sell out of the money puts, where even a 6% decline in share price could still provide a return in excess of 1% for the week.

When selling puts, however, I generally like to avoid or delay assignment, if possible, so it is helpful to be able to watch the position in the event that a rollover is necessary if shares do fall 6% or more as the contract is running out.

Traditional Stocks: Bank of America, Bed Bath and Beyond

Momentum Stocks: Abercrombie and Fitch, Blackstone

Double-Dip Dividend: AbbVie (1/13 $0.57)

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.

Jan12016

Weekend Update – January 3, 3016

Weekend Update

The "What If" game is about as fruitless as it gets, but is also as much a part of human nature as just about anything else.

How else could I explain having played that game at a high school reunion?

That may explain the consistent popularity of that simple question as a genre on so many people’s must read lists as the New Year begins.

Historical events lead themselves so beautifully to the "What If" question because the cascading of events can be so far reaching, especially in an interconnected world.

Even before that interconnection became so established it didn’t take too much imagination to envision far reaching outcomes that would have been so wildly different around the world even a century or more later.

Imagine if the Union had decided to cede Fort Sumpter and simply allowed the South to go its merry way. Would an abridged United States have been any where near the force it has been for the past 100 years? What would that have meant for Europe, the Soviet Union, Israel and every other corner of the world?

Second guessing things can never change the past, but it may provide some clues for how to approach the future, if only the future could be as predictable as the past.

Looking back at 2015 there are lots of "what if" questions that could be asked as we digest the fact that it was the market’s worst performance since 2008.

In that year the S&P 500 was down about 37%, while in 2015 it was only down 0.7%. That gives some sense of what kind of a ride we’ve been on for the past 7 years, if the worst of those years was only 0.7% lower.

But most everyone knows that the 0.7% figure is fairly illusory.

For me the "what if" game starts with what if Amazon (AMZN), Alphabet (GOOG), Microsoft (MSFT) and a handful of others had only performed as well as the averages.

Of course, even that "what if" exercise would continue to perpetuate some of the skew seen in 2015, as the averages were only as high as they were due to the significant out-performance of a handful of key constituent components of the index. Imagining what if those large winners had only gone down 0.7% for the year would still result in an index that wouldn’t really reflect just how bad the underlying market was in 2015.

While some motivated individual could do those calculations for the S&P 500, which is a bit more complex, due to its market capitalization calculation, it’s a much easier exercise for the DJIA.

Just imagine multiplying the 10 points gained by Microsoft , the 30 pre-split points gained by Nike (NKE), the 17 points by UnitedHealth Group (UNH), the 26 points by McDonalds (MCD) or the 29 points by Home Depot (HD) and suddenly the DJIA which had been down 2.2% for 2015, would have been another 761 points lower or an additional 4.5% decline.

Add another 15 points from Boeing (BA) and another 10 from Disney (DIS) and we’re starting to inch closer and closer to what could have really been a year long correction.

Beyond those names the pickings were fairly slim from among the 30 comprising that index. The S&P 500 wasn’t much better and the NASDAQ 100, up for the year, was certainly able to boast only due to the performances of Amazon, Netflix (NFLX), Alphabet and Facebook (FB).

Now, also imagine what if historically high levels of corporate stock buybacks hadn’t artificially painted a better picture of per share earnings.

That’s not to say that the past year could have only been much worse, but it could also have been much better.

Of course you could also begin to imagine what if the market had actually accepted lower energy and commodity prices as a good thing?

What if investors had actually viewed the prospects of a gradual increase in interest rates as also being a good thing, as it would be reflective of an improving, yet non-frothy, economy?

And finally, for me at least, What if the FOMC hadn’t toyed with our fragile emotions and labile intellect all through the year?

Flat line years such as 2015 and 2011 don’t come very often, but when they do, most dispense with the "what if" questions and instead focus on past history which suggests a good year to follow.

But the "what if" game can also be prospective in nature, though in the coming year we should most likely ask similar questions, just with a slight variation.

What if energy prices move higher and sooner than expected?

What if the economy expands faster than we expected?

What if money is running dry to keep the buyback frenzy alive?

Or, what if corporate earnings actually reflect greater consumer participation?

You may as well simply ask what if rational thought were to return to markets?

But it’s probably best not to ask questions when you may not be prepared to hear the answer.

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

For those, myself included, who have been expecting some kind of a resurgence in energy prices and were disbelieving when some were calling for even further drops only to see those calls come true, it’s not really clear what the market’s reaction might be if that rebound did occur.

While the market frequently followed oil lower and then occasionally rebounded when oil did so, it’s hard to envision the market responding favorably in the face of sustained oil price stability or strength.

I’ve given up the idea that the resurgence would begin any day now and instead am more willing to put that misguided faith into the health of financial sector stocks.

Unless the FOMC is going to toy with us further or the economy isn’t going to show the kind of strength that warranted an interest rate increase or warrants future increases, financials should fare well going forward.

This week I’m considering MetLife (MET), Morgan Stanley and American Express (AXP), all well off from their 2015 highs.

MetLife, down 12% during 2015 is actually the best performer of that small group. As with Morgan Stanley, almost the entirety of the year’s loss has come in the latter half of the year when the S&P 500 was performing no worse than it had during the first 6 months of the year.

Both Morgan Stanley and MetLife have large enough option premiums to consider the sale of the nearest out of the money call contracts in an attempt to secure some share appreciation in exchange for a somewhat lo0wer option premium.

In both cases, I think the timing is good for trying to get the best of both worlds, although Morgan Stanley will be among the relatively early earnings reports in just a few weeks and still hasn’t recovered from its last quarter’s poorly received results, so it would help to be prepared to manage the position if still held going into earnings in 3 weeks.

By contrast, American Express reports on that same day, but all of 2015 was an abysmal one for the company once the world learned that its relationship with Costco (COST) was far more important than anyone had believed. The impending loss of Costco as a branded partner in the coming 3 months has weighed heavily on American Express, which is ex-dividend this week.

I would believe that most of that loss in share has already been discounted and that disappointments aren’t going to be too likely, particularly if the consumer is truly making something of a comeback.

There has actually been far less press given to retail results this past holiday season than for any that I can remember in the recent and not so recent past.

Most national retailers tend to pull rabbits out of their hats after preparing us for a disappointing holiday season, with the exception of Best Buy (BBY), which traditionally falls during the final week of the year on perpetually disappointing numbers.

Best Buy has already fallen significantly in th e past 3 months, but over the years it has generally been fairly predictable in its ability to bounce back after sharp declines, whether precipitous or death by a thousand cuts.

To my untrained eye it appears that Best Buy is building some support at the $30 level and doesn’t report full earnings for another 2 months. Perhaps it’s its reputation preceding it at this time of the year, but Best Buy’s current option premium is larger than is generally found and I might consider purchasing shares and selling out of the money calls in the anticipation of some price appreciation.

Under Armour (UA) is in a strange place, as it is currently in one of its most sustained downward trends in at least 5 years.

While Nike, its arch competitor, had a stellar year in 2015, up until a fateful downtrend that began in early October, Under Armour was significantly out-performing Nike, even while the latter was some 35% above the S&P 500’s performance.

That same untrained eye sees some leveling off in the past few weeks and despite still having a fairly low beta reflecting a longer period of observation than the past 2 months, the option premium is continuing to reflect uncertainty.

With perhaps some possibility that cold weather may finally be coming to areas where it belongs this time of the year, it may not be too late for Under Armour to play a game of catch up, which is just about the only athletic pursuit that I still consider.

Finally, Pfizer (PFE) has been somewhat mired since announcing a planned merger, buyout, inversion or whatever you like to have it considered. The initially buoyed price has fallen back, but as with Dow Chemical (DOW) which has also fallen back after a similar merger announcement move higher, it has returned to the pre-announcement level.

I view that as indicating that there’s limited downside in the event of some bad news related to the proposed merger, but as with Dow Chemical, Best Buy and Under Armour, the near term option premium continues to reflect perceived near term risk.

Whatever Pfizer;’s merger related risk may be, I don’t believe it will be a near term risk. From the perspective of a call option seller that kind of perception in the face of no tangible news can be a great gift that keeps giving.

Traditional Stocks: MetLife. Morgan Stanley, Pfizer

Momentum Stocks: Best Buy, Under Armour

Double-Dip Dividend: American Express (1/6 $0.29)

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.

Nov272015

Weekend Update – November 29, 2015

Weekend Update

We used to believe that the reason people so consistently commented about how tired they were after a big Thanksgiving meal was related to the turkey itself.

Within that turkey it was said that an abundance of the basic amino acid,”tryptophan,” which is a precursor of “serotonin”  played a role in its unique ability to induce sleep.

More reasoned people believe that there is nothing special about turkey itself, in that it has no more tryptophan than any other meat and that simply eating without abandon may really explain the drowsiness so commonly experienced. Others also realize that tryptophan, when part of a melange of other amino acids, really doesn’t stand out of the crowd and exert its presence.

Then there’s the issue of serotonin itself, a naturally produced neurotransmitter, which is still not fully understood and can both energize and exhaust, in what is sometimes referred to as “the paradox of serotonin.”

From what is known about serotonin, if dietary tryptophan could exert some pharmacological influence by simply eating turkey, we would actually expect to find reports of people who got wired from their Thanksgiving meals instead of sedated.

Based upon my Thanksgiving guests this year, many of whom found the energy to go out shopping on Thursday and Friday nights, they were better proof of the notion that Black Fridays matter, rather than of the somnolent properties of turkey.

In the case of the relationship between the tryptophan in turkey and ensuing sleep, it may just be a question of taking disparate bits of information, each of which may have some validity and then stringing them together in the belief that their individual validity can be additive in nature.

Truth doesn’t always follow logic.

Another semi-myth is that when traders are off dozing or lounging in their recliners instead of trading, the likelihood of large market moves is enhanced in a volume depleted environment.

You definitely wouldn’t have known it by the market’s performance during this past week, as Friday’s trading session began the day with the S&P 500 exactly unchanged for the week and didn’t succeed in moving the needle as the week came to its end.

Other than the dueling stories of NATO ally Turkey and stuffing ally turkey, there wasn’t much this week to keep traders awake. The former could have sent the market reeling, but anticipation of the latter may have created a calming influence.

You couldn’t be blamed for buying into the tryptophan myth and wondering if everyone had started their turkey celebration days before the calendar warranted doing so.

Or maybe traders are just getting tired of the aimless back and forth that has us virtually unchanged on the DJIA for 2015 and up only 1.5% on the S&P 500 for the year.

Tryptophan or no tryptophan, treading water for a year can also tire you out.

The week started off with the news of China doubling its margin requirements and an agreement on a $160 Billion tax inversion motivated merger, yet the reaction to those news items was muted.

The same held for Friday’s 5.5% loss in Shanghai that barely raised an eyebrow once trading got underway in the United States, as drowsiness may have given way to hibernation.

Even the revised GDP, which indicated a stronger than expected growth rate, failed to really inflate or deflate. There was, however, a short lived initial reaction which was a repudiation of the recent seeming acceptance of an impending interest rate hike. For about an hour markets actually moved outside of their very tight range for the week until coming to its senses about the meaning of economic growth.

Next week there could be an awakening as the Employment Situation Report is released just days before the FOMC begins their December meeting which culminates with a Janet Yellen press conference.

Other than the blip in October’s Employment Situation Report, the predominance of data since seems to support the notion of an improving economy and perhaps one that the FOMC believes warrants the first interest rate hike in almost 10 years.

With traders again appearing to be ready to accept such an increase it’s not too likely that a strong showing will scare anyone away and may instead be cause for a renewed round of optimism.

On the other hand, a disappointing number could send most into a tizzy, as uncertainty is rarely the friend of traders and any action by the FOMC in the face of non-corroborating data wouldn’t do much to inspire confidence in anything or any institution.

For my part, I wouldn’t mind giving the tryptophan the benefit of the doubt and diving deeply into those turkey leftovers with express instructions to be woken up only once 2016 finally arrives.

Knowing that flat years, such as this one has been to date, are generally followed by reasonably robust years, overloading on the tryptophan now may be a good strategy to avoid more market indecision and avoid the wasteful use of energy that could be so much better spent in 2016.

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

A number of potential selections this week fall into the “repeat” category.

Unlike a bad case of post-Thanksgiving indigestion, the kind of repeating that occasionally takes place when selling covered calls, is actually an enjoyable condition and is more likely to result in a look of happiness instead of one of gastric distress.

This week I’m again thinking of buying Bank of
America (BAC), Best Buy (BBY), Morgan Stanley (MS) and Pfizer (PFE), all of which I’ve recently owned and lost to assignment.

Sometimes that has been the case on multiple occasions over the course of just a few weeks. Where the real happiness creeps in is when you can buy those shares back and do so at a lower price than at which they were assigned.

With the S&P 500 only about 2% below its all time high, I would welcome some weakness to start the week in hopes of being able to pick up any of those 4 stocks at lower prices. My anticipation is that Friday’s Employment Situation Report will set off some buying to end the week, so I’d especially like to get the opportunity to make trades early in the week.

Bank of America and Morgan Stanley, of course, stand to benefit from increasing interest rates, although I suppose that some can make the case that when the news of an interest rate increase finally arrives, it will signal a time to sell.

If you believe in the axiom of “buying on the rumor and selling on the news,” it’s hard to argue with that notion, but I believe that the financials have so well tracked interest rates, that they will continue doing so even as the rumor becomes stale news.

As an added bonus, Bank of America is ex-dividend this week, although it’s dividend is modest by any standard and isn’t the sort that I would chase after.

Both, however, may have some short upside potential and have option premiums that are somewhat higher than they have been through much of 2015.

While both are attractive possibilities in the coming week or weeks, if forced to consider only one of the two, I would forgo Bank of America’s added bonus and focus on Morgan Stanley, as it has recovered from its recent earnings related drop, but now may be getting ready to confront its even larger August decline.

Bank of America, on the other hand, is not too far from its 2015 high point, but still can be a good short term play, perhaps even being a recurrent one over the next few weeks.

Also ex-dividend this week are two retailers, Wal-Mart (WMT) and Coach (COH) and together with Best Buy (BBY) and Bed Bath and Beyond (BBBY) are my retail focus, as I expect this year to be like most others, as the holiday season begins and ends.

While Coach may have lost some of its cachet, it’s still no Wal-Mart in that regard.

Coach has struggled to return to its April 2015 levels, although it may finally be stabilizing and recent earnings have suggested that its uncharacteristically poor execution on strategy may be coming to an end.

With a very attractive dividend and an option premium that continues to reflect some uncertainty, I wouldn’t mind finding some company for a much more expensive lot of shares that I’ve been holding for quite some time. With the ex-dividend date this week, the stars may be aligned to do so now.

I bought some Wal-Mart shares a few weeks ago after a disastrous day in which it sustained its largest daily loss ever, following the shocking revelation that increasing employee wages was going to cost the company some money.

The only real surprise on that day was that apparently no one bothered doing the very simple math when Wal-Mart first announced that it was raising wages for US employees. They provided a fixed amount for that raise and the number of employees eligible for that increase was widely known, but basic mathematical operations were out of reach to analysts, leading to their subsequent shock some months later.

Wal-Mart shares will be getting ready to begin the week slightly higher than where I purchased my most recent shares. I don’t very often add additional lots at higher prices, but the continuing gap between the current price and where it had unexpectedly plunged from offers some continued opportunity.

As with Coach, in advance of an ex-dividend date may be a fortuitous time to open a position, particularly as the option premium and dividend are both attractive, as are the shares themselves.

Neither Best Buy nor Bed Bath and Beyond are ex-dividend this week, although Best Buy will be so the following week.

That may give reason to consider selling an extended option if purchasing Best Buy shares, but it could also give some reason to sell weekly options, but to consider rolling those over if assignment is likely.

In doing so, one strategy might be to select a rollover date perhaps two weeks away and still in the money. In that manner, there may still be reason for the holder of the option contract to exercise early in order to capture the dividend, but as the seller you would receive a relatively larger premium that could offset the loss of the dividend while at the same time freeing up the cash tied up in shares of Best Buy in order to be able to put it to use in some other income producing position.

Bed Bath and Beyond is a company that I frequently consider buying and would probably have done much more frequently, if only it had offered a dividend or consistently offered weekly options for sale and purchase.

It still doesn’t offer a dividend, but sitting near a 2 year low and never being in one of their stores without lots of company at the cash register, the shares really have their appeal during the holiday season.

Finally, even with an emphasis on financials and retail, Pfizer (PFE) continues to warrant a look.

Having purchased shares last week and having seen them assigned, there’s not too much reason to believe that their planned merger with Ireland based Allergan (AGN), is going to be resolved any time soon.

While we wait for that process to play itself out, there may be fits and starts. There will clearly be opposition to the merger, as attention will focus on many issues, but none as controversial as the tax avoidance that may be a primary motivator for the transaction.

If the news for Pfizer eventually turns out to be negative and an immovable roadblock is placed, I don’t think that very much of Pfizer’s current price
reflects the deal going to its anticipated completion.

With that in mind, the upside potential may be greater than the downside potential. As long as the option premiums are reflected any increased risk, this can be an especially lucrative trade the longer the process gets stretched out, particularly if Pfizer trades in a defined range and the position can be serially rolled over or purchased anew.

Traditional Stocks:  Bed Bath and Beyond, Morgan Stanley, Pfizer

Momentum Stocks:  Best Buy

Double-Dip Dividend: Bank of America (12/2 $0.05), Coach (12/2 $0.34), Wal-Mart (12/2 $0.49)

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.

Nov212015

Weekend Update – November 22, 2015

Weekend Update

We’ve all seen a child who is in the midst of a tantrum or some hysterical outburst.

So often that tantrum takes on a life of its own and the perpetrator has completely forgotten what set off the outburst in the first place and just can’t get things under control even when there’s no reason for its continuation.

Most tantrums are related to an item that is wanted, but either not available to the child or has been taken away from the child.

There is a reason, but there is usually no reasoning.

When faced with the odious behavior, particularly in a public place, the instinct is often to just give in, hoping that will return calm.

The outburst is often irrational and while a parent’s response in a public place may seem to be rational, in seeking to avoid further disturbances, there may be a component of irrationality, in that acceding simply reinforces unwanted behavior.

Most will tell you that nothing is better at helping to develop appropriately self-sustaining behavior than instituting fair, clear and consistent rules that are then consistently applied.

Of course, that’s not easy when you have parents who may not agree on the rules or the consistency of their application.

But as is so often the case, once that tantrum starts, it’s easy for the child to lose sight of what the initial objective was and even if that objective is achieved, the tantrum continues. Sometimes the child can become so oppositional and caught up in the moment they may not even realize that their objective has been attained and their demands acceded to.

Eventually, all tantrums run out of steam and eventually, most children grow up and leave tantrums behind, although they may find other behavioral replacements to vex those around them, even as they enter the adult world.

As a parent, it’s easier to be a grandparent.

Unfortunately, for all of its intended or unintended paternal caring for what goes on in the stock market, there is no grandparent stage for the FOMC.

They may not see themselves in a parental role, but they have certainly been at the center of creating and rewarding some inappropriate behaviors, and perhaps acceding to them, as well.

With the release of the FOMC minutes this week and with a clear shift to a more hawkish tone regarding an interest rate increase, investors finally left their tantrum behavior behind.

That is meant as giving credit to investors.

Until the FOMC finally follows through with some clear action to complement their more clear words, there’s no reason for accolades.

Besides, clarity and consistency should be the minimally accepted behaviors from the more mature and rational FOMC, after all, how could you ever expect any kind of rational behavior down below, if those above are unable to get on the same page?

That stock market’s earlier tantrum like behavior was manifested by multiple instances of indiscriminate selling whenever the very thought of low interest rates being taken away from them presented itself.

The FOMC didn’t help things by airing individual member conflicts in opinion and sending conflicting messages. It’s easy to look at investors as an irrational bunch that is very often guided by emotion over analysis and is prone to outbursts, but as a parent, the FOMC did little to create an environment to limit that kind of behavior.

Unlike parents who do have some mandates, guiding the behavior of the stock market isn’t one of the Federal Reserve’s mandates, although as long as they’re having admitted to watching economic events in China and allowing them to become part of their decision tree, you would think that they would also watch over some fairly important events here, as investors can’t necessarily be counted upon to control their own infantile behavior.

Unfortunately, the market hasn’t really shown what it wants, as it has gone back and forth between being disappointed about the prospects of a rise in interest rates to greeting those prospects as the good news it should be reflecting.

Sometimes parents can’t quite figure their child out, but dispensing with consistent and unified messages can only create more confusion for all.

Hopefully the market will get over its penchant for tantrums and irrational behavior, including the exuberance that Alan Greenspan once warned about, and the FOMC will be more mindful of the power it holds in creating adult like behavior in others

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

Over the past year there have been may false starts by the bond market in expectation of rising interest rates.

Theoretically, rising interest rates on bonds begins to make them more competitive of an alternative to stocks, but with those expectations for increasing rates, companies that stand to benefit from an interest rate environment are also expected to benefit from that kind of an environment.

MetLife (MET) and Morgan Stanley (MS) are two companies that I’m considering in the coming week, even as there has been somewhat of a breakdown in the association between rising interest rates and their share prices over the past month.

I’ve now owned shares of Morgan Stanley 4 times over the past 5 weeks, after having had shares assigned again this past week. It has tracked the 10 Year Treasury Note’s performance better than has MetLife over the past month, but it has dragged in its magnitude of change during that time.

Following a precipitous earnings related decline last month shares have been working their way higher, but I would consider buying shares again on any kind of weakness that may bring it closer to $33.50, although I may still be interested in shares if they remain flat as the coming week begins. Even with a trading shortened week, due to the Thanksgiving holiday, the call option premiums are reflecting some greater volatility in these shares and perhaps expectations for shares to continue tracking the 10 Year Treasury note higher.

MetLife, on the other hand, hasn’t tracked the 10 Year Treasury note very well, at all, in the past month, neither in magnitude, nor in direction. Not unexpectedly, its option premium doesn’t reflect quite the same expectation for it to track interest rates as reliably as Morgan Stanley, but may still be sufficient of an ROI for
a 4 day trading week that brings us that much closer to a potential FOMC decision to raise those rates.

The days when Pfizer (PFE) was among the first and foremost on everyone’s list of pharmaceutical companies ended when Genentech came on the scene. Since then, Genentech has been rolled back into its parent and many others have come on the scene, as Pfizer has seemed to fade from the conversation.

But with what may be an impending inversion deal with Ireland’s Allergan (AGN), it is most definitely back in the headlines.

Having fallen about 9% in the past 3 weeks and with an option premium that’s reflecting some of the excitement that may be awaiting, I look at this as a good opportunity to establish a new position and would be willing to keep this one for a while, as long as the dividend is still part of the equation.

After a couple of downgrades and a lowering of price targets, Darden Restaurants (DRI) seems to have fallen out of favor with analysts, after the significant management changes following a successful proxy fight earlier in the year.

Darden reports earnings prior to the end of the December 2015 option cycle and having fallen about 10% in the past 10 days, unless there is some shocking news ahead, much of the disappointment may have already played out.

Darden Restaurants offers only monthly options and it will be ex-dividend shortly after the New Year.  As a result,  I would consider a January 2016 option sale and also using an out of the money strike price, in an effort to capture the premium, dividend and some capital gain on shares, while still having about a month for shares to recover in the event of further price declines after earnings.

Lexmark (LXK) also offers only monthly options and will be ex-dividend this week.

A few years ago Lexmark plunged when it announced it was getting out of the hardware business, just as its one time parent, International Business Machines (IBM) had also shed its hardware assets.

Both companies saw their fortunes fare well as they were re-invented, but more recently both have come under significant pressure, to the point that Lexmark recently announced that it was seeking “alternatives” to enhance shareholder value, including a sale of itself.

The initial negative reaction to that, which came on top of the more than 30% drop after disastrous earnings in July 2015 were released, has seen some reversal and cooler heads may be now prevailing.

With the next earnings release scheduled for early in the February 2016 option cycle, I would consider selling either December 2015 or January 2016 options and may actually consider doing both.

In the case of the December options, I would consider the sale of in the money options, with the intent of seeing an early assignment of the position.

For example, based upon Friday’s closing price of $35.43, the option premium for a December $34 call option was $2.30. If assigned early, that would mean a net gain of 2.5% for a single day of holding. However, if not assigned early, the monthly return would then include the dividend, resulting in a 3.5% ROI, even if shares fell as much as an additional 4%.

Hewlett Packard (HPQ) reports earnings this week and it the part of the pre-split company that’s still in the business that Lexmark abandoned and that IBM spun off.

I already own shares that have calls written against them that will be called away if the combined price of Hewlett Packard and the new Hewlett Packard Enterprises (HPE) exceeds $29.

I’d like to see that happen, but at the same time I see some appeal in considering some kind of position in Hewlett Packard, with an upcoming ex-dividend date on a Monday, two weeks away from this coming Monday.

The option market is implying a 5.6% price move this coming week as earnings are reported.

Normally, I would look for the possibility of selling puts at a strike price that was outside of the range implied by the option market, if that strike price could deliver an ROI of 1%. 

However, in this case, I am currently considering the sale of a put within the range implied by the option market and would be willing to take assignment in order to then plot a strategy to then capture the dividend and some call premiums, if possible.

With the split between Hewlett Packard and Hewlett Packard Enterprises only recently having occurred, the upcoming earnings report will very likely be a very complicated one and will include lots of adjustments and expenses related to the split, so there may be a bigger move than the option market is currently predicting. However, this earnings report will close the book and will likely be quickly forgotten, just as are most reasons behind tantrums.

Finally, Best Buy (BBY) just reported earnings and it did what so many other companies have done over the past few years as stock re-purchase programs have created havoc with the metric that has been the common language of analysts and investors alike.

What they did was to beat expectations for earnings per share, while missing on revenue estimates.

The market’s initial response to the news was to take shares down by 8.4%, but more reasonable minds pared those losses very quickly.

In the latter half of last week I wrote for subscribers that I would be looking at opportunities in retail this coming week, but the strength in some of those names this past Friday, has dampened that expectation.

While many retailer stocks do well in the period between Thanksgiving and Christmas, Best Buy is a frequent outlier in that regard.

However, having just sustained a 15.6% decline during November, I think that those shares are in a position to join the usually party and follow the typical script that has  some initial disappointment in sales figures heading into Christmas and then reports of a better than expected holiday sales season when the dust has finally settled.

I know that I’ll be giving Best Buy gift certificates this year as holiday gifts and expect some of that dust to be of my doing, so I’d be happy to get some of the trickle down benefit, especially as those call and put premiums still reflect some continued anticipation for activity.

If selling puts, however, just as with Hewlett Packard, the upcoming ex-dividend date is just 2 weeks away, so if faced with assignment, rather than rolling over, there may be reason to accept assignment and then seek to collect additional premium and the dividend.

 

Traditional Stocks:    Darden Restaurants, MetLife, Morgan Stanley, Pfizer

Momentum Stocks:   Best Buy

Double-Dip Dividend:  Lexmark (11/24)

Premiums Enhanced by Earnings: Hewlett Packard (11/24 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.

Nov142015

Weekend Update – November 15, 2015

Weekend Update

Back in March 2015, when writing the article “It’s As Clear As Mud,” there was no reason to suspect that there would be a reason for a Part 2.

After all, the handwriting seemed to be fairly clear at that time and the interest rate hawks seemed to be getting their footing while laying out the ground rules for an interest rate increase that had already been expected for months prior.

In fact, back in July 2015, I wrote another article inadvertently also entitled “It’s As Clear As Mud,” but in my defense the reason for the confusion back then had nothing to do with the FOMC or the domestic US economy, so it wasn’t really a Part 2.

It was simply a case of more confusion abounding, but for an entirely different reason.

Not that the FOMC hadn’t continued their policy of obfuscation.

But here we are, 8 months after the first article and the FOMC is back at the center of confusion that’s reigning over the market as messages are mixed, economic data is perplexing and the intent of the FOMC seems to be going counter to events on the ground.

While most understand that extraordinarily low interest rates have some appeal and can also be stimulatory, there’s also the recognition that prolonged low interest rates are a reflection of a moribund economy.

While individuals may someday arrive at a point in their lives that they’re not interested in or seeking personal growth, economies always have to be in pursuit of growth unless their populations are shrinking or aging along with the individual.

Like Japan.

Most would agree that when it comes to the economy, we don’t want to be like the Japan we’ve come to know over the past generation.

So despite the stock market being unable to decide whether an increase in interest rates would be a good thing for it, an unbiased view, one that doesn’t directly benefit from cheap money, might think that the early phase of interest rate increases would simply be a reflection of good news.

Growth is good, stagnation is not.

However, the FOMC has now long maintained that it will be data driven, but what may be becoming clear is that they maintain the right to move the needle when it comes to deciding where thresholds may be on the data they evaluate.

After years of regularly being disappointed by monthly employment gains below 200,000, October 2015’s Employment Situation Report gave us a number that was below 150,000. While that was surprising, the real surprise may have come a few weeks later when the FOMC indicated that 150,000 was a number sufficiently high to justify that rate increase.

The October 2015 Employment Situation report came at a time that traders had a brief period of mental clarity. They had been looking at negative economic news as something being bad and had been sending the market lower from mid-August until the morning of the release, when it sent the market into a tailspin for an hour or so.

Then began a very impressive month long rally that was based on nothing more than an expectation that the poor employment statistics would mean further delay in interest rate hikes.

But then the came more and more hawkish talk from Federal Reserve Governors, an ensuing outstanding Employment Situation Report and terrible guidance from national retailers.

With a year of low energy prices, more and more people going back to work and minimum wage increases you would have good reason to think that retailers would be rejoicing and in a position to apply that basic law of supply and demand on the wares they sale.

But the demand part of that equation isn’t showing up in the top line, yet the hawkish FOMC tone continues.

The much discussed 0.25% increase isn’t very much and should do absolutely nothing to stifle an economy. While I’d love to see us get over being held hostage by the fear of such an increase by finally getting that increase, it’s increasingly difficult to understand the FOMC, which seems itself to be held hostage by itself.

Difficulty in understanding the FOMC was par for the course during the tenure of Alan Greenspan, but during the plain talk eras of Ben Bernanke and Janet Yellen the words are more clear, it’s just that there seems to be so much indecisiveness.

That’s odd, as Janet Yellen and Stanley Fischer are really brilliant, but may be finding themselves faced with an economy that just makes little sense and isn’t necessarily following the rules of the road.

We may find out some more of the details next week as the FOMC minutes are released, but if they’re confused, what chance do any of the rest of us have?

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 just a miserable week. I was probably more active in adding new positions than I should have been and took little solace in having them out-perform the market for the week, as they were losers, too.

This week has more potentially bad news coming from retail, at a time when I really expected some positive news, at least with regard to forward guidance.

But with Abercrombie and Fitch (NYSE:ANF) having fallen about 12% last week after having picked up a little strength in the previous week, I’m ready to look at it again as it reports earnings this week.

I am sitting on a far more expensive lot of Abercrombie and Fitch, although if looking for a little of that solace, I can find some in having also owned it on 6 other occasions in 2015 and 21 other times in the past 3 years.

Despite that one lot that I’m not currently on speaking terms with, this has been a stock that I’ve longed loved to trade.

It has been range-bound for much of the past 8 months, although the next real support level is about 20% below Friday’s closing price.

With that in mind, the option market is implying about a 13.3% price move next week. A 1% ROI could potentially be obtained by selling puts nearly 22% below that close.

A stock that I like to trade, but don’t do often enough has just come off a very bad single day’s performance. GameStop (NYSE:GME) received a downgrade this past week and fell 16.5%

The downgrade was of some significance because it came from a firm that has had a reasonably good record on GameStop, since first downgrading it in 2008 and then upgrading in 2015.

GameStop has probably been written off for dead more than any stock that I can recall and has long been a favorite for those inclined to short stocks.

Meanwhile, the options market is implying a 5.5% move next week, even though earnings aren’t to be reported until Monday morning of the following week.

A 1% ROI could possibly be achieved by selling a put contract at a strike level 5.8% below Friday’s close, but if doing that and faced with possible assignment resulting in ownership of shares, you need to be nimble enough to roll over the put contracts to the following or some other week in order to add greater downside protection.

For the following week the implied move is 12.5%, but part of that is also additional time value. However, the option market clearly still expects some additional possibility of large moves.

If you’re a glutton for more excitement, salesforce.com (NYSE:CRM) reports earnings this week and is no stranger to large price movements with or without earnings at hand.

Depending upon your perspective, salesforce.com is either an incredible example of great ingenuity or a house of cards as its accounting practices have been questioned for more than a decade.

The basic belief is that salesforce.com’s practice of stock based compensation will continue to work well for everyone as long as that share price is healthy, but being paid partially in the stock of a company whose share price is declining may seem like receiving your paycheck back in the days of Hungarian hyper-inflation.

Let’s hope it doesn’t come to that this week, as shares already did fall 4.6% last week.

The share price of salesforce.com has held up well even as rumors of a buyout from Microsoft (NASDAQ:MSFT) have gone away. The option market is implying a share price move of 8.1% next week and a 1% ROI might possibly be obtained if selling puts at a strike level 9.4% below Friday’s close.

Microsoft itself is ex-dividend this week and is one of those handful of stocks that has helped to create the illusion of a healthy broader market.

That’s because Microsoft, a member of both the DJIA and the S&P 500 is up nearly 14% for the year and is one of those few well performing companies that has helped
to absorb much of the shock that’s being experienced by so many other index components that are in correction or bear territory.

In fact, coming off its market correction lows in August, Microsoft shares are some 30% higher and is only about 5% below its recent high.

While that could be interpreted by some as its shares being a prime candidate for a decline in order to catch up with a flailing market, sometimes in times of weakness it may just pay to go with the prevailing strength.

While I’d rather consider its share purchase after a price decline and before its ex-dividend date, Microsoft’s ability to withstand some of the market’s stresses adds to its appeal right now.

On the other hand, Intel’s (NASDAQ:INTC) 5.1% decline last week and its 6.5% decline from its recent ex-dividend date when some of my shares were assigned away from me early, makes it appealing.

Despite a large differential in comparative performance between Microsoft and Intel in 2015, they have actually tracked one another very well through the year if you exclude two spikes higher in Microsoft shares in the past year.

With that in mind, in a week that I like the idea of adding Microsoft for its dividend, I also like the idea of adding more Intel, just for the sake of adding Intel and capturing a reasonably generous option premium, in the hopes that it keeps up with Microsoft.

Finally, also going ex-dividend in the coming week are Dunkin Brands (NASDAQ:DNKN) and Johnson & Johnson (NYSE:JNJ).

The former probably sells something that can help you if you’ve over-indulged in the former for far too long of a time.

Dunkin Brands only has monthly dividends, but this being the final week of the monthly cycle, some consideration can be given to using it as a quick vehicle in an attempt to capture both premium and dividend, or perhaps a longer term commitment in an attempt to also secure some meaningful gain from the shares.

Those shares are actually nearly 30% lower in the past 4 months and are within easy reach of a 22 year low.

I’m currently undecided about whether to look at the short term play or a longer term, but I am also considering using a longer term contract, but rather than looking for share appreciation, perhaps using an in the money option in the hopes of being assigned shares early and then moving on to another potential target with the recycled cash.

Johnson & Johnson is not one of those companies that has helped to create the illusion of a healthy market. If you factor in dividends, Johnson & Johnson has essentially mirrored the DJIA.

Over the past 5 years, with a very notable exception of the last quarter, Johnson & Johnson has tended to trade well in the few weeks after having gone ex-dividend.

For that reason I may look at the possibility of selling calls dated for the following week, or perhaps even the week after Thanksgiving and also thinking about some capital gains on shares in addition to its generous dividend, but somewhat lower out of the money premium.’

While thinking about what to do in the coming week, I may find myself munching on some Dunkin Donuts. That tends to bring me clarity and happiness.

Maybe I could have some delivered to the FOMC for their next meeting.

It couldn’t hurt.

Traditional Stocks:Intel

Momentum Stocks: GameStop

Double-Dip Dividend: Dunkin Donuts (11/19 $0.26), Johnson & Johnson (11/20 $0.75). Microsoft (11/17 $0.36)

Premiums Enhanced by Earnings: Abercrombie and Fitch (11/20 AM), 11/18 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.