Jul112014

Weekend Update – July 13, 2014

Weekend Update

In the past month Janet Yellen has reaffirmed the commitment to keeping stocks the preferred investment vehicle yet after the initial euphoria, skepticism and askance looks greeted any attempts to set even more new record highs.

For stock investors the greatest gift of all was there, delivered on a platter, just waiting to be taken advantage of this past week. But we didn’t do so, maybe having learned a lesson from Greek mythology and avoiding obvious and superficial temptation.

Unfortunately, the application of that lesson may have been misguided as the temptations offered by the Federal Reserve had already run fairly deep, having already been acknowledged to have fueled much of the years long rally in stocks.

Instead of focusing on accepting and making good use of the gifts this past week it didn’t take long to re-ignite talk of the beginning of the long overdue correction after a failed start to the week’s trading.

The week itself was a bizarre one with some fairly odd stories diverting attention from what really mattered.

There was the frivolous news of a wildly successful potato salad Kickstarter campaign, the inconsequential news of the demise of Crumbs (CRMB), the laughably sad news of the sudden appearance of a seemingly phony social media company in Belize with a $5 billion market capitalization while the SEC slept and feel good news of LeBron James taking his talents back to the fine people of Cleveland.

Somewhere in-between was also the news that a Portuguese bank was having some difficulty paying back short term debt obligations.

Talk of an impending correction came before this week’s FOMC statement release, which did much to erase the previous two days of weakness, but it was short lived, as fears related to the European banking system swept through the European markets and made their ways to our shores on Thursday.

This was yet another week when the market wasn’t willing to accept the assurance of continuing gifts from the Federal Reserve after the initial giddiness upon the delivery of its news. While we all know that sooner or later the gifts from the Federal Reserve will slow down and then stop altogether in advance of that time when it actually begins to impede our over-fed avarice, there isn’t too much reason to refuse the gifts that are still there to be given. While perhaps those gifts could be viewed as an entitlement perhaps the additional lesson learned is that we are resilient enough to not allow a natural sense of cautionary behavior to be disarmed.

Somehow, I doubt that’s the case, just as I doubt that Greek mythology has taught very many or lasting lessons to many of us lately.

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

Puts I sold on Bed Bath and Beyond (BBBY) that I sold a few weeks ago expired this past week, as they were within easy range of assignment or in need of rollover on Friday until murmurings of a leveraged buyout started to lift shares.

Had those murmurings waited until sometime on Monday I might have considered them as a gift, as I wanted to now add shares to my portfolio. However, coming as they did, although securing the ability to see the puts sold expire worthless, may have snatched a gift away, as I rarely want to chase a stock once it has started moving higher. However, on any weakness that see shares trading lower to begin the week, I would be anxious to add shares as I believe Bed Bath and Beyond was already in recovery mode from the strong selling pressure after it reported earnings a few weeks ago.

The Gap (GPS) continues to be one of the dwindling few that report monthly sales statistics. As it does, it regularly has paroxysms of movement when those statistics are released. Rarely does it string together more than two successive months of consistent data, such that its share price bounces quite a bit, despite shares themselves not being terribly volatile in the longer run. Those movements often provide nice option premiums and makes The Gap an attractive buy, although it can also be a frustrating position, as a result. However, it is one that I frequently like as part of my portfolio and currently do own shares. This most recent report on Friday don’t send shares moving as much as in the recent past, however, it did create an opportunity to consider the addition of more shares.

With earnings season beginning to high gear this week there is no shortage of potential candidates. However, unless most weeks when considering earnings related trades I only think in terms of put sales and would prefer not to own shares.

That is certainly the case with SanDisk (SNDK).

The option market believes that there may be a 6.6% movement in either direction next week upon earnings being released. However, a 1.1% ROI can potentially be achieved at a strike level that is outside of the range implied by the option market, making it an appealing trade, if willing to also manage the position in the event that assignment may be likely by attempting to roll over the put sale to a new time period.

On the other hand both Blackstone (BX) and Cypress Semiconductor (CY) are shares that I would want to own
at a lower price and would consider accepting assignment rather than rolling over and trying to stay one step ahead of assignment.

In the case of Cypress Semiconductor, whose products are quietly ubiquitous, since it has only monthly options available, there aren’t good opportunies to try such evasive techniques, so being prepared for ownership is a requisite if selling puts. Shares have traded in an identifiable range, so if assigned and patient there’s liukely to be an escape path while collecting option premiums and perhaps dividends, as well.

Blackstone is off from its recent highs and has been a beneficiary of the rash of IPO offerings of late. While I wouldn’t mind owning shares again at this level, the fact that it offers many expanded weekly options does allow for the possibility of managing the position through rollovers in the event that assignment may be imminent. However, with a generous dividend upcoming there may also be reason to consider ownership if assignment may be likely.

Finally, A stock that I love to own is Fastenal (FAST). To me it represents a snapshot of the US economy. Depending on your perspective when the economy does well, Fastenal does well or when Fastenal is doing well the economy is doing well. While that’s fairly simple and easy to understand, even if not entirely validated, what is always less easy to understand is how a stock responds to its earnings reports. In this case shares of Fastenal tumbled as top line numbers were very good, but margins were decreasing.

While that may not be great news for Fastenal and it certainly wasn’t for its shareholders today, the growth in sales revenues may be a positive sign for the economy. For me, the negative response provides opportunity to once again own shares and to do so as either a potential short term purchase or with a longer term horizon.

While Fastenal trades only monthly options with this being the final week of the July 2014 cycle it could potentially be purchased with the mindset of a weekly option trader. However, in the event that shares aren’t assigned, they do go ex-dividend the following week, so there may be reason to consider immediately considering an August 2014 option in hedging the share purchase.

Traditional Stocks: Bad Bath and Beyond, Fastenal, The Gap

Momentum: none

Double Dip Dividend: none

Premiums Enhanced by Earnings: Blackstone, Cypress Semiconductor, SanDisk

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.

Jul42014

Weekend Update – July 6, 2014

Weekend Update

You never really know what kind of surprises the market will bring on any given day. I’ve long given up trying to use rational thought processes to try and divine what is going to happen on any given day. It’s far too humbling of an experience to continually make such attempts.

Uncertainty may be compounded a little when we all know that low trading volume has a way of exaggerating things. With an extra long holiday coming up and many traders likely to be heading up to the Hamptons to really begin the summer, a three and half day trading week wasn’t the sort of thing that was going to generate lots of trading frenzy, although it could easily create lots of excitement and moves.

So when two big events occur in such a short time span, both of which seem to inspire optimism, as long as you’re not a bond holder, you can guess a plausible outcome. That’s especially so because lately the market hasn’t been in a "good/bad news is bad/good news" kind of mentality

In what was described as "the most significant speech yet in her still young Federal Reserve Chairmanship," Yellen re-affirmed he commitment to keep interest rates at low levels even in the face of bubbles. She made it clear that in her opinion higher interest rates was not the answer to dealing with financial excesses.

If you happen to be someone who invests in stocks, rather than bonds, could you be given any better gift, other than perhaps the same gift that Yellen gave just two weeks earlier during her post – FOMC press conference?

That gift didn’t have too much staying power and it’s unclear whether a few days off in celebration of Independence Day will makes us forget the most recent gift, but it’s good to have important friends who are either directly or indirectly looking out for your financial well-being.

When seeking to try and understand why stocks continue to perform so well, one concept that is repeatedly mentioned is that it is simply the best of alternatives at the moment. If you believe that to be the case, you certainly believe it even more after this week, especially when realizing that interest rates are likely to remain low even in the face of inflationary pressures.

Borrowing from an alternate investment class credo, it seems clear that the strategy should be simply stated as "Stocks, stocks, stocks."

As if there were any doubts about that belief, the following day came the release of the monthly Employment Situation Report and it lived up to and exceeded expectations.

So it appears that despite a significant revision of GDP indicating a horrible slowdown in the first quarter, the nation’s employers just keep hiring and the unemployment rate is now down to its lowest point since September 2008, which wasn’t a very good time if you were an equity investor.

While the "U-6 Unemployment Rate," which is sometimes referred to as the "real unemployment rate" is almost double that of the more commonly reported U-3, no one seems to care about that version of reality. As in "Animal House," when you’re on a roll you go with it.

More people working should translate into more discretionary spending, more tax revenues and less government spending on social and entitlement programs. That all sounds great for stocks unless you buy into the notion that such events were long ago discounted by a forward looking market.

However, normally that sort of economic growth and heat should start the process of worrying  about a rising interest rate environment, but that seems to be off the table for the near future.

Thank you, Janet Yellen.

Of course, with the market propelling itself beyond the 17000 level for the first time and closing the week on strength, what now seems like an age old problem just keeps persisting. That is, where do you find stock bargains?

I’m afraid the answer is that "you don’t," other than perhaps in hindsight.

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

Among my many faults are that I tend to be optimistic.

I don’t say that as many job applicants do in trying to turn the question about their greatest weakness into a strength in an effort to blow smoke in their prospective employer’s face.

That optimism, however, is more of a long term trait, as I’m always pessimistic in the short term. That seems consistent with someone who sells calls, especially of the short term variety. However, part of the problem is that my optimism often means that I purchase stocks too early on the heels of either bad news or performance in the belief that resurrection is at hand.

Most recently Coach (COH) has been a great example of that inappropriate optimism. Having owned shares 20 times in less than two years those purchases have frequently been made following earnings related disappointments and up until the most recent such disappointment, I haven’t found myself displaying a similar emotion. I’ve usually been pretty happy about the decision to enter into positions, although, in hindsight they were frequently initiated too early and I could have avoided some gastric erosion.

However, this time has been different in that even after an initially large price drop, the kind that in the past would have rebounded, shares just kept going lower. But also different is that the bad news didn’t end with earnings this time around.

As with another recent recommendation, Whole Foods (WFM), I believe that meaningful support has been displayed and now begins the time to start whittling down the paper losses through the addition of shares  or opening a new position. Despite what will certainly be years of ongoing competition with Michael Kors (KORS) and others in vying for the customer loyalty, Coach has dumped lots of bad news into a single quarter and is poised to begin its rebound along with a recovering retail sector.

While not  in retail, Mosaic (MOS) is another company that I’ve spent a year trying to whittle down the paper losses following dissolution of the potash cartel that no one ever knew had existed. In that time nine additional rounds of ownership have wiped out the losses, so now it’s time to  make some money. 

Shares have had some difficulty at the $50 level and recently have again fallen below. As with Coach, dividends and option premiums make it easier to exercise some patience, but they also can make it a compelling reason to initiate or add to positions. If adding at this level I would be very happy to see shares continue to trade in its narrow range and wouldn’t mind the opportunity to continually rollover option contracts as has been the case in the past, helping to erase large paper losses.

Also similar to Coach, in that I believe that all of the bad news and investor disbelief has been exhausted, is Darden Restaurants (DRI). There’s probably not much need to re-hash some of the dysfunction and what appears to be pure self-interest on the part of its CEO that has helped to keep its assets undervalued. However, at its current level I believe that there is room for share appreciation and a good time to start a position is often in advance of its ex-dividend date and nearly 5% dividend. 

While Darden’s payout ratio is well above the average for S&P 500 stocks, there isn’t much concern about its ability to maintain the payouts. With only monthly options available and a reporting earnings late in the upcoming season, I would consider the use of August 2014 options, rather than the more near term monthly cycle.

Also only offering monthly options, Transocean (RIG) has been slowly building off of its recent lows, but is having difficulty breaking through the $45 level. With recent pressure on refiners as a result of a Department of Commerce decision regarding exports there may be reason to believe that there would be additional incentive to bring supply to market for export. While clearly a long term process there may be advantage to being an early believer. Transocean, which I have now owned 14 times in two years also offers a very generous dividend.

As long as in the process of tabulating the number of individual rounds of ownership, Dow Chemical (DOW) comes to mind, with 18 such positions over the past two years. The most recent was added just a few weeks ago in order to capture its dividend, but shares then went down in sympathy with DuPont (DD) as it delivered some unexpectedly bad news regarding its seed sales. Showing some recovery to close the week, Dow Chemical is an example of a stock that simply needs to have  are-set of expectations in terms of what may represent a fair price. Sometimes waiting for shares to return to your notions of fairness may be an exercise in futility. While still high in my estimation based on past experience, I continue to look at shares as a relatively safe way to generate option income, dividends and share profits.

Microsoft (MSFT) is another obvious example of one of the many stocks that are at or near their highs. In that kind of universe you either have to adjust your baselines or look for those least susceptible to systemic failure. That is, of course, in the assumption that you have to be an active participant in the first place.

Since I believe that some portion of the portfolio always has to be actively participating, it’s clear that the baseline has to be raised. Currently woefully under-invested in technology, Microsoft appears to at least have relative immunity to the kind of systemic failure that should never be fully dismissed. It too offers that nice combination of option premiums and dividend to offset any potential short term disappointment.

Family Dollar Stores (FDO) reports earnings this week and must be getting tired of always being referred to as the weakest of the dollar stores. It may also already be tired of being in the cross hairs of Carl Icahn, but investors likely have no complaint regarding the immediate and substantial boost in share price when Icahn announced his stake in the company.

Shares saw some weakness as the previous week the potential buyout suitor, Dollar General (DG), considered to be the best in the class, saw its CEO announce his impending 2015 retirement. That was immediately interpreted as a delay in any buyout, at the very least and shares of both companies tumbled. While that presented an opportunity to purchase Dollar General, Family Dollar Stores are still a bit off of their Icahn induced highs of just a few weeks ago and is now facing earnings this coming week.

The option market is implying a relatively small 4.4% price move and it doesn’t quite fulfill my objective of tring to identify a position offering a weekly 1% return for a strike level outside of the implied price range. In this case, however, I would be more inclined to consider a sale of puts after earnings if the response to the report drives shares down sharply. While that may lead to susceptibility of repeating the recent experience with Coach, Carl Icahn, like Janet Yellen is a good friend to have on your side.

Finally, among the topics of the past week were the question of corporate responsibility as it comes to divulging news of the changing health status of key individuals. With the news that Jamie Dimon, Chairman and CEO of JP Morgan Chase (JPM), had been diagnosed with curable throat cancer, the question was rekindled. Fortunately, however, Dimon spared us any supposition regarding the cause of his cancer, perhaps having learned from Michael Douglas that we may not want to know such details.

While hoping for a swift and full recovery many recall when Apple (AAPL) shares briefly plunged when news of Steve Jobs’ illness was finally made public in 2009 and he took a leave of absence, opening the door for Tim Cook’s second seat at the helm of the company.

JP Morgan’s shares went down sharply on the report of Dimon’s health news on a day that the financials did quite well. To his and JP Morgan’s credit, the news, which I believe should be divulged if substantive, should not have further impact unless it changes due to some unfortunate deterioration in Dimon’s health or unexpected change of leadership.

In advance of earnings in two weeks I think at its current price JP Morgan shares are reasonably priced and in a continuing low interest rate environment and with increased regulatory safeguards should be much more protected form its own self than in past years. WHether as a short term or longer term position, I think its shares should be considered as a cornerstone of portfolios, although I wish that I had owned it more often than I have, despite 18 ventures in the past two years.

Hopefully, with Jamie Dimon continuing at the helm and in good health there will be many more opportunities to do so and revel in the process with Janet Yellen providing all the party favors we’ll need.

 

Traditional Stocks: Dow Chemical, JP Morgan Chase, Microsoft, Transocean

Momentum: Coach, Mosaic

Double Dip Dividend: Darden

Premiums Enhanced by Earnings: Family Dollar Stores

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.

Jun282014

Weekend Update – June 29, 2014

Weekend Update

There wasn’t much going on last week, but for what there was, you can be certain that there was a role played by some branch of government.

By no means I am a libertarian and I certainly understand the need for a beneficent government to protect those things that we hold dear, from assets to zoning, but this past week government seemed to be the singular driver of news during a week that was otherwise devoid of news.

For starters, we received yet another revision to the first quarter GDP, indicating a 2.9% decrease. That’s not the sort of growth that engenders much confidence in the economy, but it’s also the sort of report that doesn’t engender much confidence in the reporter.

Certainly for a market that is said to discount the future, learning that what you believed to have been true was patently false has to also shake confidence, particularly when you begin to wonder whether your own government’s reporting of economic data is any better than that from the nation we so readily disparage for the veracity of its reporting – China.

With the economic calendar so important each week, this coming week’s early Employment Situation Report, which has been fairly inconsequential for the past 6 months, may prove otherwise if either it offers data consistent with the  abysmal GDP statistic or is qualified by large downward revisions of previous months.

But with objective data reporting out of the way, the early part of the week was focused on Supreme Court rulings that were scheduled to be released as the current session comes to its end. The decision regarding the novel technology behind the Aereo product that delivers broadcast transmission to any internet enabled device was ruled unconstitutional and any company with local broadcasting interests soared on the decision. Essentially, the Supreme Court said that an antennae that is leased and captures broadcasts is illegal, while an antennae that is purchased and captures broadcast television is not.

Then the Internal Revenue Service came into focus as it ruled favorably on Iron Mountain’s (IRM) request to convert to a REIT, which was especially surprising since it had tentatively given an adverse opinion last year. The result was a surge in share price confounding those who believed that the price already fully discounted the opinion. This ruling could open the way for others to consider separating that portion of their business that generates revenues in corporate owned facilities into a REIT and enjoy those tax benefits.

Then there was the matter of the refiners that awoke Thursday morning to the shocking news that the US Department of Commerce was going to allow essentially unrefined oil to be exported, even without a license, thereby likely reducing margins at the refiners. That sector saw some brutalized victims and some clear victors from the decision.

Then there was the case of Verizon (VZ) that had a contract in Germany canceled for fears that the NSA could use the devices as an easy conduit for surreptitiously gathering intelligence. 

Finally, Barclays (BCS) drew attention from local government as the New York State Attorney General’s office filed suit against Barclays claiming “fraud and deceit” in the manner their dark pool trading was executed. Of course, when there’s one cockroach you can be certain that there are more to be found, so the financial sector becomes more widely suspect as Barclays is scrutinized.

But to be clear, I was certainly on the side of government when Janet Yellen, just the previous week gave reason to believe that interest rates would remain low, thereby suggesting that equities would be a more advantageous investment vehicle than bonds. Unfortunately, as soon as this past week started, that news was old and long forgotten, as the message had no carry over to this week’s trading.

While some of last week’s events were scheduled, others came as a surprise in more than their content. Hopefully this week will be one when the hand of government will remain invisible and allow the market to trade on something that hasn’t been seen in a long while – fundamentals.

However, now isn’t the time to hold one’s breath and it’s not necessarily likely that next week’s beginning of another earnings season will be the time to do so, either.

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

Holly Frontier (HFC) was one of those brutalized refiners whose shares plummeted upon the news that certain unrefined products could now be exported. The share drop has brought Holly Frontier to the lower end of the range in which it had been trading and in which I currently own shares. I’ve done so on five occasions this year and have watched shares go up and down in alternating quantum stages during that time. While I believe the reaction to the news may have been overdone and would like to add shares, as Holly Frontier has an appealing option premium, regular dividend and routinely pays a special dividend, as well, I would likely await to see some stability in its price as the week opens before making the decision.

I’ve been waiting a while to re-purchase shares of DuPont (DD) and after its surprise announcement of a lower earnings forecast on reduced seed sales that time may have arrived. At one time DuPont was a very frequent holding, but it’s been nearly two years since that last purchase. Since that time DuPont has started offering weekly options and much more recently expanded weekly options, greatly increasing its appeal. Like many other stocks that I consider for purchase, DuPont has that nice troika of option premium, dividend and price stability that can serve to minimize some market tremors.

Another major decliner this week was Dollar General (DG), which plunged upon news that its CEO was planning to retire sometime in 2015. Presumably, the rational for that plunge was that the company was therefore, less likely to be involved in a buyout or merger with Family Dollar Stores (FDO) as has been rumored, in the near term.

That doesn’t really seem to make very much sense to me. If the union of those two companies makes sense, as many believe that it does for both companies, it’s not terribly likely that a company would giv
e up on the idea and simply go on hiatus. They would most certainly get the process moving at an appropriate time, while ensuring that CEO succession was closely aligned with the objectives defined by the board, which will continue to be chaired by its current CEO who has indicated he would stay on during the transition period.

I actually purchased some shares in the final couple of hours on Friday in the belief that I could get a quick assignment while shares recovered and anticipated doing another purchase this coming week.

Instead, shares stumbled while trading in a wide range in the final hour and I eventually rolled over shares. However, I think that the reaction was very much not only an over-reaction, but also the wrong reaction to what was really benign news. That leaves me in a position to consider further adding shares this week.

Verizon seems to be paying a price for the US government’s alleged spying on German Prime Minister Angela Merkel and is reportedly losing government contracts in Germany to Deutsche Telecom (DT) over concerns that Verizon cell phones may be eminently capable of doing the NSA’s bidding overseas. A late day recovery restored shares above $49, but I would be anxious to purchase shares if approaching that level again, mindful of its ex-dividend date the following week.

The potential dividend payers for the week are Bristol Myers Squibb (BMY), Medtronic (MDT) and Sysco (SYY).

Bristol Myers is a frequent holding and I currently own two lots, having saved one from assignment specifically because I wanted to retain the dividend this week. It has traded in a range recently as some good news about a drug used in the treatment of melanoma has lifted shares from the low end of that range that I believe may carry shares back toward the $52 range if the overall market doesn’t fade. 

Medtronic has been much in the news lately due to its proposed $43 billion buyout of Covidien (COV), an Ireland based company. While inversions are increasingly in our lexicon these days, this merger makes sense on more than just a tax basis.

Trading near its yearly highs isn’t generally a place I want to be when opening a position, but I don’t foresee any near term threat to Medtronic’s share price and it does offer a decent dividend, made more appealing if shares are assigned relatively quickly. 

Sysco is just one of those companies that is everywhere you probably don’t always want to be. It’s non-flashy, utilitarian and below the radar, yet it is fairly indispensable and reliable in terms of what if offers to a broad range of customers. Shares have only recently begun trading weekly and expanded weekly options and while offering a nice dividend and option premium, also offers some opportunity for share appreciation, as well.

Finally, Whole Foods (WFM) also goes ex-dividend on July 1, but purchasing for the purposes of capturing the paltry dividend may be as bad of an idea as it has been for me to have purchased shares in the past. I currently own shares and have watched them tumble as the company faced increasing competition, bad weather and significant expansion efforts. In addition, an occasional comment too many and too controversial by one of its co-CEOs does nothing to help it recover its former glory.

Whole Foods is one of those rare companies that has previously recovered its lost glory, although it did take nearly 7 years to return to its 2005 price peak. I don’t really have the kind of patience, but the extent of the climb isn’t as steep as in the past.

I think that it’s bad news is behind it and it has shown some stability at its current price. While I often like to purchase shares after a price drop, especially if I already own shares, I haven’t found the reason to do so with Whole Foods while watching its value erode.

Unless there’s a report coming from government agencies next week citing health hazards of organic food, I’m finally ready to add to my Whole Food holdings and may as well take that puny dividend for my troubles.

Traditional Stocks: DuPont, Holly Frontier, Verizon, Whole Foods

Momentum: Dollar General

Double Dip Dividend: Bristol Myers Squibb (7/1), Medtronic (7/1), Sysco (7/1)

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.

 

 

Jun212014

Weekend Update – June 22, 2014

Weekend Update

There’s an old expression that advises that it’s generally a bad idea to fight the Federal Reserve.

They have pretty powerful tools even when there’s some concern that the quiver is beginning to empty.

Janet Yellen, its Chairman, may give every indication of being a dove, but my guess is that when on the canvass and feeling threatened, she would be a formidable foe to anything that creates a threat.

Right now, the most immediate threat that can be recognized is that of a rising interest rate environment, although there are still those that worry about deflation, as well. But at least most everyone is agreed that interest rates have more than just mere relevance.

I don’t think Yellen was using the old “Rope-a-dope” strategy to ultimately beat inflation, because sooner or later we all know that it is the end result of a whirring economy and if that is the goal then there has to be some acceptance of inflation’s return.

So when Janet Yellen, during her press conference that followed the release of the most recent FOMC statement suggested that inflationary signals didn’t threaten low interest rates that could only be construed as a green light to buy stocks and that’s exactly what happened as more new highs were the ultimate outcome.

The current market reminds me a little of the glitchy computer software that allows you to build roller-coasters of your dreams that only go higher.

At some point even a zealous non-engineer can realize that something is missing from the formula that creates the real excitement. The climb higher is only the anticipation and can never be realized without the drops.

Stocks, I suppose, are a little different. The real excitement comes during the climb higher, but only as long as you get off of the ride before the actual drop.

Maybe that’s one of the reasons I like a covered option strategy. On days like this past Friday, which was the conclusion of the June 2014 option cycle, I was forced off of many rides, as lots of assignments were my fate.

It was exciting going up and I can get back on. There’s always another ride coming along and maybe even one that will come at a discount on the ride down.

On the meantime, I don’t know if I want to be on the ride whenever the dove bears her teeth and puts on the brakes. As much as we like Janet Yellen’s actions that help to support the market’s continued trajectory it may be a prelude to the same characteristic that would lead to tough medicine when needed, but before we are ready to accept it.

Either way, it’s probably a good idea to stay on the same side as the Federal Reserve, taking and throwing the same punches, in the knowledge that they’re aligned with investors. Even if that alignment is unintentional it signals favoring investing over saving. That in turn belies a mindset that reduces the role of a defensive posture, so there may be some sporadic punches taken in the name of advancing the offense.

I have a lot more money this week after last week’s assignments and while still concerned about approaching that point at which a drop seems sooner rather than later, for now it seems as if the Federal Reserve just keeps adding more and more track to make the ride up more giddy and the ride down more of a “white knuckle” experience.

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

As Apple (AAPL) gets ready to begin trading its third week following the 7 to 1 split, what is clear is that for those expecting a quick profit once the shares became priced in a more egalitarian fashion it has been two weeks of disappointments. in that time Apple shares dropped 1.7% while the S&P 500 climbed 1.1%.

As I suggested at the time of the split announcement that may have been timed with earnings to help deflect closer scrutiny of results, Apple would become a better trading vehicle as it settled into that phase of its corporate identity that no longer scoffed at dividends, buybacks and stock splits.

While the speculation regarding new products and innovations will continue and there will undoubtedly be occasional elation and occasional disappointment, Apple shares will be less likely to reflect fervor that enhances risk and reward. For me, that makes it a much more logical covered option trade than at anytime over the past 30 months.

Kohls (KSS) is to me an ideal kind of stock. It just muddles along and has some occasional earnings surprises that propel shares higher or lower only to see it somehow return to more familiar territory. It has an attractive dividend and has relatively recently started trading expanded options that are available at many strike levels.

It neither stands out at the upper nor lower ends of the consumer spectrum and sees little reason to bring too much attention for itself as it is very comfortable being in the middle. That kind of comfort also brings a lot of comfort when considering its use as part of a covered option strategy.

While I already have some shares of Kohls that are hoped to be assigned away or rolled over this coming week, at the current price I think it’s time to add additional shares and perhaps make use of some of the expanded option opportunities.

Lowes (LOW) is another stock that just seems to do its job, as long as its job is not to stay for prolonged times at elevated or depressed levels. While that may describe the worst rollercoaster ever designed, it is a perfectly good design for a stock used in a covered option strategy.

I had shares assigned this past week and would consider adding them again despite a small increase in its price in that time. It is currently trading at about the mid-point of the price range that h
as worked very nicely over the past year if using such a strategy.

While the Federal Reserve may be easing some defenses as it continues to ignore some inflationary pressures I’ve been looking increasingly to a more defensive position over the past years in seeking dividends, where possible.

This week’s potential purchases reflect the difficulty in re-allocating funds when prices are at or near their highs. Both Dow Chemical (DOW) and Deere (DE) are ex-dividend this week, but are also near those one year highs. Both favorites over the past few years, while having owned shares of Dow Chemical recently, I haven’t owned Deere in almost a year, while awaiting it to give back some gains.

Inevitably, that should be the case for both Dow Chemical and Deere, but as long as the Federal Reserve keeps adding that track I’m not certain I can see a specific reason why the drop should come at this particular time for either of those stocks. While the share prices are higher than I would like they both continue to have those characteristics that made them frequent trades for me in past years and always in consideration from one week to the next.

I haven’t owned EMC Corp (EMC) as frequently as Dow Chemical or Deere, but it too goes ex-dividend this week and it, too, is one that I’ve been waiting upon to shed some of its gains. While its dividend isn’t as attractive as some others, shares would fill a void for me as I’m currently under-invested in the technology sector. That itself may not be a good reason to add shares, but EMC has been a steady and reliable performer, although I would prefer to be out of the position, if purchased, prior to earnings during the early part of the August 2014 option cycle, as it is frequently moved by its more volatile progeny, VMWare (VMW).

AS earnings season now winds down in preparation for the next one that begins in just two weeks I’m somewhat less inclined to engage in risk, despite the recent recovery of many momentum stocks.

Apollo Education (APOL) has been beleaguered for a while, along with others in the for-profit education business. Having Bill Ackman place you in his cross-hairs isn’t necessarily good for your share’s health, either.

While the option market is anticipating an 11.1% move in share price upon earnings announcement in either direction, the sale of put contracts at a strike level 14.9% below Friday’s closing price could still deliver a weekly 1% ROI, if not assigned.

I like that kind of gap between what the market is expecting and the risk level where I may be able to achieve my desired ROI. One negative factor, however, which limits the ability to respond to an adverse price movement that might make unwanted assignment possible, is the lack of expanded option availability. I like to have those available in the event that a rollover of the put contracts is necessary, in order to avoid assignment, while then awaiting a bounce back in share price.

Micron Technology (MU) also reports earnings this week and a look at its chart makes you believe that it may be ready for a rest.

While the option market is anticipating only a 7.5% move in price, the 1% ROI threshold may be able to be achieved if shares drop less than 9.3%. The availability of expanded weekly options makes this a bit more attractive than the Apollo trade, however, I tend to prefer those earnings related trades in which shares are already trading with a negative bias, such as Apollo.

A few days ago, Josh Brown asked on Twitter if anyone could find a worse looking chart in the S&P 500 than Coach (COH), he would be impressed. Well, Bed Bath and Beyond (BBBY) reports earnings this week and its chart isn’t the most beautiful of sights to behold.

As opposed to Micron Technology and Apollo Group, there isn’t the same kind of gap between the implied price move and the strike level that gives me a sense of security if selling puts. However, Bed Bath and Beyond is a stock that I wouldn’t mind owning if faced with the prospect of assignment of those puts, although I would still consider the possibility of rolling over puts, as expanded weekly options are available.

Finally, Sinclair Broadcasting (SBGI) was a stock that I kept a close eye on this past week. As the nation’s largest independent broadcaster it potential had something to lose as it awaited a decision by the Supreme Court on whether the Aereo device would be allowed to continue its re-broadcasts of programs coming over what are considered public airwaves.

I was watching closely not because I had any great interest in the legal basis for any decision, but rather because I had shares of SInclair and had sold options that were expiring this Friday. Mid-week came word that a decision might come as early as Thursday or Friday and that sent shares moving in alternating directions. Added to that was news that one of the founding family Vice-Presidents sold all of his shares earlier in the week was enough to prompt me to close the positions, pare down the profit and look for another roller coaster car.

By the time the market closed on Friday the decision had yet to be released, but selling again got the better of the shares and Sinclair lost its past month of gains.

The decision to do anything will essentially be binary. If the decision favors Aereo I would be very interested in re-purchasing shares of Sinclair Broadcasting. If the decision favors the traditional broadcasters then I’d anticipate a rebound in share price and would look elsewhere for opportunities.

For now, the Federal Reserve is giving us all of the opportunities we need and I’m certainly not going to become a fighter at this stage in my life.

Traditional Stocks: Apple, Kohls, Lowes, Sinclair Broadcasting

Momentum: none

Double Dip Dividend: Deere (6/26), Dow Chemical (6/26), EMC Corp (6/27)

Premiums Enhanced by Earnings: Apollo Education Group (6/25 AM), Bed Bath and Beyond (6/25 PM), Micron Technology (6/23 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.

Jun132014

Weekend Update – June 15, 2014

Weekend Update

It’s hard to believe that there was ever a period of a few hundred years with relative peace and little military expansion.

It’s not too hard to believe that almost 2000 years have passed, but given that the Pax Romana was followed by the Middle Ages we may want to re-think the idyllic and beneficial nature of peace.

The “Pax Romana” sounds so quaint in an era when even a week without new conflict seems like a gift from the heavens, but the markets need some kind of conflict, physical or otherwise, to keep it functioning in a rationale manner. Otherwise it gets left to its own self and that could have consequences.

This past week was one in which there was no real scheduled news and very little was expected to be happening to shake markets. It was a week when I thought the real challenge would be balancing new market highs achieved in very tentative fashion with the vacuum that can generate largely uncatalyzed moves.

In that vacuum too much quietude can lead to lots of introspection, and over-analysis, not to mention those voices that start telling you what you really should be doing. In that vacuum it’s not too unusual to see over-exaggerated responses to otherwise benign factors.

Who knew that the vacuum could be so easily magnify the results of a primary election in a small congressional district?

For some reason that was the conventional wisdom explaining the first of two triple digit losses mid-week, despite little rationale reason to believe that the political landscape could get any less accommodating. Why in the world a roadblock toward achieving immigration reform could jeopardize stock health is a difficult thesis to weave, but that was the story and everyone stuck to it, while ignoring the fact that the World Bank had cut its forecasts for global growth.

However, the following day there really was something to be concerned about and that was the disruption of a week’s worth of world peace as news came of a mostly unknown army beginning to conquer Iraq and marching toward its capital with Patton-like speed.

Its name “ISIS,” an acronym for “The Islamic State in Iraq and Syria” is an unfortunate situation for Isis Pharmaceuticals (ISIS). It reminds me a bit of the early 1980s and the one time popular diet suppressant, AYDS. Hopeful Isis Pharmaceuticals will respond better than the decision to rename a product as “Diet Ayds.”

But with tensions rising as this past week came to its close the market once again did the unexpected, just as it had done through much of 2011, 2012 and 2013.

If the lessons of the Crimean and Ukraine crises have taught us anything it’s that Friday crises tend to be good for whatever it is that’s ailing the markets.

Going into a weekend of uncertainty the market again failed to sell off and abide by the age old wisdom of not staying long going into a weekend of uncertainty.

Lately, it seems that the market thrives most when peace, whether that of political compromise necessary for a budgetary agreement or that of a cease fire, is itself at risk. With all of the recent talk about complacency, while the Volatility Index may reflect the level of past complacent behavior, the decision to ignore the unknown that may come from a marauding army marching into a nation’s capital is a true measure.

While we all want peace in every aspect of our lives there is a sense of “schadenfreude” that may exist when realizing that it is ongoing tension that may serve to keep markets thriving rather than focusing upon itself and realizing that sometimes heights are untenable.

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

In  addition to the certainty of conflict that seems to occur on a very predictable basis, so too is there certainty lately that General Motors (GM) will be in the news and not for a good reason. With even more recalls announced last week there really hasn’t been much good news for quite a while, but as we saw last week, that didn’t seem to have any impact on sales.

To its credit despite all of the adverse news General Motors has defended the $35 level very nicely, as long as you’ve had a little bit of faith and patience while others either took profits or panicked.

Following a little bit of weakness and demonstrating that shares can absorb incredible amounts of bad news, General Motors offers some good opportunities for use in a covered option strategy, as it offers an attractive dividend that results from its frequent price gyrations. With it’s equally attractive dividend it is easier to be patient while watching shares move up and down. The availability of expanded weekly options adds considerable latitude in how shares are managed while awaiting those price movements.

With the recent revision to GDP there may not be much reason to be optimistic about near term economic growth. However with continuing and steady growth in employment and perhaps bolstered by news from one time leader Intel (INTC), of increasing fortunes, I again took to my proxy for economic growth, Fastenal (FAST). 

I already own shares that may be assigned this coming week, but would not be adverse to rolling them over as they approach the purchase price after some recent weakness. I would also consider either replacing those shares, if assigned, or even adding additional shares and would further consider using some longer term options, such as the July or August 2014 contracts. The latter also adds the possibility of capturing a dividend payment.

Nike (NKE) isn’t a company that I’ve owned very often, although it is one that I look at each week when thinking of possible replacements for assigned shares. Unfortunately, this week I didn’t have any assignments and that makes me a little more guarded about adding new positions and eroding my cash position. However, it’s hard to formulate a thesis whereby Nike is disproportionately damaged by any breach of peace in the world. I also look at shares of Nike as currently being on sale after some recent losses. 

Lowes (LOW) on the other hand, is a company that I’ve owned with some frequency, as recently as a week ago. It, too, is on sale after last week’s market movements and without any real reason for its price drop.

Lowes fits the profile of companies that have been especially kind to me, in that it tends to move within a defined range, deals with an easily understandable product and happens to offer reasonable option premiums and a fair dividend.

While there’s nothing terribly exciting about the company that sits in the shadow of a larger competitor and isn’t too likely to gain from future growth nor suffer from growth disappointments, there is something exciting about booking profits at a tolerable level of risk.

With some recent concerns about its future in the Russian marketplace having been put at ease, MasterCard (MA) has rebounded from its recent lows. It is among those stocks that has seen me hoping for a drop in value and did so a bit over the past week. My comfort level with purchasing new shares is in the $76 range and it is currently just below that level, inviting some consideration. However, I may be inclined to sell puts on shares as my preference is a lower entry price. If doing so and the shares dropped below the strike I would assess whether to attempt to rollover the puts in an effort to get an even lower entry price or whether to accept assignment and position myself to sell calls and perhaps collect the trivial dividend early next month.

The week’s two potential dividend plays are very much at extremes of the spectrum. General Electric (GE) is fairly staid, moves in small doses, while Las Vegas Sands (LVS) is quite the opposite.

General Electric is a company that I don’t own often enough and am never quite certain why that is the case. It too tends to trade in a definable range, is not terribly volatile, offers a reasonable option premium and an excellent dividend. All of that sounds compelling to me, with perhaps this being the week, as the dividend serves as a lure.

Las Vegas Sands, which I purchased last week and may lose to early assignment, is still at the lower end of its recent trading range, despite the good showing last week. While I don’t particularly like chasing stocks that have risen, regardless of how much higher they may still need to go to get to recent highs, here too, the dividend may be a potent lure. While the premium is always attractive, I think that the near term lower boundary on the trading range may have been defined at about $72.

Finally, everyone who loves dysfunction would certainly be attracted to Darden Restaurants (DRI).

Not too long ago its CEO, Clarence Otis, was hailed as a genius and in touch with the casual dining needs of the nation. Now, he is castigated as caring only about his own fate and selling Darden’s assets at ridiculously low valuation in an effort to fend off activists.

Whatever.

I rarely want to consider an earnings related trade unless there are weekly and preferably expanded weekly contracts available and then usually consider the sale of puts. Sadly, in Darden’s case there are only monthly contracts, but this happens to be the final week of the monthly cycle, so in a perfectly executed strategy this could be a weekly trade.

However, despite that, I look at a potential share purchase of Darden and looking at a longer term commitment, with consideration of selling July 2014 calls in the hope of also capturing its very healthy dividend.

Dysfunction can sometimes play the same role as conflict. Sure, normalcy is far easier to deal with, but as with peace, where’s the excitement in that?

 

Traditional Stocks: Fastenal, Lowes, MasterCard, Nike

Momentum:  General Motors

Double Dip Dividend:  General Electric (6/19), Las Vegas Sands (6/18)

Premiums Enhanced by Earnings: Darden Restaurants (6/20)

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.