Aug172013

Weekend Update – August 18, 2013

Weekend Update

I believe, although I could be mistaken, that an original version of the Bible suggested that “an octogenarian shall lead them.”

Last week I was wondering where the next catalyst was going to come from.

After a couple of years of headline grabbing events and man made disasters such as “Fiscal Cliff” and “Sequestration,” it was actually good to have a summer off. We didn’t even have the obligatory Greek banking crisis this August. The downside, of course, is that there’s nothing to react toward. Instead, stocks have had to trade on such fundamentals and basics as valuation and earnings. As with many traditions, there are fewer and fewer people who can remember the origins of such things.

If you can remember back almost a year, Apple (AAPL) was just hitting $700/share and it was the reason you could have discounted the other 499 stocks that comprised the S&P 500. As went Apple, so went the health of the overall market.

It was a simpler time.

Things have changed, but then came news that Carl Icahn had put together a “large” Apple position. Then came word the Leon Cooperman, Chairman of Omega Advisors, was equally ebullient about Apple.

Its shares immediately shot up an immediate $22 upon a simple Icahn Tweet. The “Cooperman Bump” was good for another 2%, but he’s much younger.

Wonderful. We needed market leadership and Apple was ready to take the reigns once again thanks to a couple of guys who have a combined 147 years between them. Can George Soros be far behind? Based on what his ownership had done for JC Penney (JCP) shares before he curiously added 2 million shares during the course of his divorce from a much younger Bill Ackman, you would probably prefer that he kept his distance if you were long Apple shares.

As it turns You can’t predicate an entire market on the basis of a nearly octogenarian investor’s lust for overseas cash piles. While Apple piled up even more cash reserves, it also added on to its share value while the market had a recently rare triple digit move downward and just came off its worst week in 2013.

That wasn’t supposed to happen. He was supposed to lead us to a better place where we know only of profits, dividends and buybacks. A place where we are always renewed and bathed in truth.

For me the market starts anew every week as I scan to see what positions have been assigned due to the sale of call options. As occasionally happens when a monthly cycle ends my world is essentially recreated, but you never know where the truth lies. What I do know is that far fewer of my positions were assigned this week than I had expected, even with the gift of Icahn.

With continually competing voices citing reasons we go higher matched off with equally compelling reasons we go lower, the standoff is as old as that between good and evil, but suddenly evil is looking stronger.

While it may seem inviting to have an octogenarian activist lead the way, the greatest likelihood is that such a shepherd has his own interests more at heart than that of his willing flock.

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

While my preference ordinarily is to focus on selling weekly options, given some uncertainty last week, I may look to sell more monthly contracts as a defensive measure in the event of a short term downturn.

In the past year the astute have noted that “as goes Google (GOOG), so does Apple not follow,” as the prevailing thesis was that it was not possible to be invested in them concurrently. While recent attention has deservedly shifted to Apple as it’s price moved higher on news of a new iPhone and then Icahn’s position, so too has attention shifted away from Google.

I haven’t owned shares of Google in more than a year and even though it has advanced steadily since then, its recent 6% decline is enough to get me interested once again. With the next lower support level nearly $100 away the risk may be greater than the underlying “beta” might suggest, but perhaps at any sign of Apple infatuation cooling we all know where the money has to be going.

If you have the stomach for such things JC Penney reports earnings this week. I own shares, including some bought just this week and subsequently assigned. However, had you asked me a few weeks ago, I would have believed that JC Penney comparative quarter results were going to be very positive. But once the high profile dissension from Bill Ackman, calling for a speedy appointment of a permanent CEO became known and that short term melodrama played itself out, my opinion changed considerably. It would seem unlikely that such internal controversy would arise before a surprisingly good earnings report.

However, for the adventurous selling puts expiring August 23, 2013 can return an 1.3% ROI and leave you without the need to own shares if a post-earnings related drop ends up being less than 25% The options market is anticipating a 17.5% decline.

Among the walking wounded this week was Macys (M). I’ve been waiting a long time for an opportunity to own shares again, although those opportunities usually come when bad news is at hand. In this instance it was the same as had wounded numerous others this earnings season. With no other distractions during a quiet late summer people actually pay attention to such mundane things as earnings and guidance. In this case, they didn’t like what they heard, but that has by and large been the lot of retailers of late. Under the leadership of Terry Lundgren you do have to believe that if any retailer will be able to pull out from underneath the doldrums, it will be Macys.

Another of my favorite retailers, especially coming off price weakness, like most everything this past week, is Coach (COH). However, as with many of the stocks in this week’s listing, the challenge is whether what appears to be value pricing is instead, a value trap, as an overall declining market takes the good along with the bad lower. With an almost 14% drop since its earnings, Coach has had a head start on any general decline which gives me some solace if investing new funds.

Following Cisco’s (CSCO) disappointing earnings report, which may have added fuel to the market’s weakness, the technology sector didn’t fare terribly well. John Chambers, the CEO has alternated from genius to out of touch and back to genius in the span of just a few years, but may now be returning to the “out of touch” category in the eyes of some.

However, for me, he evoked an image of Hoard Schultz, chairman of Starbucks (SBUX), who a number of quarters ago following a brutal reaction to a disappointing earnings report, provided one of the most ardent defenses of his company and why the reaction was so wrong. If you had faith in Schultz, you were well rewarded. I think Chambers offered a similar post-earnings response and despite te immediate concerns there is reason for following his zeal.

Oracle (ORCL) on the other hand, may offer a better return, based upon the option premiums which may reflect an earnings report near the end of the September 2013 option cycle. It’s often difficult to distinguish its CEO, Larry Ellison, from its product, but he was in the news this week with sometimes less than flattering comments about Apple and Google. The last times Oracle disappointed with its earnings reports Ellison didn’t follow the Schultz lead and instead, pointed fingers. WHile I may be looking for more monthly options during this week’s trading activity, an Oracle trade may be an exception.

Among the vanquished last week was Seagate Technology (STX). It’s 27% decline, however started in mid-July. I owned shares the previous week and they were assigned. Seagate is another position that I would strongly consider as a candidate for weekly option sales, particularly if using deep in the money strikes.

McGraw Hill FInancial (MHFI) goes ex-dividend this week and has been on a nice ride ever since the initial reaction to news that their role in the financial meltdown was to be investigated. In fact, it recently surpassed that point from which it fell off the cliff upon the news. Normally that would be a warning signal for me, however, shares have recently scaled back 5%. I think that McGraw Hill was unduly punished by the market and still, in fact, has catching up to do, despite its great run since February 2013, when there was a near immediate realization that the reaction was well overdone.

I’m a little ambivalent about adding additional shares of Transocean (RIG to my two existing lots. Just a few days earlier I felt reasonably assured that the $47 lot would be assigned. At that time I was already thinking of re-purchasing shares in order to capture the upcoming dividend. Also in the Icahn stable of companies in his radar scope, Transocean hasn’t fared quite as well as others, and has not yet increased its dividend as Icahn suggested, although its change has come to its executive offices. Together with Halliburton (HAL) and British Petroleum (BP), Transocean is one of the “Evil Troika” that consistently offers a good place to park money owing to its narrow trading range, option premiums and dividend payout.

Finally, although Mosaic (MOS) has appeared in each of the past two weekly articles, its selection never gets old as long as it keeps doing what it has so reliably done ever since news of the dismantling of the potash cartel became known. In this case, what it has done after suffering a 20% plunge is to slowly begin raising the bar higher as questions arise regarding the ability of the cartel to stay asunder. For the past three weeks I’ve erased substantial paper losses by adding shares and selling in the money calls whose premiums are enhanced by fear and uncertainty of what tomorrow will bring. The pattern that Mosaic has been taking is essentially two steps forward and one step back and that is just perfect for executing a serial covered call strategy that hopefully follows shares back

Traditional Stocks: Cisco, Google, Macys, Oracle

Momentum Stocks: Coach, Mosaic, Seagate Technology

Double Dip Dividend: McGraw Hill FInancial (ex-div 8/22 $0.28), Transocean (ex-div 8/21 $0.56)

Premiums Enhanced by Earnings: JC Penney (8/20 AM)

Remember, these are just guidelines for the coming week. The above selections may be 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 over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

 

Aug92013

Weekend Update – August 11, 2013

Weekend Update

I like to end each week taking a look at the upcoming week’s economic calendar just to have an idea of what kind of curveballs may come along. It’s a fairly low value added activity as once you know what is in store for the coming week the best you can do is guess about data releases and then further guess about market reactions.

Just like the professionals.

That’s an even less productive endeavor in August and this summer we don’t even have much in the way of extrinsic factors, such as a European banking crisis to keep us occupied in our guessing. In all, there have been very few catalysts and distractions of late, hearkening back to more simple times when basic rules actually ruled.

In the vacuum that is August you might believe that markets would be inclined to respond to good old fundamentals as histrionics takes a vacation. Traditionally, that would mean that earnings take center stage and that the reverse psychology kind of thinking that attempts to interpret good news as bad and bad news as good also takes a break.

Based upon this most recent earnings season it’s hard to say that the market has fully embraced traditional drivers, however. While analysts are mixed in their overall assessment of earnings and their quality, what is clear is that earnings don’t appear to be reflective of an improving economy, despite official economic data that may be suggesting that is our direction.

That, of course, might lead you to believe that discordant earnings would put price pressure on a market that has seemingly been defying gravity.

Other than a brief and shallow three day drop this week and a very quickly corrected drop in May, the market has been incredibly resistant to broadly interpreting earnings related news negatively, although individual stocks may bear the burden of disappointing earnings, especially after steep runs higher.

But who knows, maybe Friday’s sell off, which itself is counter to the typical Friday pattern of late is a return to rational thought processes.

Despite mounting pessimism in the wake of what was being treated as an unprecedented three days lower, the market was able to find catalysts, albeit of questionable veracity, on Thursday.

First, news of better than expected economic growth in China was just the thing to reverse course on the fourth day. For me, whose 2013 thesis was predicated on better than expected Chinese growth resulting from new political leadership’s need to placate an increasingly restive and entitled society, that kind of news was long overdue, but nowhere near enough to erase some punishing declines in the likes of Cliffs Natural Resources (CLF).

That catalyst lasted for all of an hour.

The real surprising catalyst at 11:56 AM was news that JC Penney (JCP) was on the verge of bringing legendary retail maven Allen Questrom back home at the urging of a newly vocal Bill Ackman. The market, which had gone negative and was sinking lower turned around coincident with that news. Bill Ackman helped to raise share price by being Bill Ackman.

Strange catalyst, but it is August, after all. In a world where sharks can fall out of the sky why couldn’t JC Penney exert its influence, especially as we’re told how volatile markets can be in a light volume environment? Of course that bump only lasted about a day as shares went down because Bill Ackman acted like Bill Ackman.The ensuing dysfunction evident on Friday and price reversal in shares was, perhaps coincidentally mirrored in the overall market, as there really was no other news to account for any movement of stature.

With earnings season nearly done and most high profile companies having reported, there’s very little ahead, just more light volume days. As a covered option investor if I could script a market my preference would actually be for precisely the kind of market we have recently been seeing. The lack of commitment in either direction or the meandering around a narrow range is absolutely ideal, especially utilizing short term contracts. That kind of market present throughout 2011 and for a large part of 2012 has largely been missing this year and sorely missed. Beyond that, a drop on Fridays makes bargains potentially available on Mondays when cash from assigned positions is available.

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

For an extended period I’ve been attempting to select new positions that were soon to go ex-dividend as a means to increase income, offset lower option premiums and reduce risk, while waiting for a market decline that has never arrived.

This week, I’m more focused on the two selections that are going ex-dividend this coming week, but may have gotten away after large price rises on Thursday.

Both Cliffs Natural Resources and Microsoft (MSFT) were beneficiaries of Chinese related news. In Cliffs Natural’s case it was simply the perception that better economic news from China would translate into the need for iron ore. In Microsoft’s case is was the introduction of Microsoft Office 365 in China. Unfortunately, both stocks advanced mightily on the news, but any pullback prior to the ex-dividend dates would encourage me to add shares, even in highly volatile Cliffs, with which I have suffered since the dividend was slashed.

A bit more reliable in terms of dividend payments are Walgreens (WAG), Chevron (CVX) and Phillips 66 (PSX).

Although I do like Walgreens, I’ve only owned it infrequently. However, since beginning to offer weekly options I look more frequently to the possibility of adding shares. Despite being near its high, the prospect of a short term trade in a sector that has been middling over the past week, with a return amplified by a dividend payment, is appealing.

Despite being near the limit of the amount of exposure that I would ordinarily want in the Energy Sector, both Chevron and Phillips 66 offer good option premiums and dividends. The recent weakness in big oil makes me gravitate toward one of its members, Chevron, however, if forced to choose between just one to add to my portfolio, I prefer Phillips 66 due to its greater volatility and enhanced premiums. I currently own Phillips 66 shares but have them covered with September call contracts. In the event that I add shares I would likely elect weekly hedge contracts.

If there is some validity to the idea that the Chinese economy still has some life left in it, Joy Global (JOY), which is currently trading near the bottom of its range offers an opportunity to thrive along with the economy. Although the sector has been relatively battered compared to the overall market, option premiums and dividends have helped to close that gap and I believe that the sector is beginning to resemble a compressed spring. On a day when Deere (DE) received a downgrade and Caterpillar was unable to extend its gain from the previous day, Joy Global moved strongly higher on Friday in an otherwise weak market.

Oracle (ORCL) is one of the few remaining to have yet reported its earnings and there will be lots of anticipation and perhaps frayed nerves in advanced for next month’s report, which occurs the day prior to expiration of the September 2013 contract.

You probably don’t need the arrows in the graph above to know when those past two earnings reports occurred. Based Larry Ellison’s reaction and finger pointing the performance issues were unique to Oracle and one could reasonably expect that internal changes have been made and in place long enough to show their mark.

Fastenal (FAST) is just a great reflection of what is really going on in the economy, as it supplies all of those little things that go into big things. Without passing judgment on which direction the economy is heading, Fastenal has recently seemed to established a lower boundary on its trading range after having reported some disappointing earnings and guidance. Trading within a defined range makes it a very good candidate to consider for a covered option strategy

What’s a week without another concern about legal proceedings or an SEC investigation into the antics over at JP Morgan Chase (JPM)? While John Gotti may have been known as the “Teflon Don,” eventually after enough was thrown at him some things began to stick. I don’t know if the same fate will befall Jamie Dimon, but he has certainly had a well challenged Teflon shell. Certainly one never knows to what degree stock price will be adversely impacted, but I look at the most recent challenge as just an opportunity to purchase shares for short term ownership at a lower price than would have been available without any legal overhangs.

Morgan Stanley (MS), while trading near its multi-year high and said to have greater European exposure than other US banks, continues to move forward, periodically successfully testing its price support.

With any price weakness in JP Morgan or Morgan Stanley to open the week I would be inclined to add both, as I’ve been woefully under-invested in the Finance sector recently.

While retailers, especially teen retailers had a rough week last week, Footlocker (FL) has been a steady performer over the past year. A downgrade by Goldman Sachs (GS) on Friday was all the impetus I needed and actually purchased shares on Friday, jumping the gun a bit.

Using the lens of a covered option seller a narrow range can be far more rewarding than the typical swings seen among so many stocks that lead to evaporation of paper gains and too many instances of buying high and selling low. Some pricing pressure was placed on shares as its new CEO was rumored a potential candidate for the CEO at JC Penney. However, as that soap opera heats up, with the board re-affirming its support of their one time CEO and now interim CEO, I suspect that after still being in limbo over poaching Martha Stewart products, JC Penney will not likely further go where it’s unwelcome.

Finally, Mosaic (MOS) had a good week after having plunged the prior week, caught up in the news that the potash cartel was falling apart. Estimates that potash prices may fall by 25% caused an immediate price drop that offered opportunity as basically the fear generated was based on supposition and convenient disregard for existing contracts and the potential for more rationale explorations of self-interest that would best be found by keeping the cartel intact.

The price drop in Mosaic was reminiscent of that seen by McGraw Hill FInancial (MHFI) when it was announced that it was the target of government legal proceedings for its role in the housing crisis through its bond ratings. The drop was precipitous, but the climb back wonderfully steady.

I subsequently had Mosaic shares assigned in the past two weeks, but continue to hold far more expensively priced shares. I believe that the initial reaction was so over-blown that even with this past week’s move higher there is still more ahead, or at least some price stability, making covered options a good way to generate return and in my case help to whittle down paper losses on the older positions while awaiting some return to normalcy.

Traditional Stocks: Fastenal, Footlocker, JP Morgan, Morgan Stanley, Oracle

Momentum Stocks: Joy Global, Mosaic

Double Dip Dividend: Chevron (ex-div 8/15), Phillips 66 (ex-div 8/14), Walgreen (ex-div 8/16)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may be 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 over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

 

 

Aug22013

Weekend Update – August 4, 2013

Weekend Update

To summarize: The New York Post rumors, “The Dark SIde” and the FOMC.

This was an interesting week.

It started with the always interesting CEO of Overstock.com (OSTK) congratulating Steve Cohen, the CEO of SAC Capital, on his SEC indictment and invoking a reference to Star Wars to describe Cohen’s darkness, at least in Patrick Byrne’s estimations.

It ended with The New York Post, a one time legitimate newspaper suggesting that JC Penney (JCP) had lost the support of CIT (CIT), the largest commercial lender in the apparel industry, which is lead by the charisma challenged past CEO of The NYSE (NYX) and Merrill Lynch, who reportedly knows credit risk as much as he knows outrageously expensive waiting room and office furniture.

The problem is that if CIT isn’t willing to float the money to vendors who supply JC Penney, their wares won’t find their way into stores. Consumers like their shopping trips to take place in stores that actually have merchandise.

At about 3:18 PM the carnage on JC Penney’s stock began, taking it from a gain for the day to a deep loss on very heavy volume, approximately triple that of most other days.

Lots of people lost lots of money as they fled for the doors in that 42 minute span, despite the recent stamp of approval that George Soros gave to JC Penney shares. His money may not have been smart enough in the face of yellow journalism fear induced selling.

The very next morning a JC Penney spokesperson called the New York Post article “untrue.” It would have helped if someone from CIT chimed in and set the record straight. While the volume following the denial was equally heavy, very little of the damage was undone. As an owner of shares, Thane’s charisma would have taken an incredible jump had he added clarity to the situation.

So someone is lying, but it’s very unlikely that there will ever be a price to be paid for having done so. Clearly, either the New York Post is correct or JC Penney is correct, but only the New York Post can hide behind journalistic license. In fact, it would be wholly irresponsible to accuse the article of promoting lies, rather it may have recklessly published unfounded rumors.

By the same token, if the JC Penney response misrepresents the reality and is the basis by which individuals chose not to liquidate holdings, the word “criminal” comes to my mind. I suppose that JC Penney could decide to create a “Prison within a Store” concept, if absolutely necessary, so that everyday activities aren’t interrupted.

For the conspiracy minded the publication of an article in a “reputable” newspaper in the final hour of trading, using the traditional “unnamed sources” is problematic and certainly invokes thoughts of the very short sellers demonized by Patrick Byrne in years past.

Oh, and in between was the release of the FOMC meeting minutes, which produced a big yawn, as was widely expected.

I certainly am not one to suggest that Patrick Byrne has been a fountain of rational thought, however, it does seem that the SEC could do a better job in allaying investor concerns about an unlevel playing field or attempts to manipulate markets. Equally important is a need to publicly address concerns that arise related to unusual trading activity in certain markets, particularly options, that seem to occur in advance of what would otherwise be unforeseen circumstances. Timing and magnitude may in and of themselves not indicate wrongdoing, but they may warrant acknowledgement for an investing public wary of the process. A jury victory against Fabrice Tourre for fraud is not the sort of thing that the public is really looking for to reinforce confidence in the process, as most have little to no direct interaction with Goldman Sachs (GS). They are far more concerned with mundane issues that seem to occur with frequency.

Perhaps the answer is not closer scrutiny and prosecution of more than just high profile individuals. Perhaps the answer is to let anyone say anything and on any medium, reserving the truth for earnings and other SEC mandated filings. Let the rumors flow wildly, let CEOs speak off the top of their heads even during “quiet periods” and let the investor beware. By still demanding truth in filings we would still be at least one step ahead of China.

My guess is that with a deluge of potential misinformation we will learn to simply block it all out of our own consciousness and ignore the need to have reflexive reaction due to fear or fear of missing out. In a world of rampantly flying rumors the appearance of an on-line New York Post article would likely not have out-sized impact.

Who knows, that might even prompt a return to the assessment of fundamentals and maybe even return us to a day when paradoxical thought processes no longer are used to interpret data, such that good news is actually finally interpreted as good news.

I conveniently left out the monthly Employment Situation Report that really ended the week, but as with ADP and the FOMC, expectations had already been set and reaction was muted when no surprises were in store. The real surprise was the lack of reaction to mildly disappointing numbers, perhaps indicating that we’re over the fear of the known.

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

One of last week’s earnings related selections played true to form and dropped decidedly after earnings were released. Coach (COH) rarely disappoints in its ability to display significant moves in either direction after earnings and in this case, the disappointment was just shy of the $52.50 strike price at which I had sold weekly puts. However, with the week now done and at its new lower price, I think Coach represents a good entry point for new shares. With its newest competitor, at least in the hearts of stock investors, Michael Kors (KORS) reporting earnings this week there is a chance that Coach may drop if Kors reports better than expected numbers, as the expectation will be that it had done so at Coach’s expense. For that reason I might consider waiting until Tuesday morning before deciding whether to add Coach to the portfolio.

Although I currently own two higher priced lots of its shares, I purchased additional shares of Mosaic (MOS) after the plunge last week when perhaps the least known cartel in the world was poised for a break-up. While most people understand that the first rule of Cartel Club is that no one leaves Cartel Club, apparently that came as news to at least one member. The shares that I purchased last week were assigned, but I believe that there is still quite a bit near term upside at these depressed prices. While theories abound, such as decreased fertilizer prices will lead to more purchases of heavy machinery, I’ll stick to the belief that lower fertilizer prices will lead to greater fertilizer sales and more revenue than current models might suggest.

Barclays (BCS) is emblematic of what US banks went through a few years ago. The European continent is coming to grips with the realization that greater capitalization of its banking system is needed. Barclays got punished twice last week. First for suggesting that it might initiate a secondary offering to raise cash and then actually releasing the news of an offering far larger than most had expected. Those bits of bad news may be good news for those that missed the very recent run from these same levels to nearly $20. Shares will also pay a modest dividend during the August 2013 option cycle, but not enough to chase shares just for the dividend.

Royal Dutch Shell (RDS.A) released its earnings this past Thursday and the market found nothing to commend. On the other hand the price drop was appealing to me, as it’s not every day that you see a 5% price drop in a company of this caliber. For your troubles it is also likely to be ex-dividend during the August 2013 option cycle. While there is still perhaps 8% downside to meet its 2 year low, I don’t think that will be terribly likely in the near term. Big oil has a way of thriving, especially if we’re at the brink of economic expansion.

Safeway (SWY) recently announced the divestiture of its Canadian holdings. As it did so shares surged wildly in the after hours. I remember that because it was one of the stocks that I was planning to recommend for the coming week and then thought that it was a missed opportunity. However, by the time the market opened the next morning most of the gains evaporated and its shares remained a Double Dip Dividend selection. While its shares are a bit higher than where I most recently had been assigned it still appears to be a good value proposition.

Baxter International (BAX) recently beat earnings estimates but wasn’t shown too much love from investors for its efforts. I look at it as an opportunity to repurchase shares at a price lower than I would have expected, although still higher than the $70 at which my most recent shares were assigned. In this case, with a dividend due early in September, I might consider a September 17, 2013 option contract, even though weekly and extended weekly options are available.

I currently own shares of Pfizer (PFE), Abbott Labs (ABT) and Eli Lilly (LLY) in addition to Merck (MRK), so I tread a little gingerly when considering adding either more shares of Merck or a new position in Bristol Myers Squibb (BMY), while I keep an eye of the need to remain diversified. Both of those, however, have traded well in their current price range and offer the kind of premium, dividend opportunity and liquidity that I like to see when considering covered call related purchases. As with Baxter, in the case of Merck I might consider selling September options because of the upcoming dividend.

Of course, to balance all of those wonderful healthcare related stocks, following its recent price weakness, I may be ready to add more shares of Lorillard (LO) which have recently shown some weakness. The last time its shares showed some weakness I decided to sell longer term call contracts that currently expire in September and also allow greater chance of also capturing a very healthy dividend. As with some other selections this month the September contract may have additional appeal due to the dividend and offers a way to collect a reasonable premium and perhaps some capital gains while counting the days.

Finally, Green Mountain Coffee Roasters (GMCR) is a repeat of last week’s earnings related selection. I did not sell puts in anticipation of the August 7, 2013 earnings report as I thought that I might, instead selecting Coach and Riverbed Technology (RVBD) as earnings related trades. Inexplicably, Green Mountain shares rose even higher during that past week, which would have been ideal in the event of a put sale.

However, it’s still not to late to look for a strike price that is beyond the 13% implied move and yet offers a meaningful premium. I think that “sweet spot” exists at the $62.50 strike level for the weekly put option. Even with a 20% drop the sale of puts at that level can return 1.1% for the week.

The announcement on Friday afternoon that the SEC was charging a former Green Mountain low level employee with insider trading violations was at least a nice cap to the week, especially if there’s a lot more to come.

Traditional Stocks: Barclays, Baxter International, Bristol Myers Squibb, Lorillard, Merck, Royal Dutch Shell, Safeway

Momentum Stocks: Coach, Mosaic

Double Dip Dividend: Barclays (ex-div 8/7)

Premiums Enhanced by Earnings: Green Mountain Coffee Roasters (8/7 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

 

Jul262013

Weekend Update – July 28, 2013

Weekend Update

Stocks need leadership, but it’s hard to be critical of a stock market that seems to hit new highs on a daily basis and that resists all logical reasons to do otherwise.

That’s especially true if you’ve been convinced for the past 3 months that a correction was coming. If anything, the criticism should be directed a bit more internally.

What’s really difficult is deciding which is less rational. Sticking to failed beliefs despite the facts or the facts themselves.

In hindsight those who have called for a correction have instead stated that the market has been in a constant state of rotation so that correction has indeed come, but sector by sector, rather than in the market as a while.

Whatever. By which I don’t mean in an adolescent “whatever” sense, but rather “whatever it takes to convince others that you haven’t been wrong.”

Sometimes you’re just wrong or terribly out of synchrony with events. Even me.

What is somewhat striking, though, is that this incredible climb since 2009 has really only had a single market leader, but these days Apple (AAPL) can no longer lay claim to that honor. This most recent climb higher since November 2012 has often been referred to as the “least respected rally” ever, probably due to the fact that no one can point a finger at a catalyst other than the Federal Reserve. Besides, very few self-respecting capitalists would want to credit government intervention for all the good that has come their way in recent years, particularly as it was much of the unbridled pursuit of capitalism that left many bereft.

At some point it gets ridiculous as people seriously ask whether it can really be considered a rally of defensive stocks are leading the way higher. As if going higher on the basis of stocks like Proctor & Gamble (PG) was in some way analogous to a wad of hundred dollar bills with lots of white powder over it.

There have been other times when single stocks led entire markets. Hard to believe, but at one time it was Microsoft (MSFT) that led a market forward. In other eras the stocks were different. IBM (IBM), General Motors (GM) and others, but they were able to create confidence and optimism.

What you can say with some certainty is that it’s not going to be Amazon (AMZN), for example, as you could have made greater profit by shorting and covering 100 shares of Amazon as earnings were announced. than Amazon itself generated for the quarter. It won’t be Facebook (FB) either. despite perhaps having found the equivalent of the alchemist’s dream, by discovering a means to monetize mobile platforms.

Sure Visa (V) has had a remarkable run over the past few years but it creates nothing. It only facilitates what can end up being destructive consumer behavior.

As we sit at lofty market levels you do have to wonder what will maintain or better yet, propel us to even greater heights? It’s not likely to be the Federal Reserve and if we’re looking to earnings, we may be in for a disappointment, as the most recent round of reports have been revenue challenged.

I don’t know where that leadership will come from. If I knew, I wouldn’t continue looking for weekly opportunities. Perhaps those espousing the sector theory are on the right track, but for an individual investor married to a buy and hold portfolio that kind of sector rotational leadership won’t be very satisfying, especially if in the wrong sectors or not taking profits when it’s your sector’s turn to shine.

Teamwork is great, but what really inspires is leadership. We are at that point that we have come a long way without clear leadership and have a lot to lose.

So while awaiting someone to step up to the plate, maybe you can identify a potential leader from among this week’s list. As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories (see details).

ALthough last week marked the high point of earnings season, I was a little dismayed to see that a number of this week’s prospects still have earnings ahead of them.

While I have liked the stock, I haven’t always been a fan of Howard Schultz. Starbucks (SBUX) had an outstanding quarter and its share price responded. Unfortunately, I’ve missed the last 20 or so points. What did catch my interest, however, was the effusive manner in which Schultz described the Starbucks relationship with Green Mountain Coffee Roasters (GMCR). In the past shares of Green Mountain have suffered at the ambivalence of Schultz’s comments about that relationship. This time, however, he was glowing, calling it a “Fantastic relationship with Green Mountain and Brian Kelly (the new CEO)… and will only get stronger.”

Green Mountain reports earnings during the August 2013 option cycle. It is always a volatile trade and fraught with risk. Having in the past been on the long side during a 30% price decline after earnings and having the opportunity to discuss that on Bloomberg, makes it difficult to hide that fact. In considering potential earnings related trades, Green Mountain offers extended weekly options, so there are numerous possibilities with regard to finding a mix of premium and risk. Just be prepared to own shares if you opt to sell put options, which is the route that I would be most likely to pursue.

Deere (DE) has languished a bit lately and hasn’t fared well as it routinely is considered to have the same risk factors as other heavy machinery manufacturers, such as Caterpillar and Joy Global. Whether that’s warranted or not, it is their lot. Deere, lie the others, trades in a fairly narrow range and is approaching the low end of that range. It does report earnings prior to the end of the monthly option cycle, so those purchasing shares and counting on assignment of weekly options should be prepared for the possibility of holding shares through a period of increased risk.

Heading into this past Friday morning, I thought that there was a chance that I would be recommending all three of my “Evil Troika,” of Halliburton (HAL), British Petroleum (BP) and Transocean (RIG). Then came word that Halliburton had admitted destroying evidence in association with the Deepwater disaster, so obviously, in return shares went about 4% higher. WHat else would anyone have expected?

With that eliminated for now, as I prefer shares in the $43-44 range, I also eliminated British Petroleum which announces earnings this week. That was done mostly because I already have two lots of shares. But Transocean, which reports earnings the following week has had some very recent price weakness and is beginning to look like it’s at an appropriate price to add shares, at a time that Halliburton’s good share price fortunes didn’t extend to its evil partners.

Pfizer (PFE) offers another example of situations I don’t particularly care for. That is the juxtaposition of earnings and ex-dividend date on the same or consecutive days. In the past, it’s precluded me from considering Men’s Warehouse (MW) and just last week Tyco (TYC). However, in this situation, I don’t have some of the concerns about share price being dramatically adversely influenced by earnings. Additionally, with the ex-dividend date coming the day after earnings, the more cautious investor can wait, particularly if anticipating a price drop. Pfizer’s pipeline is deep and its recent spin-off of its Zoetis (ZTS) division will reap benefits in the form of a de-facto massive share buyback.

My JC Penney (JCP) shares were assigned this past week, but as it clings to the $16 level it continues to offer an attractive premium for the perceived risk. In this case, earnings are reported August 16, 2013 and I believe that there will be significant upside surprise. Late on Friday afternoon came news that David Einhorn closed his JC Penney short position and that news sent shares higher, but still not too high to consider for a long position in advance of earnings.

Another consistently on my radar screen, but certainly requiring a great tolerance for risk is Abercrombie and Fitch (ANF). It was relatively stable this past week and it would have been a good time to have purchased shares and covered the position as done the previous week. While I always like to consider doing so, I would like to see some price deterioration prior to purchasing the next round of shares, especially as earning’s release looms in just two weeks.

Sticking to the fashion retail theme, L Brands (LTD) may be a new corporate name, but it retains all of the consistency that has been its hallmark for so long. It’s share price has been going higher of late, diminishing some of the appeal, but any small correction in advance of earnings coming during the current option cycle would put it back on my purchase list, particularly if approaching $52.50, but especially $50. Unfortunately, the path that the market has been taking has made those kind of retracements relatively uncommon.

In advance of earnings I sold Dow Chemical (DOW) puts last week. I was a little surprised that it didn’t go up as much as it’s cousin DuPont (DD), but finishing the week anywhere above $34 would have been a victory. Now, with earnings out of the way, it may simply be time to take ownership of shares. A good dividend, good option premiums and a fairly tight trading range have caused it to consistently be on my radar screen and a frequent purchase decision. It has been a great example of how a stock needn’t move very much in order to derive outsized profits.

MetLife (MET) is another of a long list of companies reporting earnings this week, but the options market isn’t anticipating a substantive move in either direction. Although it is near its 52 week high, which is always a precarious place to be, especially before earnings, while it may not lead entire markets higher, it certainly can follow them.

Finally, it’s Riverbed Technology (RVBD) time again. While I do already own shares and have done so very consistently for years, it soon reports earnings. Shares are currently trading at a near term high, although there is room to the upside. Riverbed Technology has had great leadership and employed a very rational strategy for expansion. For some reason they seem to have a hard time communicating that message, especially when giving their guidance in post-earnings conference calls. I very often expect significant price drops even though they have been very consistent in living up to analyst’s expectations. With shares at a near term high there is certainly room for a drop ahead if they play true to form. I’m very comfortable with ownership in the $15-16 range and may consider selling puts, perhaps even for a forward month.

Traditional Stocks: Deere, Dow Chemical, L Brands, MetLife, Transocean

Momentum Stocks: Abercrombie and Fitch, JC Penney

Double Dip Dividend: Pfizer (ex-div 7/31)

Premiums Enhanced by Earnings: Green Mountain Coffee Roasters (8/7 PM), Riverbed Technology (7/30 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

 

Jul202013

Weekend Update – July 21, 2013

Weekend Update

This week may have marked the last time Ben Bernanke sits in front of far less accomplished inquisitors in fulfilling his part of the obligation to provide congressional testimony in accordance with law.

The Senate, which in general is a far more genteel and learned place was absolutely fawning over the Federal Reserve Chairman who is as good at playing close to the vest as anyone, whether its regarding divulging a time table for the feared “tapering” or an indication of whether he will be leaving his position.

If anything should convince Bernanke to sign up for another round it would be to see how long the two-faced good will last and perhaps give himself the opportunity to remind his detractors just how laudatory they had been. But I can easily understand his taking leave and enjoying the ticker tape, or perhaps the “taper tick” parade that is due him.

But in a week when Treasury Secretary Jack Lew and Bernanke had opportunities to move the markets with their appearances, neither said anything of interest, nor anything that could be mis-interpreted.

Instead, at the annual CNBC sponsored “Delivering Alpha Conference” the ability of individuals such as Jim Chanos and Nelson Peltz to move individual shares was evident. What is also evident is that based upon comparative performance thus far in 2013, there aren’t likely to be many ticker tape parades honoring hedge fund managers and certainly no one is going to honor an index.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. There are many potential earnings related trades this week beyond those listed in this article for those interested in that kind of trade. (see details).

A portion of this week’s selections reflect the recently wounded, but certainly not mortally, from recent disappointing earnings. While there may not be any victory tours coming anytime soon for some of them, it’s far too short sighted to not consider the recent bad news as a stepping stone for short term opportunism.

In terms of absolute dollars lost, it’s hard to imagine the destruction of market capitalization and personal wealth at the hands of Microsoft (MSFT), Intel (INTC) and eBay (EBAY). While no one is writing an epitaph for eBay, there are no shortage of obituary writers for Microsoft and Intel. However, although most all businesses will someday go that path, I don’t think that any of that triumvirate are going to do so anytime soon, although Microsoft’s nearly 11% drop on Friday was more than the option market anticipated. It was also more than an innocent cough and may not be good for Steve Ballmer’s health.

Since my timeframe is usually short, although I do currently have shares of Intel that will soon pass their one year anniversary, I don’t think their demise or even significantly more deterioration in share price will be anytime soon. All offer better value and appealing option premiums for the risk of a purchase. Additionally, both Intel and Microsoft have upcoming dividends during the August cycle that simply adds to the short term appeal. My eBay shares were assigned on Friday, but I have been an active buyer in the $50-52.50 range and welcomed its return to that neighborhood.

I currently own some shares of Apple (AAPL) and sold some $450 August 17, 2013 calls in anticipation of its upcoming earnings. While I normally prefer the weekly options, the particular shares had an entry of $445 and haven’t earned their keep yet from cumulative option premiums. The monthly option instead offered greater time protection from adverse price action, while still getting some premium and perhaps a dividend, as well. However, with earnings this week, the more adventurous may consider the sentiment being expressed in the options market that is implying a move of approximately 5% upon earnings. Even after Friday’s 1% drop following some recent strength, I found it a little surprising at how low the put premiums are compared to call options, indicating that perhaps there is some bullish sentiment in anticipation of earnings. I simply take that as a sign of the opposite and would expect further price deterioration.

I’m always looking to buy or add shares of Caterpillar (CAT). I just had some shares assigned in order to capture the dividend. After Chanos‘ skewering of the company and its rapid descent as a direct result, I was cheering for it to go down a bit further so that perhaps shares wouldn’t be assigned early. No such luck, even after such piercing comments as “they are tied to the wrong products, at the wrong time.” I’m not certain, but he may have borrowed that phrase from last year when applied to Hewlett Packard (HPQ). For me, the various theses surrounding dependence on China or the criticisms of leadership have meant very little, as Caterpillar has steadfastly traded in a well defined range and have consistently offered option premiums upon selling calls, as well as often providing an increasingly healthy dividend. To add a bit to the excitement, however, Caterpillar does report earnings this week, so some consideration may be given to the backdoor path to potential ownership through the sale of put options.

While Chanos approached his investment thesis from the short side, Nelson Peltz made his case for Pepsico’s (PEP) purchase of Mondelez (MDLZ). My shares of Mondelez were assigned today thanks to a price run higher as Peltz spoke. I never speculate on the basis of takeover rumors and am not salivating at the prospect of receiving $35-$38 per share, as Peltz suggested would be an appropriate range for a, thus far, non-receptive Pepsico to pay for Mondelez ownership. Despite the general agreement that margins at Mondelez are low, even by industry standards, it has been trading ideally for call option writers and I would consider repurchasing shares just to take advantage of the option premiums.

Fastenal (FAST) is just one of those companies that goes about its business without much fanfare and it’s shares are still depressed after offering some reduced guidance and then subsequently reporting its earnings. It goes ex-dividend this week and offers a decent monthly option premium during this period of low volatility. Without signs of industrial slowdowns it is a good place to park assets while awaiting for some sanity to be restored to the markets.

Although I’ve never been accused of having fashion sense Abercrombie and Fitch (ANF) and Michael Kors (KORS) are frequently alluring positions, although always carrying downside risk even when earnings reports are not part of the equation. I have been waiting for Kors to return to the $60 level and it did show some sporadic weakness during the past week, but doggedly stayed above that price.

Abercrombie and Fitch is always a volatile position, but offers some rewarding premiums, as long as the volatility does strike and lead to a prolonged dip. It reports earnings on August 14, 2013 and may also provide some data from European sales and currency impacts prior to that. Kors also reports earnings during the AUgust cycle and ant potential purchases of either of these shares must be prepared for ownership into earnings if weekly call contracts sold on the positions are not assigned.

Finally, it’s hard to find a stock that has performed more poorly than Cliffs Natural Resources (CLF). Although no one has placed blame on its leadership, in fact, they have been lauded for expense controls during demand downturns, it didn’t go unnoticed that shares rallied when the CEO announced his upcoming retirement. It also didn’t go unnoticed that China, despite being in a relative downturn, purchased a large portion of the nickel, a necessary ingredient for steel, available on the London commodity market. For the adventurous, Cliffs reports earnings this week and seems to have found some more friendly confines at the $16 level. The option market expects a 9% move in either direction. A downward move of that amount or less could result in a 1% ROI for the week, if selling put options. I suspect the move will be higher.

Traditional Stocks: Caterpillar, eBay, Intel. Microsoft, Mondelez

Momentum Stocks: Abercrombie and Fitch, Michael Kors

Double Dip Dividend: Fastenal (ex-div 7/24 $0.25)

Premiums Enhanced by Earnings: Apple (7/23 PM), Cliffs Natural Resources (7/25 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

Disclosure: I am long AAPL, FAST, CAT, CLF, INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.