Mar232014

Weekend Update – March 23, 2014

Weekend Update

There was a time when the Chairman of the Federal Reserve did not hold press conferences.

In the past that would have been a very good thing, as the last Chairman to not have held press conferences, Alan Greenspan, was cryptic. When he did speak, such as during congressional testimony, he could send markets gyrating to opposite extremes before even having uttered a single verb. 

When Ben Bernanke succeeded him and introduced the concept of a regularly scheduled press conference people were thrilled with the idea that there would be a new era of transparency and an end to the use of words shrouded by their own opacity.

For the most part Ben Bernanke’s press conferences were yawners. Not because of a lack of interesting subject matter, but because the markets rarely reacted to any new insights and inadvertent slips of strategic policy intentions just weren’t going to come from someone who carefully measured every word.

Now it was Janet Yellen’s turn and there had even been talk of her holding such press conferences after each FOMC minutes release and not simply on an alternating monthly basis.

Yellen performed admirably, once you get over the fact that with your eyes closed she sounds like Woody Allen’s sister, never batting an eyelash when one questioner twice referred to the FOMC members as “you guys” and then herself once referred to the cultural phenomenon of “shacking up,” it was what she said or didn’t say or maybe meant or maybe didn’t mean that sent the market abruptly tumbling at 3:04 PM Wednesday afternoon.

What was learned was that in a world of imprecision, especially when discussing time frames, any lapse that leads to a more precise time frame can create reactions from people that claim to loathe uncertainty but are really more afraid of certainty. The very idea that interest rates might begin to rise as soon as 6 months from now as part of a strategic plan by the Federal Reserve was a momentary reason to panic.

But was it really because of what Janet Yellen said or more a case of traders going to a second or even third derivative of the consequences of whatever it is that she may have said or may have meant.

That seems like good enough reason to exercise the emotional part of a coherent investing strategy.

The market’s response this week showed that it is very much on edge and harbors a significant amount of nervousness, but it also shows impressive reparative ability. 

Over the past few weeks it is that reparative ability that has repeatedly been tested and repeatedly met the challenge. 

With continued challenges in mind, this week more of my attention is focused upon positions that may be less susceptible to a breakdown in the event of a market giving into some of the challenges that may await. While in recent weeks I haven’t been adverse to more risky or volatile positions, I once again find myself not being attracted to risk as the market is again near all time highs, despite its seeming resilience and resistance to challenges.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum categories, with no “PEE” selections this week (see details).

The world of a stock analyst continues to confound me. On the one hand, I saw this week’s decline in shares of Bristol Myers Squibb (BMY) as an opportunity to consider bringing it back into my portfolio, particularly since I need additional healthcare representation. However, this week came a curious assessment from analysts at The Jeffries Group who raised their price target of shares to $48 and issued a “hold” rating on shares.

Since a $48 price target is about 10% below the Friday’s close, which itself is 8% lower than where shares started the month, it does beg a question or two. 

Rather than asking those questions, I like what appears to be an opportunity, having waited for shares to return to my comfort level. The fact that Bristol Myers will be paying a dividend shortly further encourages me to consider going for the trifecta; an increase in share value, an option premium and the dividend, during what is hoped to be a short period of ownership.

British Petroleum (BP) is another stock that has seen its shares fall about 8% this month. I haven’t owned shares since November 2012, but have been anxious to do so since that time, futilely hoping that it would return to the $43 level at which I had repeatedly traded its shares. Sometimes you may have to give up some hopes and perhaps come to the realization that after its 8% fall that may be the biggest gift that is to come. While its option premium is less rich than I would like the enticement of its dividend makes it one of those companies that I don’t mind owning for more than an occasional short term fling, particularly since it doesn’t appear to be poised to present undue risk, even in a falling market.

While British Petroleum may now seem to have much in the way of added risk, Holly Frontier (HFC) is not exactly be a prototypical stock to consider when looking to avoid risk. It certainly trades with some sudden and rapid moves in both directions and does so on a regular basis. Yet despite that kind of behavior it seems to also be very capable of finding its way back home. Having owned several times in the past few months and having just had shares assigned this past week, I’m interested in restoring them to my portfolio. The single caveat is that it is near the top of the range that I’ve had comfort initiating a position.

With the attentions of Nelson Peltz and Carl Icahn, Mondelez (MDLZ) and eBay (EBAY), respectively have seen their initial bursts of share appreciation moderate of late. Until Icahn came onto the scene eBay was one of my very favorite covered call trades as it
so reliably traded in a range. His sudden interest and unimaginative plan to spin off the PayPal unit was initially news divulged by eBay upon its earnings announcement and it shifted focus from mediocre performance to activist investing.

Following some fairly nasty exchanges, including a battle of words with Marc Andreessen, who sits on the board of eBay, the share price has started moderating a bit, having gone down approximately 5% from its peak earlier this month. That’s still on the high end of my trading range, but the interest is returning and would be greatly enhanced with any further drop.

Mondelez, on the other hand, has made some peace with its activist and its shares have stagnated ever since. As with eBay and so many other stocks, I like stagnation, especially if punctuated with occasional bursts of activity that keeps traders and especially potion buyers ion their toes. Mondelez goes ex-dividend this week and that has been a good time to consider entering into a new position or adding shares.

A Court of Appeals ruling on Friday regarding debit card swipe fees was greeted by differing levels of enthusiasm for shares of Visa (V) and MasterCard (MA) that appeared to adversely impact MasterCard well out of proportion to the favor found in Visa. Despite the acknowledged greater market share that Visa controls in the debit card area, analysts predominantly noted an incremental benefit to MasterCard as well, however its shares fell sharply, placing it back in the attractive price range

LuLuLemon Athletica (LULU) reports earnings this week. With a new clothing line recently released and with new leadership, as an existing shareholder with much more expensively priced shares, my hope is that they will provide guidance that casts an optimistic light on its future fortunes. No stranger to large earnings related moves there is, however, the possibility that this earnings report could be the kind that a new CEO often uses for advantage by dumping all of the bad news and dead weight so that, by comparison, future earnings reports are glowing and reflect upon the new CEO.

The option market is implying a 10.5% move when earnings are announced. By some of its own historical standards that may be an understatement of what its shares are capable of doing and the direction has been predominantly on the downside. The 1% ROI that may be able to be obtained even with a 14% drop in share price may make that risk worthy for some, especially if you believe, as I do, that this earnings report will be greeted in a positive manner.

Family Dollar Stores (FDO) has not had a good month ever since a downgrade to “sell” and disappointing earnings from Dollar General (DG). Now near its yearly lows volatility has returned to its option premiums helping to balance the risk that may be associated with this purchase, despite its historically low beta level. I already own shares and have been fighting back its price drop by attempting to take advantage of that enhanced option premium. While there may be some disagreement about what an improving retail sector means for the lower echelon of retailers, such as Family Dollar Store, I subscribe to the “high tide theory” particularly since economic recovery is leaving many behind and increasingly tethered to the lower echelon of retail.

Other than being named as one of the world’s most ethical companies, there really was no other bad news to have accounted for International Paper (IP) being unable to capitalize on the market’s advance this week. It’s current price places it close to the lower end of its trading range and makes it increasingly appealing to own. With more spin-offs of its assets planned within the next few months in pursuit of a successful strategy that has seen a number of such assets spun off, International Paper has created and optimized value without the need for outside agitation and has been a good candidate for a covered option strategy in the past year.

Finally, GameStop (GME) reports earnings this week. It received a blow to its share price when Wal-Mart (WMT) announced that it was encroaching on GameStop’s core business by offering to exchange Wal-Mart shopping credit for used video games. Whether Wal-Mart believes that they have a potentially profitable product line in used video games or simply plan to use customer entry into the stores as a means of enticing them toward other Wal-Mart purchases isn’t clear, but I think that impact on GameStop will be far less than the market has already assigned.

Wal-Mart, priding itself on offering the lowest prices, isn’t likely to offer the highest prices on its game repurchases. Secondly, only the most desperate of families is going to garnish their kid’s video games, which through some tradition have become the property of kids to do with as pleased and then trade them in for a chance for even more Wal-Mart goods. The rightful owners of those games, the kids, are going to need a really compelling reason to go into Wal-Mart.

Adult gamers, on the other hand, may not have enough energy to re-direct their inertia and change their game swapping habits.

The option market is implying a 5.5% move upon earnings release and GameStop is certainly no stranger to large price swings. However, the sale of a put option at a strike price about 11% below Friday’s closing price can still return a weekly ROI of 1%. That’s the sort of fun that could have me easily glued to the ticker crawl on my stock screen.

 

Traditional Stocks: Bristol Myers Squibb, British Petroleum, eBay, Family Dollar Store, Holly Frontier, International Paper, MasterCard

Momentum Stocks: none

Double Dip Dividend:  Mondelez (3/27)

Premiums Enhanced by Earnings: GameStop (3/27 AM), LuLuLemon Athletica (3/27 AM)

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.

Mar162014

Weekend Update – March 16, 2014

Weekend Update

Most of us have, at one time or another believed that we were carrying the weight of the world on our shoulders. The reality will always be that unless we are the President of the United States with a decision to be made regarding pressing that red button, those feelings are somewhat exaggerated and unlikely to be borne out in fact.

It’s probably not an exaggeration, however, to suggest that in the past week the burden of the world weighed down heavily on the U.S. stock markets.

Slowing growth and questionable economic statistics from China and an unfolding crisis in Crimea were the culprits identified this week that sapped the momentum out of our markets. The complete list of “reasons” for last week’s performance was compiled by Josh Brown, but ultimately it all came down to our shoulders. Perhaps like a regressive tax the individual investor may feel an exaggerated impact as well when the market behaves badly and may also take longer to recover from the heavy load of losses.

In addition to the global issues then there were also issues of regulation, seeing the SEC and FTC weigh in on Herbalife (HLF), dueling words of umbrage from billionaires over eBay (EBAY) and litigation from the New York State Attorney General’s Office over General Motor’s (GM) role in potentially avoidable vehicular deaths.

What there wasn’t was anything positive or optimistic to be said during the week, other than sooner or later Spring will arrive. For the first time since the last real attempt at a correction nearly two years ago the market closed lower in each trading session of the past week.

While the weekend may change my opinion, as additional news may be forthcoming as Russian war games on Ukraine’s borders play themselves out and a Crimean referendum is held, I find myself optimistic for the coming week.

I usually try to find ten potential trades for each coming week. Last week I struggled to find just nine. This week my preliminary list was nearly twenty and I had a difficult time narrowing down to ten stocks.

That hasn’t happened in a while.

Certainly, as has been discussed in previous weeks following a downward moving market, the challenge is discerning between value and value traps. In that regard this past week is no different, but for inspiration, I look to the option seller’s best friend.

That would be volatility. It creates the kind of premiums that can make me salivate and it is the lack of volatility that makes me wonder whether anyone really cares anymore about the need for stock markets to react appropriately to fundamental factors, as opposed to simply moving higher under all circumstances.  

Since late 2011 we’ve been used to seeing historically low levels of volatility with occasional spikes representing market downturns. For those following along you know that there haven’t been many of those downturns in the past 20 months, although we did just recently quickly recover from an equally quick 7% loss. Those downturns saw spikes in volatility.

Suddenly there has been a lot of discussion about increasing volatility and for those that get excited about technical analysis, much is made of the significance of Volatility Index breaking above the 200 Day Moving Average.

What you don’t hear, however, are the video playbacks of all of the times the Volatility Index has surpassed that 200 Day Moving Average and it did not lead to a market breakdown, as suggested by many.

Instead, a quick look at the past year seems to indicate an alternating current of spikes in volatility between larger spikes and smaller ones. Simply put, I think we’re experiencing a regularly scheduled smaller spike in volatility.

I could be wrong, but that’s what hedging is all about.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum categories, with no “PEE” selections this week (see details).

As with last week, despite the uncertainty that may usher in the coming week I see some possibilities even with some higher beta positions, on a selective basis.

While I’ve been trying to emphasize dividend paying positions for the past three months, the only potential such trades that had any appeal for me this week fell into the higher beta category.

While Best Buy (BBY) is probably immune to any direct impact from an overseas crisis, it has had no difficulty in creating its own and has certainly created a crisis of faith before regaining some respectability under new leadership. But for those that have held shares that all seems so long ago after some disappointing earnings reports. Hit especially hard this most recent earnings season, Best Buy has two months left to acquit itself and another two weeks to have their cash registers ring loudly to offset any weather related disappointments. In the meantime shares do go ex-dividend this week and have been trading in a narrow range of late. In the absence of any news it may be expected to keep doing so long enough to capture a dividend and perhaps a premium or two.

Las Vegas Sands (LVS) also goes ex-dividend this week and is also a higher beta stock. While I have traded this stock w
ith some frequency, it’s been a while since doing so as it resists going much lower. While it is at a relative low to its recent high after a 7% decline, it has still had a fairly uninterrupted trajectory. Like Best Buy, there’s not too much reason to suspect that events in Crimea will serve as a direct contagion, the higher beta may be its own heavy weight in the event of a market decline, but like cockroaches, gambling will survive even nuclear holocaust, as may Sheldon Adelson, the Chairman. It may also survive some weakness in China, as there’s no better place to bury your misery than in their Maxao casinos.

It’s usually a fallacy in the making when you use logic to convince yourself of the rationale to buy a stock. That includes the belief that if you liked a stock at one price it must certainly be even more likeable at a lower price. Yet that’s where I find myself with General Electric (GE), whose shares were just assigned from me a week ago and now find themselves priced below that earlier strike price. However, in the case of General Electric, unless there are some horrific surprises around the corner or a complete market meltdown, it’s hard to imagine that it could be classified as being a value trap at this new lower price. Down 4% in the past week and 10% YTD, if the market is heading lower, GE will have been ahead of the curve. While it’s option premium doesn’t reflect much in the way of volatility it does represent a reasonable means to surpass the performance of a flat market.

While retail has been a place that money has gone to die of late, you get a feeling that things may be reversing, at least in the minds of analysts when even Coach (COH), a literal punching leather bag for all, receives an upgrade. While my shares of Coach were assigned this week, as were my shares of Kohls (KSS), I’m ready to repurchase both in their current range, as the long fall down deserves at least a short climb higher.

Coach has shown itself to be able to faithfully defend the $46 level despite so many assaults over the past two years. That ability to consistently bounce back has made it a great covered option position, whether through outright purchase or the sale of puts.

Kohls represents exactly what I like in my stocks. That is a non-descript existence and just happily going along its way without making too much fuss, other than an occasional earnings related outburst. Dependable is far more important than being flashy and as a stock and as a company, Kohls hugs that middle lane reliably, but still provides a competitive premium thanks to those occasional outbursts.

If the thesis that retail is ready for a comeback has more of a basis than just as reflected in share price, but also reflects pent up spending from a harsh winter, MasterCard (MA) is a prime beneficiary. While already somewhat protected from the ravages of weather by virtue of being able to spend your money with just a simple mouse click, there are just some things that need to be done in the real world. Trading well below its pre-split price until recently I had not owned shares in years. Now more readily purchased in scale, I look forward to the opportunity to purchase and re-purchase these shares with some degree of regularity, WHile its dividend is paltry, there is certainly room for growth to rise to the levels of Visa (V) and Discover Financial Services (DFS). However, notwithstanding any potential bump in share price along with a dividend hike, the option premiums can make the wait worthwhile.

In a week of no industry specific news, following a flurry of changes in industry dynamics initiated by T-Mobile (TMUS), Verizon (VZ) fell 3% bringing it down to a level from which it has found significant strength. While General Electric may face some potential liability with events in Crimea or a deteriorating economy in China, I don’t see quite the same liability for Verizon. Instead, whatever burdens it has to carry will come from an increasingly competitive landscape as it and AT&T (T) are continually pushed by T-Mobile and perhaps Sprint (S). In the meantime, while trading in a range and finding support at $46, there’s always the additional lure of a 4.5% dividend.

While Verizon isn’t terribly exciting it meets its match in Intel (INTC). However, the excitement that comes from growth isn’t absolutely necessary to generate predictable profits. Intel is especially well suited when it’s share price is very close to a strike level. If volatility continues to rise the opportunity to purchase Intel expands as the price range at which it may be purchased increases, while still offering an attractive option premium which can be further enhanced by an attractive dividend.

While it was only a matter of time until retail would begin to dig its way out from under the piles of snow, no sector has brutalized me more this past year than the one that requires digging. Freeport McMoRan (FCX) is among that group that hasn’t been terribly kind to me, despite my belief that it would be the “stock of the year” for 2013.

With copper itself being brutalized this past week, despite gold’s relative strength, Freeport McMoRan has itself had the weight of the market’s response to the less than robust Chinese economy to shoulder. But the one thing that you can always count on is that data from China can easily correct reality and that explains the seemingly recurrent see-saw ride that we have been on in those sectors that are tied to their data. The true plunge in copper prices, if sustained, will not be good news for Freeport McMoRan, whose generous dividend payout could conceivably be jeopardized.

On the other hand, shares are now at a level that has repeatedly created substantial returns for those willing to test the waters.

Finally, not many companies, especially those with a newly appointed CEO had as bad a week as General Motors. You might think that having paid its first dividend in years this past Friday there would be reasons to rejoice, but finding yourself at the top of the headlines related to customer deaths isn’t an enviable place, nor one conducive to a thriving share price. When the Attorney General of any state piles on that doesn’t help.

However, with a chorus of those clamoring for General Motors to re-test the $30 level purely on a technical basis there may be reason enough to believe that won’t be the case. Having timed a purchase of shares as inopportunely as possible, I’d like nothing more than to see that position restored to some respect.

As with the recent news that the FTC will b
e investigating allegations that Herbalife was engaged in a Ponzi scheme, the bad news for General Motors, while coming as an acute event, will take a long while to play out, regardless of the merits of the cases or the human tragedies caught up in what is now a story of fines, punishment andperhaps even acquittal.

Traditional Stocks: Coach, General Electric, General Motors, Intel, Kohls, MasterCard, Verizon

Momentum Stocks: Freeport McMoRan

Double Dip Dividend: Best Buy (ex-div 3/18), Las Vegas Sands (ex-div 3/18)

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.

Mar92014

Weekend Update – March 9, 2014

Weekend Update

It was a week of conflict and uncertainty that nonetheless took the market to new highs.

That’s really not the way it’s supposed to work, as the market is said to dislike uncertainty and there’s certainly plenty of that at the moment. Then again, the market is also supposed to dislike being long going into a weekend of uncertainty, yet it can’t resist buying into the close of a trading week, having again done so the past two Friday’s, despite the breaking news and later developing situation in Crimea.

While news seemed to moderate early in the week there was new concern over escalation as the week came to its close, yet the market closed t another record high.

Granted that it was also a week in which the Employment Situation Report was released and as we all know by now that means a week in which the market goes higher, but conflicts on the ground threatened that certainty. While many finally discussed the recent relationship between the market and the Employment Situation Report, you heard it here, first, two reports ago.

Meanwhile, some of the week’s conflict may have had an historical basis going back centuries as Vladimir Putin’s Russia supported a split of Ukraine, while other conflicts, such as between Carl Icahn and Marc Andreessen are more recent and involve the split of eBay (EBAY). Despite the way in which we instinctively await the release of the monthly Employment Situation Report, the only stories that really mattered and garnered any attention were those of conflict.

Putin, Icahn and Andreessen. Two bullies and a visionary, although you can decide what role is assumed by each player, understanding that bullies can also be visionaries.

While Putin seeks to re-draw the map most of us have never really looked at, the battle between Icahn and Andreessen has temporarily pulled eBay off of my map, as it no longer trades in that comfortable range that I had come to appreciate in the quest to sell covered calls on a serial basis. 

Recent reports suggest that the decision to proceed in Crimea was a strategy that emerged haphazardly and was borne out of emotion and deep grievances. In contrast, the conflict surrounding eBay is very likely one that has it its basis simply in differing opinions about where investor value resides. Still, despite what may be well reasoned positions, as with most other aspects of life, I don’t particularly care for conflict and being put in a position to either choose sides or sit and wonder where the new reality will set up shop.

It seems a little surprising that another world leader, Chancellor Angela Merkel of Germany would describe her recent conversations with Putin as being with a man that she was uncertain was in touch with reality and “in another world.” If accurate, having a world leader possess a somewhat less tenuous grasp of reality should be a concern for markets, although the eBay marketplace is likely to be indifferent as both Icahn and Andreessen toil in worlds of more objective reality.

While international conflict is underway and its outcome is still far from certain that comfortable range is also being exceeded in the market as a whole as it works it way toward new highs despite a paucity of a rational basis. Here too, there’s some conflict, as we’ve all been taught that the market is rational.

I usually have new funds to start each week as the previous week typically has share assignments. This past week was no different. However, faced with cash looking to be spent, markets again at new highs and uncertainty abounding, I’m facing personal conflict as the coming week approaches.

The conflict isn’t over whether to invest that money, as that’s always a given, but what theme to adopt in seeking to find the balance between safety and reward.

Some weeks there a sense of a need to embrace risk and volatility and other weeks there’s an abiding feeling that boring is the new chique.

This week I’m split between the two and see a role for opening the portfolio to both sides of the range. Sometimes the solution is for differing sides to simply get together and understand what each can bring to the table.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum categories, with no “PEE” selections this week (see details).

If I were to focus on low beta and presumed safety, at least from the perspective of my trading strategy of utilizing covered options, I would give serious consideration to shares of Altria (MO), Coca Cola (KO) and Merck (MRK) this week, as they all go ex-dividend. However, the premiums of the former are just too low. While collecting both premium and dividend would present an acceptable return, the potential for early assignment would create a poor investment choice. On the other hand, Merck offers both an appealing premium and dividend, but a frightening appearing chart, unless you believe that little can go wrong in just a week.

If you believe that to be the case, you too may be living in another world.

Part of the conflict this week is pitting the desire to find bargain prices and learning to accept the fact that share prices may be creating new normal levels that are, unfortunately, higher and bring with them increased risk, but without concomitant offsets in risk reflected in option premiums.

Both Lowes (LOW) and Home Depot (HD) are now near their yearly highs. Taking a very narrow view, both hav
e out-performed the S&P 500 since the bottom of the most recent attempt at a correction early last month. Normally, that might send me looking elsewhere for a short term opportunity, but I find some solace knowing that they have lagged a bit in the longer term. Both offer reasonable option premiums during this period of low volatility, but Home Depot also offers the potential advantage of being ex-dividend this week.

While Lowes and Home Depot may be near their highs some of the typically lesser volatile positions that I follow and also currently own are at lower prices, having lagged the market and may offer the opportunity and price combination that is becoming more difficult to locate.

There’s not too much reason to recount the recent trials of Target (TGT). In addition to its own security breach issues it has also had the unfortunate experience of being a retailer at a time that retail hasn’t fared terribly well. Following recent less than stellar earnings it did what other retailers did a few weeks ago when those earnings weren’t as disappointing as expected and shares surged. In the meantime shares have come down a bit, but are still far from their not so distant peak.

Marathon Oil (MRO) is also fairly far from its recent peak and has little reason for having suffered such a fate. It is now trading slightly above the mid-range of what had been a comfortable trading range in the past and I believe is a good entry point and hopefully an exit point as well. If Marathon Oil can stay in this range for a little while it option premiums can make this a very attractive recurrent purchase and sale of calls. Already owning some slightly more expensive shares I wouldn’t be adverse to adding to that position and using option premiums to offset paper losses on the initial lot of shares.

A portion of my Holly Frontier (HFC) holdings were assigned this week after a very unexpectedly sharp climb. Shares go ex-dividend this week after having distributed a special dividend earlier in the month. Having bounced back from some recent near term lows its shares are a little higher than that mid-point of the range that I generally like to use when considering adding shares, however the upcoming dividend adds incentive to restore the position. These shares often exhibit large price swings in a narrow time frame and those help to support a very appealing option premium that’s even more generous if the dividend is captured, as well.

While all of the recent excitement has centered around the rumored buyout of Lorillard (LO) by Reynolds American (RAI), Phillip Morris (PM) has languished of late. With events heating up a bit on the European continent perhaps increasing nerves will boost sales of their products, but more likely share price will be supported by talks of merger activity in the sector and visions of new markets in electronic cigarettes and even marijuana for domestic players. Although the prices of both Lorillard, the purchase target, and Reynolds American, the rumored purchaser fell quite a bit after the story was digested, this isn’t likely to be the end of the story. Phillip Morris has protected the $80 level of late and shouldn’t be at risk to decline if such buyout talks fail to move forward, as it didn’t participate in the rumor rally.

While prudence may dictate that priority be placed on re-populating a portfolio with lower risk positions at this time there may still be some room for more adventurous positions.

One of my favorites, despite still holding more expensive shares purchased prior to the dissolution f the potash cartel is Mosaic (MOS). While I haven’t enjoyed their continued position in my portfolio, other than their dividend income production, I have enjoyed the climb from $40 to $50, having owned shares on numerous occasions in the interim. Despite now being at the high end of its post-cartel break-up range, I think that shares are still poised to go higher and continue to offer short term opportunity. Enough so that I would consider not hedging my entire position.

Citigroup (C) is significantly below its highs reached earlier in the year. It has, however, seemed to find support at about the $48 level and responded reasonably well to some recent bad news coming from their Mexican unit. While Citigroup hasn’t been an especially good core long term holding for many, other than those smart enough to have purchased shares at its nadir, it does have the potential to be more rewarding for those looking for small and short term opportunities. Someday, perhaps in my lifetime, it may also increase its payout ratio from its current 0.9% as soon as regulators give that clearance.

Finally, Seagate Technology (STX) is a good example of a stock that saw its price exceed my own comfort level and to which I eventually adapted by accepting a new normal. In the case of Seagate that has happened on any number of occasions over the past two years as it continues to surprise by its continued relevance as a company.

After waiting for a while, I increased that comfort level from $48 to $49.50 by virtue of having sold puts this past Friday. That new higher level itself was some 20% below its January 2014 high.

However, in a tiny fraction of the time that I waited to finally adapt, I found myself having to roll over the put contract to the next week as shares suddenly added to their day’s losses, before recovering near the close. That recovery gives me some additional confidence in recognizing comfort at this level and suggesting that others do so, as well.

Hopefully, if all goes as planned, these disparate selections may find a way to get along and provide a lesson to others.

Traditional Stocks: Lowes, Marathon Oil, Phillip Morris, Target

Momentum Stocks: Citibank, Mosaic, Seagate Technology

Double Dip Dividend: Holly Frontier, Home Depot (ex-div 3/11)

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.

Mar22014

Weekend Update – March 2, 2014

Weekend Update

“What correction?” you may rightfully ask.

Being creatures of habit it’s sometimes unusual to understand why we’re not better at identifying patterns.

Sure, we try to see things and ascribe common property characteristics to them, such as cups and handles, but we don’t necessarily see what’s staring us in the face.

While everyone was ready to accept the decline of a few weeks ago as the long delayed arrival of the correction we all knew was coming, what was overlooked was that since May 2012 every attempt at a correction was quickly stomped out and the market moved onto new highs.

“Maybe this time will be different,” is a common response to what we often know to be obvious. To our own defense, maybe this time it was, as the decline very briefly exceeded that previously impervious 5% level. As I looked back at those weeks maybe that’s what I was thinking as I was certainly in “exercise caution” mode, rather than increasingly testing the waters with the cash reserves I had built up for just that kind of moment.

It’s definitely easier to talk a game than to play in it. Despite having had a more optimistic outlook the past two weeks I didn’t necessarily put that tone into unbridled action.

With the exception of the final hour of trading this past week when the market was ostensibly reacting to what could be a degradation of events in the former Soviet Union, it was a week of being led by technical factors rather than events or news.

Mostly there was no news other than the sudden rehabilitation of much of retail, despite continuing to put forward disappointing, albeit less disappointing, numbers. With weather probably now discounted going forward they may be safe havens until the next time they reflect the reality that consumers aren’t digging into their own cash reserves.

In the meantime the only reality that had any impact was that the S&P 500 had a well defined high point and that the market was hovering around that point. Technicians ruled as the market was fully aware of the perceived importance of that level and spoke of nothing else as it was exceeded, then surrendered, then finally exceeded again, despite a Crimean assault on its integrity during those final minutes of weekly trading.

In the absence of an unfolding of continued degradation in the Crimea and eastern Ukraine, as the only world event currently on the horizon, next week continues to be one that advances on technical factors and stays ignorant of news and events, with the possible exception of Friday’s Employment Situation Report.

Despite disappointing news, despite good news, we all know what that means, especially from Thursday 3:59 PM to Friday 4:00 PM.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

It wasn’t an especially good week for the financial sector last week but three potential trades figure prominently in this week’s list.

JP Morgan Chase (JPM), AIG (AIG) and MetLife (MET) have all lagged the S&P 500 this year and their charts look remarkably similar to one another, sharing some important characteristics, particularly with regard to where their current prices stand relative to the near past.

While AIG has an upcoming dividend this week to make it a little more appealing, it has spent the past six months range bound, which makes it an increasingly attractive consideration for a covered option strategy. It’s currently at about the mid-point of that range, which mitigates risk for entry. While its CEO, Robert Benmosche came out of retirement from his villa in Croatia, I don’t believe that AIG has a portfolio of risk in Crimea or environs, but given how far flung AIG’s non-insurance related interests used to be, it wouldn’t be overly shocking to learn that it did have some actual insurance exposure to risk in that region. Like most other natural or man made tragedies insurance companies frequently do more than survive challenges coming their way. No one can do that better than Benmosche.

JP Morgan is finally spending less time in the headlines, although in the often perverse world of share pricing, it has floundered a bit as the bad news has slowed and there isn’t word of more billions of dollars of fines coming their way. While not quite range bound, yet, shares are still 5% below their recent peak and also at a near term mid-point if considering entry.

MetLife is down a more substantial 8% from its near term high and is also now at about its mid-point trading level. While it may be responsive to increasing interest rates, there probably isn’t too much downside risk related to that same measure, even if a whispered tapering to the taper becomes reality.

Verizon (VZ) has had some unusually large price moves up and down of late while not really going anywhere. That is my kind of stock and I’ve now owned shares on four occasions since the beginning of this year. With the large alternating moves in price its option premiums have been getting more and more attractive even as market volatility has dropped. It’s hard to resist that kind of stock even though the competitive landscape is being challenged by T-Mobile (TMUS) which is enjoying its time in the sun but at some point will see the price for its strategies to capture market share.

While I’m not as focused on dividend paying stocks this week, already having a number going ex-dividend this week, one that may garner attention is VF Corp (VFC). Like so many stocks that seem to fall flat on the promise of price ap
preciation following a stock split, VF Corp has languished of late after an extended ride higher prior to the stock split. With only monthly options available this one be more of a defensive position if purchased, anticipating that even in a market decline it may be able to have some greater ability to withstand downward pressure.

One sign of my optimism is an increased consideration of “Momentum” stocks, after a period of focusing more on “Traditional” and dividend paying positions. However, some of that optimism is hedged by looking at participation in positions through the sale of put contracts rather than the use of covered calls.

I just closed a Cree (CREE) put position this past Friday about an hour after having rolled it over to the following week as I had done numerous times on several individual lot positions since October 2013. Shares having routinely bounced up and down after a very poorly received earnings report have provided that opportunity.

Although now without a position I would readily consider another sale of put contracts on Cree at any sign of price weakness. It’s high maintenance can be offset by its returns as long as it continues trading in a range and rapidly alternates price direction, as it has been doing for the past few months.

LuLuLemon Athletica (LULU) has been a disappointment for me, currently owning one lot. Having recently had another lot assigned at an even lower price after deciding to take an assignment of a put contract, Friday’s sharp drop is an enticing opportunity to try the route of a put sale once again and helping to chip away at the paper losses on the original shares. While there is some suggestion that its core demographic may be looking elsewhere I look for LuLuLemon to stage a significant push to re-establish itself as a non-misogynistic partner in fashion under its new leadership.

Deckers (DECK) was another earnings related trade highlighted last week. Despite offering a decent report of earnings, it was a perfect example of just how important future guidance can be, as its shares tumbled 13% upon disappointing guidance. While that fall was outside the implied volatility predicted by the option market it was still within the threshold 1% ROI strike price that I prefer to use.

While the news of poor guidance is being digested there may be additional opportunity to profit in the belief that shares are nearing a near term trading low. As with most earnings related trades prior to the report, I would likely consider this trade also to be one that’s made through the sale of out of the money put contracts. For those that like Deckers at this price you might like it even more if it doesn’t go lower.

Joy Global (JOY) is one of those stocks that is tethered to the fortunes of the Chinese economy and specifically its infrastructure growth and projects. Now trading at the top of the range that I like to enter into new positions there does appear to be some opportunity at strike levels below the range outlined by the implied volatility, which is always a situation that gets my attention.

Finally, It was a good week for Elon Musk last week, although it’s probably always good to be Elon Musk. Last week, I suggested that SolarCity was a potential good earnings related trade, but a funny thing happened. When 4 PM rolled around on February 24 and everyone was expecting the release, it wasn’t to be. Presumably the executives at SolarCity knew before then that they wouldn’t be ready before 4 PM. Reportedly the reason for the delay was due to accounting issues related to recent acquisitions and a change in overhead allocation related to an increase in megawatts deployed.

What?

Not surprisingly, shares nose-dived when the announcement of the delay was made. After all, who has confidence in a company when accounting issues are at hand? Inexplicably, however, shares surged the rest of the week, ending up nearly 15% higher than where it had ended the previous week. Additionally, the option market’s assignment of implied volatility had fallen from 12.8% the previous week to 8.4%, probably because the revenues part of the earnings report was released. Still, anything less than a 9.5% drop in share price after Monday’s scheduled event can result in a 1.1% ROI. While not as inviting a trade as it would have been last week when you could have derived a similar ROI as it’s cushion was an almost 18% price drop, it still has some appeal.

 

Traditional Stocks: JP Morgan, MetLife, Verizon

Momentum Stocks: Cree, Deckers, LuLuLemon Athletica

Double Dip Dividend: AIG (ex-div 3/7), VF Corp (ex-div 3/6)

Premiums Enhanced by Earnings: Joy Global (3/6 AM), SolarCity (3/3 PM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often cou
pling 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.

Feb232014

Weekend Update – February 23, 2014

Weekend Update

When this past week was all said and done, it was hard to discern that anything had actually happened.

Sure, there was an Olympics being staged and fomenting revolution in Ukraine, but it was a week when even the release of FOMC minutes failed to be news. Earnings season was winding down, the weather was in abeyance and the legislative docket was reasonably non-partisan.

I could have spent last week watching the grass grow if it hadn’t been covered in a foot of snow.

In its own way, despite the intermediate and alternating moves approaching triple digits, the past week was a perfect example of reversion to the mean. For those that remember 2011, it was that year in a microcosm.

The coming week promises to be no different, although eight members of the Federal Reserve are scheduled to speak. While they can move markets with intemperate or unfiltered remarks, which may become more meaningful as “hawks” assume more voting positions, most people will likely get their excitement from simply reading the just released 2008 transcripts of the Federal Reserve’s meetings as the crisis was beginning to unfold. While you can learn a lot about people in times of crisis, other than potential entertainment value the transcripts will do nothing to add air to the vacuum of the past week. What they may contain about our new Chairman, Janet Yellen, will only confirm her prescience and humor, and should be a calming influence on investors.

As a covered option investor last week was the way I would always script things if anyone would bother opening the envelope to read what was inside. While I have no complaints about 2012 or 2013, as most everyone loves a rising market, 2011 was an ideal market as the year ended with no change. Plenty of intermediate movement, but in the end, signifying nothing other than the opportunity to seemingly and endlessly milk stocks for their option premiums that were nicely enhanced by volatility.

Although I’ve spent much of the past year expecting, sometimes even waiting at the doorstep for the correction to come, the past few weeks have been potentially dangerous ones as I’ve had optimism and money to spend. That can be a bad combination, but the past 18 months have demonstrated a pattern of failed corrections, at least by the standard definition, and rebounds to new and higher highs.

While there may be nothing to see here, there may be something to see there as the market may again be headed to new neighborhoods.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details). A companion article this week explores some additional earnings related trades.

In a week that Wal-Mart (WMT) again disappointed with its earnings report, once again the market failed to follow its lead. In the past year Wal-Mart has repeatedly disappointed, yet the market has disconnected form its leadership, other than for a brief two hours of panic a few months ago when Wal-Mart announced some increasing inventory levels. That panic quickly resolved once Wal-Mart explained their interpretation of inventory levels.

However, one does have to wonder under what economic circumstances does Wal-Mart not meet expectations? Is the economy thriving and people are moving to other retailers, such as Target (TGT) or even Sears (SHLD) or are they moving to Family Dollar Store (FDO)? WHile it is possible that Wal-Mart may simply be suffering from its own bad economic and internal forecasting, there isn’t much reason to be sanguine about retailing. My money is on Family Dollar.

One source that I use for information lists Family Dollar as going ex-dividend this week, however, I haven’t found that to be corroborated anywhere else and historically the first quarter ex-dividend date is in the second week of March. If shares do go ex-dividend this week I would have significant enthusiasm for adding shares, but even in the absence of that event I’m inclined to make that purchase.

Coming off two successive weeks of garnering more than the usual number of dividends, this week is relatively slim pickings. Weyerhauser (WY) and Molson Coors (TAP) both go ex-dividend this week, but both are near the bottom of my list for new purchases this week.

While I like Molson Coors, at the moment the product holds some more appeal than the stock, which is trading near its yearly high point. However, with earnings now out of the way and Canadians around the world celebrating Olympic victories, what better way to show solidarity than to own shares, even if just for a week? Other than potential technical indicators which may suggest an overbought condition, there isn’t too much reason to suspect that in a flat or higher moving market during the coming week, Molson Coors shares will decline mightily. With shares as the body and a head composed of a nice premium and dividend, it just may be time to indulge.

Weyerhauser is a perfectly boring stock. Often, i mean that in a positive sense, but in this case I’m not so certain. I’ve owned shares since May 2013 and would be happy to see them assigned. Despite Weyerhauser offering a dividend this week, my interests are more aligned with re-establishing a position in International Paper (IP). In addition to offering a weekly option, which Weyerhauser does not, its options liquidity and pricing is superior. While it is trading near its yearly high, it has repeatedly met resistance at that level. As a result, while eager to once again own shares, I would be much more willing to do so even with just a slight drop in price.

While offering only a monthly option is a detriment as far as Weyerhauser is concerned, it may be a selling point as far as Cypress Semiconductor (CY) goes. I like to consider adding shares when it is near a strike price as it was after Friday’s close. Shares can be volatile, but it tends to find its way back, especially when home is $10. WHile earnings aren’t due until April 17, 2014, that is just one day before the end of the monthly cycle. Therefore, if purchasing shares of Cypress at this time, I would be prepared to set up for ownership through the May 2014 cycle in the event that shares aren’t assigned when the March cycle comes to an end, in order to avoid being caught in a vortex if a disappointment is at hand. The dividend and the premiums will provide some solace, however.

Although I had shares of Fastenal (FAST) assigned this past week and still own some more expensive shares, this company, which I believe is a proxy for economic activity, has been a spectacular covered call trade and has lent itself to serial ownership as it has reliably traded in a defined range. It doesn’t report earnings until April 10, 2014, but it does have a habit of announcing altered guidance a few weeks earlier. That can be annoying if it comes at the end of an option cycle and potentially removes the chance of assignment or even anticipated rollover, but it’s an annoyance I can live with. After two successive quarters of reduced guidance my expectation is for an improved outlook.

I haven’t owned shares of Deere (DE) for a few months as it had gone on a ride higher, just as Caterpillar (CAT), another frequent holding, is now doing. Deere is now trading at the upper range of where I typically am interested in establishing a position, but after a 7% decline, it may be time to add shares once again. It consistently offers an option premium that has appeal and in the event of longer than anticipated ownership its dividend eases the wait for assignment.

While I would certainly be more interested in Starbucks (SBUX) if its shares were trading at a lower level, sometimes you have to accept what may be a new normal. I had nearly a year elapse before coming to that realization and missed many opportunities in that time with these shares. It does, however, appear that the unbridled move higher has come to an end and perhaps shares are now more likely to be range bound. As with the market in general it’s that range that others may view as mediocrity of performance that instead may be alternatively viewed as the basis for creating an annuity through the collection of option premiums and dividends.

I’ve never been accused of having fashion sense, so it’s unlikely that I would ever own any Deckers (DECK) products at the right time. One minute they sell cool stuff, the next minute they don’t and then back again. Just like the story of most stocks themselves.

What is clear is that they have become cool retailers again and impressively, shares have recovered from a recent large decline. With earnings due to be announced this week the option market is implying a 12.3% potential movement in shares. In the meantime, if you can set your sights on a lowly 1% ROI for the week’s worth of risk a 16.3% drop can still leave you without the obligation to purchase the shares if having sold puts.

Less exciting, at least in terms of implied moves, is T-Mobile (TMUS). It also reports earnings this week and there has to be some thought to what price T-Mobile is paying and will be paying for its very aggressive competitive stance. While its CEO John Legere, may be a hero to some for taking on the competition, that may very quickly fade with some disappointing earnings and cautionary guidance. the option market is pricing a relatively small move of 8.7%, while current option pricing can return a 1% ROI on a strike level 9.5% lower than Friday’s close. Although that’s not much of a margin of difference, I may be more inclined to consider the sale of puts if shares drop substantively on Monday in advance of Tuesday morning’s announcement. Alternatively, if not selling puts in advance of earnings and shares do significantly fall following earnings, there may be potential to do the put sale at that time.

Finally, Abercrombie and Fitch (ANF) reports earnings this week. It is one of the most frustrating and exhilirating of stocks and I currently own two lots. My personal rule is to never own more than three, so I still have some room to add shares, or more likely sell puts in advance of its earnings. Abercrombie and FItch is a nice example of how dysfunction and lowered expectations can create a stock that is so perfectly suited for a covered option strategy. Its constant gyrations create enhanced option premiums that are also significantly impacted by its history of very large earnings related price changes.

For those that have long invested in shares the prospect of a sharp decline upon earnings can’t come as a surprise. However, with a 10.7% implied price move this coming week, one can still achieve a 1% ROI if shares fall less than 15.3%, based on Friday’s closing price.

Traditional Stocks: Deere, Family Dollar Store, Fastenal, International Paper, Starbucks

Momentum Stocks: Cypress Semiconductor

Double Dip Dividend: Molson Coors (ex-div 2/26)

Premiums Enhanced by Earnings: Abercrombie and Fitch (2/26 AM), Deckers (2/27 PM), T-Mobile (2/25 AM)

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.