Feb132015

Weekend Update – February 15, 2015

Weekend Update

You would think that when the market sets record closing highs on the S&P 500 that there would be lots of fireworks after the fact and maybe lots of excited anticipation before the fact.

But that really hasn’t been the case since 2007.

The “whoop whoop” sounds you may have heard coming from the floor of the NYSE had nothing to do with pitched fervor, but rather with traditional noise making at 3:33 PM on the Friday before a 3 day holiday.

The whooping noise was also in sharp contrast to the relative calm of the past week and it may have been that calm, or maybe the absence of anxiety, that allowed the market to add another 2% and set those record highs.

After a while you do get tired of always living on the edge and behaving in a hyper-caffeinated way in response to even the most benign of events.

Even back in 2007 as we were closing in on what we now realize was the high point for that year, there were so many records being set, seemingly day in and out, that it began to feel more like an entitlement rather than something special.

You whoop about something special. You don’t whoop about entitlements. There was no whooping on Friday at 4 PM. instead, it was a calm, matter of fact reaction to something we had never seen before. New highs are met with yawns and new heights aren’t as dizzying as they used to be, especially if you don’t look down.

When your senses get dulled it’s sometimes hard to see what’s going on around you, but there’s a difference between maintaining a sense of calm and having your senses dulled to the dangers of collateralized debt obligations or other evils of the era.

This calmness was good.

As opposed to those who refer to pullbacks from highs as being healthy, this calm character of this climb to a new high was what health is really all about. I feel good when my portfolio outperforms the market during a down week, but the end result is still a loss. When I really feel great is when out-performing during an up week.

Both may feel good, but only one is good in absolute terms. From my perspective, the only healthy market is one that is moving higher, but not doing so recklessly.

This week, was a continuation of a month that has characterized by calm events and an appropriate measure of acceptance of those events while moving to greater heights in a methodical way

While it may be good to not see some kind of unbridled buying fervor break out when records are reached, it does make you wonder why the same self control can’t be put on when things momentarily appear dire, as there have certainly been pl
enty of near vertical declines in the past few months that just a little calmness of mind could have avoided.

Coming from the most recent decline that ended in January 2015, the move higher has presented a circuitous path toward Friday’s new high close.

Instead of the straight line higher or the “V-shaped” recoveries that so many refer to, and that have characterized upward reversals in the past few months, this most recent reversal has been a stagger stepped one.

Rather than coming as a burst of unbridled excitement, the market has been taking the time to enjoy and digest the ride higher.

The climb was odd though when you consider that oil prices had been moving strongly higher, retail sales were disappointing, interest rates were climbing and currency troubles were plaguing US company profits. All these were happening as gold, long a proxy for the investor anxiety was gyrating with large moves.

But perhaps it was a sense of serenity and calm from overseas that offset those worrying events. Greece and the European Union appeared to be closer to an agreement on debt concerns and another Ukraine peace accord seemed likely.

The stock market simply decided that nothing could possibly happen to derail either of those potential agreements.

So there’s calmness, dulled senses and burying your head in the sand.

This week the calmness may have been secondary to some denial, but given the result, I’m all for denial, as long as it can keep reality away just a little longer.

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

What surprises me most, particularly considering a portfolio that doesn’t often hold very many DJIA positions, is that this week there are 5 DJIA members that may have reason for garnering attention.

It has been a bit more than two years since I last owned American Express (NYSE:AXP). Up until 2015, if you had looked at its performance in the time since I last owned it and happened to have also been in a vacuum at the time, it looked as if it had a pretty impressive ride.

That impression would have been upset if the vacuum was disrupted and you began to compare its performance to the S&P 500 and especially if comparing it to its rivals.

That ride got considerably more bumpy this past week as it will be losing a major co-branding partner, Costco (NASDAQ:COST) in 2016. While the possibility of that partnership coming to an end had been well known, the market’s reaction suggests that either it was ignored or calmness doesn’t reside when mediocre rewards programs are threatened with extinction.

But a 10% plunge seems drastic. The co-branding effort allowed American Express to dip its toes into the credit card business and deal with normal folks who don’t always pay their credit card charges in full, but do pay interest charges. Given the Costco shopper demographic that seemed like a nice middle ground for risk and reward that will be difficult to replace. However, American Express shares are now on sale, having reached 16 month lows and the excitement injects some life into its option premiums.

Intel (NASDAQ:INTC) recovered some of its losses since my last purchase, but not enough to make it within easy striking distance of an assignment.

While it was a great performer in 2014 it has badly trailed the S&P 500 in 2015. While it may be subject to currency crosswinds, nothing fundamental has changed in its story to warrant its most recent decline, particularly as “old tech” has had its respect restored.

While its option premium is not overly exciting enough to consider using out of the money options, there is enough reason to believe that there is some additional potential for price recovery left in its shares to consider not covering all new shares.

Coca Cola (NYSE:KO) continues to be derided and maybe for good reason as it needs something to both change its image of being out of touch with contemporary tastes and some diversification of its product lines.

The former isn’t likely to happen overnight, nor is any revenue related calamity expected to strike with suddeness, at least not before its next dividend, which is expected in the next few weeks. In the meantime, as with Intel, there may be some reason to believe that some price recovery may be part of the equation when deciding to sell calls on the position.

In the cases of DJIA components Johnson and Johnson (NYSE:JNJ) and General Electric (NYSE:GE) their upcoming ex-dividend dates this week add to their interest.

Johnson and Johnson, when reporting earnings last month was one of the first to remind us of the darkness associated with a strong US dollar and its shares are still lower, having trailed the S&P 500 by nearly 8% since earnings release on January 20th. Most of that decline, however, has come since the market began its turnaround once February started.

Uncharacteristically, Johnson and Johnson’s option premium has become attractive, even in
a week that has a significant dividend event. As with its fellow DJIA members, Intel and Coca Cola, I would consider some possibility of trying to also capitalize on share appreciation to complement the option premium and the dividend.

General Electric is the least appealing of the DJIA components considered this week as its option premium is fairly small as it goes ex-dividend. However, General Electric is a stock that I repeatedly can’t understand why I haven’t owned with much greater regularity.

It has traded in a fairly predictable range, has offered an excellent and growing dividend and reasonable option premiums for an extended period of time. That’s a great combination when considering a covered option strategy.

Add Kellogg (NYSE:K) to the list of companies bemoaning the impact of a strong dollar on their earnings and future prospects for profits. Down nearly 5% on its earnings and a more impressive 9.6% in the past 3 weeks it also has to deal with falling cereal sales, which likely played a role in analyst downgrades this week. While currencies continually fluctuate and at some point will shift to Kellogg’s benefit, those sagging sales adjusted for currency effect, is a cause for concern, but not right away.

As with American Express that price decline brings shares to a more reasonable price point, well below where I last owned shares less 2 months ago. With an upcoming dividend in the March 2015 option cycle and only offering monthly options, I would consider selling March options bypassing what remains of the February contract in anticipation of some price recovery.

Facebook (NASDAQ:FB) has been uncharacteristically quiet since it reported earnings last month, as investor attention has shifted to Twitter (NYSE:TWTR).

Its share price has been virtually unchanged over the past 3 months but its option premiums have remained very attractive and continue to be so, even as it may have recently fallen off investor’s radar screens despite having avoided mis-steps that characterize so many young companies with great growth.

While I generally consider the sale of puts in advance of earnings and frequently would prefer not to take assignment of shares, Facebook is an exception to that preference. While I would consider entering a position through the sale of puts if shares move adversely the market for its options is liquid enough to likely allow put rollovers, or if taking assignment create an easy path for selling calls on the position.

Finally, I don’t really begin to make believe that I understand the dynamics of oil prices, nor understand the impact of prices on the various industries that either get their revenue by being some part of the process from ground to tank or that see a large part of their costs related to energy pricing. I certainly don’t understand “crack spreads” and find myself more likely to giggle than to ask an informed question or add an insight when the topic arises.

United Continental Holdings (NYSE:UAL) is one of those that certainly has a large portion of its costs tied up in fuel prices. While hedging of fuel can
certainly be a factor in generating profits, it can also be a tool to generate losses, as they have learned.

With about $1 billion in hedging related losses expected in 2015 United shares are down nearly 10% since having reported earnings. That’s only fair as its price trajectory higher over the previous months was closely aligned with the perception that falling jet fuel prices would be a boon for airlines, without real regard to the individual liabilities held in futures contracts.

As with energy companies over the past few months the great uncertainty created by rapidly moving prices created greatly enhanced option premiums. With oil prices having significant gains this week but still a chorus of those calling for $30 oil, it’s anyone’s guess where the next stop may be. However, any period of stability or only mildly higher fuel prices may still accrue benefit to those airlines that had been hedged at far higher levels, such as United.

While we think about an “energy sector,” there’s no doubt that its comprised of a broad range of companies that fit in somewhere along that continuum from discovery to delivery. It’s probably reasonable to believe that not all portions of the sector experience the same level of response to price changes of crude oil.

Western Refining (NYSE:WNR) is ex-dividend this week and reports earnings the following week. It’s in a portion of the energy sector that doesn’t suffer the same as those in the business of drilling when crude oil prices are plunging, as evidenced by the refiner’s performance relative to the S&P 500 in 2015.

If previous earnings reports from many others in the sector are to act as a guide, although there have been some exceptions, any disappointing earnings are already anticipated and Western Refining’s report will be well received.

For that reason, I might consider, as with Kellogg, bypassing the February 2015 option contract and considering a sale of the March 2015 contract, which also provides nearly a month for share price to recover in the event of a move lower upon earnings.

Traditional Stocks: American Express, Coca Cola, Intel, Kellogg

Momentum Stocks: Facebook, United Continental Holdings

Double Dip Dividend: General Electric (2/19), Johnson and Johnson (2/20), Western Refining (2/18)

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.

Jan162015

Beware of Earnings Unless You Dare

No categories

Although the first week of this most recent earnings season has been less than spectacular, as the financial sector has suffered under a low interest rate environment, I continue to look at the more speculative portion of my portfolio as being available to generate quick income from stocks before or after earnings are announced.

During a week that stocks, interest rates, oil, precious metals and currencies have all gyrated wildly, what’s a little added speculation with earnings?

The process of trading in anticipation or after earnings news is one that seeks to balance risk with reward, accepting a relatively small reward in exchange for taking on a level of risk that appears to be less than the market is expecting.

The basic concepts and considerations in the approach are related to:

  • personal ROI goal;
  • individual temperament for risk, and
  • time and ability to trade in or out of risk in response to events.

The concepts are covered in previous articles, but in summary, the objective is to find a stock that can deliver an acceptable ROI when selling a weekly put option at a strike level that is lower than the bottom of the range defined by the option market’s implied volatility for that stock.

For my tolerances I seek a 1% ROI for a weekly position at a strike price that is outside the boundaries implied by the option market.

While achieving the desired ROI is an objective metric, and should be done within the context of acceptable risk, the decision process to initiate a trade is frequently based upon share behavior.

My preference, when it appears that both the risk and the reward measures are satisfactory, is to sell puts into share weakness in advance of earnings. If that condition isn’t met, I may also consider the sale of puts after earnings if there is significant price weakness after the report.

After Friday’s strong close, which may have come as a surprise to most everyone after a week of declines, many stocks reporting earnings next week may now be coming off of Friday’s advances. Insofar as Friday’s performance may have represented a reflexive bounce higher, I would be initially reluctant to jump into any put sale related trades for concern about an equally reflexive drop lower.

However, a number of the positions covered in this article have already suffered large losses in advance of their earnings report, some perhaps due to altered guidance and many are already well off from their highs, even as the S&P 500 is barely 4% lower after a quick triple bottom.

I tend to be more interested in those stocks that have already fallen than I am in those whose shares are moving higher prior to earnings, as that moves the strike level that I would have to use to achieve my desired 1% ROI for the week higher, and may also shift premium enhancement on the call side of the equation, rather than to the put side, which also contributes to a lower ROI.

While the traditional opinion and belief is that put sellers must be willing to own the shares in which they have sold puts, I often do not want to take ownership unless an ex-dividend date is approaching. While many sell puts in order to gain an entry into share ownership at a lower and more attractive price, I do so generally in order to capture the income stream from the option sales.

For that reason, it is important to have liquidity in the options market in order to be able to concurrently close the position and open a new one for a forward week if assignment is unwanted. Ideally, that would also be done at a lower strike price, however, in an otherwise low volatility environment, as we currently have, despite some recent increase, that is a difficult objective unless there is additional stock specific volatility, as may be seen in the energy sector currently.

Whether able to rollover to a lower strike level or not, the primary goals are to delay or prevent assignment and to collect additional net premiums in an attempt to ultimately see the position expire or be closed.

Among the stocks for consideration this week are many that can be readily recognized for inherent risk, which may also influence price behavior on a regular basis regardless of upcoming earnings or guidance.

This week I’m considering the sale of puts of shares of Cree (NASDAQ:CREE), Freeport McMoRan (NYSE:FCX), F5 Networks (NASDAQ:FFIV), General Electric (NYSE:GE), International Business Machines (NYSE:IBM), Intuitive Surgical (NASDAQ:ISRG), Netflix
(NASDAQ:NFLX), Starbucks (NASDAQ:SBUX), SanDisk (NASDAQ:SNDK) and United Continental Holdings (NYSE:UAL).

 

 

Generally I don’t spend too much time considering the relative merits of the stocks being considered for earnings related trades, preferring to remain agnostic to those issues and simply following guidelines outlined above.

Looking at this week’s list, there is no shortage of stories in advance to scheduled earnings, such as SanDisk releasing altered guidance or Freeport McMoRan feeling the sudden weight of collapsing copper prices, in addition to its growing exposure to gold and energy prices.

While I don’t use margin to add stock positions, it is often perfectly suited for this kind of trading activity. I generally use these trades in an account hat has margin privileges. While selling cash secured puts decreases the amount of margin that is available to you, it does not draw on margin funds and, therefore, doesn’t incur interest expenses. Those expenses will only be incurred if the shares are assigned to you and are subsequently purchased through the use of the credit extended.

One thing noticed among the positions cited above is that fewer are meeting my criteria and being assigned a “YES” designation. That may reflect an increasing sense of pessimism among option market traders as compared to previous quarterly earnings periods. Normally I would only consider those with a “YES” rating, but may now also consider those that are “MARGINAL.”

If considering the sale of put options, there is always a possibility of early assignment, especially if shares go far below the strike price and when using a weekly contract. If that occurs, the seller of the put contracts should be prepared to either own shares or attempt to rollover the put option to a forward date.

The lower the volatility environment the less benefit there is to the put holder to delay assignment for deep in the money positions. In the event of early assignment the opportunity is then created to begin managing shares and enhancing return through the sale of call options. However, where possible, it may be best to consider pre-emptive action in order to prevent or delay assignment.

Finally, in the current market environment, moves, especially downward, seem to be sudden and magnified. If pursuing any of these earnings related trades it helps to have exit strategies planned in advance and to limit falling prey to surprise, as that may be the one thing that can be counted upon.

Jan22015

Weekend Update – January 4, 2015

Weekend Update

If you follow the various winning themes for the past year, any past year for that matter, the one thing that seems fairly consistent is that the following year is often less than kind to the notion that good things can just keep happening unchanged.

Often the crowd has a way of ruining good things, whether it’s a pristine and previously unknown hidden corner of a national park or an obscure trend or pattern in markets.

Back in the days when people used to invest in mutual funds the sum total of many people’s “research” was to pick up a copy of Money Magazine and see which was the top performing fund or sector for the year and shift money to that fund for the following year.

That rarely worked out well.

You don’t have to think too far back to remember such things as “The January Effect” or “Dogs of the Dow.” The more they were written about and discussed, and the more widely they were embraced, the less effective they were.

The “Santa Claus Rally” wasn’t very different, at least this year, even as the final day of that period for a brief while looked as if it might end with an upward flourish, but that too disappointed.

Remember “Sell in May and then go away”?

Like most things, the more you anticipate joining in on all of the fun that others have been having, the more likely you’re going to be disappointed.

The latest patterns getting attention are the “years ending in 5” and “Presidential election cycles in years ending in 5.” They may have some history to back up the observations, but seemingly overlooked is the close association between those two events, that are not entirely independent of one another.

Since 2015 happens to be both a year ending in “5” and the year preceding a presidential election, it is clear that the only direction can be higher. What that leaves is the debate over how to get to the promised land. That, of course, is the issue of the merits of active versus passive management of stock portfolios.

For purposes of clarity, the only “merit” that really matters is performance.

Those who have used a simple passive strategy over the past two years, perhaps as simple as being entirely invested in the SPDR S&P 500 Trust (NYSEARCA:SPY) to the exclusion of everything else, would have been hoisted on the shoulders of the crowd while hedge fund managers would have been trampled underneath.

The past two years haven’t been especially kind to hedge fund managers, b
ut they have been trampled for very different reasons in that time.

In 2013 who but a super-human kind of investor could have kept up with the S&P 500 while also trying to decrease risk? It’s not terribly easy to match a 30% gain. Hedging has its costs and if markets go only higher those costs simply eat into profits.

In 2014, though, it was a different issue, as the only people who really prospered, in what was still a good year, were those who didn’t try to outsmart markets, as it was almost impossible to even begin classifying the market in 2014. The continual sector rotation either required lots of luck to be continually on the right side of trades or lots of real skill and talent.

Luck runs out. Skill and talents have greater staying power and there’s a reason that only a handful of money managers are well known and regarded for more than a year at a time.

What is fascinating about the market is that even as it ended the year with a very respectable gain those who tried to finesse the market by actively trading don’t have the same kind of elation about its performance.

Just ask them.

So the question is whether the simplicity of a passive strategy is going to again be superior to an active strategy in 2015

As an active trader I’d like to think that passivity will be passé as the new year begins. Of course, you do have to wonder how that arbitrary divide that begins after New Years can actually create an environment with a different character, but somehow that arbitrary divide creates a situation where very few years are like the year preceding it.

I have reason to believe that I have neither skill nor luck, so can only count on the observation that a good thing becomes less of a good thing with time.

Popularity is superficial, while history runs deep.

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

I also like to think that I’ve never really had an original thought.

This week’s potential stock selections to begin 2015 may be an excellent example of the lack of originality, as all of the names are either recent selections, purchases or assigned positions. Add to that their general lack of exciting qualities and you have a really impotent one – two punch to start the year.

With earnings season set to begin the week after this coming week there’s plenty of time for excitement. However, with the upcoming week featuring an FOMC Statement release and the Employment Situation Report, there’s already enough excitement in the upcoming week to want to add to it.

The scheduled events of this week also offer more than enough opportunity to add to this past week’s broad weakness, particularly if the FOMC emphasizes strong GDP data or there is unusually large employment growth, either of which could signal interest rate increases ahead.

In that kind of environment, even if widely expected, the immediate reaction would likely be a shock to the system and I would prefer my exposure to be offset by the security of size and quality. Characteristics that coincidentally may be found in components of the S&P 500, so favored by passivists.

Among those are three members of the DJIA.

General Electric (NYSE:GE), Intel (NASDAQ:INTC) and Verizon (NYSE:VZ) are among this week’s list.

Intel is a little bit of an anomaly to be included in the list, as it was the best performing of the DJIA stocks in 2014 and might, therefore, be reasonably expected to lag in 2015. However, I think that those who would have been prone to pile into the stock because of its performance in the past year would have already done so, as its most recent performance has trailed the S&P 500.

What appeals to me about Intel’s shares for a very short term trade is that the crowd turned very suddenly on them on Friday, giving up nearly all of an almost 3% gain earlier in the trading session. With that arbitrary divide creating its own unique trading dynamics, Intel may not receive quite the same attention as General Electric and Verizon, as those may garner notice because they are among those “dogs” that still have faithful adherents.

But beyond that, Intel still has a fundamentally positive story behind its climb in 2014 and may again be well aligned with the fortunes of a Microsoft (NASDAQ:MSFT), as it continues on its return to relevance. For a short term trade in advance of its upcoming earnings report on January 15, 2015, I wouldn’t mind it trading listlessly in return for the option premium.

General Electric is simply at a price point that I find attractive, having recently had shares assigned. It certainly hasn’t been a very attractive stock over the years for much of anything other than a covered option strategy, but it has been well suited for that, as long as it can continue to trade in a relatively narrow range.

Verizon will be ex-dividend this week and is down nearly 9% from its high in November. Bruised a little due to increasing competition among mobile providers and sustaining the expenses of subsidizing the iPhone, it will report earnings in less than 3 weeks and I might want to either be out of any position prior to then, or if not, use an extended weekly option if having to rollover a position to acquire some additional premium in protection, in the event of an adverse response to earnings.

Dow Chemical (NYSE:DOW) has had its fortunes most recently closely aligned to the energy sector. WHile owning a more expensive lot, I’ve traded other lots as shares have fallen in an effort to generate quick returns from option premiums and share appreciation.

As those shares again approach $45.50 I would like to do so again, but recognizing that oil is at a precarious level, as it gets closer to the $50 level, which if breached, could pull Dow Chemical even lower.

That increased volatility due to the uncertainty in the energy sector has made the option premiums much more appealing. However, even with that challenge, Dow Chemical has the advantage of a highly competent and long serving CEO who is increasingly responsive to the marketplace as he has activists breathing down his neck.

The Mosaic (NYSE:MOS) story isn’t one of being held hostage by an energy cartel and falling prices, as is the case with Dow Chemical, but rather it fell prey to the collapse of the much less well known potash cartel.

Hopefully, the time frame will be far shorter for Dow Chemical than it has been for Mosaic, as I’ve been sitting on some much more expensive shares for quite a while. In the interim, however, Mosaic has offered many opportunities for entering into new positions in the hopes of quick assignment and capturing option premiums, dividends and some occasional capital gains on shares.

While its next dividend is till some months away, it is now quickly again in the price range at which I like to consider adding shares again, although it could still go even lower. However, as long as it does continue trading in this relatively narrow range, it is capable of generating serial option premiums and even if its performance may seem mediocre on a yearly basis, its ROI can be very attractive.

I don’t get terribly excited about food stocks, but when looking for some relative calm, both Campbell Soup (NYSE:CPB) and Kelloggs (NYSE:K) may offer some respite from any tumult that may confront the market next week.

Both were recently assigned and at these levels I wouldn’t mind owning them again. In the case of Campbell Soup, that means the opportunity to capture its dividend and not be concerned about its next earnings until the March 2015 option cycle.

Kellogg is a stock that I would consider buying more often, however, the decision is related to how closely its price is to one of the strike levels on its monthly options.

Unlike Campbell Soup which has strikes at $1 intervals and many weekly options have $0.50 intervals, Kellogg options utilize $2.50 intervals, which can make the premiums relatively unattractive if the share price is at a distance from the strike at the time of the proposed sale of option contracts.

Finally, my plan to add shares of eBay (NASDAQ:EBAY) a couple of weeks agowent unrequited. The fact that its shares are now 2% lower doesn’t necessarily make me salivate over the prospects about adding shares now, as the past two weeks could have represented lost opportunities to generate option premiums and in a position to do so again in the coming week, as shares seem to be settling in at this higher level.

The coming year may be a fascinating one for eBay as the speculation grows about the planned spin off of PayPal, which may never make it to an IPO as it may be coveted by another company.

Of course, who might benefit from that detour is also open to question as eBay itself may be in the crosshairs of an acquiring behemoth.

For now, I still like owning eBay shares and usually selling near or in the money calls, but I would increasingly consider setting aside a portion of those shares for the kind of capital gains that so many have moaned about not having seen over the years as slings and arrows have consistently been thrown in eBay’s direction.

Traditional Stocks: Dow Chemical, eBay, General Electric, Intel, Kellogg, Mosaic

Momentum Stocks: none

Double Dip Dividend: Campbell Soup (1/8), Verizon (1/7)

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.

Dec62014

Weekend Update – December 7, 2014

Weekend Update

Trying to listen to the President put forth some statistics regarding the employment situation in the United States this past week was difficult, as my attention was captured by the festive holiday backdrop.

Holding a prominent position next to our nation’s flag was what appeared to be a symbol that perhaps reflected official endorsement of Bacchanalian celebrations, together with the more traditionally accepted holiday decorations. Enlarging the photo did nothing to re-direct my imagination.

The President’s exploring the good news contained in the Employment Situation Report and trumpeting the trend in employment statistics may have been his muted version of a Bacchanalian victory lap, of sorts.

Focusing on that background item for as long as I did in wonderment caused me to lose sight of what should probably be recognized, as Friday’s Employment Situation Report indicated the addition of more than 300,000 new jobs in the past month, as well as a substantial upward revision to the previous month.

I guess that I wasn’t alone in losing focus about what’s been going on in the economy, as later that day during one of their now ubiquitous polls, CNBC viewers were asked whether President Obama was good for the stock market.

I suppose the answer may depend on the criteria one uses to define “good.” as well as whether one believes that things would have been better without him or his economic policies, or whether their time frame is forward or backward looking. read more

Sep132014

Weekend Update – September 14, 2014

Weekend Update

Two weeks ago the factors that normally move markets were completely irrelevant. Instead, investors focused much of their attention on the tragic story that ended with the passing of Joan Rivers, while allowing the market to go on auto-pilot.

The fact that economic and geo-political news was ignored during that week wasn’t really much of a concern as markets went on to secure their fifth straight weekly gain.

This past week was essentially another one where the the typical kind of news we look to was irrelevant, at least as far as gaining our attention. This week most of our efforts focused on the unfortunate story of a talented, but abusive football player and the introduction of new products from Apple (AAPL).

There was a time, not so very long ago, when that football player was considered a soft spoken role model. In fact, somewhere is a photo of my wife, in a Baltimore Ravens jersey, and he at a charitable event, one of many that he attended and supported.

Amazingly, as the home Baltimore Ravens played their game on Thursday night, there were reportedly many female fans wearing the jersey of that abusive player, even though there were plenty of offers and incentives to exchange such jerseys in for pizza, drinks and other items.

The memory of the past is apparently more relevant than the reality of the present, sometimes.

There was a time, also not so very long ago, that Apple’s fate was the same as the fate of the markets, except that when Apple went higher, the market lagged and when Apple went lower, the market outpaced in the decline. Now, its ability to lead is less evident and so its place in the week’s news was mostly as a products release event, rather than as a marking moving event.

Those days of past are now irrelevant and Apple’s reality is tied and the market routinely part ways.

Unfortunately, that football player’s brutish actions made the new iPhone 6’s planned publicity campaign appear to be ill-conceived. Equally unfortunate was that this past week’s irrelevancies weren’t sufficient to allow markets to return to auto-pilot and instead snapped that weekly winning streak, as fears of liquidity may have captured investor’s attention.

Weeks filled with irrelevancy are likely to come to an end as the coming week is filled with lots of challenges that could easily build upon the relatively mild losses that broke that successive streak of weekly gains.

In the coming week there is an FOMC statement release as well as the Chairman’s press conference. Many are expecting some change in wording in the FOMC statement that would indicate a willingness to commence interest rate increases sooner than originally envisioned. That could have an adverse impact on equity markets as a drying up of liquidity could result.

Perhaps even more of a impetus for decreased liquidity is the planned Ali Baba (BABA) IPO. Likely to be the largest ever for US markets, the money to pay for those shares has to be coming from someplace and could perhaps have contributed to this week’s preponderance of selling. It’s not too likely that a lot of money will be coming off the sidelines for these share purchases, so it’s reasonable to expect that funds have been and will be diverted.

Unfortunately, the IPO comes at the end of the week, so I don’t expect much in the way of discretionary spending to buy markets before that, unless some nice surprise in the way the FOMC’s statement is interpreted.

Let’s not also forget this week’s referendum on Scotland’s independence. No one knows what to expect and a nervous market doesn’t like surprises, nor sudden adverse shifts in currency rates.

It’s hard to know whether these events will be more relevant than some of the irrelevancies of preceding weeks, but they certainly represent upcoming challenges.

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

This is a week that I don’t have too much interest in earnings or in “momentum” kind of stocks, unless there’s also a dividend involved in the equation. Having watched some well known and regarded companies take their knocks during this past week, yet fully aware that the market is not even 2% below its recent high level, there’s not too much reason to be looking for risk.

As volatility rises concurrent with the market dropping, the option premiums themselves should show evidence of the perceived increased risk and can once again make even the most staid of stocks start looking appealing.

With my personal cash reserves at lower levels than I would like, I’m not eager to make many new purchases this week, despite what appear to be some relative bargains.

While the market was broadly weak I was fortunate in having a few positions assigned and may be anxious to re-purchase those very same positions at any sign of weakness or even if they stay near their Friday closing prices.

Those stocks were British Petroleum (BP), T-Mobile (TMUS) and Walgreen (WAG). Although they’re not included in this week’s listing, they may be among the first potential purchases that I look toward completing and may be satisfied being an onlooker for the rest of the week.

Among other stocks that may warrant some interest are those that have under-performed the S&P 500 since the beginning of the summer, a completely arbitrary measure that I have been using for the past few weeks, particularly during the phase of the market’s continuing climb.

^SPX ChartGeneral Electric (GE) is
one of those staid stocks whose option premiums of late have been extraordinarily low. It goes ex-dividend this week and is starting to look a little bit more inviting. Having now spun off some of its financial assets and made preparations to sell its appliances divisions to my old bosses at Electrolux (ELUXY), General Electric is slowly refocusing itself and while not having looked as a stellar performer, it has greatly out-paced the S&P 500 since the bottom of the financial crisis in 2009. In hindsight it is a position that I’ve owned far too infrequently over those years.

Dow Chemical (DOW) and DuPont (DD) have both lagged the S&P 500 over the past two months, much of it having come in the past week. Those drops have brought shares back to levels that I would entertain share re-purchases.

The option premium pricing may indicate some greater risk in Dow Chemical, however both companies have some activists interests that may help to somewhat offset any longer term pressures.

I’ve been waiting for Verizon (VZ) shares to drop for a while and while it has done so in the past week, it’s still not down to the $47.50 level that I my eyes on. However, its current level may offer sufficient attraction to re-enter a position in advance of its upcoming, and increased dividend.

Without a doubt the mobile telephone sector has been an active one of late and I suspect that T-Mobile’s very aggressive strategy to acquire customers will soon show up in everyone’s bottom line and not in the way most would like. However, with strong price support at $45, a combination of option premiums and dividends could help ownership of Verizon shares offset those pressures while awaiting assignment of shares.

While Intel (INTC) hasn’t followed the pattern of the preceding selections and has performed well since the beginning of summer, it did give back enough ground in the past week to return to a level that interests me. On the downside is the credible assertion that perhaps shares of Intel have accelerated too much in the past few months and can be an easy target for any profit taking. WHile that may certainly be true, by all appearances the once moribund Intel has new life and I suspect will be reflected in earnings, should the goal of short term ownership turn into something longer.

As with Verizon, and hopefully General Electric, as its option premiums could still stand to improve, the combination of a strong dividend yield and option premiums can be helpful in waiting out any unexpectedly large and sudden price declines.

Given the mediocrity of performance by eBay (EBAY) over the past couple of years, it may be hard for anyone to find much relevance in the company, except for that potential jewel, PayPal. I purchased more shares last week and did expect that there might be some downside pressure if Apple announced a new payment system, as had been widely expected. Moving higher into the upcoming Apple event shares did go strikingly lower once details of “Apple Pay” became known. The use, however, of an expanded weekly option provided a rich premium related to the uncertainty surrounding the Apple event and time to dig out of any hole.

The bounce back came sooner than expected as some rumors regarding Google’s (GOOG) interest in eBay made their rounds. Whether valid or not, there’s not too much question that the pressure to consider a spin off of the PayPal unit is ramping up and may, in fact, be seen as necessary by eBay if it perceives any erosion on PayPal’s value as a result of a successful Apple Pay launch. In such a case, it’s far better to spin off that asset while it is still in its ascendancy, rather than to await some evidence of erosion. That is known as the “take the money and run” strategy and may serve eBay’s interests well, despite earlier assertions that PayPal functioned best and provided greatest value as an eBay subsidiary division.

While Visa (V) has announced its alignment with Apple, MasterCard (MA) always seems to be somewhat left out or at least not in a proactive position in the changing payments landscape. Yet even while it has ceded much of the debit card arena to Visa, it continues to be a very steady performer trading in a reasonably narrow range and offering an equally reasonable premium for the risk of owning shares. While selling those options also gives up the potential for upside share appreciation, that upside potential has been limited since the stock split. Much in the way as with eBay, the consideration of a covered option trade may be warranted and a means to generate returns from a position that has little net movement.

Las Vegas Sands (LVS) is the lone momentum stock for the week and it has a dividend this week that warrants some consideration. Having been brutalized in the last few weeks as the gaming sector, particularly those with interests in Macao have seen significant price erosion it appears to be developing some support in the $62.50 level. While I wish I knew that with certainty, what I do know with some degree of confidence is that when Las Vegas Sands does find that level of support it has consistently been a very good covered options position.

Finally, I jumped the gun with one of this week’s selections, having purchased shares of Cypress Semiconductor (CY) on Friday afternoon. I particularly like this company for non-investing reasons because it has been a fertile breeding ground for innovation in an number of different areas. However, by the same token, the same broad thinking that allows it to serve as an incubator also has its CEO spend too much time in the spotlight on policy related issues, when all I really want is for its share price to grow and to return to profitability.

In this case I was eager to purchase shares again in anticipation of its upcoming dividend early in the October 2014 option cycle. However, I also wouldn’t mind early assignment, having sold a deep in the money option. EIther way, the prospects of a satisfactory return look good, as even if not assigned early, there is a potential ROI of 2.5% even if shares fall nearly 5% from the purchase price.

The one caveat, if you find such things to be relevant, is that earnings will be released just two days before the end of the October cycle so there may be reason to consider rolling this forward at that point that the November 2014 options are available for sale.

Of course, all relevancy is in the eye of the
beholder and sometimes it is nice to not have any weighty issues to consider. After this coming week we may find ourselves wishing for those mindless days glued to “Access Hollywood” rather than the stock ticker.

Traditional Stocks: Cypress Semiconductor, Dow Chemical, DuPont, eBay, Intel, MasterCard, Verizon

Momentum: none

Double Dip Dividend: General Electric (9/18), Las Vegas Sands (9/18)

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.