Category Archives: Weekend Update

Blame “The Big Man.”

For some, “The Big Man” may refer to a personal deity. For others, the late saxophonist for The E Street Band.

While I have abiding faith in each of those, there’s no doubt in my mind that Ben Bernanke is “The Big Man.”

While the stock market soared to a new high just two months after its most recent high, it shouldn’t be lost on too many people that the Chairman of the Federal Reserve was at the center of the move down from the highs as well as the move beyond the high.

Just take a quick look at the journey of the S&P 500 from its high on May 21, 2013 to its new high on July 11, 2013.

Guess who got the blame for those drops? That’s right. Ben Bernanke in what was obviously a slam dunk example of cause and effect, at least based on the fervor with which fingers were pointed.

But on the heels of Thursday’s march to record heights very few of those fingers were pointed in Bernanke’s general direction or heaping praise upon him.

After Thursday’s close, one well known individual only begrudgingly gave Bernanke credit for the gains, suggesting that it was unexpectedly good earnings that drove the rally. In her questioning of interview guests, her phrasing of the question to get their opinions on the root cause of the day’s rally trailed off as mentioning Bernanke as a possible catalyst.

You can argue cause or correlation, but to me it’s clear. Especially when you consider that the most extreme moves, on June 20 and July 11, 2013 came after some words from the Chairman in complement of the committee minutes.

What isn’t clear is what exactly Bernanke said that made this month any different and resulted in a market making new highs. Did he speak more slowly? Did he enunciate more clearly?

When the most recent minutes were released it came as somewhat of a surprise that so much attention within the FOMC was spent on how the markets react to words. The concern that FOMC members had for the words used by its members, especially its Chairman, was evident in the text of the minutes.

Words. Words that are interpreted at will. Words that are interpreted in context, out of context, on the basis of breathing patterns and cadence.

But to show how long we have come, at least no one is interpreting policy on the basis of the thickness of Bernanke’s attaché case.

What’s also not clear to me is how “credible” individuals can make comments, such as “by offering so much information in such a muddled fashion, they have made policy less transparent,” in reference to the FOMC by a Bank of America (BAC) official. Compare that to the complaints levied against predecessor Alan Greenspan, whose leadership and obtuse pronouncements were criticized for their lack of transparency.

But that is the general theme. There is no “winning,” despite how simple Charlie Sheen made it sound during manic periods. As Federal Reserve Chairman, Ben Bernanke is criticized roundly regardless of what he says or does, as if he is pushing the “enter” key to get those algorithms running a muck when the outcome is bad and criticized when the results are pleasing.

Perhaps I listen and read with a very different set of filters, but the metrics and criteria for a tapering of Quantitative Easing seems to be clearly defined. It is the policy that everyone loves to hate, but most of all, really love, at least when it comes to personal fortunes. The conflict within must be terrible, when on the one hand you have disdain for the interference but really love the results. It’s probably similar to how noted politicians may feel when engaging in illegal acts between consenting adults when they have sworn to uphold those laws.

While my personal fortune has improved this week, I too am conflicted. I’m certainly happy about the gains, but would like to see somewhat of a resting period. With these sudden gains I stand to see too many positions assigned next week with the expiration of the July 2013 option cycle. Of course, I felt the same way last month, until I got what I wished for well in excess of my wishes, following the June 2012 FOMC minutes and Bernanke’s press conference, just 2 days prior to monthly expiration. Suddenly, the number of assignments was far fewer than anticipated.

Beyond that, I still have memories of a similar rapid recovery from a 5% drop in 2012 that saw me also wishing for a breather, only to see the bottom fall out from under and drag the market down 9%.

Surely there is something than can make us all happy. It just appears to not be Ben Bernanke unless he calls it a public service career, although I certainly wouldn’t be among those looking forward to that outcomeCertainly not like a ubiquitous and noted gold enthusiast who commented “the good news is at least that Ben Bernanke is leaving,” when asked who he thought might be replacing him.

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

As has been the case several times over the past few months it sometimes gets more challenging to discover potential bargains at mountain tops when you can still see the valley below. This week the general trend is looking for low beta and high yield stocks.

The contrarian in me always looks at stocks that have received analysts downgrades. On Friday, both Bristol Myers Squibb (BMY) and Target (TGT) had that honor. Fortunately, Target’s first CEO and a member of the original Dayton family of owners who passed away this week didn’t have to suffer the indignity of a downgrade. Although both Bristol Myers and Target are both up from recent dips and approaching 52 weeks highs, of late they have also fared well during market declines. While I prefer either of these low beta stocks on the immediate period before an ex-dividend date, I actually would have much preferred that they reacted more negatively to the downgrades, but in a strong market they may simply be a case of “high and going higher,” while perhaps also having some downside resistance.

Another pharmaceutical company that has my attention this week is GlaxoSmithKline. Its chart looks just like that of Bristol Myers, but has the added benefit of an expected dividend payment during the August 2013 option cycle, although like Bristol Myers will also add some earnings related risk during that cycle. It tends to match the S&P 500 during downward moves, so Bristol Myers may have an edge in that regard if you have room for only one more pharmaceutical in your portfolio. However, the dividend, i believe may outweigh that consideration, especially if you believe that the overall market is headed higher.

I don’t very often own shares of any of the major oil and gas companies other than British Petroleum (BP) and it has been many years since I’ve owned Royal Dutch Shell (RDS.A), although there is rarely a week that I haven’t checked its chart and performance. Keeping with the theme, its low beta and very generous dividend, which is likely during the August 2013 cycle make it an appealing consideration.

Caterpillar (CAT) has been cited almost on a daily basis as being one of the worst performers of the S&P 500, at lest prior to last week’s strong performance. Caterpillar, which only has a very small portion of its overall business dependent on the Chinese economy hasn’t been able to escape the perception that it is intimately tied to that market and has been held hostage by that weakness and uncertainty. I almost always own shares and currently have two lots. Despite last week’s strong move and the relatively high beta, I may add additional shares as they are ex-dividend during the week offering an increased payout.

Cheniere Energy Partners (CQR), which operates liquefied natural gas terminals, is a good example of a low beta/high dividend company. It has been reliably paying a consistently sized dividend since going public in 2007, currently a 5.6% yield. Although it does report earnings on August 2, 2013 and has in the past exhibited some greater volatility with earnings, it is also expected to go ex-dividend during the August 2013 option cycle. It also tends to do well in down markets, which has appeal for me since I’m still somewhat nervous about what tomorrow may bring, even if Bernanke stays silent.

Darden Restaurants (DRI) is a company that I usually only consider purchasing in order to capture its dividend. I did consider it recently for that purpose, but didn’t buy the shares. Now, instead, I’ve come to appreciate it on its own merits. Those include a low beta, a nice call premium for the remaining week of the monthly option cycle and freedom from earnings reports until sometime in September, as Darden was among the last to report earnings in the immediately prior earnings season.

I love trading shares or buying puts in Abercrombie and Fitch (ANF). Of course, doing so runs counter to the pursuit of low beta positions, but it does offer a small dividend. Its volatility is what makes it a frequently good trade when selling either covered calls or puts. The risk tends to come with earnings and occasionally they do pre-release information, especially regarding European operations and currency risk, typically two weeks before earnings, which are currently scheduled for August 14, 2013.

For those with strong constitutions, there is VMWare (VMW) which will report earnings on July 23, 2013, the first week of the August 2013 cycle. Its shares still haven’t recovered from the loss related to February 2013 earnings, as there is increasing concern that its proprietary product no longer can sustain growth against competition for the cloud by Microsoft (MSFT), Oracle (ORCL) and Amazon (AMZN).

For the final week of the July 2013 option cycle, prior to earnings, for those believing that VMWare will delay any substantive move until after earnings, there is an opportunity for the short term trade which includes the sale of calls. However, if purchased shares are not assigned, earnings related risk is of concern.

Finally, there are many high profile companies reporting earnings this coming week, many of whom trade with high beta and have had recent large gains. However, the option premium pricing of out of the money puts, which I typically like to sell to exploit earnings, are very inexpensive, indicating continuing bullish sentiment.

Two exceptions are SanDisk (SNDK) and Align Technology (ALGN).

As perhaps expected, they are neither low beta, nor offer high dividend yields, or any yield for that matter. Both SanDisk and Align Technology are significantly higher over the past two months, both hovering at 20% gains since early May 2013 and easily outperforming the S&P 500 during that period. The worries of years past that SanDisk was doomed as flash memory was going to become a commodity hasn’t quite worked out as predicted.

As a lapsed Pediatric Dentist, I’m very familiar with Align Technologies “even a monkey can perform Orthodontics” technology and it has recently expanded its product portfolio and is increasingly enticing non-specialists to adopt the product in the hopes of creating new profit centers within office practices.

If either is a case of “high and going higher,” then selling out of the money puts expiring this coming Friday is certainly a consideration and a relatively simple way to generate premium income. If either is poised to give back recent gains Align Technology offers a better risk to reward experience as you can generate approximately 0.9% ROI for the week if shares drop less than 15%. However, the additional caveats for both of these is that they do tend to underperform in a dropping market.

Traditional Stocks: Bristol Myers, Cheneire Energy Partners, Darden Restaurants, GlaxoSmithKline, Royal Dutch Shell, Target

Momentum Stocks: Abercrombie and Fitch, VMWare

Double Dip Dividend: Caterpillar (7/18 $0.60)

Premiums Enhanced by Earnings: Align Technology (7/18 PM), SanDisk (7/17 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.

 

Spoiler Alert.

When it comes to your stocks, there’s never a time to panic, unless it’s your intention to provide bargain priced stocks to some unknown and unseen buyer.

Like many, I’m still scratching my head trying to understand what it is that Federal Reserve Chairman Ben Bernanke said that caused so much market discomfort this week. Despite the reaction, you do have to give credit to our own markets for at least being orderly in what seemed to be a somewhat irrational reaction. While individual traders may have demonstrated some panic upon seeing a 350 point loss, the market itself did nothing to exhort them to do so.

Bernanke himself went to some length to be crystal clear, knowing that the market had already shown how nervous it was about anything related to Quantitative Easing. Although he said nothing inflammatory, that didn’t stop many from placing blame at his feet for a subsequent 2.5% market drop. Doing so completely ignored how tightly coiled the spring had already been, as demonstrated by the sudden rise in volatility and the back and forth triple digit moves that we had not seen since the last year, coincidentally just prior to the market giving up significant gains.

Had no one noticed that we were trading an entirely different market the past 3 weeks?

While it didn’t appear that Bernanke unveiled any new information and simply described, once again, those data driven parameters that would be used to decide when it might be appropriate to diminish injections of liquidity, the market found reason to see gloom.

Imagine if you started screaming in terror every time you realized that someday you would die.

Of course concurrent events, such as the sudden bear market in Japan or the tightening of credit in China may be part of the equation, as can confusion about the bond markets and the crumbling of precious metals support. But when all reason fails, we should always lay blame at the feet of China. In this case the suggestion was that a Chinese credit crisis was brewing, as if China was unable to borrow from the western world’s playbook and show us the real meaning of Quantitative Easing.

In hindsight, there’s never a shortage of explanations for events. It reminds me of the time that I told my mother that the lamp must have jumped by itself onto the floor. That seemed as logical as the fact that I had accidentally knocked it off with a stickball bat. There were actually any number of plausible and implausible explanations, once you realized that proof was elusive. I probably should have considered blaming China.

After Thursday’s close, the single worst day of the year, the S&P 500 was down a shade above 5% from its intra-day high a few short weeks ago. Considering that half of that drop came on a single day, 5% isn’t very significant. Perhaps that’s why there was no real institutional panic.

But panic can take on various forms. It’s the other form that has me concerned at the moment.

To some degree the buying that resulted during previous half-hearted attempts of the market to stall its unbridled charge higher was a form of panic from among those who were afraid to miss out on the next run higher. Time and time again in 2013 we’ve heard that every dip was a buying opportunity as “FOMO,” the “fear of missing out,” reared its ugly head.

As someone who has been raising cash in anticipation of a correction since the end of February, I’m now at my target level, but that brings a challenge.

The challenge is in deciding when to start investing that money and deciding what’s a value and what may be a value trap, as prices come down. If we’re to believe conventional wisdom that called for a continued market rise, there’s still lots of money sitting on the sidelines from 2009 still wondering whether it’s all just another trap. That may be an entirely different kind of panic, the “fear of commitment.”

With the market down by 5% as of Thursday’s close, it’s probably as likely that the market can go down an additional 5% as it is that a rebound will erase the losses, but perhaps only temporarily.

Rules are a good thing to have and to fall back upon when there is a tendency to want to panic. As a general rule, when the market is down about 5% and I have cash available, I tend not to think in terms of more than an additional 5% move in either direction. Rather than guessing which way things will go, I consider investing 20% of my remaining cash with each 1% move of the market. If the market moves higher I tepidly satisfy my need to not miss out while not entirely abandoning my skepticism that a rally may be simply a “head fake” in advance of another leg downward. If the market, however, heads lower I’m picking up some values that hopefully won’t become value traps.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend or Momentum categories. Although some high profile companies are reporting earnings in the coming week, there are no selections in the “PEE” category, while we await the beginning of the next earnings season in two weeks (see details).

With a handful of assignments as the June 2013 option cycle ended, but fewer than I had expected, thanks to that 2.5% drop, I do have more cash than I think is warranted, so I will be looking for entry points this coming week, however, courting risk is not something that I’m particularly interested in doing, so the list is skewed toward “Traditional” and dividend paying positions, especially those that have already paid their dues in terms of recent price drops.

Amgen (AMGN) started its market descent before the overall market decided to take its long overdue break. To its detriment, it is about 3% higher than its recent low during that period, but it is still nearly 15% below its recent high and still 8% below its level after having fallen following its most recent earnings release. With some support at both $91 and $94 and having already experienced its own personal bear market, I think that shares can withstand any macro-economic headwinds or further market volatility.

Morgan Stanley (MS) received regulatory approval to purchase the final 25% piece of the Smith Barney brokerage from Citigroup (C), fulfilling a strategic priority for Morgan Stanley. Presumably months from now when earnings are reported investors will have already discounted the news that negative adjustments made to capital will adversely impact those earnings reports. I doubt it, but as usual, I hope to purchase shares, sell calls and then see them assigned long before short term memories prove themselves to be deficient. Morgan Stanley is consistently said to be at greater risk than many due to its European exposure, but while things are reasonably quiet on that front I don’t perceive that as a near term issue.

Coach (COH) is my lone “Momentum” category pick this week, although it may no longer belong in that category. Although it often exhibits explosive earnings related moves, shares do have a tendency to trade within a well defined range and do not often trade wildly in the absence of news. The recent addition of weekly call options makes me consider its purchase more frequently than simply in advance of its ex-dividend date, as I had frequently done in the past.

I always enjoy listening to those who posit on the relative merits of Hone Depot (HD) versus Lowes (LOW) and who then opine on the role of the housing market on the health of these home improvement centers. There’s often not much consistency in the opinions and the rationale for those opinions. Over the years the companies have jockeyed with one other for analyst and investor attention and favor. I prefer Lowes because it offers a very nice option premium, far superior to Home Depot, yet both have nearly identical trading volatility.

Cypress Semiconductor (CY) is simply a low key company whose products are ubiquitous. It tends to trade in a narrow range although it can have sharp daily moves. Going ex-dividend this week and always offering an attractive premium thanks to that volatility it is a position that I don’t own as frequently as I should. I do prefer, however, buying shares when they are somewhat closer to a strike level, as opposed to its current price in-between strikes. Even though that may mean paying more for shares it may make assignment of shares more likely, which is usually my goal.

Ever since spinning off Phillips 66 (PSX), I haven’t owned shares of its parent Conoco Phillips (COP). Having under-performed the S&P 500 since the market high, I now see Conoco as offering an attractive alternative to the more volatile Phillips 66 and still offering an option premium that warrants attention.

Intel (INTC) may not be as ubiquitous as it once was, but it is working hard to change that with mobile and tablet strategies. I had owned non-performing shares for quite a while waiting for an opportunity to finally sell calls upon them. That opportunity only came recently, but I believe that its recent stock decline is just a respite and shares will go higher from here. Fortunately, if not, there is a dividend to help the time go by faster.

DuPont (DD) and Dow Chemical (DOW) are, for me, stalwarts in implementing a covered call strategy. While I currently own shares of Dow Chemical, I’m not averse to adding more as it goes ex-dividend this week. I haven’t owned DuPont, on the other hand, for several months and following its recent 7% drop since the market peak I think this may be a time to pick up shares. Although it may have another 10% downside it has shown an ability to recover from abrupt losses. Both Dow Chemical and DuPont report earnings during the first week of the August 2013 cycle.

Finally, As long as considering shares of Dow Chemical and DuPont it may only seem natural to also consider another stalwart, Deere (DE). Also lower from its recent high, Deere shares are ex-dividend this week. As with Cypress Semiconductor, I prefer when Deere trades near a strike level before making new purchases in order to enhance likelihood of assignment.

Traditional Stocks: Amgen, Conoco Phillips, Intel, DuPont, Lowes, Morgan Stanley

Momentum Stocks: Coach

Double Dip Dividend: Cypress Semiconductor (ex-div 6/25), Deere (ex-div 6/26), Dow Chemical (ex-div 6/26)

Premiums Enhanced by Earnings: none

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 individual investor.

 

I’ve been waiting for a decline for so long that sooner or later I’m bound to be right.