The "What If" game is about as fruitless as it gets, but is also as much a part of human nature as just about anything else.
How else could I explain having played that game at a high school reunion?
That may explain the consistent popularity of that simple question as a genre on so many people’s must read lists as the New Year begins.
Historical events lead themselves so beautifully to the "What If" question because the cascading of events can be so far reaching, especially in an interconnected world.
Even before that interconnection became so established it didn’t take too much imagination to envision far reaching outcomes that would have been so wildly different around the world even a century or more later.
Imagine if the Union had decided to cede Fort Sumpter and simply allowed the South to go its merry way. Would an abridged United States have been any where near the force it has been for the past 100 years? What would that have meant for Europe, the Soviet Union, Israel and every other corner of the world?
Second guessing things can never change the past, but it may provide some clues for how to approach the future, if only the future could be as predictable as the past.
Looking back at 2015 there are lots of "what if" questions that could be asked as we digest the fact that it was the market’s worst performance since 2008.
In that year the S&P 500 was down about 37%, while in 2015 it was only down 0.7%. That gives some sense of what kind of a ride we’ve been on for the past 7 years, if the worst of those years was only 0.7% lower.
But most everyone knows that the 0.7% figure is fairly illusory.
Of course, even that "what if" exercise would continue to perpetuate some of the skew seen in 2015, as the averages were only as high as they were due to the significant out-performance of a handful of key constituent components of the index. Imagining what if those large winners had only gone down 0.7% for the year would still result in an index that wouldn’t really reflect just how bad the underlying market was in 2015.
While some motivated individual could do those calculations for the S&P 500, which is a bit more complex, due to its market capitalization calculation, it’s a much easier exercise for the DJIA.
Just imagine multiplying the 10 points gained by Microsoft , the 30 pre-split points gained by Nike (NKE), the 17 points by UnitedHealth Group (UNH), the 26 points by McDonalds (MCD) or the 29 points by Home Depot (HD) and suddenly the DJIA which had been down 2.2% for 2015, would have been another 761 points lower or an additional 4.5% decline.
Beyond those names the pickings were fairly slim from among the 30 comprising that index. The S&P 500 wasn’t much better and the NASDAQ 100, up for the year, was certainly able to boast only due to the performances of Amazon, Netflix (NFLX), Alphabet and Facebook (FB).
Now, also imagine what if historically high levels of corporate stock buybacks hadn’t artificially painted a better picture of per share earnings.
That’s not to say that the past year could have only been much worse, but it could also have been much better.
Of course you could also begin to imagine what if the market had actually accepted lower energy and commodity prices as a good thing?
What if investors had actually viewed the prospects of a gradual increase in interest rates as also being a good thing, as it would be reflective of an improving, yet non-frothy, economy?
And finally, for me at least, What if the FOMC hadn’t toyed with our fragile emotions and labile intellect all through the year?
Flat line years such as 2015 and 2011 don’t come very often, but when they do, most dispense with the "what if" questions and instead focus on past history which suggests a good year to follow.
But the "what if" game can also be prospective in nature, though in the coming year we should most likely ask similar questions, just with a slight variation.
What if energy prices move higher and sooner than expected?
What if the economy expands faster than we expected?
What if money is running dry to keep the buyback frenzy alive?
Or, what if corporate earnings actually reflect greater consumer participation?
You may as well simply ask what if rational thought were to return to markets?
But it’s probably best not to ask questions when you may not be prepared to hear the answer.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or "PEE" categories.
For those, myself included, who have been expecting some kind of a resurgence in energy prices and were disbelieving when some were calling for even further drops only to see those calls come true, it’s not really clear what the market’s reaction might be if that rebound did occur.
While the market frequently followed oil lower and then occasionally rebounded when oil did so, it’s hard to envision the market responding favorably in the face of sustained oil price stability or strength.
I’ve given up the idea that the resurgence would begin any day now and instead am more willing to put that misguided faith into the health of financial sector stocks.
Unless the FOMC is going to toy with us further or the economy isn’t going to show the kind of strength that warranted an interest rate increase or warrants future increases, financials should fare well going forward.
MetLife, down 12% during 2015 is actually the best performer of that small group. As with Morgan Stanley, almost the entirety of the year’s loss has come in the latter half of the year when the S&P 500 was performing no worse than it had during the first 6 months of the year.
Both Morgan Stanley and MetLife have large enough option premiums to consider the sale of the nearest out of the money call contracts in an attempt to secure some share appreciation in exchange for a somewhat lo0wer option premium.
In both cases, I think the timing is good for trying to get the best of both worlds, although Morgan Stanley will be among the relatively early earnings reports in just a few weeks and still hasn’t recovered from its last quarter’s poorly received results, so it would help to be prepared to manage the position if still held going into earnings in 3 weeks.
By contrast, American Express reports on that same day, but all of 2015 was an abysmal one for the company once the world learned that its relationship with Costco (COST) was far more important than anyone had believed. The impending loss of Costco as a branded partner in the coming 3 months has weighed heavily on American Express, which is ex-dividend this week.
I would believe that most of that loss in share has already been discounted and that disappointments aren’t going to be too likely, particularly if the consumer is truly making something of a comeback.
There has actually been far less press given to retail results this past holiday season than for any that I can remember in the recent and not so recent past.
Most national retailers tend to pull rabbits out of their hats after preparing us for a disappointing holiday season, with the exception of Best Buy (BBY), which traditionally falls during the final week of the year on perpetually disappointing numbers.
Best Buy has already fallen significantly in th e past 3 months, but over the years it has generally been fairly predictable in its ability to bounce back after sharp declines, whether precipitous or death by a thousand cuts.
To my untrained eye it appears that Best Buy is building some support at the $30 level and doesn’t report full earnings for another 2 months. Perhaps it’s its reputation preceding it at this time of the year, but Best Buy’s current option premium is larger than is generally found and I might consider purchasing shares and selling out of the money calls in the anticipation of some price appreciation.
Under Armour (UA) is in a strange place, as it is currently in one of its most sustained downward trends in at least 5 years.
While Nike, its arch competitor, had a stellar year in 2015, up until a fateful downtrend that began in early October, Under Armour was significantly out-performing Nike, even while the latter was some 35% above the S&P 500’s performance.
That same untrained eye sees some leveling off in the past few weeks and despite still having a fairly low beta reflecting a longer period of observation than the past 2 months, the option premium is continuing to reflect uncertainty.
With perhaps some possibility that cold weather may finally be coming to areas where it belongs this time of the year, it may not be too late for Under Armour to play a game of catch up, which is just about the only athletic pursuit that I still consider.
Finally, Pfizer (PFE) has been somewhat mired since announcing a planned merger, buyout, inversion or whatever you like to have it considered. The initially buoyed price has fallen back, but as with Dow Chemical (DOW) which has also fallen back after a similar merger announcement move higher, it has returned to the pre-announcement level.
I view that as indicating that there’s limited downside in the event of some bad news related to the proposed merger, but as with Dow Chemical, Best Buy and Under Armour, the near term option premium continues to reflect perceived near term risk.
Whatever Pfizer;’s merger related risk may be, I don’t believe it will be a near term risk. From the perspective of a call option seller that kind of perception in the face of no tangible news can be a great gift that keeps giving.
Traditional Stocks: MetLife. Morgan Stanley, Pfizer