Dec12013

Weekend Update – December 1, 2013

Weekend Update

We may be on the verge of the Eve of Inflection.

Thanksgiving is that time of year when many sit back and think about all of their bounty and good fortune in the past year.

Sometimes the processes of reflection and introspection bring about inflection. Sometimes reviewing where you’ve been and where you appear to be heading are sufficient causes to consider a change in path or direction.

Nowhere is that more true than among many hedge fund managers now faced with the end of the year in sight and a stock market that has been out-performing their own trading and expertise. Many have already made the decision to increase risk taking behavior and eschew hedging in a last ditch effort to catch up to the averages and to secure their bonuses or save their jobs.

That may be more an example of desperation rather than introspection, but that kind of behavior may also herald an inflection point, not only in personal behavior but also in the very nature of the markets, especially if you take a contrarian view. When others change their behavior and begin to chase it may be time to take cover.

Sometimes that change in path is neither wanted nor welcome, but perhaps unavoidable. With the market hitting new highs on a nearly daily basis, what hasn’t escaped notice is that the rate of increase is itself decreasing. Most will tell you that in the case of a momentum stock a sign that its heady days are about to become a memory is when the rate of growth begins decreasing. In this case, it seems that it is the market as a whole whose rate of increase has recently been on the decline.

Depending on your perspective, if you are eternally bullish that decline is just a chance to digest some gains and prepare for the next leg higher. For the bears that slowing is the approach to the point of inflection.

Every roller coaster has them. Every stock market has them. On roller coasters, even when your eyes are closed you know when a change in slope direction is about to occur. It’s not quite as intuitive or simple in the stock market because human nature often believes that simple laws governing events can be suspended. No one thinks in a cautionary manner when the prevailing spirit is “laissez les bon temps rouler.”

While the overall market would likely find that a point of inflection would take it lower, there may be opportunity in stocks whose points of inflection may have been reached and are now bound to go higher or are already on their way.

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).

Stanley Black and Decker (SWK) reported its earnings early in the most recent earnings season. It was the first to blame the government shutdown on its poorer than anticipated results and shares plummeted about 15%. Having recovered nearly half of that loss, with about another 6 weeks to go until the next earnings report, shares go ex-dividend this week. It has been a bit more than a year since the last time I owned shares, then too purchased in part because of its upcoming dividend. I think Stanley Black and Decker still has some room to move higher relative to the overall market and now offers good opportunity in advance of its next report.

To a degree Stanley Black and Decker and Fastenal (FAST) are related and dependent upon residential and commercial growth. This past week’s durable goods orders report didn’t necessarily send news of a robust economy, but Fastenal has been trading in a range of late which is always a reason to consider as part of a covered option strategy. I already own two lots of Fastenal, but continue to like it at its current price in anticipation that it will remain near that price.

The Gap (GPS) is one of those clothing retailers that still insists on releasing monthly comparison statistics. The past two monthly reports have sent shares moving in opposite directions as the report itself is the source of exceptionally high option premiums. With conflicting interpretations in two successive monthly reports there is little reason to believe that any volatility surrounding the monthly reports are indicative of systemic or irreparable issues at the retailer. Even with the prospect of another negative report this coming week, I don’t believe that the market will react as rashly as had occurred in October and from which point shares have now fully recovered.

While both AIG (AIG) and Halliburton (HAL) do go ex-dividend this week, their dividends alone aren’t appealing enough to focus attention on their purchase. Both, however, are sufficiently off from their recent high levels to warrant consideration. Both also represent stocks that appear to have set new baseline price levels as they have been slowly and methodically moved higher until very recently. Those are opportunities that get enhanced by the prospects of an inflection and their option premiums complemented by the possibility of also capturing dividends, albeit modest ones.

Dow Chemical (DOW) may also appear to be in the category of having fallen some from its recent high point and perhaps ready for a turnaround, with its current levels serving as that point of inflection taking the stock to a modestly higher level. While it may also be subject to some of the larger macro-economic issues such as those faced by Stanley Black and Decker and Fastenal, Dow Chemical’s dividend offers some protection during a market decline and its option premiums help to provide a cushion during either bigger picture declines or stock specific missteps.

While the previously mentioned positions are all fairly sedate choices that may be expected to do better if there is an inflection in the market, there may also be room for consideration of some more volatile additions to the portfolio, particularly as part of short term trading strategies.

Freeport McMoRan (FCX) has reversed course from its nearly 15% climb in October, simply an example of successive points of inflection in a short period of time. I think that the selling is now overdone, not only in Freeport McMoRan, but in the metals complex and that shares of Freeport are once again getting ready for another period of inflection. While I have held some positions in Freeport McMoRan much longer than my typical holding, its dividend has made the holding period more tolerable. That dividend appears to be secure, even while there is some talk of gold miners being at risk of cutting dividends if ore prices continue to decline.

For the ones really enjoying roller coaster rides, Walter Energy (WLT) may be just the thing. Its recent drop for its near term high seems to be developing a new price floor that can serve as the point of inflection taking the price higher, although I would expect that based on its recent behavior such a move might be short lived. However, that rapid alternation in direction has made Walter Energy a very good recent covered call trade, although for some the sale of puts may be a more appropriate manner to take advantage of the share’s volatility.

Finally, it’s yet another week to consider eBay (EBAY). Despite a 2.5% gain on Friday, eBay is simply proving the analysts correct, in that it continues to be a moribund stock trading in a tight range. It was decried just two weeks ago for being unable to escape from that range while the rest of the market seemed to be thriving. In the meantime, those practicing a covered call strategy and owning shares of eBay, over and over again, have fared well. Responding to the analyst’s cry, eBay did test that lower range and has now bounced back nicely to the point that it is once again in the middle of that range. That’s an ideal position to consider opening a new position or adding to an existing position.

Traditional Stocks: Dow Chemical, eBay, Fastenal, The Gap

Momentum Stocks: Freeport McMoRan, Walter Energy

Double Dip Dividend: AIG (ex-div 12/3 ), Halliburton (ex-div 12/4), Stanley Black and Decker (ex-div 12/4)

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.

Nov22013

Weekend Update – November 3, 2013

Daily Market Update

Some things are just unappreciated until they’re gone.

If you can remember those heady days of 2007, it seemed as if every day we were hitting new market highs and everyone was talking about it when not busy flipping houses.

Some will make the case that is the perfect example of a bubble about to burst, similar to when a bar of gold bullion appears on the cover of TIME magazine, just in time to mark the end of a bull run.

On the other hand, when everyone is suddenly talking about perhaps currently being in a bubble it may be a good time to plan for even more of a good thing.

That’s emblematic of the confusion swirling in our current markets. Earnings are up. Better than expected by most counts, yet revenues are down. The stock market can do only one thing and so it goes higher.

In case you haven’t been paying attention, 2013 has been a year of hitting record after record. Yet the buzz is absent, although house flipping is back. Not that I go to many social events but not many are talking about how wild the market has been. That’s markedly different from 2007.

Listening to those who purport to know about human behavior and markets, that means that we are not yet in a stock market bubble and as such, the market will only go higher, yet that’s at odds with the rampant bubble speculation that is being promoted in some media.

I’m a little more cynical. I see the paucity of excitement as being reflective of investors who have come to believe that consistently higher markets are an entitlement and have subsequently lost their true value. No one seems to appreciate a new record setting close, anymore. The belief in the right to a growing portfolio is no different from the right to use a calculator on an exam. Along with that right comes the loss of ability and appreciation of that ability.

Without spellchecker, the editors at Seeking Alpha would have a hard time distinguishing me from a third grader, but spelling really isn’t something I need to due. It’s just done for me.

While many were unprepared in 2007 because they were caught up in a bubble, 2013 may be different. In 2007 the feeling was that it could only get better and better, so why exercise caution? But in 2013 the feeling may be that there is nothing unusual going on, so what is there to be cautious about?

AS markets do head higher those heights are increasingly met with ennui instead of wonder and awe. It’s barely been more than five years since we last felt the wrath of an over-extended market but I’m certain that the new daily records will be missed once they’re gone.

As a normally cautious person when it comes to investing, but not terribly willing to sacrifice returns for caution my outlook changes with frequency as new funds find their way into my account after the previous week’s assignment of options I had sold.

This past week I didn’t have as many assignments as I had expected owing to some late price drops on Friday, so I’m not as likely to go on a spending spree this coming week, as I don’t want to dig deeply into my cash reserve. This week I’m inclined to think more in terms of dividend paying stocks and relatively few higher beta names, although opportunity is situational and Monday morning’s opening bell may bring surprise action. I appreciate surprise and for the record, I appreciate every single bit of share appreciation and income that comes my way as a gift from this market.

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).

I currently own shares of MetLife (MET) and have done so several times this year. MetLife reported earnings this past week. They reported a nearly $2 billion turnaround in profits, but missed estimates, despite strength in every metric. They re-affirmed that a lower interest rate environment, as might be expected with a continuation of Quantitative Easing, could impact its assets’ performance in the coming year. That was the same news that created a buying opportunity in the previous quarter, so it should not have come as too much of a surprise. What did, however come as a surprise was the announcement that MetLife would no longer be offering earnings per share guidance. According to its CEO “we will instead expand our discussion of key financial metrics and business drivers, creating a more informed view of MetLife’s future prospects.” The price drop and it’s ex-dividend date this week make it a likely candidate for using my limited funds this week.

I’ve long believed that Robert ben Mosche, CEO of AIG (AIG) was something of a saint. Coming out of comfortable retirement in Croatia to attempt an AIG rescue, he continued on his quest even while battling cancer and still found the time to re-pay AIG’s very sizeable debt to US taxpayers. Who needs that sort of thing when you can live like royalty off the Mediterranean coast?

AIG was punished after reporting earnings this past week. It’s hard to say whether the in line earnings, but slightly lower revenue was to blame for the nearly 7% drop or whether joining forces with MetLife was to blame. Not that they literally joined forces, it’s just that ben Mosche announced that AIG will no longer comment on its “aspirational goals,” which was a way of saying that they too were no longer going to provide guidance. I haven’t owned shares in 2 months and that was at a lower price point than even after the large Friday drop, but I think the opportunity has re-arrived.

Wells Fargo (WFC) goes ex-dividend this week and as much as I’ve silently prayed for its share price to drop back to levels that I last owned them, it just hasn’t worked out that way. To a large degree Wells Fargo has stayed above the various banking controversies and has deflected much of the blame and scrutiny accorded others. At some point it becomes clear that prices aren’t likely to drop significantly in the near term, so it may be time to capitulate and get back on the wagon. However, what does give me some solace is that shares have trailed the S&P 500 during the three time frames that I have been recently using, each representing a near term top of the market; May 21, August 2 and September 19, 2013.

In the world of big pharma, Merck (MRK) has shared in little of the price strength seen by some others. In fact, of late, the best Merck has been able to do to prompt its shares higher have all come on the less constructive side of the ledger. Only the announcement of workforce reductions and other cost cutting steps have been viewed positively.

But at some point a value proposition is created which isn’t necessarily tied to pipelines or other factors pertinent to long term price health. In this case, a quick 7% price drop is enough to warrant consideration of a company paying an attractive dividend and offering appealing enough option premiums to sustain interest in shares even if they stagnate while awaiting the next price catalysts. Besides, if you’re selling covered calls, there’s nothing better than share price stagnation.

What is a week without drawing comparisons between Michael Kors (KORS) and Coach (COH)? Coach has become everyone’s favorite company to disparage, although on any given day it may exchange places with Caterpillar. Kors, is of course, the challenger that has displaced Coach in the hearts of investors and shoppers. Having sold Coach puts in advance of earnings and then purchasing shares even after those expired, those were assigned this past week. However, at this price level Coach is still an appealing covered option purchase and well suited for a short term strategy, even if there is validity to the thesis that it is ceding ground to Kors.

Kors, on the other hand, is doing everything right, including entering the S&P 500. It’s hard not to acknowledge its price ascent, even after a large secondary offering. While I know nothing of fashion and have no basis by which to compare Coach and Kors, I do know that as Kors reports earnings this week the option market is implying approximately 7.5% price move in either direction. However, anything less than a 10% decline in price can still deliver a 1% ROI

Williams Companies (WMB) is one of those companies that seems to fly under the radar. Although I’ve owned shares many times there has never been a reason compelling me to do so on the basis of its business fundamentals. Instead, ownership has always been prompted by an upcoming dividend or a sudden price reversal. In this case I just had shares assigned prior to earnings, which initially saw a big spike in price and then an equally large drop, bringing it right back to the level that I have found to be a comfortable entry point.

Riverbed Technology (RVBD) reported earnings last week and I did not purchase additional shares or sell puts, as I thought I might. Too bad, because the company acquitted itself well and shares moved higher. I think that shares are just starting and while RIverbed Technology has probably been my most lucrative trading partner over the years, purely on the basis of option premiums, this time around I am unlikely to write call options on all new shares, as I think $18 is the next stop before year end, particularly if the overall market doesn’t correct.

What can anyone add to the volumes that have been said about Apple (AAPL) and Intel (INTC)? Looking for insights is not a very productive endeavor, as the only new information is likely to currently exist only as insider information. Both are on recent upswings and both have healthy dividends that get my attention because of their ex-dividend dates this week. Intel offers nothing terribly exciting other than its dividend, but has been adding to its price in a stealth fashion of late, possibly resulting in the assignment of some of my current shares that represent one of the longest of my holdings, going back to September 2012. While I have always liked Intel it hasn’t always been a good covered call stock because when shares did drop, such as after earnings, the subsequent price climbs took far too long to continually be able to collect option premiums. However, without any foreseeable near term catalysts for a significant price drop it offers some opportunities for a quick premium, dividend and perhaps share appreciation, as well.

Finally, in its short history of paying dividends Apple’s shares have predominantly moved higher after going ex-dividend, although there was one notable exception. Given the factors that may be supporting Apple’s current price levels, including pressure from activist investors and Apple’s own buybacks, I’m not overly concerned about the single historical precedence and think that the triumvirate of option premium, dividend and share appreciation makes it a good addition to even a conservative portfolio.

Traditional Stocks: AIG, Merck, Williams Companies

Momentum Stocks: Coach, Riverbed Technology

Double Dip Dividend: Apple (ex-div 11/6), Intel (ex-div 11/5), MetLife (ex-div 11/6), Wells Fargo (ex-div 11/6)

Premiums Enhanced by Earnings: Michael Kors (11/5 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.

Jul52013

Weekend Update – July 7, 2013

Weekend Update

Much has been made of the recent increase in volatility.

As someone who sells options I like volatility because it typically results in higher option premiums. Since selling an option provides a time defined period I don’t get particularly excited when seeing large movements in a share’s price. With volatility comes greater probability that “this too shall pass” and selling that option allows you to sit back a bit and watch to see the story unwind.

It also gives you an opportunity to watch “the smart money” at play and wonder “just how smart is that “smart money”?

But being a observer doesn’t stop me from wondering sometimes what is behind a sudden and large movement in a stock’s price, particularly since so often they seem to occur in the absence of news. They can’t all be “fat finger ” related. I also sit and marvel about entire market reversals and wildly alternating interpretations of data.

I’m certain that for a sub-set there is some sort of technical barrier that’s been breached and the computer algorithms go into high gear. but for others the cause may be less clear, but no doubt, it is “The Smart Money,” that’s behind the gyrations so often seen.

Certainly for a large cap stock and one trading with considerable volume, you can’t credit or blame the individual investor for price swings, especially in the absence of news. Since for those shares the majority are owned by institutions, which hopefully are managed by those that comprise the “smart money” community, the large movements certainly most result in detriment to at least some in that community.

But what especially intrigues me is how the smart money so often over-reacts to news, yet still can retain their moniker.

This week’s announcement that there would be a one year delay in implementing a specific component of the Affordable Care Act , the Employer mandate, resulted in a swift drop among health care stocks, including pharmaceutical companies.

Presumably, since the markets are said to discount events 6 months into the future, the timing may have been just right, as a July 3, 2013 announcement falls within that 6 month time frame, as the changes were due to begin January 1, 2014.

By some kind of logic the news of the delay, which reflects a piece of legislation that has regularly alternated between being considered good and bad for health care stocks, was now again considered bad.

But only for a short time.

As so often is seen, such as when major economic data is released, there is an immediate reaction that is frequently reversed. Why in the world would smart people have knee jerk reactions? That doesn’t seem so smart. This morning’s reaction to the Employment Situation report is yet another example of an outsized initial reaction in the futures market that saw its follow through in the stock market severely eroded. Of course, the reaction to the over-reaction was itself then eroded as the market was entering into its final hour, as if involved in a game of volleyball piting two team of smart money against one another.

Some smart money must have lost some money during that brief period of time as they mis-read the market’s assessment of the meaning of a nearly 200,000 monthly increase in employment.

After having gone to my high school’s 25th Reunion a number of years ago, it seemed that the ones who thought they were the most cool turned out to be the least. Maybe smart money isn’t much different. Definitely be wary of anyone that refers to themselves as being part of the smart money crowd.

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

As a caveat, with Earnings Season beginning this week some of the selections may also be reporting their own earnings shortly, perhaps even during the July 2013 option cycle. That knowledge should be factored into any decision process, particularly since if you select a shorter term option sale that doesn’t get assigned, since yo may be left with a position that is subject to earnings related risk. By the same token, some of those positions will have their premiums enhanced by the uncertainty associated with earnings.

Both Eli Lilly (LLY) and Abbott Labs (ABT) were on my list of prospective purchases last week. Besides being a trading shortened week in celebration of the FOurth of July, it was also a trade shortened week, as I initiated the fewest new weekly positions in a few years. Both shares were among those that took swift hits from fears that a delay in the ACA would adversely impact companies in the sector. In hindsight, that was a good opportunity to buy shares, particularly as they recovered significantly later in the day. Lilly is well off of its recent highs and Abbott Labs goes ex-dividend this week. However, it does report earnings during the final week of the July 2013 option cycle. I think that healthcare stocks have further to run.

AIG (AIG) is probably the stock that I’ve most often thought of buying over the past two years but have too infrequently gone that path. While at one time I thought of it only as a speculative position it is about as mainstream as they come, these days. Under the leadership of Robert Ben Mosche it has accomplished what no one believe was possible with regard to paying back the Treasury. While its option premiums aren’t as exciting as they once were it still offers a good risk-reward proposition.

Despite having given up on “buy and hold,” I’ve almost always had shares of Dow Chemical (DOW) over the past 5 years. They just haven’t been the same shares for very long. It’s CEO, Andrew Liveris was once the darling of cable finance news and then fell out of favor, while being roundly criticized as Dow shares plummeted in 2008. His star is pretty shiny once again and he has been a consistent force in leading the company to maintain shares trading in a fairly defined channel. That is an ideal kind of stock for a covered call strategy.

The recent rise in oil prices and the worries regarding oil transport through the Suez Canal, hasn’t pushed British Petroleum (BP) shares higher, perhaps due to some soon to be completed North Sea pipeline maintenance. British Petroleum is also a company that I almost always own, currently owning two higher priced lots. Generally, three lots is my maximum for any single stock, but at this level I think that shares are a worthy purchase. With a dividend yield currently in excess of 5% it does make it easier to make the purchase or to add shares to existing lots.

General Electric (GE) is one of those stocks that I only like to purchase right after a large price drop or right before its ex-dividend date. Even if either of those are present, I also like to see it trading right near its strike price. Its big price drop actually came 3 weeks ago, as did its ex-dividend date. Although it is currently trading near a strike price, that may be sufficient for me to consider making the purchase, hopeful of very quick assignment, as earnings are reported July 19, 2013.

Oracle (ORCL) has had its share of disappointments since the past two earnings releases. Its problems appear to have been company specific as competitors didn’t share in sales woes. The recent announcement of collaborations with Microsoft (MSFT and Salesforce.com (CRM) says that a fiercely competitive Larry Ellison puts performance and profits ahead of personal feelings. That’s probably a good thing if you believe that emotion can sometimes not be very helpful. It too was a recent selection that went unrequited. Going ex-dividend this week helps to make a purchase decision easier.

This coming week and next have lots of earnings coming from the financial sector. Having recently owned JP Morgan Chase (JPM) and Morgan Stanley (MS) I think I will stay away from those this week. While I’ve been looking for new entry points for Citigroup (C) and Bank of America (BAC), I think that they’re may be a bit too volatile at the moment. One that has gotten my attention is Bank of New York Mellon (BK). While it does report earnings on July 17, 2013 it isn’t quite as volatile as the latter two banks and hasn’t risen as much as Wells Fargo (WFC), another position that I would like to re-establish.

YUM Brands (YUM) reports earnings this week and as an added enticement also goes ex-dividend on the same day. People have been talking about the risk in its shares for the past year, as it’s said to be closely tied to the Chinese economy and then also subject to health scare rumors and realities. Shares do often move significantly, especially when they are stoked by fears, but YUM has shown incredible resilience, as perhaps some of the 80% institutional ownership second guess their initial urge to head for the exits, while the “not so smart money” just keeps the faith.

Finally, one place that the “smart money” has me intrigued is JC Penney (JCP). With a large vote of confidence from George Soros, a fellow Hungarian, it’s hard to not wonder what it is that he sees in the company, after all, he was smart enough to have fled Hungary. The fact that I already own shares, but at a higher price, is conveniently irrelevant in thinking that Soros is smart to like JC Penney. In hindsight it may turn out that ex-CEO Ron Johnson’s strategy was well conceived and under the guidance of a CEO with operational experience will blossom. I think that by the time earnings are reported just prior to the end of the August 2013 option cycle, there will be some upward surprises.

Traditional Stocks: Bank of New York, British Petroleum, Dow Chemical, Eli Lilly, General Electric,

Momentum Stocks: AIG, JC Penney

Double Dip Dividend: Abbott Labs (ex-div 7/11), Oracle (ex-div)7/10)

Premiums Enhanced by Earnings: YUM Brands (7/10 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.

   

Apr72013

Weekend Update – April 7, 2013

Weekend Update

I’m was beginning to feel like one of those Pacific Island soldiers that never found out World War II had ended and remained ever-presently vigilant for an impending attack that never came.

Amazingly, some held up their vow to defend for decades while I’m having difficulty after a bit more than a month waiting for a correction. Nothing big, just in line with this same time period in 2012, as I see lots of similarities to that time, not only in the parallel nature of the charts, but also in my own less than stellar performances, having been selling covered options as religiously as a sentinel keeps an eye on the horizon.

Having weathered the acute shock value of Cyprus, decreasing economic growth in China, currency manipulation in Japan and digested the initial uncertainty of the Korean Peninsula, it looked as if any sentinel for a sell-off would be a lonely soldier.

Now faced with a disappointing employment situation there’s opportunity to wonder over the weekend whether the pole has been sufficiently greased or whether this is simply the very quick mini sell-off of April 2012 that occurred just as Apple (AAPL) hit its high, then quickly recovered, just in time to lead to a 9% sell-off.

Apple had came off its April high by 5% at that point that the greater market downturn began, which is that same point that Google (GOOG) was down from its recent high point, at the close of Thursday’s trading (April 4, 2013). Coincidentally, that was the day before today’s sell-off. For those that have believed that Google has rotated into market leadership, having wrestled the position away from Apple, that may be a cause for concern. as does the fact that Google has traded below that dreaded 50 Day Moving Average.

I don’t know much about those kind of technical factors, but I do recognize that sometimes there is a basis for deja vu being more than just a feeling. What actually exists over the horizon is still anyone’s guess, but unlike those lonely soldiers you can feel relatively assured that at some point an unwelcome visitor will appear and wreak some havoc on the market. From my perspective that comes along every 52 months, so I’m not quite ready to accept that the time has come to drop defenses, but there may be room to let the guard down a bit.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories, as earnings season begins anew on April 8, 2013 (see details). Additionally, for the first time in a few weeks there is a somewhat greater emphasis on Momentum stocks, as a coming downslide might reasonably be expected to unduly impact upon issues that have thrived recently, particularly the more defensive stocks. However, I am still inclined to consider monthly contracts over weekly ones, simply for a little extra breathing room while continuing to await a market heading in a southerly direction.

One Momentum stock that has also thrived up until very recently is YUM Brands (YUM). It also happens to go ex-dividend this week and has already given back much of its gains in the absence of any news. In the past it has demonstrated itself very capable of bouncing back from both real news and speculation regarding its forward prospects. Simultaneously being held hostage to the Chinese economy and also proving to be independent of swirling winds, YUM Brands serves as a model of what can be achieved in a marketplace where the playing field is anything but level.

A real signal that something is evolving, at least from my perspective, is that I no longer classify AIG (AIG) as a Momentum stock. Over the past year, had I followed by frequent suggestions that AIG might be an appropriate covered call position, I think I could have limited my portfolio to a single stock. Robert Ben Mosche, it’s CEO is the poster child for leadership and focus. With some recent share weakness, I think it may be time to add it back to a portfolio in need of income and reasonable price stability.

A couple of months ago I made an earnings related trade in F5 Networks (FFIV) that worked out nicely. Having sold puts just prior to earnings, F5 surpassed expectations and the trade was closed in 4 days. Thursday evening after the closing bell, F5 release disappointing guidance that saw its shares fall more than 15%.

I hate guidance that comes out weeks before earnings and catches me off-guard. In the past I’ve seen Cummins Engine (CMI) and Abercrombie and Fitch (ANF) seem to regularly upset happy shareholders with that kind of timed guidance. Despite the fact that analysts seem to be in agreement that this is solely an F5 issue, it indiscriminately drags down the sector, perhaps offering opportunities.

In this case, I think the opportunities are now in both Cisco (CSCO) and Riverbed Technology (RVBD), both unduly hit in the aftermath of F5 and just a couple of weeks ago by Oracle’s (ORCL) disappointing earnings, which were also agreed to be an Oracle specific shortcoming. I currently own shares of Riverbed and would even consider adding to the position ahead of earnings later in the month.

Western Refining (WNR) returns to the list from last week, as an unrequited purchase. It is, possibly another example of how the market acts indiscriminately and emotionally. Following Valero’s (VLO) moaning about the costs of upcoming EPA initiatives for cleaner gas the market punished the entire sector, despite the fact that the EPA suggested that the costs of compliance were minimal for most refiners. The market made no distinction and assumed that all refiners would be subject to additional costs similar to the $300-400 million suggested by Valero. Unfortunately, I didn’t have the fortitude to pick up shares of Western Refining as it briefly dipped below $30 or Phillips 66 (PSX) as it fell about 10%. It didn’t stay there very long and certainly never confirmed the worst case scenario that Valero so openly shouted.

MetLife (MET) also returns from last week, which was another week of hesitancy to commit cash in favor of building reserves. There were, however, a number of times that I was ready to part with some of the cash, but ultimately resisted. As opposed to Western Refining, MetLife’s shares went down even further, so those decisions to embrace inaction may have balanced one another out. I continue to believe that shares will benefit from an increasingly healthy housing market, although that is far from MetLife’s core and highest profile business.

The financial sector was hit quite hard this past week. Since I owned shares of both Morgan Stanley (MS) and JP Morgan (JPM), I was acutely aware of their duress. However, in addition to JP Morgan and Wells Fargo (WFC) releasing earnings this Friday and perhaps representing some opportunity, Bank of America (BAC), whose shares I had assigned just a week ago has given up much of its recent run-up higher and is becoming attractive again.

Finally, Bed Bath and Beyond (BBBY) s one of my favorite stores, but not one of my favorite stocks. It has had a bit of a price rise on some buy-out speculation and it has demonstrated past ability to disappoint on earnings. Already down about 4% from its very recent high, I would be comfortable owning shares at $60 and would consider a 1.5% ROI for a 2 week holding period to be a decent reward while anticipating less than a 5% decline in share price in the after-math of earnings.

Traditional Stocks: AIG, Cisco, MetLife

Momentum Stocks: Bank of America, Riverbed Technology, Western Refining,

Double Dip Dividend: YUM Brands (ex-div 4/10)

Premiums Enhanced by Earnings: JP Morgan (4/12 AM), Pier 1 (4/11 AM), Wells Fargo (4/12 AM)

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.

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.

 

Jan272013

Weekend Update – January 27, 2013

Weekend Update

By Thursday evening I had already lost track of how many records and new highs had been set as trading was getting ready to enter the final week of January. Depending on the parameters and definitions it seems as if every minute someone was referring to one new market high of one sort or another.

Sometimes I think that the Wilshire 5000 doesn’t get its due recognition, but if the trend continues it will join the party, even if only to have set a record for intra-day trading level on a Tuesday following inauguration.

If they weren’t calling new records they were hyper-focused on just how far we were from a new record. By the way, just for the record, the WIlshire 5000 is 1.3% away from its all time record high.

After a while the meaning of a record becomes less and less. I certainly didn’t feel the special nature of whatever was being watched so closely. S&P 500 at 1500? For me, the only record that counts is 14,164 for the Dow and 1565 on the S&P 500, both more than 5 years ago.

But even those records are meaningless, because all that really matters is where your own assets are residing.

I’d also lost track of how many consecutive gaining days we had other than to remember that last January seemed to be the very same. Like through a million cuts we went higher each and every day, simply setting a record for the number of slices.

You don’t have to be a short seller to bemoan a relentless upward path, but it’s a little more excruciating when there’s no apparent reason for what has caused such despair. At least Ackman knows where Loeb lies.

Alright, it hasn’t really been excruciating and it hasn’t really been a period of despair to live and die by covered option sales. That may be a bit of an exaggeration, as you do share in the market’s gains, but maybe not as much. Of course, that assumes that the next guy is actually taking their profits rather than falling prey to human nature and letting it all ride. I like taking profits on a very regular basis and moving on before the welcome is outstayed.

Records don’t mean very much. Just ask the performance enhanced athletes that are being denied recognition for their accomplishments. I don’t really know what exactly is juicing the markets right now, but I do know that there’s little reason to believe that the recent heights are deserved.

Ultimately, looking back at the record highs of October 2007, I realize that the best performance enhancer since then has been ignoring the occasional mindless melt ups and doing the conservative thing. Collecting penny by penny selling those options until the sum of the parts is greater than the whole. I continually maintain that you don’t have to be a great stock picker or market timer to have your records beat theirs.

And get there sooner.

As volatility keeps setting its own record lows it does become more challenging to get more pennies for your efforts in selling options. Although I’ve never been much of a fan of earnings season, at the very least it does its part to enhance premiums, if you don’t mind the enhanced risk, as well. As a covered call seller risk is not high on the list of favorite things, but there has no be some solace in knowing that a uni-directional move sooner or later has to come to an end. Hopefully, when it does, it won’t be quite as bruising as has been the descent of Apple (AAPL) after its one way journey higher.

As always, the week’s selections are categorized as either being Traditional, Momentum, Double Dip Dividend, or “PEE” (see details).

What strikes me this week is how I had a very difficult time identifying a “Traditional” candidate. Over the past month the least well performing sector, Utilities, has nonetheless delivered growth. The makes it difficult to spot potential targets that are also fairly priced.

That brings me to the elephant in the room. For the second week in a row Apple is back on the list. Last week it was a possible earnings related trade. Up until an hour before the close of Wednesday’s trading I thought of selling weekly $480 puts, but decided that having done the same with Mellanox (MLNX) and F5 Networks (FFIV) enough was enough. What exactly does that say when either Mellanox or F5 Networks is thought to be less risky than Apple? It probably says something about my delusional diagnostic methodology rather than the respective companies. But as Apple is now near the last price at which I owned it and closer to a $425 support level, it just seems harder to ignore. I think that once Tim Cook replaces the “WWJD” bracelet on his wrist and gets a new one from which to draw inspiration and guidance, things will get back to normal. The new bracelet would simply be inscribed “WWJD.” The difference? What Would Jobs Do?

With the “Traditional” category so quickly dispatched, it’s another week and another reason to think about adding shares of AIG (AIG). Of course, I wouldn’t have to consider doing that if my one and two week old lots hadn’t been assigned. But the reality is that the shares are always welcome back home. I look at the option premiums as being something like the rent you might collect from your adult child living in the basement.

I wanted so much to pick up shares of Baidu (BIDU) once again last week but it just didn’t get to a good price point. By that I mean that as opposed to barely a month or two ago the extraordinarily low volatility is taking its toll on intrinsic value and making the sale of in the money calls somewhat less of a slam dunk, particularly when the intrinsic value is more than half of the difference between two strike prices. I’m hoping to see Baidu trade within $2 or less of a lower strike price early in the week.

YUM Brands (YUM) should probably have the ticker symbol “YOYO.” It responds more to the conflicting daily rumors regarding the vitality of the Chinese economy than do traditional metrics of growth, such as copper and iron ore. Today’s drop was just another in the recent series of rumors regarding safety of the chicken offerings. It’s hard to imagine that YUM Brands is delivering a lower quality or unsafe product than is generally available to the growing consumer base in China.

There was a time, before Apple, that Texas Instruments (TXN) reporting earnings set the tone for the market. Those days are long gone. In fact, no one really sets that tone anymore, not even IBM (IBM), whose own great earnings and share performance did nothing more than be the sole reason for the Dow’s positive performance on Tuesday, while the S&P fell flat. In the meantime, Texas Instruments has survived its own earnings report and has a decent dividend this week in addition to income streams from its weekly option offerings.

Fastenal (FAST) is just a remarkably stable company whose products are ubiquitous yet out of view. Somehow, the fact that they have about 2600 company owned stores has escaped my view, but somehow they haven’t escaped the end user. More important than the company’s stability is the stability of shares over time. The dividend is fairly meager, but added to its option premium a reasonably safe place to leave money for a little while.

US Steel (X) is a recent and current holding. It is among a large group of high profile companies that are reporting earnings this week and may satisfy being plugged in to the equation that evaluates premiums of put sales relative to potential earnings related stock dives. For US Steel accepting the possibility of a 5% decline can still result in a 1% gain.

Lexmark (LXK) was also a recent holding. I still don’t fully understand where their earnings come from now that they are getting out of the printer business. However. it has shown resilience after the revelation that people on wireless devices just aren’t printing as much as the next guy tethered to a desk and computer. It too may offer an appealing award for accepting the possibility of a sharp earnings related decline.

VMWare (VMW), a one time high flier has settled into a good place. Although it is capable of making large moves after earnings, those moves on a percentage basis are fairly modest. Yet it does regularly offer premiums that are attractive. It’s one time parent EMC Corp (EMC) reports earnings in the morning and may offer some insights for the later reporting VMWare.

And finally, there’s Facebook. I still get a little smirk thinking about the vitriol directed toward me when making the case for buying shares following expiration of the first lock-up period. Just as with Apple, your portfolio isn’t a very good place to park your emotions. Whatever your opinion may be on Facebook the shares, Facebook the IPO, Facebook the company or Facebook the hoodie, it is an appealing trade based upon its earnings release this week.

Traditional Stocks: Apple

Momentum Stocks: AIG, Baidu, YUM Brands

Double Dip Dividend: Fastenal (ex-div 1/30), Texas Instruments (ex-div 1/29)

Premiums Enhanced by Earnings: Lexmark (1/29 AM), Facebook (1/30 PM), US Steel (1/29 AM), VMWare (1/28 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. 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.