Jan12016

Weekend Update – January 3, 3016

Weekend Update

The "What If" game is about as fruitless as it gets, but is also as much a part of human nature as just about anything else.

How else could I explain having played that game at a high school reunion?

That may explain the consistent popularity of that simple question as a genre on so many people’s must read lists as the New Year begins.

Historical events lead themselves so beautifully to the "What If" question because the cascading of events can be so far reaching, especially in an interconnected world.

Even before that interconnection became so established it didn’t take too much imagination to envision far reaching outcomes that would have been so wildly different around the world even a century or more later.

Imagine if the Union had decided to cede Fort Sumpter and simply allowed the South to go its merry way. Would an abridged United States have been any where near the force it has been for the past 100 years? What would that have meant for Europe, the Soviet Union, Israel and every other corner of the world?

Second guessing things can never change the past, but it may provide some clues for how to approach the future, if only the future could be as predictable as the past.

Looking back at 2015 there are lots of "what if" questions that could be asked as we digest the fact that it was the market’s worst performance since 2008.

In that year the S&P 500 was down about 37%, while in 2015 it was only down 0.7%. That gives some sense of what kind of a ride we’ve been on for the past 7 years, if the worst of those years was only 0.7% lower.

But most everyone knows that the 0.7% figure is fairly illusory.

For me the "what if" game starts with what if Amazon (AMZN), Alphabet (GOOG), Microsoft (MSFT) and a handful of others had only performed as well as the averages.

Of course, even that "what if" exercise would continue to perpetuate some of the skew seen in 2015, as the averages were only as high as they were due to the significant out-performance of a handful of key constituent components of the index. Imagining what if those large winners had only gone down 0.7% for the year would still result in an index that wouldn’t really reflect just how bad the underlying market was in 2015.

While some motivated individual could do those calculations for the S&P 500, which is a bit more complex, due to its market capitalization calculation, it’s a much easier exercise for the DJIA.

Just imagine multiplying the 10 points gained by Microsoft , the 30 pre-split points gained by Nike (NKE), the 17 points by UnitedHealth Group (UNH), the 26 points by McDonalds (MCD) or the 29 points by Home Depot (HD) and suddenly the DJIA which had been down 2.2% for 2015, would have been another 761 points lower or an additional 4.5% decline.

Add another 15 points from Boeing (BA) and another 10 from Disney (DIS) and we’re starting to inch closer and closer to what could have really been a year long correction.

Beyond those names the pickings were fairly slim from among the 30 comprising that index. The S&P 500 wasn’t much better and the NASDAQ 100, up for the year, was certainly able to boast only due to the performances of Amazon, Netflix (NFLX), Alphabet and Facebook (FB).

Now, also imagine what if historically high levels of corporate stock buybacks hadn’t artificially painted a better picture of per share earnings.

That’s not to say that the past year could have only been much worse, but it could also have been much better.

Of course you could also begin to imagine what if the market had actually accepted lower energy and commodity prices as a good thing?

What if investors had actually viewed the prospects of a gradual increase in interest rates as also being a good thing, as it would be reflective of an improving, yet non-frothy, economy?

And finally, for me at least, What if the FOMC hadn’t toyed with our fragile emotions and labile intellect all through the year?

Flat line years such as 2015 and 2011 don’t come very often, but when they do, most dispense with the "what if" questions and instead focus on past history which suggests a good year to follow.

But the "what if" game can also be prospective in nature, though in the coming year we should most likely ask similar questions, just with a slight variation.

What if energy prices move higher and sooner than expected?

What if the economy expands faster than we expected?

What if money is running dry to keep the buyback frenzy alive?

Or, what if corporate earnings actually reflect greater consumer participation?

You may as well simply ask what if rational thought were to return to markets?

But it’s probably best not to ask questions when you may not be prepared to hear the answer.

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

For those, myself included, who have been expecting some kind of a resurgence in energy prices and were disbelieving when some were calling for even further drops only to see those calls come true, it’s not really clear what the market’s reaction might be if that rebound did occur.

While the market frequently followed oil lower and then occasionally rebounded when oil did so, it’s hard to envision the market responding favorably in the face of sustained oil price stability or strength.

I’ve given up the idea that the resurgence would begin any day now and instead am more willing to put that misguided faith into the health of financial sector stocks.

Unless the FOMC is going to toy with us further or the economy isn’t going to show the kind of strength that warranted an interest rate increase or warrants future increases, financials should fare well going forward.

This week I’m considering MetLife (MET), Morgan Stanley and American Express (AXP), all well off from their 2015 highs.

MetLife, down 12% during 2015 is actually the best performer of that small group. As with Morgan Stanley, almost the entirety of the year’s loss has come in the latter half of the year when the S&P 500 was performing no worse than it had during the first 6 months of the year.

Both Morgan Stanley and MetLife have large enough option premiums to consider the sale of the nearest out of the money call contracts in an attempt to secure some share appreciation in exchange for a somewhat lo0wer option premium.

In both cases, I think the timing is good for trying to get the best of both worlds, although Morgan Stanley will be among the relatively early earnings reports in just a few weeks and still hasn’t recovered from its last quarter’s poorly received results, so it would help to be prepared to manage the position if still held going into earnings in 3 weeks.

By contrast, American Express reports on that same day, but all of 2015 was an abysmal one for the company once the world learned that its relationship with Costco (COST) was far more important than anyone had believed. The impending loss of Costco as a branded partner in the coming 3 months has weighed heavily on American Express, which is ex-dividend this week.

I would believe that most of that loss in share has already been discounted and that disappointments aren’t going to be too likely, particularly if the consumer is truly making something of a comeback.

There has actually been far less press given to retail results this past holiday season than for any that I can remember in the recent and not so recent past.

Most national retailers tend to pull rabbits out of their hats after preparing us for a disappointing holiday season, with the exception of Best Buy (BBY), which traditionally falls during the final week of the year on perpetually disappointing numbers.

Best Buy has already fallen significantly in th e past 3 months, but over the years it has generally been fairly predictable in its ability to bounce back after sharp declines, whether precipitous or death by a thousand cuts.

To my untrained eye it appears that Best Buy is building some support at the $30 level and doesn’t report full earnings for another 2 months. Perhaps it’s its reputation preceding it at this time of the year, but Best Buy’s current option premium is larger than is generally found and I might consider purchasing shares and selling out of the money calls in the anticipation of some price appreciation.

Under Armour (UA) is in a strange place, as it is currently in one of its most sustained downward trends in at least 5 years.

While Nike, its arch competitor, had a stellar year in 2015, up until a fateful downtrend that began in early October, Under Armour was significantly out-performing Nike, even while the latter was some 35% above the S&P 500’s performance.

That same untrained eye sees some leveling off in the past few weeks and despite still having a fairly low beta reflecting a longer period of observation than the past 2 months, the option premium is continuing to reflect uncertainty.

With perhaps some possibility that cold weather may finally be coming to areas where it belongs this time of the year, it may not be too late for Under Armour to play a game of catch up, which is just about the only athletic pursuit that I still consider.

Finally, Pfizer (PFE) has been somewhat mired since announcing a planned merger, buyout, inversion or whatever you like to have it considered. The initially buoyed price has fallen back, but as with Dow Chemical (DOW) which has also fallen back after a similar merger announcement move higher, it has returned to the pre-announcement level.

I view that as indicating that there’s limited downside in the event of some bad news related to the proposed merger, but as with Dow Chemical, Best Buy and Under Armour, the near term option premium continues to reflect perceived near term risk.

Whatever Pfizer;’s merger related risk may be, I don’t believe it will be a near term risk. From the perspective of a call option seller that kind of perception in the face of no tangible news can be a great gift that keeps giving.

Traditional Stocks: MetLife. Morgan Stanley, Pfizer

Momentum Stocks: Best Buy, Under Armour

Double-Dip Dividend: American Express (1/6 $0.29)

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.

Sep182015

Weekend Update – September 20, 2015

Weekend Update

This past Monday, prior to the market’s opening, I posted the following for Option to Profit subscribers:

“In all likelihood, at this point there are only two things that would make the market take any news badly.

The first is if no interest rate increase is announced.

Markets seem to have finally matured enough to understand that a rate hike is only a reflection of all of the good and future good things that are developing in our economy and are ready to move on instead of being paralyzed with fear that a rate hike would choke off anemic growth.

The second thing, though, is the very unlikely event of a rate hike larger than has been widely expected. That means a 0.5% hike, or even worse, a full 1% hike.

That would likely be met with crazed selling.”

Based on the way the market was trading this week as we were awaiting the FOMC Statement which was very widely expected to announce an interest rate increase, you would have been proud.

The proudness would have arisen as it seemed that the market was finally at peace with the idea that a small interest rate increase, the first in 9 years, wouldn’t be bad news, at all.

Finally, it seemed as if the market was developing some kind of a more mature outlook on things, coming to the realization that an interest rate hike was a reflection of a growing and healthy economy and was something that should be celebrated.

It always seemed somewhat ironic to me that the investing class, perhaps those most likely to endorse the concept of teaching a man how to fish rather than simply giving a handout, would be so aghast at the possibility of a cessation of a zero interest rate policy (“ZIRP”), which may have been tantamount to a handout.

The realization that ours was likely the best and most fundamentally sound economy in the world may have also been at the root of our recent disassociation from adverse market events in China.

So while the week opened with more significant weakness in China, our own markets began to trade as if they were now ready to welcome an interest rate increase and seeing it for what it really reflected.

All was well and in celebration mode as we awaited the news on Thursday.

As the news was being awaited, I saw the following Tweet. 

I don’t follow many people on Twitter, but Todd Harrison, the founder of Minyanville is one of those rare combinations of humility, great personal and professional successes, who should be followed.

I have an autographed copy of his book “The Other Side of Wall Street,” whose full title really says it all and is a very worthwhile read.

Like the beer pitchman, Todd Harrison doesn’t Tweet much, but when he does, it’s worth reading, considering and placing somewhere in your memory banks.

Many people in their Twitter profiles have a disclaimer that when they re-Tweet something it isn’t necessarily an endorsement.

When I re-Tweet something, it is always a reflection of agreement. There’s no passive – aggressiveness involved in the re-Tweet by saying “I endorse the re-Tweeting of this, but I don’t necessarily endorse its content.”

I believed, as Todd Harrison did, some 4 minutes before the FOMC statement release, that the knee jerk reaction to the FOMC decision wasn’t the one to follow.

But a funny thing happened, but not in a funny sort of way.

For a short while that knee jerk reaction would have been the right response to what should have been correctly viewed as disappointment.

What was wrong was a reversion back to a market wanting and believing that it was given another extension of the ZIRP handout. That took a market that had given up all of its substantial gains and made another reversal, this time going beyond the day’s previous gains.

With past history as a guide, going back to Janet Yellen’s predecessor, who introduced the phenomenon of the Federal Reserve Chairman’s Press Conference, the market kept going higher during the prepared statement portion of the conference and continued even higher as some clarification was sought on what was meant by “global concerns.”

Of course, everyone knew that meant China, although one has to wonder whether those global concerns also included the opinions held and expressed by Christine Legarde of the International Monetary Fund and others, who believe that it would be wrong for the FOMC to introduce an interest rate increase in 2015.

While some then began to wonder whether “global concerns” meant that the Federal Reserve was taking on a third mandate, it all turned suddenly downward.

With the exception of a very early Yellen press conference when she mischaracterized the FOMC’s time frame on rate increases and the market took a subsequent tumble, normally, Yellen’s dovish and dulcet tones are like a tonic for whatever may have been ailing the market/ This week, however, the juxtaposition of dovish and hawkish sentiments from the FOMC Statement, the subsequent press conference prepared statement and questions and answers may have been confusing enough to send traders back to their new found friend.

Logic.

Perhaps it was Yellen’s response that she couldn’t give a recipe to define what would cause the FOMC to act or perhaps it was the suggestion that the FOMC needn’t wait until their next meeting to act that sent markets sharply lower as they craved some certainty.

Or maybe it was a sudden realization that if markets had gone higher on the anticipation of a rate increase, logic would dictate that it go lower if no increase was forthcoming.

And so the initial response to the FOMC decision was the right response as the market may have shown earlier in the week that it was finally beginning to act in a mature fashion and was still capable of doing so as the winds shifted.

Perhaps the best question of that afternoon was one that pointed out an apparen
t inconsistency between expectations for full employment in the coming years, yet also expectations for inflation remaining below the Federal Reserve’s 2% target.

Good question.

Her answer “If our understanding of the inflation process is correct……we will see further upward pressure on inflation, may have represented a very big “if” to some and may have deflated confidence at the same time as a re-awakening was taking place that suggested that perhaps the economy wasn’t growing as strongly as had been hoped to support continued upward movement in the market.

That’s the downside to focusing on fundamentals.

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

As the market continues its uncertainty, even as it may be returning more to consideration of fundamentals, I continue to like the idea of going with some of the relative safety that may be found with dividends.

Last week I purchased more shares of General Electric (GE), hoping to capture both the dividend and the volatility enhanced premium. Those shares, however were assigned early, but having sold a 2 week option the ROI for the 3 days of holding reflected that additional time value and was a respectable 1.1%.

Even though I still hold some shares with an October 2, 2015 $25 expiration hanging over them, this week I find myself wanting to add shares of General Electric, once again, as was the case in each of the last two weeks.

Although there is no dividend in sight for another 3 months, the $25 neighborhood has been looking like a comfortable one in which to add shares as volatility has made the premiums more and more attractive and there may also be some short term upside to shares to help enhance the return.

A covered option strategy is at its best when the same stock can be used over and over again as a vehicle to generate premiums and dividends. For now, General Electric may be that stock.

Verizon (VZ) doesn’t have an upcoming dividend this week, but it will be offering one within the next 3 weeks. In addition to its recently increased dividend, the yield was especially enhanced by its sharp decline in share price at the end of the week as it gave some dour guidance for 2016.

There’s not too much doubt that the telecommunications landscape is changing rapidly, but if I had to put my confidence in any company within that smallest of sectors to survive the turmoil, it’s Verizon, as long as their debt load isn’t going to grow by a very unneeded and unwanted purchase of a pesky competitor that has been squeezing everyone’s margins.

I see Verizon’s pessimism as setting up an “under promise and over deliver” kind of scenario, as utilities typically find a way to thrive, but rarely want to shout up and down the streets about how great things are, lest people begin taking notice of how much they’re paying for someone else’s obscene profits.

Among those being considered that are going to be ex-dividend this week are Cypress Semiconductor (CY) and Green Mountain Keurig (GMCR).

I already own shares of Cypress Semiconductor and have a way to go to reach a breakeven on those shares which I purchased after its proposed buyout of another company fell through. I’ve held shares many times over the years and have become very accustomed to its significant and sizable moves, while somehow finding a way to return back to more normative pricing.

Following this past Friday’s decline its well below the $10 level that I’ve long liked for adding shares. With an ex-dividend date on Tuesday, if the trade is to be made, it will be likely done early in the week.

However, the other consideration is that Cypress Semiconductor is among the early earnings reporters and it will be reporting  on the day before its next option contract expires. For that reason, if considering a share purchase, I would probably look at a contract expiration beyond October, in the event of further price erosion.

Also going ex-dividend but not until Monday of the following week are Deere (DE) and Dow Chemical (DOW).

Like so many other stocks, they are badly beaten down and as a result are featuring an even more alluring dividend yield. However, their Monday ex-dividend date is something that can add to that allure, as any decision to exercise the option has to be made on the previous Saturday.

That presents opportunity to look at strategies that might seek to encourage early assignment through the sale of in the money call options utilizing expanded weekly options.

While Caterpillar (CAT) and others are feeling the pain of China’s economic slowdown, that’s not the case for Deere, but as is often the case, there are sympathy pains that become all too real.

Dow Chemical, on the other hand has continued to suffer from the belief that its fortunes are closely tied to oil prices. It;s CEO refuted that barely 9 months ago and subsequent earnings reports have borne out his contention, yet Dow Chemical continues to suffer as oil prices move lower.

If looking for a respite from dividends, both Bank of America (BAC) and Bed Bath and Beyond (BBBY) may be worth a look this week.

The financial sector was hard hit the past few days and Bank of America was additionally in the spotlight regarding the issue of whether its CEO should also hold the Chairman’s title.

As with Jamie Dimon before him who successfully faced the same shareholder issue and retained both designations, no one is complaining about the performance of Brian Moynihan.

Even as I sit on some more expensive shares that have options sold on them expiring in two weeks, I have no reason to complain.

Following a second consecutive day of large declines, Bank of America is trading near its support that has seemed to hold up well under previous assault attempts. As with other stocks that have suffered large declines, there is greater ability to attempt to capitalize on price gains without giving up much in the way of option premiums.

Bed Bath and Beyond reports earnings this week and has seen its price in steady decline for the past 4 months. Unlike others that have had a more precipitous decline as they’ve approached the pleasure of a 20% decline, Bed Bath and Beyond has done it in a gradual style.

While those intermediate points along the drop down may represent some resistance on the way back up, that climb higher is made easier when the preceding decline
wasn’t vertical.

When considering an earnings related trade I usually look for a weekly return of 1% or greater by selling put options at a strike price that’s below the bottom range implied by the option market. The preference is that the strike price that provides that return be well below that lower boundary, The lower, the better the safety cushion.

For Bed Bath and Beyond the implied move is about 6.3%, but there is no safety cushion below a $56.50 strike level to yield that 1% return. Therefore, instead of selling puts before earnings, I would consider, as has been the predominant strategy of the past two months, of considering the sale of puts after earnings are announced, but only if there is a significant price decline.

Finally, Green Mountain Keurig is going ex-dividend this coming week, but it hardly qualifies as being among the relatively safe universe of stocks that I would prefer owning right now.

I usually like to think about opening a position in Green Mountain Keurig through the  sale of puts. However, with the ex-dividend date this week that would be like subsidizing someone who was selling those puts for the dividend related price decline.

Other than the dividend, there’s is little that I could say to justify a long term position on Green Mountain and even have a hard time justifying a short term position.

However, Green Mountain’s ex-dividend day is on Friday and expanded weekly options are available.

I would consider the purchase of shares and the concomitant sale of deep in the money expanded weekly calls in an attempt to see those shares assigned early.

As an example, with Green Mountain closing at $56.74 on Friday, the October 2, 2015 $54.50 call option would have delivered a premium of $3.08.

For a rational option buyer to consider early exercise on Thursday, the price of shares would have to be above $54.79 and likely even higher than that, due to the inherent risk associated with owning shares, even if only for minutes on Friday morning after taking their possession.

However, if assigned early, there would be a 1.5% ROI for the 4 days of holding even if the shares fell somewhat less than 3.4%.

Their coffee and their prospects for continued marketplace success may both be insipid, but I do like the tortured logic and odds of the dividend related trade as we look ahead to a week where logic seeks to re-assert itself.

 

Traditional Stock: General Electric, Verizon

Momentum Stock: Bank of America

Double-Dip Dividend: Cypress Semiconductor (9/22), Deere (9/28), Dow Chemical (9/28), Green Mountain Keurig (9/25)

Premiums Enhanced by Earnings: Bed Bath and Beyond (9/24 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.

Jun202015

Weekend Update – June 21, 2015

Weekend Update

No matter how old you are, people love getting gifts.

That may even be the case when you end up paying for them yourself.

Sometimes, that’s the real surprise.

Last year, for example, I received a surprise birthday gift when hitting one of those round numbers. It was a trip to my favorite city, New Orleans, and I was further surprised by friends and family that had assembled there and then individually popped up at totally unexpected times and places.

The real surprise was when I received the hotel bill and then subsequently the other bills. While I’ll be forever remembering the moment a tap on my shoulder at a busy restaurant announced, “Sir, your drinks are here,” only to turn around and see one of my sons unexpectedly turn up holding a platter of shots. Priceless, but as long as we’re talking about price, I think that I would have chosen less costly libations had I known what was to be in store for me.

In hindsight, though, it was a great gift, but I paid the price as many expect will be the case after years of the Federal Reserve injecting liquidity into the system and keeping interest rates at historic lows, much as is now occurring throughout Europe and the world.

Following the FOMC Statement release this past week was Janet Yellen’s press conference and as one person said to me, hers was the “best tightrope walking” he’d ever seen.

Janet Yellenda, has a nice ring to it and she certainly did a great job of staying on course while questions came at her trying their best to throw her off message. Many of those questions were posed to see her lose her tight cling to the carefully nuanced words that served to tantalize, while hinting of what was ahead.

Instead of seeing the gift for what it was, they wanted to know when the bill would be coming due and maybe who was going to end up holding the bag when the celebrations were all over.

Of course, there are those really sick people for whom the gift would be seeing someone else fail or fall off that tightrope wire, but Yellen was better than any gust of wind that could come her way.

For those that had so recently come to expect that perhaps the FOMC would raise interest rates with this past week’s statement release, the market made it clear that they considered the delay as a real gift, even if the celebration and enjoyment lasted just for a day or so.

Sooner or later, there’s also a price that needs to be paid.

That gift, withholding the interest rate increase that just a couple of weeks ago seemed as if it might come this past week, not only was being delayed, but perhaps being delayed all the way to September. As if that gift wasn’t enough, there was a suggestion that any rate increase wasn’t necessarily going to be part of a planned series of regular rate increases, as had been the practice during the Greenspan era.

Could it get any better? At least that was how most heard her words as she delicately balanced them against one another, saying only those things that could be construed by willing ears as “Laissez les bons temps rouler,” as they like to say in New Orleans.

On Thursday, the day after the FOMC Statement release and press conference, it didn’t seem that it could get any better, as the market celebrated what could only be interpreted as a gift for stock investors.

Still, the reality is that while we are winding down a monetary policy era that has likely been to the benefit of our stock markets, the rest of the world is now beginning on that path and may offer stiff winds for us as the bill gets tallied.

The gales coming from Europe were evident this past week as the market was also reacting to the tightrope walk that Greece was doing as it vacillated between being reasonable and unrealistic.

Telling its IMF and ECB safety nets that there were better safety nets out there, while forgetting that neither Russia nor China has ever saved anyone without exacting a price that makes simple interest paid to the IMF and ECB look absolutely charitable, our own markets swayed along with those cross currents of uncertainty.

There may be lots of those cross currents ahead, so that balancing skill may come in very handy while waiting for earnings season to begin again in July and offering the possibility of getting grounded in fundamental reality.

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

Last week marked the second consecutive week in which I didn’t open any new positions, something that would have been unimaginable to me at any point during the past 7 or more years. This coming week I can see more of the same, as there’s very little compelling news ahead to make we want to let go of the cash in my hand. As the bill may be ready to come due soon, I’d like to be ready with that cash on hand to balance the cha
llenge of uncertainty.

Of course, as is usually the case, once the reality of the bill finally settles in, most of the time that represents an opportunity to again start moving forward.

For now, unless there is some further compelling reason to come from upcoming GDP, Retail Sales, Employment Situation and JOLTS reports to believe that the economy is heating up sufficiently to warrant a rate increase in July, the next catalyst may very well come from earnings.

This past week Oracle (NYSE:ORCL) reported earnings. It is among a very small handful of significant companies that report late in the cycle. In fact, their report was almost 3 months following the close of the quarter upon which they reported. While many of those reported soon after earnings season started, less than 2 weeks after the close of that quarter, the expectation for currency related revenue declines was so high at that time, that those companies didn’t see stock prices harshly punished for the dollar’s strength.

Now? Not so much.

Most, in fact, took the previous earnings report opportunity to provide decreased forward guidance as the expectation was that we were headed for US Dollar and Euro parity.

Nearly 3 months later that projection hasn’t become reality, as the US dollar has weakened significantly since March 31, 2015 and that can be expected to show up in the next quarter’s earnings reports. Unfortunately for Oracle share holders, had the company reported in April, there’s a chance that they would have gotten the same free pass as did others at that time.

Sinclair Broadcasting (NASDAQ:SBGI) and Comcast (NASDAQ:CMCSA) are both firmly in the control of their founding families and are on different ends of the spectrum when it comes to their approach to bringing content into the home.

The family nature of Comcast was highlighted this past Friday with the passing of its founder, Ralph Roberts, at age 95. My mother used to say, “they should never go younger,” and while I was never a fan of their product and service, the man was an outlier in many good ways.

With Comcast having recently been extricated from a potential buyout of another cable company, it’s also finding that there are opportunities outside of people’s television sets and streaming devices, as its ownership of Universal Studios makes it the beneficiary of some blockbuster movie releases.

On the downside, it is near its 52 week high as it gets ready to go ex-dividend the week after next. That gives some reason for pause, although neither Greece nor currency headwinds should be an issue, although rising interest rates can be particularly hurtful for a capital intensive company.

However, I especially like Monday ex-dividend dates and like the idea of being assigned early on those positions, as you can get an additional week of premium in exchange for giving up the dividend and holding the stock position for a shorter period of time than planned, while having the opportunity to re-invest the assignment proceeds into another position. With the availability of expanded weekly options on Comcast there are a number of different expiration dates that can be used in an effort to capture additional time premium or try to find the right balance between premium, dividend and time.

Sinclair Broadcasting is in the terrestrial business and just keeps getting larger and larger. It’s not particularly an exciting stock, but does trade with a fairly large price range without any particularly moving news.

It is now at a price that is still above its range mid-point, but that however, has been a reliable launching pad for new positions. With only monthly options available the time commitment is longer as the July 2015 cycle begins this coming week. With earnings coming during the August 2015 cycle any short term price decline necessitating a rollover may look to bypass additional earnings risk and go to a September 2015 expiration, which would also include an upcoming dividend.

Philip Morris (NYSE:PM) and Blackberry (NASDAQ:BBRY) can both elicit some emotional responses, but for very different reasons. Both have upcoming events this week that can offer some opportunity.

Philip Morris is ex-dividend this week and that dividend is very attractive. The company recently stopped its aggressive buyback program as it was feeling the pain of currency exchange and did so, ostensibly, in favor of the dividend. With a history of annual dividend increases coming for the third quarter of each year, there is some question as to wh
ether that will be possible this year, as cash flow is decreased from both currency and declining sales.

Earnings are scheduled to be reported on the day prior to the end of the July 2015 monthly cycle, so in the event that shares haven’t been assigned prior to that, I would consider attempting to rollover any expiring option to a date that may give sufficient time to recover from any price decline.

Blackberry reports earnings this week and is sitting precariously near its yearly lows. The options market is implying an 8% price move when earnings are released on Tuesday morning.

Blackberry usually has released earnings on Friday mornings over the past few years and I’ve generally overlooked it because my preference is to sell a weekly put on most earnings related trades. I further prefer those that report early in the week, so as to have time for some price recovery if at risk for assignment, particularly as some price recovery could ease the ability to rollover the position to delay or avoid assignment.

With a Tuesday morning report and the chance of achieving a 1% ROI at a strike just outside the range implied by the options market, the interest in a short put position is rekindled. However, the greatest likelihood is that I would be more inclined to consider a put sale after earnings, if the price declines, as the premium can really get further enhanced as the price challenges that 52 week low.

I currently own shares of Dow Chemical (NYSE:DOW) and am at risk of having those shares assigned in order to capture the dividend. With those contracts expiring on July 2, 2015 and the ex-dividend date of Friday, June 26th, the $0.42 dividend would require a price of at least $53.92 for the $53.50 options to be assigned early. If that looks like a possibility as trading nears it close on Thursday, I may consider rolling over the option position in order to secure the dividend.

However, with any price decline in shares, particularly if coming early in the week, I would consider adding additional shares and again consider selling call options for the following, holiday shortened week, or even for the week afterward.

Dow Chemical has recently been trading well off its lows that were fueled by decreasing oil prices. CEO Andrew Liveris, who has come under fire on his own for allegedly using his position to finance his lifestyle, did an excellent job in convincing investors that Dow Chemical was a beneficiary of decreasing oil prices, rather than a victim, as it was being treated early in 2015, prior to his going on the offensive.

I think that even if oil prices head moderately higher in the near term, Andrew Liveris would be able to convince people that was also to the benefit of Dow Chemical, just as I expect he’ll be able to convince internal Dow Chemical “watch dogs” that his personal actions were entirely appropriate.

Finally, I had Bank of America (NYSE:BAC) shares assigned this past week, but following weakness among financials on Friday, as well as following the week’s peak in interest rates, shares declined.

That decline, although still leaving shares near a 6 month high, does provide another entry point opportunity. While its shares may continue to be pressured if the bond market bids interest rates lower, the bond market knows exactly where interest rates are going to be headed and financials should be following along.

While the premiums aren’t spectacular, I would look at a potential purchase of shares with an eye toward a longer term holding trying to capitalize on share gains supplemented by option premiums while awaiting the reality of rate increases to come.

Traditional Stocks: Sinclair Broadcasting

Momentum Stocks: Bank of America

Double-Dip Dividend: Comcast (6/29), Dow Chemical (6/26), Philip Morris (6/23)

Premiums Enhanced by Earnings: Blackberry (6/23 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.

Mar212015

Weekend Update – March 22, 2015

Weekend Update

The past week has to be one to make most people pause and try to understand the basis for what we just experienced.

In a week otherwise devoid of any meaningful news there was a singular event in the middle of the week and then a little bit of follow-up to help clarify that event.

That event was the release of this month’s FOMC Statement and the subsequent clarifying event was the press conference held by its Chair, Janet Yellen.

In its aftermath, I am more confused than ever.

Not so much about where interest rates are headed, nor when, but more about the thought processes that propel markets when expectations are so clearly defined and what our continuing expectations should be.

Most everyone who follows markets knows that the great debate of late has not been whether the FOMC was going to begin the process of raising interest rates, but when they were going to begin that process. Somehow, we believed that the answer to that question was going to come when we learned whether the word “patience” would continue to characterize the FOMC’s timetable with regard to its effort to “normalize the stance of monetary policy.”

Most had taken positions that the first rate increase would come either as early as this June or perhaps as late as September. The continuing use of the word “patience” was perceived as a sign that interest rate increases wouldn’t occur until sometime after June 2015.

So you have to excuse some confusion when the market reversed course by more than 300 points as it learned that the word “patience” was eliminated, but also received news that the FOMC didn’t foresee an interest rate increase before their next meeting in April 2015.

April?

That could mean that an increase by the May meeting was still on the table and the last time I looked, May came before June, especially if you believe a more hawkish approach is warranted.

Presumably, it was the fear of interest rate increases coming as early as June that was a source for recent market weakness.

As I parsed the words I couldn’t understand the way in which the news was initially embraced. While I expected that regardless of the wording outcome the market would find reason to move forward, I certainly didn’t expect the reaction that ensued, especially since the signal was so mixed and really offered nothing to get excited about, nor to fear.

No rate increase likely in April? That’s the best the FOMC could do?

But in a world where even the slightest of interest rate increases is feared, despite the past evidence suggesting that it should be embraced, the very thought of an increase possibly coming before June should have sent buyers heading for the exits.

Yet it was more than good enough, at least for a couple of hours, and actually represented the first in 7 trading sessions where the market reversed course intra-day, having had triple digit moves in opposite directions each and every one of those days.

Now clearly that has to inspire confidence for whatever is to come next.

It’s a good thing that I don’t believe very much in chart analysis, because it would otherwise be very tempting to notice that the previous 7 trading sessions shows a clear pattern of lower highs and higher lows when looking at the net change and an even more compelling series of higher highs and higher lows when looking at the DJIA closing levels.

Yet, at the same time, it has been nearly 4 weeks ever since the DJIA has been able to string together as little as 2 consecutive days of gains.

Perhaps not to coincidentally the last time the market was able to do that was on the occasion of Janet Yellen’s two day mandated congressional testimony during which time she re-iterated a dovish position regarding the initiation of interest rate increases. But barely 2 days later suspicion of her intentions set in as the Vice-Chairman of the FOMC, Stanley Fischer struck a more hawkish tone that just a week later seemed to be validated by the Employment Situation Report.

Despite the fact that there has been no other corroborating evidence to drive the data that the FOMC insists that it values, the market lost its forward momentum from February until Janet Yellen once again took center stage.

Why people just didn’t believe her all along is a mystery, just as it is a mystery that they again chose to believe her.

How long will the trust in her comforting words last this time?

Perhaps Friday’s GDP release, coming on the same day as a scheduled speech by Stanley Fischer will give us some idea of the staying power of the dove when faced with a circling hawk.

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

It was neither a good week to be DuPont (NYSE:DD) nor eBay (NASDAQ:EBAY) as both received analyst downgrades and saw their shares fall significantly when compared to the S&P 500 over the previous 7 sessions.

DuPont’s downgrade came amid worries of problems in its agricultural and chemical segments, along with concerns about the kind of currency headwinds that we’re likely to be hearing much more about in the coming weeks as the next earnings season gets ready to begin.

While those are all important issues, certainly important enough to see DuPont’s shares fall nearly 9% relative to the S&P 500 in the past week, there was lots of activist related news that may be setting the stage for a more contentious kind of fight than Nelson Peltz usually gets himself into. However, it is that activist position that the analyst recognized as a risk to his overall negative outlook as Peltz took to the media last week to be both more accommodating in his requests to DuPont, but also to voice his frustrations.

In the meantime the recent drop in share price is similar to other such drops seen in the past year that have been at levels representing higher lows and that have set the stage for climbs to higher highs.

While Dow Chemical (NYSE:DOW) may be suffering from some of the same issues as DuPont and has the added liability of oil interests in Kuwait, it is at least seemingly at peace with its own activist investors, or at the very least the relations are not overtly adverse at the moment.

Dow Chemical has been very much tied to energy prices these past few months even as its CEO Andrew Liveris has clearly stated that on a net basis the decrease in energy prices is beneficial to Dow Chemical, as it pays more for energy input than it depends on revenue from energy outputs.

Shares are ex-dividend this week and are attractively priced, although as long as energy is under pressure and as long as Liveris’ contention goes ignored, the shares will be under pressure. I currently own shares and Dow Chemical was for a long time a staple in my portfolio, both as a long term holding and as a frequent trading vehicle. At the current price I think a new position could be used as either a longer term holding or a serial trade.

eBay has been absent from my portfolio for a couple of months as I’ve grown too uneasy with it flirting near the $60 level to consider re-purchasing shares. Even the $57.50 level puts me at unease, but a recent downgrade calling into question the value of its PayPal unit in light of increasing competition, most recently from Facebook (NASDAQ:FB) was welcome and did bring shares closer to the upper level at which I had some comfort.

Shares recovered nicely from the initial reaction to the downgrade, but still trailed the S&P 500 by 5% over the past 7 trading sessions.

In the past I have very much liked owning eBay when it was mired in a tight range, yet still delivered appealing option premiums due to the occasional earnings related surprises. The story changed once activism entered the picture and shares started moving beyond the 2 year price range in the belief that PayPal had great value beyond what was already reflected in eBay’s price.

With each passing day, however, the luster of PayPal may be diminishing, even as it still remains an extremely valuable brand and service.

As it sits at the upper end of where I would consider taking a position, I would be very interested in either adding shares and selling calls or selling puts on any further drop in price. If selling puts this is one position that I wouldn’t mind taking assignment on in the event of an adverse price move, but would still look at the possibility of simply rolling over those puts to forward weeks.

AbbVie (NYSE:ABBV) is increasingly becoming an interesting company. While it certainly has some challenges as it’s chief revenue generating drug goes off patent next year, it has certainly been actively pursuing other lucrative areas, including management of Hepatitis C and cancer therapy, with its planned purchase of Pharmacyclics (NASDAQ:PCYC).

While shares have recovered somewhat from its recent low following an analyst downgrade, they are still nearly 8% lower YTD, but the company is certainly not standing still. In addition to upside potential, the shares offer attractive option premiums and an upcoming dividend that’s well ahead of that offered by its one time parent.

I’m not much of a video gamer even though I can get easily get sucked in by useless activities of a repetitive nature. My guess is that a combination of lack of skill, lack of attention span and allegiance to pinball have kept me indifferent to much of the last 25 years of home entertainment.

This week, however, GameStop (NYSE:GME) and Activision (NASDAQ:ATVI) have my attention.

I was actually happy to see my shares of GameStop get assigned this past week ahead of earnings this week. The timing was good as its generous dividend was captured without having to think about the risk of its upcoming earnings.

GameStop is a company that many have written off for years, pointing toward its paleolithic business model, the challenges of brick and mortar as well as streaming competition and the always large short interest looming over shares.

But somehow it continues to confound everyone.

With shares about 10% higher in March the option market is implying a price move of 7.8% upon earnings release. Meanwhile a 1% ROI may be able to be obtained even if shares fall almost 10% following the news. As with eBay, GameStop is a company that I wouldn’t mind owning if puts were at risk of being assigned. However, I’d be much more willing to sell puts if there was some price weakness heading into earnings. Otherwise, I would wait until after earnings and again consider the sale of puts in the event of a large price drop.

The last time I purchased Activision was after its own large price drop following earnings this past February when the company announced record earnings but provided weak forward guidance.

Shares, however, recovered quickly as Activision announced a large share buyback and increased dividend. Since then the shares have been trading in a fairly tight range and they are ex-dividend this week.

That dividend, however, is an annual one and on that basis is paltry. However, if shares end up being a short term holding the dividend yield can be very attractive, especially taken together with the option premiums available when selling calls.

Finally, LuLuLemon (NASDAQ:LULU) reports earnings this week and appears to be back in favor with shoppers as the company appears to be sufficiently distanced from its founder. Time may have been the best of all remedies to their particular problem as shares have shown great recovery.

The option market is implying an earnings related move of 8% and a 1% ROI may be able to be obtained when selling puts at a strike level 10.1% below Friday’s closing price. In the past, LuLuLemon has had some very significant earnings moves, with 15-20% moves not being out of the norm.

However, unlike a number of other stocks mentioned this week, LuLuLemon had nicely out-performed the S&P 500 over the past 7 trading sessions. For that reason I would be inclined to wait until after earnings are released and would consider either a sale of puts or a buy/write in the event of a large price drop.

Traditional Stocks: AbbVie, DuPont, eBay

Momentum Stocks: none

Double Dip Dividend: Activision (3/26), Dow Chemical (3/27)

Premiums Enhanced by Earnings: GameStop (3/26 PM), LuLuLemon (3/26 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.

Mar72015

Weekend Update – March 8, 2015

Daily Market Update

It seems as if it has been a long time since we were at that stage where good economic news was interpreted negatively and bad news was celebrated.

Lately, on the economic front there really hasn’t been any bad news, although depending on your perspective perhaps the good news just hasn’t been good enough. That might include unrequited expectations for a consumer buying frenzy that hasn’t yet materialized as a result of energy savings.

On the other hand the good news has been steady. Not terribly spectacular, but a steady climb toward an improved economic landscape for more and more people. Again, to put a little cynical spin on things, for some the climb has been far too slow and the 5.5% unemployment rate a bit illusory as so many may have simply dropped out of the employment seeking pool.

After a week in which the market moved in alternating directions on no news at all during the first 3 days of trading, it finally reverted to a paradoxical form when the Employment Situation Report was released on Friday morning.

A much better than expected number and with no revisions to previous months was great if you were among those looking for and finding a new job. What it wasn’t great for were the prospects of interest rates staying low and the Federal Reserve continuing with its “patience.”

At least that’s how the impact of the data was perceived. The good news was cast in a very negative way and the immediate reaction was not much different from the panic that might beset a grocery store when in August the Farmer’s Almanac may call for unusually brutal winter and people clear the shelves of milk in anticipation.

While there are still far too many people in need of jobs and newly created jobs aren’t necessarily of the same caliber of pay as those lost since 2008, for some the burden of the good news was too much to bear and the selling accelerated to a level not seen in quite a while, although never really to the point of toilet paper frenzy.

At the very least for those who practice a paradoxical approach to the interpretation of news, they were able to contain some of their emotions even as their irrational selling ruled the day. It was like still finding a carton of milk after the hordes had beaten you to the store, indicating that not everyone believed that Armageddon was the next stop.

I think that if I could choose, I’d much rather be trading stocks when there is an identifiable and consistent reaction to events, even if it may be less than rational. The early part of the week, moving up and down daily in individual vacuums could do little to create any kind of confidence regarding market direction. In essence, it’s easier to plan survival tactics when maniacs are in charge than it is when no one is in charge.

Those that were in charge on Friday based their actions on fear and dragged the rest of us down with them.

They were fearful that putting more people to work would accelerate the timetable for raising interest rates. That in turn would lead to greater costs of doing business and would be coming at a time that the rest of the world is lowering rates.

That would probably lead to even greater strength in the US Dollar, perhaps even USD and Euro parity, which only serves to accentuate those currency headwinds that have already been highlighted as reducing corporate earnings and would only further create competitive threats.

Cycles. You can’t live with them and you can’t live without them.

The reaction by traders on Friday would have you believe that none of this was previously known or suspected to be in our future.

The reality is that we all know that rates are going to go higher. It’s just a question of whether we follow Janet Yellen’s perceived path or Stanley Fisher’s accelerated path.

Personally, my fear is how we could be trading in a market that in the space of a single week, when both Yellen and Fischer expressed their opinions, could go from the comforting assurances from Janet Yellen to completely tossing out those assurances. That leads to the question of whether we believe she is simply wrong or just lying.

Neither of those is very comforting.

It’s actually even worse than that, as last week the market, following a positive response to Yellen’s comments turned on her barely 2 days later upon Fischer’s suggestion that interest rate increases would be coming sooner, rather than later.

On the other hand a more rational consideration of Friday’s reaction would suggest that maybe the reaction itself was irrational and unwarranted because Janet Yellen is in a better position to know about the timing or rate increases than a nervous portfolio manager and is probably much less likely to lie or mis-represent her intentions.

There’s always that.

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

Following Friday’s sell-off a number of positions appear to be more appropriately priced, however, the accelerating nature of the sell-off should leave some residual precaution as approaching the coming week, as even stock innocents were taken along for the plunge on Friday and could just as easily still be at risk.

Another large climb in 10 Year Treasury interest rates makes interest related investment strategies more appealing to some and the impending start of the European version of Quantitative Easing may also serve to siphon investment funds from US equity markets.

While I do have some room in my mind and heart for some more exciting kind of positions this week, my primary focus is likely to be on more mundane positions, especially if there’s a dividend at hand. This week’s selection is also more limited, than usual, as I expect my week to be ruled by some of that heightened caution, at least at the outset of trading.

Huntsman (NYSE:HUN), Coca Cola (NYSE:KO) and Merck (NYSE:MRK) seem to be appropriate choices for the coming week and all under-performed the S&P 500 during the past week, with the latter perhaps having more currency related considerations in their futures.

Trading right near its one year low is Huntsman Corp . It’s not a terribly exciting company, but at the moment, who really needs excitement?

Trading only monthly options I might consider the use of a longer term option sale, perhaps a May 2015, to further reduce the excitement, while bypassing earnings in late April and adding a decent sized premium to the potential return, in addition to the upcoming dividend and, hopefully, some capital gains from shares, as well.

There probably isn’t very much that can be said about Coca Cola that would offer any great new insights. With a number of potential support levels beneath its current price and a recently enhanced option premium, particularly in a week that it is ex-dividend, a position seems to offer a good balance of reward with risk.

While the company may still be floundering in its efforts to better diversify its portfolio of offerings and while it may continue to be under attack for its management, those may be of little concern for a very short term strategy seeking to capitalize on option premiums and the upcoming dividend. At its current price level, however, it is below its mid-point level range for the past 6 months and may offer some near term upside in the underlying shares in addition to the income related opportunities.

You really know that it’s no longer your “grandfather’s stock market” when big pharma is no longer the keystone in everyone’s portfolio and is no longer making front page new on a daily basis. Instead, increasingly big pharma is playing second fiddle to smaller pharmaceutical companies, at least in garnering attention, unless it is involved in a proposed buy-out or merger, as is increasingly the case.

On a steady price decline since the end of January 2015, when the market started its own party mode, Merck shares are also ex-dividend this week and offer a better premium proposition than is normally the case when doing so.

Dow Chemical (NYSE:DOW) has for the past few months been held hostage by energy prices and will likely continue so while the supply – demand situation for oil evolves for better or worse.

The only good news is that while it may be unduly castigated for its joint energy holdings the impact has been relatively muted. During the past few months as shares have become more volatile its option premiums have understandably been increasing and making it again worthy of some consideration.

Although it doesn’t go ex-dividend for another 3 weeks I would already place my sights on trying to capture that dividend and would consider a longer term option contract in order to attempt to lock in several weeks of premiums in addition to the dividend as oil is likely to go up and down man
y times during that time frame.

Sometimes, the best approach during periods of advanced volatility is to try and ride things out by placing some time distance between your short option positions and events.

I was considering adding more shares of Mosaic (NYSE:MOS) a few weeks ago, as it passed the $52.50 level, thinking that it might be ready for a breakout, perhaps bringing it back to levels last seen before the breakdown of the potash cartel. I can’t really recall why I ultimately decided to look elsewhere, but instead shares went into another break-down.

That breakdown last week will hopefully be much smaller, since I already own shares and will take nowhere near as long to recoup the losses.

The nearly 8% decline in shares last week for no discernible reason has now brought them back to the upper range of where I had most recently been comfortable adding shares. While the broader macro-economic picture may suggest less acreage being put to use to add to the supply of already low priced crops there isn’t such a clean association between commodity prices and fertilizer prices.

With its ex-dividend date having just passed and with the recent trend still pointing downward, Mosaic may be a good candidate to consider the sale of put options as a means of potential entry into a long position, but at an even lower price.

Finally, for the third consecutive week I would consider establishing a position in shares of United Continental (NYSE:UAL) as part of a paired trade with an energy holding, especially if you crave the kind of excitement that Huntsman may not be able to provide.

I’ve been using Marathon Oil (NYSE:MRO) as the matching energy position and had my UAL shares assigned this past Friday, despite a large price drop for the second consecutive week just before expiration.

With the energy holding still in my portfolio I would consider another purchase of UAL, particularly if there is weakness in its shares to open the week. As has been the case previously, because of the volatility in shares the option premiums have been very generous. However, rather than directly taking advantage of those premiums, my preference has been to balance risk with reward and instead have opted for lower premiums by selecting deep in the money strike prices. Doing so allows shares to drop in price while still being able to deliver an acceptable ROI for the week.

Traditional Stocks: Dow Chemical

Momentum Stocks: Mosaic, United Continental

Double Dip Dividend: Huntsman (3/12), Coca Cola (3/12), Merck (3/12)

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.