Feb232014

Weekend Update – February 23, 2014

Weekend Update

When this past week was all said and done, it was hard to discern that anything had actually happened.

Sure, there was an Olympics being staged and fomenting revolution in Ukraine, but it was a week when even the release of FOMC minutes failed to be news. Earnings season was winding down, the weather was in abeyance and the legislative docket was reasonably non-partisan.

I could have spent last week watching the grass grow if it hadn’t been covered in a foot of snow.

In its own way, despite the intermediate and alternating moves approaching triple digits, the past week was a perfect example of reversion to the mean. For those that remember 2011, it was that year in a microcosm.

The coming week promises to be no different, although eight members of the Federal Reserve are scheduled to speak. While they can move markets with intemperate or unfiltered remarks, which may become more meaningful as “hawks” assume more voting positions, most people will likely get their excitement from simply reading the just released 2008 transcripts of the Federal Reserve’s meetings as the crisis was beginning to unfold. While you can learn a lot about people in times of crisis, other than potential entertainment value the transcripts will do nothing to add air to the vacuum of the past week. What they may contain about our new Chairman, Janet Yellen, will only confirm her prescience and humor, and should be a calming influence on investors.

As a covered option investor last week was the way I would always script things if anyone would bother opening the envelope to read what was inside. While I have no complaints about 2012 or 2013, as most everyone loves a rising market, 2011 was an ideal market as the year ended with no change. Plenty of intermediate movement, but in the end, signifying nothing other than the opportunity to seemingly and endlessly milk stocks for their option premiums that were nicely enhanced by volatility.

Although I’ve spent much of the past year expecting, sometimes even waiting at the doorstep for the correction to come, the past few weeks have been potentially dangerous ones as I’ve had optimism and money to spend. That can be a bad combination, but the past 18 months have demonstrated a pattern of failed corrections, at least by the standard definition, and rebounds to new and higher highs.

While there may be nothing to see here, there may be something to see there as the market may again be headed to new neighborhoods.

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). A companion article this week explores some additional earnings related trades.

In a week that Wal-Mart (WMT) again disappointed with its earnings report, once again the market failed to follow its lead. In the past year Wal-Mart has repeatedly disappointed, yet the market has disconnected form its leadership, other than for a brief two hours of panic a few months ago when Wal-Mart announced some increasing inventory levels. That panic quickly resolved once Wal-Mart explained their interpretation of inventory levels.

However, one does have to wonder under what economic circumstances does Wal-Mart not meet expectations? Is the economy thriving and people are moving to other retailers, such as Target (TGT) or even Sears (SHLD) or are they moving to Family Dollar Store (FDO)? WHile it is possible that Wal-Mart may simply be suffering from its own bad economic and internal forecasting, there isn’t much reason to be sanguine about retailing. My money is on Family Dollar.

One source that I use for information lists Family Dollar as going ex-dividend this week, however, I haven’t found that to be corroborated anywhere else and historically the first quarter ex-dividend date is in the second week of March. If shares do go ex-dividend this week I would have significant enthusiasm for adding shares, but even in the absence of that event I’m inclined to make that purchase.

Coming off two successive weeks of garnering more than the usual number of dividends, this week is relatively slim pickings. Weyerhauser (WY) and Molson Coors (TAP) both go ex-dividend this week, but both are near the bottom of my list for new purchases this week.

While I like Molson Coors, at the moment the product holds some more appeal than the stock, which is trading near its yearly high point. However, with earnings now out of the way and Canadians around the world celebrating Olympic victories, what better way to show solidarity than to own shares, even if just for a week? Other than potential technical indicators which may suggest an overbought condition, there isn’t too much reason to suspect that in a flat or higher moving market during the coming week, Molson Coors shares will decline mightily. With shares as the body and a head composed of a nice premium and dividend, it just may be time to indulge.

Weyerhauser is a perfectly boring stock. Often, i mean that in a positive sense, but in this case I’m not so certain. I’ve owned shares since May 2013 and would be happy to see them assigned. Despite Weyerhauser offering a dividend this week, my interests are more aligned with re-establishing a position in International Paper (IP). In addition to offering a weekly option, which Weyerhauser does not, its options liquidity and pricing is superior. While it is trading near its yearly high, it has repeatedly met resistance at that level. As a result, while eager to once again own shares, I would be much more willing to do so even with just a slight drop in price.

While offering only a monthly option is a detriment as far as Weyerhauser is concerned, it may be a selling point as far as Cypress Semiconductor (CY) goes. I like to consider adding shares when it is near a strike price as it was after Friday’s close. Shares can be volatile, but it tends to find its way back, especially when home is $10. WHile earnings aren’t due until April 17, 2014, that is just one day before the end of the monthly cycle. Therefore, if purchasing shares of Cypress at this time, I would be prepared to set up for ownership through the May 2014 cycle in the event that shares aren’t assigned when the March cycle comes to an end, in order to avoid being caught in a vortex if a disappointment is at hand. The dividend and the premiums will provide some solace, however.

Although I had shares of Fastenal (FAST) assigned this past week and still own some more expensive shares, this company, which I believe is a proxy for economic activity, has been a spectacular covered call trade and has lent itself to serial ownership as it has reliably traded in a defined range. It doesn’t report earnings until April 10, 2014, but it does have a habit of announcing altered guidance a few weeks earlier. That can be annoying if it comes at the end of an option cycle and potentially removes the chance of assignment or even anticipated rollover, but it’s an annoyance I can live with. After two successive quarters of reduced guidance my expectation is for an improved outlook.

I haven’t owned shares of Deere (DE) for a few months as it had gone on a ride higher, just as Caterpillar (CAT), another frequent holding, is now doing. Deere is now trading at the upper range of where I typically am interested in establishing a position, but after a 7% decline, it may be time to add shares once again. It consistently offers an option premium that has appeal and in the event of longer than anticipated ownership its dividend eases the wait for assignment.

While I would certainly be more interested in Starbucks (SBUX) if its shares were trading at a lower level, sometimes you have to accept what may be a new normal. I had nearly a year elapse before coming to that realization and missed many opportunities in that time with these shares. It does, however, appear that the unbridled move higher has come to an end and perhaps shares are now more likely to be range bound. As with the market in general it’s that range that others may view as mediocrity of performance that instead may be alternatively viewed as the basis for creating an annuity through the collection of option premiums and dividends.

I’ve never been accused of having fashion sense, so it’s unlikely that I would ever own any Deckers (DECK) products at the right time. One minute they sell cool stuff, the next minute they don’t and then back again. Just like the story of most stocks themselves.

What is clear is that they have become cool retailers again and impressively, shares have recovered from a recent large decline. With earnings due to be announced this week the option market is implying a 12.3% potential movement in shares. In the meantime, if you can set your sights on a lowly 1% ROI for the week’s worth of risk a 16.3% drop can still leave you without the obligation to purchase the shares if having sold puts.

Less exciting, at least in terms of implied moves, is T-Mobile (TMUS). It also reports earnings this week and there has to be some thought to what price T-Mobile is paying and will be paying for its very aggressive competitive stance. While its CEO John Legere, may be a hero to some for taking on the competition, that may very quickly fade with some disappointing earnings and cautionary guidance. the option market is pricing a relatively small move of 8.7%, while current option pricing can return a 1% ROI on a strike level 9.5% lower than Friday’s close. Although that’s not much of a margin of difference, I may be more inclined to consider the sale of puts if shares drop substantively on Monday in advance of Tuesday morning’s announcement. Alternatively, if not selling puts in advance of earnings and shares do significantly fall following earnings, there may be potential to do the put sale at that time.

Finally, Abercrombie and Fitch (ANF) reports earnings this week. It is one of the most frustrating and exhilirating of stocks and I currently own two lots. My personal rule is to never own more than three, so I still have some room to add shares, or more likely sell puts in advance of its earnings. Abercrombie and FItch is a nice example of how dysfunction and lowered expectations can create a stock that is so perfectly suited for a covered option strategy. Its constant gyrations create enhanced option premiums that are also significantly impacted by its history of very large earnings related price changes.

For those that have long invested in shares the prospect of a sharp decline upon earnings can’t come as a surprise. However, with a 10.7% implied price move this coming week, one can still achieve a 1% ROI if shares fall less than 15.3%, based on Friday’s closing price.

Traditional Stocks: Deere, Family Dollar Store, Fastenal, International Paper, Starbucks

Momentum Stocks: Cypress Semiconductor

Double Dip Dividend: Molson Coors (ex-div 2/26)

Premiums Enhanced by Earnings: Abercrombie and Fitch (2/26 AM), Deckers (2/27 PM), T-Mobile (2/25 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.

Nov92013

Weekend Update – November 10, 2013

Weekend Update

Is there life after momentum slows?

There was no shortage of stocks taking large price hits last week, as earnings season had already begun its slowdown phase. However, for some of the better known momentum stocks the slightest mis-steps were all the reason necessary to flee with profits.

For those who live long enough, it should never come as a surprise that some things are just destined to slow down.

Momentum fits into that category, although based on the past week it’s more of a question of falling down than slowing down for some.

After the fact, no one seemed to be surprised.

In a week that saw a decrease in the ECB’s main lending rate that was widely described as being a “surprise'” later in the day came reports that most economists expected the cut. The market clearly didn’t, however, as the economists may have neglected to pass on their views.

And then there was a surprisingly large increase in non-farm payroll jobs. Somehow everyone was taken off guard and the market responded by interpreting good news as good news and finished the week with a flourish.

What surprised me, however, was that there was such a disconnect between the anticipated numbers and the actual report, which covered the period of the government shutdown. The disconnect had to do with methodology, as forecasts didn’t take into account that government statistics considered furloughed employees to be employed, since they were to receive back, through legislative action.

Oops.

In effect, Friday’s rally was based on a misunderstanding of methodology. It will also certainly be interesting to see what impact Ben Bernanke’s statement after the market’s close may have on Monday’s trading.

I think the unemployment rate probably understates the degree of slack in the labor market. I think the employment-population ratio overstates it somewhat, because there are important downward trends in participation

Unfortunately, Friday’s gains complicate the goal of finding bargain priced stocks in the coming week, but with a little water having been thrown on the fire there may be opportunity yet.

Everyone, including me, likes to look for clues and cues that have predictive value. Parallels are drawn at every opportunity to what we know from the past in the expectation that it can foretell the future.

For some the sudden increase in IPOs coming to market and the sudden fall of many momentum stocks heralds a market top. In hindsight, if it does occur, it will be regarded as “no surprise.” If it doesn’t occur within the attention span of most paying attention it will simply be conveniently ignored.

For others the reversal of fortune may represent values and not value traps.

But no matter what the case there is life after momentum slows. It’s just a question of accommodation to new circumstances.

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).

eBay (EBAY) like so many stocks that I consider tends to trade in a range. While eBay is often criticized for being “range bound” there is some comfort in knowing that it is less likely to offer an unwanted surprise than many other stocks. My shares were assigned this past week and are now trading at the upper range of where I may normally initiate a position. However, having owned shares on ten separate occasions this year I would be anxious to do so again on the slightest of pullbacks.

Although hardly a momentum stock, Mondelez (MDLZ) had some earnings woes this past week, although it did recover a bit, perhaps simply being carried along by a rallying market. Shares are still a little higher than I would like for an entry point, but I expect that as a short term selection it will match market performance, while in a market turn-down it will exceed performance.

Fastenal (FAST) is another fairly sedate company, yet its stock often has some large moves. I see Fastenal as a leading indicator of economic activity, but also very sensitive to the economy. I think its most recent price weakness will be reversed as the impact of a resolution of the government’s shutdown trickles down to the economy. I currently own shares with a contract set to expire this week, but at this price am considering doubling down on what in essence can be a weekly option contract during the final week of the November 2013 cycle.

Deere (DE) is another range bound stock, that in hindsight I should have bought on numerous occasions over the past few months. Good option premiums, a good dividend and not facing some of the same external pressures as another favorite, Caterpillar (CAT), makes Deere a perennially good selection within its sector.

I currently own shares of both Eli Lilly (LLY) and International Paper (IP), both of which go ex-dividend this week. Unlike many other stocks that I discuss, I have not owned either on multiple occasions this year and my current shares are now below their cost. Both emerged unscathed after recent earnings reports, although both are down considerably from their recent highs and both have considerably under-performed the S&P 500 from the time for its first in a series of market highs on May 21, 2013. That latter criterion is one that I have been using with some regularity as the market has continued to reach new highs in an effort to identify potential late comers to the party.

Which finally brings me to the momentum stocks that have my attention this week, some of which may be best approached through the sale of put options and may be best avoided in a weakening market.

Much has been said of the “ATM effect” on Facebook (FB), as speculation that investors were selling Facebook shares to raise money to buy Twitter (TWTR) shares. Following an abrupt reversal during its conference call when there was a suggestion that adolescents were reducing their Facebook use shares have just not regained their traction. Sometimes it’s just profit taking and not driven by the allure of a newer stock in town. But assuming that the “ATM effect” has some validity and with a large gap between the Twitter IPO price and its 7% lower price on its first full day of trading, I can’t imagine now taking the opportunity to sell Facebook in order to purchase Twitter shares. On its own merits Facebook may be a momentum stock that has a cushion of protection until its next earnings report, unless an errant comment gets in the way, again.

Chesapeake Energy (CHK) is much higher than the level at which I last owned shares at $21. Waiting for a return has been fruitless and as a result, rather than having owned shares on 15 occasions, as in 2012, thus far, I’ve only had five bouts of ownership. With the melodrama surrounding its founder and ex-CEO in its past, Chesapeake may begin trading a bit more on fundamentals rather than hopes for a return to its glory days. at such, its price action may be less unidirectional than it has been over the past four months. After last week’s earnings report related drop, while still higher than I would like, I think there may be reason to consider a new entry, perhaps through the sale of put options.

Freeport McMoRan (FCX) is a stock that has been testing my patience through the year. More precisely, however, I’ve had no real issue with Freeport McMoRan’s leadership, in fact, given metal prices, it has done quite well. What I don’t understand is how it has been taking so long for markets to appreciate its strategic initiatives and long term strategies. For much of the year my shares have been non-performing, other than for dividend payments, but with a recent run higher some are generating option premium income streams. Despite the run higher, I am considering adding more shares as the entire metals complex has been showing strength and some stability, as well.

Finally, while I’ve said before that I don’t spend too much time looking at charts, a recent experience with Tesla (TSLA) was perhaps a good reason to at least acknowledge that charts can allow you to look at the past.

While it’s probably always a good week to be Elon Musk, relatively speaking last week wasn’t so good, as both Tesla and Solar City (SCTY) were treated harshly after earnings were released. The spin put around another reported car fire that its resultant heat could be garnered to power several mud huts didn’t give shares much of a boost, perhaps because that might have cannibalized SolarCity sales, with the two companies likely having much overlap in ownership.

Tesla reported earnings last week and took a drubbing through successive days.

A reader of last week’s article asked:

“George, what are your thoughts on a sale of Puts on TSLA which reports Tuesday?”

My response was:

“TSLA isn’t one that I follow, other than watching in awe.

But purely on a glance at this week’s option pricing the implied volatility is about 12% and you can get a 1% ROI on a strike that’s about 17% lower, currently $135

It looks as if it may have price support in the $134-$139 range, but it’s hard to know, because its ascent has been so steep that there may not be much of a real resting point.

In a very speculative portion of my portfolio I might be able to find some money to justify that trade.”

As it turned out Tesla closed the week at $137.95 and now has my attention. You do have to give some credit to its chart on that one. WIth disappointment over its sales, supply chain issues and reports of car fires and even Elan Musk suggesting that “Tesla’s stock price is more than we have any right to deserve,” it has fallen by nearly 21% from the time of that comment, barely 2 weeks prior to earnings. Although to be entirely fair shares did fully recover from a 7.5% decline in the aftermath of the statement in advance of earnings.

While still not knowing where the next resting point may be in the $119-$122 range, representing as much as another 13% price drop. With earnings out of the way to enhance option premiums the risk-reward proposition isn’t as skewed toward reward. However, for those looking to recapture of bit of their own momentum, despite the realization that the end may be near, a put sale can return an ROI of approximately 1.4% at a strike price nearly 6% below Friday’s close is not breached.

The nice thing about momentum slowing is that if you fall the floor isn’t as far away as it used to be.

Traditional Stocks: Deere, eBay, Fastenal, Mondelez

Momentum Stocks: Chesapeake Energy, Facebook, Freeport McMoRan, Tesla

Double Dip Dividend: Eli Lilly (ex-div 11/13), International Paper (ex-div 11/13)

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.

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

Sep292013

Weekend Update – September 29, 2013

Weekend Update

“There’s always a calm before the storm” is a fairly well known saying that doesn’t always accurately define a sequence of events.

Are all storms preceded by a period of calm? Is calm always followed by a storm?

The predictive capability of a period of calm hasn’t necessarily been validated among meteorological circles.

Being a meteorologist, however, is very similar to being a stock analyst or a market technician. No one really expects you to get it right, because you get it wrong so often. Besides, you would have to be a fool to fully predicate your actions on their prognostications. Neither group tends to publicly sit down and review the signals that had them sending the wrong messages.

Other than that meteorologists often get their wardrobes provided at no cost, while market analysts often get unlimited supplies of antacids. Meteorologists, though often wrong, are still very often beloved by their audience. I’m not certain the same can be said for stock analysts.

This past week was a forgettable one in just about all aspects. It was a week of calm, at least as far as potentially market moving news tend to go. Yet even in the midst of a sea of calm, the market was down over 1% and was unable to hold the 1700 level on the S&P 500, bringing us back to a level last seen about 10 days ago, when all was sunny.

While meteorologists often look to macro events, such as “El Nino,” or even global warming, the macro events that may move our markets are many and varied, but none seem to have paid a call this week. In fact, even factors that in the past sent chills of fear and uncertainty into the hearts of investors, such as a government shutdown or impending default on US obligations, have thus far barely elicited a yawn.

The perfect storm of good news and absence of bad news has simply continued. Aalthough this week was one of relative calm it’s hard to not notice dark clouds on the horizon, most of which are preceded by the fear of “what if.” What if tapering begins? What if the government is shut down? What if there is a government default?

Maybe that’s why Goldman Sachs (GS) just recommended the use of portfolio protective puts and that sentiment was quickly echoed by many that had access to a microphone. Coming in advance of the beginning of the new earnings season it reminds us that the just completed earnings season had few reasons to believe that growth was the trend at hand.

Of course, one could also be of the opinion that with everyone rallying to secure their protective puts this could be the perfect time to prepare for another market move higher.

In an effort to hedge the hedge, I am continuing to keep my cash reserves at relatively high levels but am still confident that with each week there are reasonably attractive trades that have a degree of safety and can create current income streams to help offset any market weakness.

If there is calm ahead, I prefer to look for stocks this week that are somewhat boring and have been trading in a reasonably narrow range. That kind of calm is just the tonic for covered option strategies.

This week the potential stock selections are restricted to the “Traditional” category, as no appealing choices were found in the Double Dip Dividend, Momentum and “PEE” categories this week (see details).

On an otherwise bad day to end the week, Microsoft (MSFT) danced to its own drummer, as Steve Ballmer, the outgoing CEO performed one of his characteristic morale raising dances at what is likely to be the final annual company wide meeting at which he presides. Reportedly, the day’s bump in share price came as the rumor regarding Ford (F) CEO Alan Mulally made the rounds indicating that his interest in assuming the position at Microsoft was strengthening. While it seems difficult to understand the synergy it may simply be another example of the market’s appetite for an anti-Ballmer. But without regard to immediate stories regarding transition in leadership, Microsoft just continues to offer a good combination of option premiums and dividends at this level, as it further commits itself toward creating its own ecosystem, perhaps not with an eye on increasing marketshare, but rather on retaining the loyalty of customers who might otherwise feel the lure of the competition.

While it was a good day for Microsoft it wasn’t a very good day for Intel (INTC). While the past years have seen close correlation between the fortunes of Intel and Microsoft, they certainly diverged this week. Part of the reason was some concern regarding a delay in the start of “Intel TV,” a web based television service which was thought to be a remedy for its poorly diversified revenue sources. Intel has demonstrated some resilience in the $22.50 range and like Microsoft offers a good combination of option premiums and dividends.

I liked Dow Chemical (DOW) enough to buy it last week in the hopes of capturing its dividend and option premium. However, a late afternoon spike in its share price right before going ex-dividend resulted in early assignment of shares. Following Friday’s sharp price decline, it”s right back to where it started. Still attractive, but without the dividend. It stands in sharp distinction to many of the companies that I’ve been considering over the past two months in that it s current share price is higher than where it stood at a recent market top on May 21, 2013 when the market reacted to FOMC minutes and a Ben Bernanke press conference by embarking on a quick 4% decline.

While I liked Deere (DE) last week and almost always find myself liking it, I didn’t purchase shares last week in an attempt to capture the dividend. Sometimes, especially for stocks above $50 the nearest strike prices are too far away from the current share price to offer a premium that offers sufficient reward for the risk undertaken. That was the case last week. However, if the lower prices to close the week hold at the open of this week and remain near the strike, I think the timing may be just right to add shares of Deere.

As far as boring stocks go, Mondelez (MDLZ) is boring in everything other than its name. Even Nelson Peltz’s self-serving attempts to move share price by discussing why he believed it was an ideal take-over target for Pepsi (PEP) did nothing to stir share price in any meaningful or sustained way. That kind of price stability is ideally suited for a covered option strategy.

Retail has been a difficult sector recently, especially teen retail. However, just as Mondelez can make boring become interesting, so too can The Gap (GPS) make boredom the new chique. Well down from a brief earnings fueled rise, shares appear to have support at the $40 level and won’t face the challenge of earnings until mid-way through the November 2013 option cycle. In the interim, it also goes ex-dividend during the October 2013 cycle.

Following its recent earnings related drop Darden Restaurants (DRI) is trading at a much more appealing level. From a covered option trader’s perspective the strike prices below the $50 level, graduated in single dollars is much more attractive and offers many more opportunities than the sparser ones available above $50. While Darden may also be a boring kind of pick it’s interest level is also enhanced by a very nice dividend that comes during the October cycle.

Finally, Barclays (BCS) may have qualified as a “Momentum” selection based on its recent price movements but once the dust settles it should start trading in a more sedate manner. In addition to various legal worries and the backdrop of lethargic European economies, Barclays recently announced the need to meet increased capital reserve requirements. Doing so through the issuance of stock is never a great way to see shares appreciate. However, the issuance of “rights” to existing shareholders entitling them to purchase shares at approximately a 40% discount helped to drive up share price

Traditional Stocks: Barclays, Deere, Darden, Dow Chemical, Intel, Microsoft, Mondelez, The Gap

Momentum Stocks: none

Double Dip Dividend: none

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may be become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

 

 

 
 
 
 
 
 

 

Sep222013

Weekend Update – September 22, 2013

Weekend Update

Generally, when you hear the words “perfect storm,” you tend to think of an unfortunate alignment of events that brings along some tragedy. While any of the events could have created its own tragedy the collusion results in something of enormous scale.

For those that believe in the wisdom that can be garnered from the study of history, thus far September 2013 has been at variance with the conventional wisdom that tell us September is the least investor friendly month of the year.

What has thus far made this September different, particularly in contrast to our experience this past August, has been a perfect storm that hasn’t come.

Yet, but the winds are blowing.

Barely three weeks ago we were all resolved to another bout of military action, this time in Syria. History does tend to indicate that markets don’t like the period that leads up to hostilities.

Then we learned that the likely leading contender to assume the Chairmanship of the Federal Reserve, Larry Summers, withdrew his name from consideration of the position that has yet to confirm that its current Chairman will be stepping down. For some reason, the markets didn’t like prospects of Larry Summers being in charge but certainly liked prospects of his being taken out of the equation.

Then we were ready to finally bite the bullet and hear that the Federal Reserve was going to reduce their purchase of debt obligations. Although they never used the word “taper” to describe that, they have made clear that they don’t want their actions to be considered as “tightening,” although easing on Quantitative Easing seems like tightening to me.

There’s not too much guidance that we can get from history on how the markets would respond to a “taper,” but the general consensus has been that our market climb over the past few years has in large part been due to the largesse of the Federal Reserve. Cutting off that Trillion dollars each year might drive interest rates higher and result in less money being pumped into equity markets.

What we didn’t know until the FOMC announcement this past Wednesday was what the market reaction would be to any announcement. Was the wide expectation for the announcement of the taper already built into the market? What became clear was that the market clearly continues to place great value on Quantitative Easing and expressed that value immediately.

As long as we’re looking at good news our deficit is coming down fast, employment seems to be climbing, the Presidents of the United States and Iran have become pen pals and all is good in the world.

The perfect storm of good news.

The question arises as to whether any eventual bad news is going to be met with investors jumping ship en masse. But there is still one thing missing from the equation. One thing that could bring us back to the reality that’s been missing for so long.

Today we got a glimpse of what’s been missing. The accelerant, if you will. With summer now officially over, at least as far as our elected officials go, the destructive games have been renewed and it seems as if this is just a replay of last year.

Government shutdowns, debt defaults and add threats to cut off funding for healthcare initiatives and you have the makings of the perfect storm, the bad kind, especially if another domino falls.

Somewhat fortuitously for me, at least, the end of the September 2013 option cycle has brought many assignments and as a result has tipped the balance in favor of cash over open positions.

At the moment, I can’t think of a better place to be sitting as we enter into the next few weeks and may find ourselves coming to the realization that what has seemed to be too good to be true may have been true but could only last for so long.

While I will have much more cash going into the October 2013 cycle than is usually the case and while I’m fully expecting that accelerant to spoil the party, I still don’t believe that this is the time for a complete buying boycott. Even in the middle of a storm there can be an oasis of calm.

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).

After Friday’s loss, I have a difficult time in not being attracted to the idea of adding shares of Caterpillar (CAT). It has been everyone’s favorite stock to deride for its dependence on the Chinese economy and for its lack of proactive leadership in the past year. Jim Chanos publicly proclaimed his love for Caterpillar as his great short thesis for the coming year. Since it has trailed the S&P 500 by 16% on a year to date basis there may be good reason to believe that money goes into Caterpillar shares to die.

However, it has been a perfect stock with which to apply a serial covered option strategy. In 13 trades beginning July 2012, for example, it has demonstrated a 44.9% ROI, by simply buying shares, collecting dividends and premiums and then either re-purchasing shares or adding to existing shares. In that same time the index was up 28%, while Caterpillar has lost 3%.

It’s near cousin Deere (DE) also suffered heavily in Friday’s market and has also been an excellent covered option trade over the past year. Enhancing its appeal this week is that it goes ex-dividend. I currently own shares, but like Caterpillar, in smaller number than usual and purchases would provide the additional benefit of averaging down cost, although I rarely combine lots and sell options based on average cost.

Also going ex-dividend this week is Dow Chemical (DOW). This has been one of those companies that for years has been one of my favorite to own using the covered option strategy. However, unlike many others, it hasn’t shown much propensity to return to lower price levels after assignment. I don’t particularly like admitting that there are some shares that don’t seem to obey the general rule of gravity, but Dow Chemical has been one of those of late. I also don’t like chasing such stocks particularly in advance of what may be a declining market. However, with the recent introduction of weekly options for Dow Chemical I may be more willing to take a short term position.

YUM Brands (YUM) is similar in that regard to Dow Chemical. I’ve been waiting for it to come down to lower price levels, but just as it had at those lower levels, it proved very resilient to any news that would send its shares downward for a sustained period. As with Caterpillar, YUM Brands is tethered to Chinese news, but even more so, as in addition to economic reports and it’s own metrics, it has to deal with health scares and various food safety issues that may have little to no direct relationship to the company. YUM Brands does help to kick off the next earnings season October 8th and also goes ex-dividend that same week.

Continuing along with that theme, UnitedHealth Group (UNH) just hasn’t returned to those levels at which I last owned shares. In fact, in this case it’s embarrassing just how far its shares have come and stayed. What I can say is that if membership in the Dow Jones Index was responsible, then perhaps I should have spent more time considering its new entrants. However, with the Affordable Care Act as backdrop and now it being held hostage by Congressional Republicans, shares have fallen about 6% in the past week.

Mosaic (MOS) is among the companies that saw its share price plummet upon news that the potash cartel was collapsing. Having owned much more expensive shares at that time, I purchased additional shares at the much lower level in the hope that their serial assignment or option premium generation would offset some of the paper losses on the older shares. Although that has been successful, I think there is continuing opportunity, even as Mosaic’s price slowly climbs as the cartel’s break-up may not be as likely as originally believed.

If you had just been dropped onto this planet and had never heard of Microsoft (MSFT) you might be excused for believing this it was a momentum kind of stock. Between the price bounces that came upon the announcement of the Nokia (NOK) purchase, CEO Ballmer’s retirement, Analyst’s Day and the announcement of a substantial dividend increase, it has gyrated with the best of them. Those kinds of gyrations, while staying within a nicely defined trading range are ideal for a covered option strategy.

Cypress Semiconductor (CY) goes ex-dividend this week. This is a stock that I frequently want to purchase but am most likely to do so when its purchase price is near a strike level. That’s especially true as volatility is low and there is less advantage toward the use of in the money options. With a nice dividend, healthy option premiums, good leadership and product ubiquity, this stock has traded reliably in the $10-12 range to also make it a very good covered option strategy stock selection.

Every week I feel a need to have something a little controversial, as long as there’s a reasonable chance of generating profit. The challenge is always in finding a balance to the risk and reward. This week, I was going to again include Cliffs Natural Resources, as I did the previous week, however a late plunge in share price, likely associated with reports that CHinese economic growth was not going to include industrial and construction related growth, led to the need to rollover those shares. I would have been happy to repurchase shares, but not quite as happy to add them.

Fortunately, there’s always JC Penney (JCP). It announced on Friday that it was seeking a new credit line, just as real estate concern Vornado (VNO) announced its sale of all its JC Penney stake at $13. Of course the real risk is in the company being unable to get the line it needs. While it does reportedly have nearly $2 billion in cash, no one wants to see starkly stocked shelves heading into the holidays. WHether through covered options or the sale of put options, JC Penney has enough uncertainty built into its future that the premium is enticing if you can accept the uncertainty and the accompanying risk.

Finally, I had shares of MetLife (MET) assigned this past week as it was among a handful of stocks that immediately suffered from the announcement that there would be no near term implementation of the “taper.” The thesis, probably a sound one was that with interest rates not likely to increase at the moment, insurance companies would likely derive less investment related income as the differential between what they earn and what they pay out wouldn’t be increasing.

As that component of the prefect storm is removed one would have to believe that among the beneficiaries would be MetLife.

Traditional Stocks: Caterpillar, MetLife, Microsoft, UnitedHealth Group

Momentum Stocks: JC Penney, Mosaic, YUM Brands

Double Dip Dividend: Cypress Semiconductor (ex-div 9/24), Deere (ex-div 9/26), Dow Chemical (ex-div 9/26)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may be become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

Sep62013

Weekend Update – September 8, 2013

Weekend Update

Employment Situation Report, Taper, new Yahoo! (YHOO) logo, Syria.

Not a line from a new, less catchy Billy Joel song, but a transition week going from the quietude of summer, which was mostly focused on fundamentals to the event driven and emotional rest of the year when the world seems to be perennially on fire, jumping from crisis to crisis.

In a few days traffic in my part of the country returns back to its normal heinous condition as our nation’s elected officials return from a much deserved 37 day vacation that they were unable to truncate by a few days to address some outstanding issues.

Just to be clear, it’s the electorate that deserved the break, but now they’re back and we can settle into our more normal state of dysfunction, while decreasing our focus on such mundane things as earnings. For the record, I don’t get out onto the roads very much anymore, having given up gainful employment for a life of ticker watching, but it’s not as easy to escape the results of having exercised our democratic rights.

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