Mar312013

Weekend Update – March 31, 2013

Weekend Update

It’s said that George Eastman, founder of Eastman Kodak (EKDKQ), was quite methodical as he approached the end of his life and was prepared to put his escape plan into action.

“My work here is done” may be a very logical way to approach any kind of transition, although it doesn’t have to be taken to the extreme that Eastman felt was appropriate under his circumstances. Be prepared, but don’t be crazy.

I’ve been transitioning a portfolio for almost a month in anticipation of the market taking a break and perhaps giving back some of its gains; maybe even a lot of its gains.

Doing so has made me much less fun to be around, but circumstances do change and being prepared for plausible scenarios means having exit strategies and surviving to see them do as planned until it’s time to exit the exit strategy. Once my work is done I can’t wait to get back to work.

I for one was glad to see the first quarter of 2013 come to an end. Fortunately, as a covered option seller, my remaining life span may not be sufficient to see another opening yearly quarter such as this past one, as the last such period was in 1987.

You may or may not remember how that year ended, but let’s just say that a single day 500 point drop back then was a lot more meaningful than it would be today.

I wasn’t prepared back then, in fact, that was the last time I used a margin account. I may end up being wrong this time around, but in watching markets for a number of years, both as a casual observer and as an active participant it’s reasonably clear that the good times don’t just keep rolling.

Selling covered calls is a great strategy when applied methodically, but it does meet its match in markets that just do nothing other than going higher. Hopefully April will usher in some greater variety in outcomes, as the past few weeks, despite having established records in both the Dow Jones and S&P 500 have been showing some signs of tentative behavior.

Part of being a less fun person has meant initiating fewer new positions each week. The first step to creating an environment that wouldn’t entice me to spend money on new positions was to cut off the funding just like you might with any addict. Luckily, most stock traders won’t resort to petty crime and pawning the belongings of loved ones to feed the habit, although that margin account can be very appealing and the answer to an easy fix.

I cut off my flow of funds by moving from weekly to extended weekly or monthly options. Longer contracts means less weekly contracts available to be assigned and less opportunity for new weekly cash to be available to “feed the beast.”.

Unfortunately, I also curtailed my cash flow by some unseemly timing in the purchase of new positions this past quarter, such as Petrobras (PBR) and Cliffs Natural Resources (CLF) that are sitting awaiting opportunities to have call contracts written against them.

The next part of the transition was focusing on reliable dividend paying stocks. The kind your grandfather would feel comfortable owning. Last week, all new positions went ex-dividend last week or this coming week. They’re not very exciting to own, but dividends, especially when their ensuing share price reduction is partially offset by option premiums are especially welcome.

Keeping more cash in reserve, moving away from “Momentum” positions, longer contracts and seeking near term dividends is the exit strategy and my transition is nearly complete.

Now comes the waiting and the period of self-doubt, which includes wondering when it’s time to abandon a thesis. In the meantime, increasing cash reserves doesn’t mean a total prohibition against finding potential new opportunities. After all, being prepared doesn’t have to take you to extremes. Once you’ve reached a crazy state of preparedness it’s hard to turn around to see the light.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend or Momentum categories, with no selections in the “PEE” category, as earnings season begins anew on April 8, 2013 (see details). Additionally, as in previous weeks there is a greater emphasis on stocks that offer monthly contracts only, eschewing the usual preference for the relatively higher ROI of weekly options for the guarantee of premiums for a longer period in order to ride out any turbulence.

Some of this week’s selections are stocks that I already own but may consider adding to existing positions. One such stock is Deere (DE) which left me somewhat exasperated this past Thursday, the final day of a holiday shortened trading week.

At almost precisely noon shares of Deere dropped by about $1.40 in about 8 minutes, taking it from the realm of stocks poised for assignment. The plunge happened while the market was stable and most other heavy machinery and equipment makers were actually going higher. There was no news to account for the sudden and sustained drop. Neither in real time nor hours after.

Caterpillar (CAT) is one of the stocks that has an ignominious reputation during this record setting quarter. It was among the worst performers of the quarter and was routinely tagged as a laggard on those days that the broad market performed well. I recently purchased shares having waited all quarter for them to reach the price point that was very kind to me in 2012. It accompanied Deere for a small portion of the former’s inexplicable retreat but recovered sufficiently to avoid being tagged yet again.

Bristol Myers Squibb (BMY) and Medtronic (MDT) fit into two ongoing themes. Looking for near term dividend paying shares and belonging to the broadly defined healthcare sector. While healthcare has been the leading sector for the trailing year, I think there are still short term opportunities, even with a specter of a declining market. While both Bristol Myers and Medtronic have had significant advances lately, the combination of dividend and premium continue to make it appealing.

MetLife (MET), also a recent holding, fits into my broad definition of “healthcare” if you stretch that definition to an extreme. Part of my positive outlook for its shares is related to what I believe will be growth in its home insurance business. Of course, I rarely think in terms of fundamentals and certainly don’t have a long term perspective on its shares, but it is well positioned to maintain price stability even in a stock market of reduced stability.

Wells Fargo (WFC) and JP Morgan (JPM) are two very different banks. JP Morgan goes ex-dividend this week and has been beleaguered with domestic attacks from elected officials and international attacks as Cyprus may or may not add risk to global banks, such as JP Morgan.

On the other hand, Wells Fargo is as pure of a domestic play as you can find at a size that still makes it “too big to fail.” With news of improving real estate sales all over the country the Wells Fargo money machine is poised to re-create the glory days that so abruptly ended 5 years ago.

I’ve been looking for an excuse to purchase Lowes (LOW) for the past few weeks and have watched its price show some mild erosion during that time

Dow Chemical (DOW) has been one of my favorite stocks for a long time. I purchased additional shares last week to capture its dividend and after looking at its performance over the past 10 months feel guilty thinking that it’s a “boring” stock.

In fact, it’s been absolutely the poster child for what makes a covered call strategy a successful one. While its stock price has virtually remained unchanged since May 2012, the active cycle of buying shares, selling calls, assignment, buy shares, etc.. has resulted in a nearly 40% ROI.

Finally, Western Refining (WNR) is a company whose shares I briefly owned recently at a much lower price. It was one that got away during the uni-directional market of the first quarter. Its price has come down a bit and I think may now be at its “new normal” making it perhaps an antidote to Petrobras in a sector that has some catching up to do.

Traditional Stocks: Caterpillar, Deere, Dow Chemical, JP Morgan, Lowes, MetLife, Wells Fargo

Momentum Stocks: Western Refining

Double Dip Dividend: Bristol Myers (ex-div 4/3), JP Morgan (ex-div 4/3), Medtronic (ex-div 4/3)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the 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.

 

Mar242013

Weekend Update – March 24, 2013

Weekend Update

Common sense tells us that at some point there has to be some retracement following an impressive climb higher. My common sense has never been very good, so I’m beginning to question the pessimism that overtook me about 4 weeks ago.

Maybe the new version of a market plunge is simply staying at or near the same level for a few days. After all, who doesn’t believe that if you’re not moving ahead that you’re falling behind? It is all about momentum and growth. Besides, if history can be re-written by the victors, why not the rules that are based on historical observations?

During the previous 4 weeks I’ve made very few of the trades that I would have ordinarily made, constantly expecting either the sky to fall down or the floor to disappear from underneath. Of the trades, most have fallen in line with the belief that what others consider a timeless bit of advice. Investing in quality companies with reliably safe dividends may be timeless, but it can also be boring. Of course, adding in the income from selling options and it’s less so, but perhaps more importantly better positioned to cushion any potential drops in an overall market.

That makes sense to me, so there must be something flawed in the reasoning, although it did work in 2007-2009 and certainly worked in 1999-2000. I can safely say that without resorting to a re-writing of history.

Among the areas that I would like to consider adding this week are healthcare, industrials and financial sectors, having started doing so last week with Caterpillar (CAT) and Morgan Stanley (MS).

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend or “PEE” categories, with no selections in the “Momentum” category, befitting common sense. (see details). Additionally, there is a greater emphasis on stocks that offer monthly contracts only, eschewing the usual preference for the relatively higher ROI of weekly options for the guarantee of premiums for a longer period in order to ride out any turbulence.

Deere (DE) has been unnecessarily caught in the headlights recently, as it frequently trades in parallel to other heavy machinery giants, despite Deere not having the same kind of global economic exposure. The fact that it goes ex-dividend this week and always offers a reasonable premium, even when volatility is low, makes it a good selection, especially at its current price, which is down about 8% in a time that the S&P 500 has been up 3%. That seems a bit incongruous.

State Street Bank (STT) also goes ex-dividend this week. At a time when banks with global interests are at risk due to European Union and Euro related issues, State Street is probably the lowest profile of all of our “too big to fail” banks that play with the “big boys” overseas. Despite a marked climb, particularly from mid-January, it has shown resistance to potentially damaging international events.

While State Street Bank looks appealing, I have wanted to pick up shares of JP Morgan (JPM) for the past couple of weeks as it and its one time invincible CEO and Chairman, have come under increasing scrutiny and attack. Although it doesn’t pay a dividend this week, if purchased and call options are not assigned, it does offer a better dividend to holders than State Street and will do so on April 3, 2013. Better yet, Jamie Dimon will be there to oversee the dividend as both CEO and Chairman, as the Board of Directors re-affirmed his dual role late Friday afternoon, to which shares showed no response.

If you’re looking for a poster child to represent the stock market top of 2007, then look no further than Blackstone (BX). It was even hotter than Boston Chicken of a generation earlier, and it, too, quickly left a bad after taste. Suddenly, Blackstone no longer seems irrelevant and its name is being heard more frequently as buyouts, mergers and acquisitions are returning to the marketplace, perhaps just in time for another top.

Back in the days when I had to deal with managed care health companies, I wasn’t particularly fond of them, perhaps because I was wrong in the early 1980s when I thought they would disappear as quickly as they arrived. As it turns out, it was only the managed care company on whose advisory board I served that left the American landscape for greener pastures in The Philippines. Humana, one of the early managed care companies at that time was predominantly in the business of providing health care. These days it’s divested itself of that side of the social contract and now markets and offers insurance products.

Humana (HUM) is a low volatility stock as reflected in its “beta” of 0.85 and is trading close to its two year low. The fear with Humana, as with other health care with a large Medicare population is that new reimbursement rates, which are expected to be released on April 1, 2013 will be substantially lower. Shares have already fallen more almost 20% in the past 6 weeks at a time when insurers, on the other side of the equation, have fared well.

UnitedHealth Care (UNH) is the big gorilla in the healthcare room. It has really lagged the S&P 500 ever since being add to the DJIA. However, if your objective is to find stocks upon which you can generate revenue from dividends and the sale of option premiums, you really don’t need much in the way of share performance. In fact, it may be antithetical to what you really want. UnitedHealth Group, though, doesn’t have the same degree of exposure to Medicare fees, as does Humana.

While the insurers and the health care providers battle it out between themselves and the government, there’s another component to healthcare that comes into focus for me this week. The suppliers were in the news this week as Cardinal Health (CAH) reportedly has lost its contract with Walgreens (WAG). Cardinal Health and Baxter (BAX) do not do anything terribly exciting, they just do somethings that are absolutely necessary for the provision of healthcare, both in formal settings and at home. Although also subject to Medicare reimbursement rates and certainly susceptible to pricing pressure from its partners, they are consistently reliable companies and satisfy my need to look for low beta positions. Besides their option premiums, Cardinal Health also goes ex-dividend this week.

Then again, what’s healthcare without pharmaceuticals? Merck (MRK) is another of those companies whose shares I’ve wanted to buy over the past few weeks. It’s now come down from its recent Vytorin related high and may round out purchases in the sector.

With the safe and boring out of the way, there are still a few laggard companies that have yet to report their quarterly earnings before the cycle starts all over again on April 8th. Of those, one caught my attention.

Why anyone goes into a GameStop (GME) store is beyond me. Yet, if you travel around the country you will still see the occasional Blockbuster store, as well. Yet, somehow GameStop shares tend not to suffer terribly when earnings are released, although it is very capable of making large moves at any other time. The current proposition is whether the sale of puts to derive a 2.8% ROI in the event of less than a 12% decline in share price is worthwhile.

Now that’s a challenging game and you don’t even have to leave home to play it.

Traditional Stocks: Baxter, Blackstone, JP Morgan, UnitedHealth Group

Momentum Stocks: none

Double Dip Dividend: Cardinal Health (3/27), Deere (3/26), Humana (3/26), State Street Bank (3/27)

Premiums Enhanced by Earnings: GameStop (3/28 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.

 

Mar102013

Weekend Update – March 10, 2013

Weekend Update

It only seems fitting that one of the final big stories of the week that saw the Dow Jones eclipse its nearly 6 year old record high would be the latest reports of how individual banks performed on the lmost recent round of “stress tests.” After all, it was the very same banks that created significant national stress through their equivalent of bad diet, lack of exercise and other behavioral actions.

Just as I know that certain foods are bad for me and that exercise is good, I’m certain that the banks knew that sooner or later their risky behavior would catch up with them. The difference is that when I had my heart attack the effects were restricted to a relatively small group of people and I didn’t throw any one out of their homes.

Having had a few stress tests over the years myself, I know that sometimes the anticipation of the results is its own stress test. But for some reason, I don’t believe that the banks that were awaiting the results are facing the same concerns. Although I’m only grudgingly modifying my behavior, it’s not clear to me that the banks are or at least can be counted to stay out of the potato chip bag when no one is looking.

Over the past year I’ve held shares in Goldman Sachs (GS), JP Morgan Chase (JPM), Wells Fargo (WFC), Citibank (C), Bank of America (BAC) and Morgan Stanley (MS), still currently holding the latter two. They have been, perhaps, the least stressful of my holdings the past year or so, but I must admit I was hoping that some among that group would just go and fail so that they could become a bit more reasonably priced and perhaps even drag the market down a bit. But in what was, instead, a perfect example of “buy on the rumor and sell on the news,” success led to most stressed bank shares falling.

The other story is simply that of the market. Now that its surpassed the 2007 highs it just seems to go higher in a nonchalant manner, not giving any indication of what’s really in the works. I’ve been convinced for the past 2 or three weeks that the market was headed lower and I’ve taken steps for a very mild Armageddon. Raising cash and using longer term calls to cover positions seemed like a good idea, but the only thing missing was being correct in predicting the direction of the market. For what it’s worth, I was much closer on the magnitude.

The employment numbers on Friday morning were simply good news icing on the cake and just added to my personal stress, which reflected a combination of over-exposure to stocks reacting to speculation on the Chinese economy and covered call positions in a climbing market.

Fortunately, the news of successful stress test results serves to reduce some of my stress and angst. With news that the major banking centers have enough capital to withstand severe stresses, you do have to wonder whether they will now loosen up a bit and start using that capital to heat up the economy. Not to beat a contrarian horse to death, but since it seems inevitable that lending has to resume as banking portfolios are reaching maturity, it also seems inevitable that the Federal Reserve’s exit strategy is now in place.

For those that believe the Federal Reserve was the prime sponsor of the market’s appreciation and for those who believe the market discounts into the future, that should only spell a market that has seen its highs. Sooner or later my theory has to be right.

I’m fine with that outcome and would think it wonderfully ironic if that reversal started on the anniversary of the market bottom on March 10, 2009.

But in the meantime, individual investment money still has to be put to work. Although I continue to have a negative outlook and ordinarily hedge my positions by selling options, the move into cash needs to be hedged as well – and what better way to hedge than with stocks?

Not just any stocks, but the boring kind, preferably dividend paying kind, while limiting exposure to more controversial positions. People have their own unique approaches to different markets. There’s a time for small caps, a time for consumer defensive and a time for dividend paying companies. The real challenge is knowing what time it is.

As usual, this week’s selections are categorized as being either Traditional, Momentum or Double Dip DIvidend (see details). As earnings season is winding down there appear to be no compelling earnings related trades in the coming week.

Although my preference would be for shares of Caterpillar (CAT) to approach $85, I’m heartened that it didn’t follow Deere’s (DE) path last week. I purchased Deere and subsequently had it assigned, as it left Caterpillar behind, for the first time in 2013, as they had tracked one another fairly closely. With the latest “news du jour” about a Chinese government commitment to maintaining economic growth, there may be enough positive news to last a week, at which point I would be happy to see the shares assigned and cash redeployed elsewhere.

Along with assigned shares of Deere were shares of McGraw Hill (MHP). It’s price spiked a bit early in the week and then returned close enough to the strike price that a re-purchase, perhaps using the same strike price may be a reasonable and relatively low risk trade, if the market can maintain some stability.

There’s barely a day that goes by that you don’t hear some debate over the relative merits of Home Depot (HD) and Lowes (LOW). Home Depot happens to be ex-dividend this week and, unless it causes havoc with you need to be diversified, there’s no reason that both companies can’t be own concurrently. Now tat Lowes offers weekly options I’ve begun looking more frequently at its movement, not just during the final week of a monthly option cycle, which coincidentally we enter on Monday.

I rarely find good opportunity to purchase shares of Merck (MRK). It’s option premium is typically below the level that seems to offer a fair ROI. That’s especially true when shares are about to go ex-dividend. However, this week looks more appealing and after a quick look at the chart there doesn’t appear to be much more than a 5% downside relative to the overall market.

Macys (M) is another company that I’ve enjoyed purchasing to capture its dividend and then hold until shares are assigned. It’s trading about 6% higher than when I last held shares three weeks ago and is currently in a high profile legal battle with JC Penney (JCP). There is certainly downside in the event of an adverse decision, however, it now appears as if the judge presiding over the case may hold some sway as he has suggested that the sides find a resolution. That would be far less likely to be draconian for any of the parties. The added bonuses are that Macys is ex-dividend this week and it too has been added to the list of those companies offering weekly option contracts.

Cablevision (CVC) is one of New York’s least favorite companies. The distaste that people have for the company goes well beyond that which is normally directed at utilities and cable companies. There is animus director at the controlling family, the Dolans, that is unlike that seen elsewhere, as they have not always appeared to have shareholder interests on the list of things to consider. But, as long as they are paying a healthy dividend that is not known to be at risk, I can put aside any personal feelings.

Michael Kors (KORS) isn’t very consistent with the overall theme of staid, dividend paying stocks. After a nice earnings related trade a few weeks ago and rise in share price, Kors ran into a couple of self-made walls. First, it announced a secondary offering and then the founder, Michael Kors, announced a substantial sale of personal shares. It also may have more downside potential if you are one that likes looking at charts. However, from a consumer perspective, as far as retailers go, it is still” hot” and offers weekly options with appealing enough premiums for the risk. This turned out to be one of the few selections for which I couldn’t wait until the following week and sent out a Trading Alert on Friday morning.

Seagate Technology (STX) is another theme breaker. In the past I have had good fortune selling puts after price drops, which are frequent and sudden. The additional downside is that when drops do come, the recoveries are relatively slow, so patience may be required, as well as some tolerance for stress if selling puts and the price starts approaching the strike.

The final theme buster is Transocean (RIG). Is there anything that Carl Icahn is not involved with these days? Transocean has been a frequent trading vehicle for me over the years. Happy when weekly options became available, I was disappointed a few weeks ago when they disappeared. It is part of the “Evil Troika” that I often own concurrently. If purchased, Transocean will once again join British Petroleum (BP) in the portfolio, replacing Halliburton (HAL) which was assigned on Friday. Transocean has re-instituted the dividend, although it will still be a few months until the first such payment. Icahn believes that it is too little and too late. I don’t know how he would have the wherewithal to change the “too late” part, but most people would be happy with the proposed 4+% dividend.

Traditional Stocks: Caterpillar, Lowes

Momentum Stocks: McGraw Hill, Michael Kors, Seagate Technology, Transocean

Double Dip Dividend: Cablevision (ex-div 3/13), Home Depot (ex-div 3/12), Macys (ex-div 3/13), Merck (ex-div 3/13)

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.

 

Mar32013

Weekend Update – March 3, 2013

Weekend Update

Sequester This.

Despite being a reasonably smart guy, I’ve never understood how to play the game of “craps.” It’s too fast, there are too many possible decisions and when you get right down to it, it’s name is probably based on something that aptly describes something you’d rather not touch or taste. A name like that should serve as fair warning to stay away. Sometimes a glance at the people playing the game sends the same message.

Not that a word like “sequester” is any better. The very sound of “sequestration” makes me want to cringe as I think about what my poor dachshund had to endure. It’s probably almost as bad as what the individual investor has to endure on a maddeningly frequent basis as markets whipsaw for no apparent reason, yet there’s never a shortage of reasons to explain the unexplainable. At least the dog never required an explanation and eventually went on his way, fully healed from the experience. I can’t say the same thing about my portfolio.

The events that spurred the past week’s early sell-off was by all accounts equal parts Italy, Federal Reserve and Sequestration. Later in the week, as the market was knocking at the gates of 2007’s record levels it was Italy, the Federal Reserve and the lack of interest in the Sequestration that were responsible for the turn of events.

What’s not to understand?

Just a few months earlier the new year’s gains were said to be due to averting the Fiscal Cliff. You may or may not recall the gyrations the market took as competing elected officials decided to vent and spew as they raised and then dashed hopes of a meaningful resolution and simply played craps with other people’s portfolios. Since we’ve all learned that ethical guidelines regarding investment portfolios of elected officials are rather lax, you had to wonder just how the “house” odds were stacked in their game of craps.

This time around as the Sequestration deadline loomed the market just kept chugging along higher. It’s hard to understand that as it seems that there can only be a downside, regardless of whether a resolution is reached or not, unless it becomes clear that there really is no danger posed by this thing they’ve called “The Sequester.”

It seems odd that many are taking great pains to paint frightening and untenable outcomes if the sequestration becomes reality. Yet no one seems to care. Not the man on the street, who based on his knowledge of geography can’t possibly have any idea of what the sequestration is, nor the markets.

To me, the ultimate game of craps was being played this week, as no one really knows what either outcome to this most recent crisis will bring the economy or the markets. Yet that didn’t stop concerned parties from dueling press conferences and then abandoning Washington, DC prior to the deadline and prior to an agreement. Most of all, it didn’t end money pouring into stocks and pushing them higher and higher.

Couple that uncertainty with the certainty that myriads of people beginning to foam at the corners of their mouths felt as we got tantalizingly closer to the heights of 2007. That’s precisely how storms are created.

Just as there were dueling certainties, we also had dueling countdown clocks this past week. Nothing good ever comes of those clocks, whether for the sequestration deadline or Dow points until 14164.

Option to Profit subscribers know that I’ve been unusually dour the past week or two out of concern for a repeat of 2012’s market month long 9% drop. The course that we’re following currently seems eerily familiar.

With that personal concern it’s somewhat more difficult to select stock picks for the coming week, particularly while also looking for opportunities to raise cash positions in preparation for bargains ahead.

However, as Jim Cramer has long said, “there’s always a bull market somewhere.”

I don’t know if that’s true, but there’s always a strategic approach to fit every circumstance.

In this case, while I strongly favor weekly options, where they are available, concerns regarding a quick and sharp downturn lead me to look more closely at monthly or even longer option opportunities in an attempt to still put money to work but to not be left empty handed after expiration of a weekly contract, while then holding a greatly devalued position. The longer term contracts, although perhaps offering lower time adjusted ROIs, do offer some opportunity to assure premium flow for more than a single week and do allow for greater time to ride out any storms.

The week’s selections are categorized as either Traditional, Momentum, Double Dip Dividend or “PEE” and include a look at premiums derived from selling weekly, remaining March 2013 options or April 2013 options (see details).

Deere (DE) was on my list last week, as well. But like most items on the list last week, it remained unpurchased as my cautionary outlook was already at work. In the past month Deere has already had a fairly big drop compared to the S&P 500. I don’t see very much sequester related risk with a position right now, but Deere does have a habit of getting dragged along with others reacting to bad industrial news.COF

Citibank (C) was also on the list last week, but was replaced by Morgan Stanley (MS) as one of the few trades of the week. Although I’m expecting some market challenges ahead, I don’t believe that the decline will be lead by financials, which have already been week of late. If the sequestration occurs and some of the forecasted job cuts become reality, in the short term, I would expect the credit side of Capital One’s (COF) business to benefit. I’ve had Capital One on my wish list in the past, but haven’t bought shares for quite a while, as its monthly only options premiums were always off putting. Now that there are weekly options available, it seems strange that I’d be looking more toward the security provided by the longer term contracts.

With all of the dysfunction at JC Penney (JCP) and Sears’ (SHLD) ambivalence about its position in retail, Kohls (KSS) is just a solid performer. Its been in the news lately, including the rumor category. My shares were recently assigned, but as earnings are out of the way and price is returning to the comfort range, Kohls, too, is another of the boring, but reliable stocks that can be especially welcome when all else is languishing.

Although I own Williams Companies (WMB) with some frequency, I’m not certain that I can refer to it as one of my “favorites.” It’s performance while holding it is usually middling, but sometimes it’s alright to be just average. Williams does go ex-dividend this week and is also in my comfort zone with its current price.

YUM Brands (YUM) is one of those stocks that seem to have a revolving door in my portfolio. It is probably as responsive to analysts interpretation of events as any stock that I’ve seen and it typically finds its way back to where it started before the poorly conceived interpretations were unleashed on the investing public. I had wanted to pick up shares last week to replace those assigned the week prior, but simply valued cash more.

Praxair (PX) is just a boring company whose big gas tanks are ubiquitous. Sometimes boring companies are just the right tonic, when the stresses of a falling market are prevailing, at least in my mind. Making a dividend payment this week makes it less boring and perhaps it still has enough helium on hand to resist falling.

Pandora (P) reports earnings this week and it is fully capable of moving 25% on that event. At the moment, the options market is factoring in approximately a 16% move. AT it’s current price, I would strongly consider taking chances of receiving a 1+% ROI in return for seeing a 25% or less price drop.

On a positive note, we can draw a parallel from an astute observation from more than a century ago. Since “everything that can be invented has been invented,” there was clearly no future need for the Patent Office. So too, with the passing of the Sequestration, there can be no other unforeseen man made fiscal crises possible, so it should all be milk and honey going forward. Don’t let the higher volatility fool you into believing otherwise.

Traditional Stocks: Deere, Capital One, Kohls

Momentum Stocks: Citibank, YUM Brands

Double Dip Dividend: Williams Company (ex-div 3/6)

Premiums Enhanced by Earnings: Pandora (3/7 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.

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

 

Feb242013

Weekend Update – February 24, 2013

Weekend Update

We all engage in bouts of wishful thinking.

On an intellectual level I can easily understand why it makes sense to not be fully invested at most moments in time. There are times when just the right opportunity seems to come along, but it stops only for those that have the means to treat that opportunity as it deserves.

I also understand why it is dangerous to extend yourself with the use of margin or leverage and why it’s beneficial to resist the need to pass up that opportunity.

What I don’t understand is why those opportunities always seem to arise at times when the well has gone dry and margin is the only drink of water to be found.

Actually, I do understand. I just wish things would be different.

I rely on the continuing assignment of shares and the re-investment of cash on a weekly basis. My preference is for anywhere from 20-40% of my portfolio to be turned over on a weekly basis.

But this past week was simply terrible on many levels. Whether you want to blame things on a deterioration of the metals complex, hidden messages in the FOMC meeting or the upcoming sequester, the market was far worse than the numbers indicated, as the down volume to up volume was unlike what we have seen for quite a while.

On Wednesday the performances of Boeing (BA), Hewlett Packard (HPQ) and Verizon (VZ), all members of the Dow Jones Industrials Index helped to mask the downside, as the DJIA and S&P 500 diverged for the day. Thursday was more of the same, except Wal-Mart (WMT) joined the very exclusive party. So far, this week is eerily similar to the period immediately following the beginning of 2012 climb and immediately preceding a significant month long decline of nearly 10%,beginning May 2012.

That period was also preceded by the indices sometimes moving in opposite directions or differing magnitudes and those were especially accentuated during the month long decline.

So what I’m trying to say is that with all of the apparent bargains left in the carnage of this trading shortened week, I don’t have anywhere near the money that I would typically have to plow in head first. I wish I did; but I don’t. I also wish I had that cash so that I wouldn’t necessarily be in a position to have it all invested in equities.

Although that margin account is overtly beckoning me to approach, that’s something that I’ve developed enough strength to resist. But at the same time, I’m anxious to increase my cash position, but not necessarily for immediate re-investment.

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

Cisco (CSCO) was one of those stocks that I wanted to purchase last week, but like most in a wholly unsatisfying week, it wasn’t meant to be. With earnings out of the way and some mild losses sustained during the past week, it’s just better priced than before.

Although there have been periods of time that I’ve owned shares of both Caterpillar (CAT) and Deere (DE), up until about $10 ago on each stock there has rarely been a time over the past 5 years that I haven’t owned at least one of them. This past week saw some retreat in their prices and they are getting closer to where I might once again be comfortable establishing ownership.

Lockheed Martin (LMT) is one of those stocks that I really wished had offered weekly option premiums. Back in the days when there was no such vehicle this was one of my favorite stocks. This week it goes ex-dividend and that always gets me to give a closer look, especially after some recent price drops. Dividends, premiums and a price discount may be a good combination.

Dow Chemical (DOW) has been in my doghouse of late. That’s not any expression of its quality as a company, nor of its leadership. After all, back when the market last saw 14,000, Dow Chemical was among those companies whose shares, dividends and option premiums helped me to survive those frightening days. But after 2009 had gotten well entrenched and started heading back toward 14000, the rest of the market just left Dow behind. Then came weekly options and Dow Chemical didn’t join that party. More recently, as volatility has been low, it’s premiums have really lagged. But now, at its low point in the past two months for no real reason and badly lagging the broad market, it once again looks inviting.

Lorillard (LO) was on my radar screen about a month ago, but as so often happens when it came time to make a decision there appeared to be a better opportunity. This week Lorillard goes ex-dividend. Unfortunately, it no longer offers a weekly option, but this is one of those companies that if not assigned this month will likely be assigned soon, as tobacco companies have this knack for survival, much more so than their customers.

MetLife (MET) was on last week’s radar screen, but it was a week that very little went according to script. Maybe this week will be better, but like the tobacco companies that are sometimes the bane of insurance companies, even when paying out death benefits, somehow these companies survive well beyond the ability of their customers.

United Healthcare (UNH) simply continues the healthcare related theme. Already owning shares of Aetna (AET), I firmly believe that whatever form national healthcare will take, the insurance companies will thrive. Much as they have done since Medicaid and Medicare appeared on the national landscape and they moaned about how their business models would be destroyed. After 50 years of moaning you would think that we would all stop playing this silly game.

The Gap (GPS) reports earnings this week, along with Home Depot (HD) as opposed to most companies that I consider as potential earnings related trades, there isn’t a need to protect against a 10-20% drop. At least I don’t think there is that kind of need. But whereas the concern of holding shares of some of those very volatile companies is real, that’s not the case with these two. Even with unexpected price movements eventually ownership will be rewarded. The fact that Home Depot gained 2% following Friday’s upgrade by Oppenheimer to “outperform” always leads me to expect a reversal upon earnings release.

On the other hand, when it comes to MolyCorp (MCP) there’s definitely that kind of need to protect against a 20% price decline. Always volatile, MolyCorp got caught in last week’s metal’s meltdown, probably unnecessarily, since it really is a different entity. Yet with an SEC overhang still in its future and some investor unfriendly moves of late, MolyCorp doesn’t have much in the way of good will on its side.

Nike (NKE) goes ex-dividend this week and its option premiums have become somewhat more appealing since the stock split.

Salesforce.com (CRM) is another of those companies that I’m really not certain what it is that they do or provide. I know enough to be aware that there is drama regarding the relationship between its CEO, Mark Benioff and Oracle’s mercurial CEO, Larry Ellison, to get people’s attention and become the basis of speculation. I just love those sort of side stories, they’re so much more bankable that technical analysis. In this case, a xx% drop in share price after earnings could still deliver a 1% ROI.

Finally, two banking pariahs are potential purchases this week. I’ve owned both Citibank (C) and Bank of America (BAC) in the past month and have lost both to assignment a few times. As quickly as their prices became to expensive to repurchase they have now become reasonably priced again.

Although Friday’s trading restored some of the temporarily beaten down stocks a bit, a number still appear to be good short term prospects. I emphasize “short term” because I am mindful of a repeat of the pattern of May 2012 and am looking for opportunities to move more funds to cash.

I don’t know if Friday’s recovery is a continuation of that 2012 pattern, but if it is, that leads to concern over the next leg of that pattern.

For that reason I may be looking at opportunities to increase cash levels as a defensive move. In the event that there are further signals pointing to a strong downside move, I would rather be out of the market and miss a continued upside move than go along for the ride downward and have to work especially hard to get back up.

I’ve done that before and don’t feel like having to do it again.

Traditional Stocks: Caterpillar, Cisco, Deere, Dow Chemical, MetLife, United Healthcare

Momentum Stocks: Citibank

Double Dip Dividend: Bank of America (ex-div 2/27), Lockheed Martin (ex-div 2/27), Lorillard (ex-div 2/27), Nike (ex-div 2/28)

Premiums Enhanced by Earnings: Home Depot (2/26 AM), MolyCorp (2/28 PM), Salesforce.com (2/28 PM), The Gap (2/28 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 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.