Weekend Update – April 27, 2014

“The Bear” is waking up.

Whether you interpret that to mean that Russia is seeking to return to some of its faded and faux glory left behind as its empire crumbled, or that the stock market is preparing for a sustained downward journey, neither one likes to feel threatened.

As we prepare for the coming week the two bears may be very much related, at least if you believe in such things as “cause and effect.”

It now seems like almost an eternity when the first murmurings of something perhaps going on in Crimea evoked a reaction from the markets.

On that Friday, 2 months ago, when news first broke, the DJIA went from a gain of 120 points to a loss of 20 in the final hour of trading, but somehow managed to recapture half of that drop to cap off a strong week.

Whatever happened to not going home long on the brink of a weekend of uncertainty?

Since that time the increased tensions always seemed to come along on Fridays and this past was no different, except that on this particular Friday it seems that many finally went home with lighter portfolios in hopes of not having lighter account balances on Monday morning.

As often is the case these kind of back and forth weeks can be very kind to option sellers who can thrive when wandering aimlessly. However, while we await to see what if any unwanted surprises may come this weekend, the coming week packs its own potential challenges as there will be an FOMC announcement on Wednesday and the Employment Situation Report is released on Friday. Although neither should be holding much in the way of surprise, it is often very surprising to see how the market reacts to what is often the lack of news even when that is the expectation.

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

With the prospects of some kind of uncomfortable beginning to the coming week there may be reason to stay away from those companies or sectors that might have enhanced risk related to any kind of escalating “tit for tat” that may occur if events in and around Ukraine and Russia deteriorate.

Bed Bath and Beyond (BBBY), which as far as I know has little exposure east of Bangor and west of Los Angeles, is one of those companies that suffered the wrath of a disappointed market. Like many that stumble, but whose underlying business, execution or strategies aren’t inherently flawed, there comes a point that price stability and even growth returns. While it has only been 2 weeks since earnings, Bed Bath and Beyond has withstood any further stresses from a wounded market and has thus far settled into some stability. While some may question the legitimacy of using this past winter’s weather as an excuse for slumping sales, I’m not willing to paint with a broad brush. In fact, I would believe that retailers like Bed Bath and Beyond, typically not located in indoor malls would be more subject to weather related issues than mall based, one stop shopping centers.

Having been to a number of other countries and having seen the high regard in which coffee is held, it’s not very likely that Keuring Green Mountain (GMCR) would feel any serious loss if exports to Russia were blocked as part of sanctions. At the current high levels, I’m surprised to be considering shares again, but I have had a long and happy history with this very volatile stock that has taken on significantly greater credibility with its new CEO.

Because of its volatility its option premiums are always attractive, but risk will be further enhanced as earnings are scheduled to be reported the following week. Shares are approaching that level they stood before its explosive rise after the most recent earnings report.

Aetna (AET) for a brief moment looked to be one of those reporting earnings that was going to capitalize on good news. Following a nice advance on the day of earnings it started on this past fateful Friday with another 1.5% advance on top of a nearly 6% advance the day before. Within 10 minutes and well before the market started its own decline, that early gain was completely gone.

As pro-Russian militias may say if they believed that any expatriate nationals might be threatened in France, “C’est la vie.” While that is certainly the case, such unexpected moves re-offer opportunity as the health care insurers are in a position to bounce back from some recent weakness. With earnings now out of the way and little bad news yet to be reported regarding the Affordable Healthcare Act transition, Aetna can get back to what health insurance companies have always been good at doing, besides lobbying. Although it’s dividend is on the low side, Aetna is a company that I could envision as a long term core holding.

Dow Chemical (DOW) also reported earnings this past week and beat projections the old fashioned way. They cut costs in the face of falling revenues. While that says nothing good about an economy that is supposed to be growing, Dow Chemical’s value may be enhanced as it has activists eyeing it for possible break-up. On the other end, defending the status quo is a hardened CEO who is likely to let little fall through the cracks as he pursues his own vision. While shares are trading near their highs the activist presence is potentially helpful in keeping shares trading within a range which entices me to consider shares now, after a small drop, rather than waiting for a larger one on order to re-open a position. With its option premiums, generous dividend and opportunity for share appreciation, Dow Chemical is one stock that I would also consider for longer term holding.

I’m on the fence over Cypress Semiconductor (CY). I currently own shares and always like the idea of having some just as it trades near it strike price. It has a good recent habit of calling $10 its home and works hard to get back to that level, whether well above or well below. However, befitting its high beta it fell about 5% on Friday and has placed itself quite a distance from its nearest strike. While I generally like paying less for shares, in the case of Cypress I may be more enticed by some price migration higher in order to secure a better premium and putting shares closer to a strike that may make it easier to roll over option contracts to June 2014, if necessary. Holding shares until June may offer me enough time after all of these years to learn what Cypress Semiconductor actually does, although I’m familiar with its increasingly vocal CEO.

This is another week replete with earnings. For those paying attention last week a number of companies were brutalized last week when delivering earnings or guidance, as the market was not very forgiving.

Among those reporting earnings this week are Herbalife (HLF), Twitter (TWTR) and Yelp (YELP).

There’s not much you can say about Herbalife, other than it may be the decade’s most unpredictable stock. Not so much in terms of revenues, but rather in terms of “is it felonious or isn’t it felonious?” With legal and regulatory issues looming ahead the next bit of truly bad news may come at any moment, so it may be a good thing that earnings are reported on Monday. At least that news will be out of the way. Unlike many other volatile names, Herbalife actually move marginally higher to end the week, rather than plunging along with the rest. My preference, if trading on the basis of earnings, would be to sell puts, particularly if there is a substantive price drop preceding earnings.

Twitter lost much of the steam it had picked up in the early part of the week and finished at its lows. I already have puts on shares having sold them about a month ago and rolled them forward a few times in the hopes of having the position expire before earnings.

However, with its marked weakness in the latter part of the week I’m interested in the possibility of selling even more puts in advance of earnings on Tuesday. However, if there is price strength on Monday, I would be more inclined to wait for earnings and would then consider the sale of puts if shares drop after earnings are released.

Yelp is among those also having suffered a large drop as the week’s trading came to its close. as with Twitter, the option market is implying a large earnings related move in price, with an implied volatility of nearly 15%. However, a drop of less than 21% may still be able to deliver a 1.1% return.

For those that just can’t get enough of earnings related trades when bad news can be the best news of all, a more expanded list of potential trades can be seen.

Finally, Intel (INTC) and Microsoft (MSFT) are part of what now everyone is affectionately referring to as “old tech.” A few months ago the same people were somewhat more derisive, but now “old tech” is everyone’s darling. Intel’s ex-dividend date is May 5, 2014, meaning that shares would need to be owned this week if hoping to capture the dividend. Microsoft goes ex-dividend during the final week of the May 2014 cycle.

Both stocks have been frequent holdings of mine, but both have recently been assigned. Although they are both trading near the top of their price ranges, the basic appeal still holds, which includes generous dividends and satisfactory premiums. Additionally, bit also have in common a new kind of leadership. Intel is much more focused on operational issues, befitting the strength of its new CEO, while Microsoft may finally simply be ready to “get it” and leverage its great assets, recognizing that there may be some real gems beyond Windows.

Traditional Stocks: Momentum Stocks: Aetna, Bed Bath and Beyond, Dow Chemical, Microsoft

Momentum: Cypress Semiconductor, Keurig Green Mountain

Double Dip Dividend: Intel (ex-div 5/5)

Premiums Enhanced by Earnings: Herbalife (4/8 PM), Twitter (4/27 PM), Yelp (4/30 PM)

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.

Weekend Update – January 12, 2014

Confusion Reigns.

January is supposed to be a very straightforward month. Everyone knows how it’s all supposed to go.

The market moves higher and the rest of the year simply follows. Some even believe it’s as simple as the first five trading days of the year setting the tone for the remainder still to come.

Since the market loves certainty, the antithesis of confusion, the idea of a few days or even a month ordaining the outcome of an entire year is the kind of certainty that has broad appeal.

But with the fifth trading day having come to its end on January 8th, the S&P 500 had gone down 11 points. Now what? Where do we turn for certainty?

To our institutions, of course, especially our central banking system which has steadfastly guided us through the challenges of the past 6 years. The year started with some certainty as Federal Reserve Chairman nominee Janet Yellen was approved by a vote that saw fewer negative votes cast than when her predecessor Ben Bernanke last stood for Senate approval, although there were far fewer total votes, too. On a positive note, while there was voting confusion among political lines, there was only certainty among gender lines.

While Dr. Yellen’s confirmation was a sign to many that a relatively dovish voice would predominate the FOMC, even as some more hawkish governors become voting members this year, the announcement that Dr. Stanley Fischer was being nominated as Vice-Chair sends a somewhat different message and may embolden the more hawkish elements of the committee.

That seems confusing. Why would you want to do that? But then again, why would you have pulled the welcome mat out from under Ben Bernanke?

Then on Friday morning came the first Employment Situation Report of the new year and no one was remotely close in their guesses. Nobody was so pessimistic as to believe that the fewest new jobs created in 14 months would be the result.

But the real confusion was whether that was good news or bad news. Did we want disappointing employment statistics? How would the “new” Federal Reserve react? Would they step way from the taper or embrace it as hawks exert their philosophical position?

More importantly, how is a January Rally supposed to take root in the remaining 14 trading days in this kind of muddled environment?

Personally, I like the way the year has begun, there’s not too much confusion about that being the case, despite my first week having been mediocre. While the evidence is scant that the first five days has great predictive value, there is evidence to suggest that there is no great predictive value for the remainder of the year if January ends the month lower. I like that because my preference is alternating periods of certainty and confusion, as long as the net result remains near the baseline. That is a perfect scenario for a covered option strategy and also tends to increase premiums as volatility is enhanced.

I prefer to think of it as counter-intuitive rather than confusing.

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).

There’s not much confusion when it comes to designating the best in large retail of late. Most everyone agrees that Macys (M) has been the best among a sorry bunch, yet even the best of breed needed to announce large layoffs in order to get a share price boost after being range bound. However, this week the embattled retail sector seems very inviting despite earnings disappointments and the specter of lower employment statistics and spending power.

Finding disappointments among retailers isn’t terribly difficult, as even Bed Bath and Beyond (BBBY), which could essentially do nothing wrong in 2013 more than made up for that by reporting its earnings report. While earnings themselves were improved, it was the reduced guidance that seems to have sent the buyers fleeing. There was no confusion regarding how to respond to the disappointment, yet its plummet brings it back toward levels where it can once again be considered as a source of option premium income, in addition to some opportunity for share appreciation.

L Brands (LB) shares are now down approximately 12% in the past 6 weeks. It is one of those stocks that I’ve owned, but have been waiting far too long to re-own while waiting for its price to return to reasonable levels. Like Bed Bath and Beyond it offered lower guidance for the coming quarter after heavy promotions that are likely to reduce margins.

Target (TGT) has had enough bad news to last it for the rest of the year. While it recently reported that it sales had been better than expected prior to the computer card data hack, it also acknowledged that there was a tangible decline in shopping activity in its aftermath. Its divulging that as many as 70 million accounts may have been compromised, it seemed to throw all bad news into the mix, as often incoming CEOs do with write-downs, so as to make the following quarter look good in comparison. For its part, Target, recovered nicely on Friday from its initial price decline and has been defending the $62.50 line that I believe will be a staging point higher.

Sears Holdings (SHLD) on the other hand doesn’t even pretend to be a ret
ailer. The promise of great riches in its real estate holdings is falling on deaf ears and its biggest proponent and share holder, Eddie Lampert, has seen his personal stake reduced amid hedge fund redemptions. Shares plummeted after reporting disappointing holiday sales. What’s confusing about Sears Holding is how there is even room for disappointment and how the Sears retail business continues, as it has recently been referred to as a “national tragedy.”

But I have a soft spot in my heart for companies that suffer large event driven price drops. Not that I believe there is sustainable life after such events, but rather that there are opportunities to profit from other people like me who smell an opportunity and add support to the share price. However, my time frame is short and I don’t necessarily expect investor largesse to continue.

I did sell puts on Sears Holding on Friday, but would not have done so if the event and subsequent share plunge had been earlier in the option cycle. Sears Holdings, only offers monthly options and in this case there is just one week left in that cycle. If faced with the possibility of assignment I would hope to be able to roll the puts options forward, but do have some concerns about a month long exposure, despite what would likely be an attractive premium.

While there’s no confusion about the nature of its products, Lorillard’s (LO) recent share decline, while not offering certainty of its end, does offer a more reasonable entry point for a company that offers attractive option premiums even when its very healthy dividend is coming due. Like Sears Holdings, Lorillard only offers monthly option contracts, but in this case I have no reservations about holding shares for a longer time period if not assigned.

Conoco Phillips (COP) has been eclipsed in my investing attention by the enormous success of its spin-off Phillips 66 (PSX), but had never fallen off my radar screen. While waiting for evidence that the same will occur to Phillips 66 through its own subsequent spin-off of Phillips 66 Partners (PSXP), my focus has returned to the proud parent, whose shares appear to be ready for some recovery. However, with a dividend likely during the February 2014 option cycle, I don’t mind the idea of shares continuing to run in place and generate option income in a serial manner.

Perhaps not all retailers are in the same abysmal category. Lowes (LOW), while not selling much in the way of fashions or accessories and perennially being considered an also ran to Home Depot, goes ex-dividend this week and has traded reliably at its current level, making it a continuing target for a covered option strategy. I’ve owned in 5 times in 2013, usually for a week or two, and wonder why I hadn’t owned it more often. Following its strong close to end the week I would like to see a little giveback before making a purchase. Additionally, since the ex-dividend date is on a Friday, I’m more likely to consider selling an option expiring the following week or even February, so as to have a greater chance of avoiding early assignment of having sold an in the money option.

Whole Foods (WFM) also goes ex-dividend this week, but its paltry dividend alone is a poor reason to consider share ownership. However, its inexplicable price drop after having already suffered an earnings related drop makes it especially worthy of consideration. While I already own more expensively priced shares and often use lesser priced additional lots in a sacrificial manner to garner option premiums to offset paper losses, I’m inclined to shift the emphasis on share gain over premium at this price level. Reportedly Whole Foods sales suffered during the nation wide cold snap and that may be something to keep in mind at the next earnings report when guidance for the next quarter is offered.

Although earnings season will be in focus this week, especially with big money center banks all reporting, I have no earnings selections this week. Instead, I’m thinking of adding shares of Alcoa (AA) which had fared very nicely after being dis-invited from membership in the DJIA and not so well after leading off earnings season on Thursday.

While I typically am niot overly interested in longer term oiutlooks, CEO Klaus Kleinfeld’s suggestion that demand is expected to increase strongly in 2014 could help to raise Alcoa’s margins. Even a small increase would be large on a percentage basis and could easily be the fuel for shares to continue their post DJIA-explusion climb.

Finally, I was a bit confused as Verizon’s (VZ) shares took off mid-day last week and took it beyond the range that I thought my shares wouldn’t be assigned early in order to capture the dividend. In the absence of news the same didn’t occur with shares of AT&T which was also going ex-dividend the next day and other cell carriers saw their shares drop. In hindsight, the drop in shares the next day, well beyond the impact of dividends, was just as confusing. Where there is certainty, however, is that shares are now more reasonably priced and despite their recent two day gyrations trade with low volatility compared to the market, making them a good place to park money for the defensive portion of a portfolio.

Traditional Stocks: Bed Bath and Beyond, Conoco Phillips, L Brands, Lorillard, Target, Verizon

Momentum Stocks: Alcoa, Sears Holdings

Double Dip Dividend: Lowes (ex-div 1/17), Whole Foods (ex-div 1/14)

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.

Weekend Update – April 7, 2013

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.