Apr142013

Weekend Update – April 14, 2013

Weekend Update

Increasingly modern science is helping to bring great clarity to an understanding of the very essence of our universe’s existence. Yet there remain some questions that will likely forever escape our ability to comprehend.

Some questions, such as the perennial “what is the meaning of life?” do not have a “Higgs-Boson” to provide a unifying hypothesis and can simultaneously provide contentment as well as contention.

I prefer to ask a very basic question that rarely has an answer. “What were they thinking?” Sometimes I ask a variant of that question – “What was I thinking?” Lately I’ve been asking the latter quite a bit.

What perplexes me, though, is how such two groups of smart people can convincingly commit themselves to opposite sides of an investment or so convincingly change their allegiances. I suppose that same observation can be applied toward the issue of nations going to war and then pursuing peace. The reasons aren’t always clear, yet the convictions are rock solid.

In this case, it’s one of my long time favorites and most recently under-performing stocks, Microsoft (MSFT) that is at the center of my attention. It happens to report earnings this coming week and any significant price changes ahead of earnings reflect conviction and large bets to back up that conviction.

For many, Microsoft has been an under-performer for a decade. I don’t look at it quite like that because of its option premiums and dividends while trading in a reasonably narrow price range. Lately, however, I haven’t been selling options as regularly as I had over nearly a decade of nearly continual share ownership. That’s because that price range had significantly narrowed and was well below my cost.

But this week really got my attention as shares skyrocketed, at least by Microsoft’s standards, about 6% over 2 days and surpassed $30. You may remember that $30 level, because that was just a bit above the level that many “smart” people finally publicly declared their love of the shares, just in tome to get in before a pronounced course reversal.

That was over a year ago. The price course higher was slow and under the radar. It’s rise, just as what happens to a frog in a pot of water that is slowly heated to the boiling point, went totally unrecognized by those that get paid for the opinions. The subsequent retreat, however was faster, but not of epic proportion.

But it was different this week. On no real news earlier in the week, shares surged. I don’t really recall the last time Microsoft had that kind of move higher without very positive news to propel it. I would assume, given it is a Dow Jones Index stock that it took the money of many smart people to make it rise as high and as quickly as it had done. I guess there was conviction behind the buying ahead of earnings. What else could account for the very high profile movement?

Then, just as quickly, actually even more quickly, the “smartest guys in the room” at Goldman Sachs (GS) downgraded Microsoft from “Neutral” to “Sell,” causing shares to fall 5% at time that the overall market was reaching for yet another new high. To be fair, Goldman Sachs tempered its conviction, having started at “Neutral” and not regressing downward to its “Conviction Sell” category.

Yet the market reacted with great conviction while I sat and asked the age old questions, happily having sold $29 calls earlier in the monthly cycle, finally getting back in that game as shares once again started a slow, below the radar ascent.

The reversals of late are frequent and very often without obvious catalyst, such as may be seen with shares of Baidu (BIDU) and Whole Foods (WFM). Then again, there weren’t necessarily catalysts to send them downward, either.

Sometimes reversing direction may take on a personal nature, as I’ve been bearish for more than a month and reluctant to commit to new positions while building cash and using longer term option contracts, where possible as often as possible. There does come a point when you begin to wonder what carries the greater cost. Missing out on further advances or chasing those advances. Although we don’t experience annual 20-30% gains very often, they do happen and they do have to start someplace. Maybe 10% over the first three months of the year is that place.

What’s missing though, is the conviction. My certainty of a correction was greater that is my current uncertainty. Having been wrong thus far shouldn’t be part of the equation, but it is hard to ignore.

For my personal trades I continue to be inclined to consider the increased safety of longer term monthly contracts, as I continue to expect some market correction, but I’m getting tired of waiting and missing out on some short term opportunities. Whatever convictions I may have or be evolving toward, I want to hedge those convictions.

In other words, I either have no convictions or am very flexible on them.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories, as earnings season gets into high gear this coming week (see details).

Walgreen (WAG) is one of those stocks that I regret having sold covered call options upon. It was also one of those rare instances in the past year that I waited to sell the options because I believed that shares would recover quickly from a precipitous drop. What i didn’t realize was just how great the recovery would be. Lately, the recoveries seem to be less quick and less robust, as the market appears to be more wary of mis-steps, even while in the midst of general enthusiasm. Despite impressive gains for the year, well ahead of the Health Care Index SPDR (XLV), Walgreen continues to be well poised to navigate through any health care model.

EMC Corp (EMC) in recent years has been defined by its wildly successful spin-off, VMWare (VMW). Following VMWare’s most recent disappointing guidance EMC has been defined by that guidance. I currently own shares and have also had other share lots assigned in the past few months. EMC reports earnings during the first week of the May 2013 option cycle, but appears to have developed support in the $23 level. I may consider adding shares or selling puts in advance of earnings, even though I am over-invested in the Technology sector and it has been under-performing.

McGraw Hill (MHP) continues its share rehabilitation after being put in the crosshairs of those that blame its actions for the past fiscal crisis. Whether it can successfully implement the famed “I was just doing my job” defense or not, it is still well below its previous trading levels.

Now that my cardiac rehabilitation has been completed, I don’t think I’ll ever need to don a pair of sneakers again. Fortunately, Footlocker (FL) can draw upon a population that isn’t very much like me and also sees fashion in pieces of rubber and cloth that are assembled far away by those that couldn’t qualify to work at FoxConn. It goes ex-dividend this week and although there is not a terribly large advantage to selling the option and attempting to also secure the dividend, it may be a good opportunity in a week that the general market is not showing large gains

As Chesapeake Energy (CHK) re-approached the $20 level that was my signal to purchase shares again after having owned numerous lots over the course of 2012. With much of the drama gone and the well deserved condemnation of telegraphing their need to sell assets at levels approaching distressed pricing, I think shares will actually even offer long term prospects, not just as a conduit for generating option premium income.

Joy Global (JOY) is one of those stocks that is very responsive to rumors concerning the Chinese economy, As much as Caterpillar (CAT) is increasingly levered to Chinese growth, Joy Global is much more so and has correspondingly larger moves upon news. Although I own Caterpillar and Deere (DE) at the moment, and those heavy movers are a little out of favor, with Joy Global near its yearly low and with earnings still a few weeks away, I may be tempted to pick up shares and capitalize on its always high option premium.

As the financial sector has been alternating between ups and downs in response to hypothetical stress tests and real stresses, none has been more responsive than Bank of America (BAC). After JP Morgan (JPM) and Wells Fargo (WFC) reported earnings on Friday, April 12, 2013, it will be Bank of America’s turn next week. Having owned shares several times already this year, its shares have shown great resilience during that period. Although current option pricing doesn’t seem to be expecting a significant drop after earnings are released, it certainly is possible. However, the resilience provides me some reason to believe that even with a drop it won’t take an undue length of time to see shares ultimately assigned. The presence of extended weekly options on Bank of America also offers an expansion of strategies and premium price points.

Finally, Align Technology (ALGN) is just an incredible profit center for dentists that use the product. Speaking as a one time practicing dentist, basically an idiot can perform an increasingly wide range of orthodontic services utilizing the technology. It is one of the first stocks that I started following in order to validate the “PEE” thesis. Shares are very capable of large earnings related moves, but most recently the put premiums have become a little less welcoming, However, anything less than a 10% drop in share price can still result in a 1.3% ROI for the week. If you don’t mind the fact that its shares have dropped by 30% in the past in the aftermath of earnings that can be a good risk-reward offering, at least for some.

Traditional Stocks: EMC, McGraw Hill, Walgreen

Momentum Stocks: Chesapeake Energy, Joy Global

Double Dip Dividend: Footlocker (ex-div 4/17)

Premiums Enhanced by Earnings: Align Technology (4/18 PM), Bank of America (4/17 AM), Microsoft (4/18 PM)

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

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

 

Mar102013

Weekend Update – March 10, 2013

Weekend Update

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: Caterpillar, Lowes

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

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

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

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

 

Feb102013

Weekend Update – February 10, 2013

Weekend Update

On Wednesday of this week, the Postmaster General, Patrick Donahoe, made the announcement that many of us had been expecting for years as the red ink lived up to its a visual onomatopoeia name and hemorrhaged.

No more Saturday delivery for ordinary mail. Unless I’m going away to summer camp this year, I’m not anticipating any extended grieving period for the loss, although like so many other things, the principal wags the principle.

It was a major news story in an otherwise slow news week. Surprisingly, what had gone unnoticed was the additional comment that effective immediately gloom of night would be sufficient cause to suspend delivery. Rain and snow are now also potential impediments to service, regardless of a centuries old social contract.

It’s a new world.

Forget about social contracts or expectations of behavior. Although if you follow the stock market you’re probably accustomed to broken dreams and hopes and rarely come to expect the expected.

Increasingly, data is ignored for its objective and descriptive properties. For example, when The Gap (GPS) announces great quarterly sales, as it did this week, it’s shares fell 4%, despite everyone agreeing that the results were extraordinary.

Equally common is the incredible emphasis now placed upon guidance, as if those issuing guidance have any greater ability to read the future than does the head of a close knit household. As much as I thought I knew about my family I don’t think I ever guessed anything correctly even a day into the future.

Have you ever visited a physicians office and browsed through some dated magazines? As it turns out, with near universal application, those whom we consider to be futurists have a fairly poor track record. Yet, when it comes to guidance, it is the closest thing we have to the gospel and fortunes are made or lost on the basis of the prognostications of people every bit as flawed as the guy you ignore on the subway platform every day.

For me, the past few weeks have broken some personal and inter-personal social contracts. As a die hard covered option investor, risk is the antithesis of everything I value. But as the market has been climbing higher and higher, it’s become harder and harder to find new places to park money. Additionally, the reduced premiums resulting from reduced volatility make it harder to live that life style to which I’ve become so accustomed.

That means only one thing and the devil has to be embraced.

Over the past few weeks I’ve had difficulty finding well priced and conservative investments that would feed my insatiable appetite. As a result, there have been more high beta name and more earnings related plays, not to mention lots more antacids. But sometimes you just do what has to be done.

This coming week looks to be a little different thanks to some market hesitancy. Blame it on Europe, blame it on Draghi, or just blame it on burn-out, I don’t really care, because as bad as we are at telling the future, we’re at least equally as bad at recognizing causation and correlation. It’s not like pornography. You don’t necessarily know it when you see it. But for whatever reason, this week, unlike the preceding month, it seemed easier to spot some lesser risk potential investments

As always, stocks are categorized as being either Traditional, Momentum, Double Dip Dividend or “PEE” (see details).

British Petroleum (BP) has no shortage of legal issues still awaiting it. To me it’s mind boggling that judgments and fines of $20 Billion could possibly have come as good news, but that is how news is interpreted. For some, perhaps more rational, British Petroleum’s inability to have its share price keep up with the likes of its partners in evil, Halliburton (HAL) and Transocean (RIG) is a sign of the legal liability overhang.

For me, it is finally down enough that I am interested in re-purchasing shares last owned a month ago, which to me seems like an eternity, since at the moment I own neither its shares, nor Halliburton or Transocean, usually mainstays of my portfolio. The dividend this week is a bonus.

As long as on the energy theme, Southwestern Energy (SWN) was a potential selection from last week that went unrequited. At this level it still looks like a reasonable trade and resultant ROI after selling an in the money option, in a market that may be taking a little break

The Limited (LTD) is one of those retailers that I never seem to own often enough, which is odd since I’m a serial re-purchaser of stocks that I’ve owned and that subsequently are assigned due to the use of covered calls. It has a good dividend, including regular use of special dividends and trades in a reasonably tight range. During the final week of a monthly option it becomes a bit more appealing to me. However, if not assigned next Friday and faced with owning shares for at least an additional month, it dies go ex-dividend early in the March 2013 option cycle. Although I own more retailers than I would like, at the moment, this is one for which it may be worth bending some diversification rules.

DuPont (DD) was one of those stocks that I regularly owned when I first started selling options. A combination of good premiums, reliable dividends and price appreciation, especially after early 2009 made it a great income generator. These days, lower volatility has taken its toll on the premiums and the availability of only monthly options has made me look elsewhere. However, this week DuPont goes ex-dividend, and as the final week of the monthly option cycle it effectively trades as a weekly option, although you have to be prepared to own it through the next cycle or longer.

Walter Energy (WLT) and Cliffs Natural Resources (CLF) seem to go hand in hand in the speculative corner of my portfolio. It goes ex-dividend this week and always offers a nice option premium in exchange for the risk that is being taken on. A caveat that should be considered for adding new shares is that if shares are not assigned by the end of the week, Walter Energy reports earnings the following week and that may be more excitement than many would want to accept. Writing a deeper in the money call or a longer duration call may be strategies to reduce that kind of stress.

Baidu (BIDU) is one of the very few Chinese companies that I ever consider purchasing. I do, however, miss the days when Muddy Waters would live up to its name and cast aspersions on the accounting practices of some Chinese companies. That always represented a good opportunity to sell puts a few days later and then merrily go on your way when the waters calmed. Someday, I’m fairly confident that most, if not all of the fears that we have regarding accounting practices will become reality. I’m hopeful that it’s not this week, as I already own shares of Baidu by virtue of being assigned $97.50 puts on Friday (February 7, 2013). If you don’t mind wild swings within a 10% range on a seemingly regular basis, Baidu is a good way to generate income. My experience with shares has been that a moment or two after its price performance looks bleak, it bounces right back. It is a good example of why gloom shouldn’t be a deterrent, but I doubt the Postmaster General is paying any attention to me.

Riverbed Technology (RVBD) was a potential earnings choice last week. As usual it’s price movements tend to be exaggerated after it announces earnings, particularly since they tend to give pessimistic guidance. Back in the old days you would give pessimistic guidance and then shares would soar when earnings surpassed the forecast. That was so yesterday’s social contract. RIverbed reported record revenues, in-line EPS data, but offered a weak outlook. SO what else is new? Its shares have been one of my greatest option premium producers for years and I look for every opportunity to either own shares or sell puts.

Buffalo Wild Wings (BWLD) is one of those places that I would love to visit, but know that it may not be worth trading off a few years of my life. It is also one of those companies that tends to have exaggerated moves following earnings release. In this case about 1.4% for a 10% drop in share price. The biggest caveat is that Buffalo Wild Wings has shown that it can easily drop 15% on earnings release.

Cliffs Natural Resources is not for the faint of heart. It bounces around on rumors of the Chinese economy’s well being and global growth. It is a good example of forecaster’s inability to forecast, as it recently fully recovered from a recent major downgrade from Goldman Sachs (GS), which at least was consistent in demonstrating that predicting commodity prices was not one of its strengths. On top of its usual volatility, Cliffs Natural reports earnings this week and has yet to announce its next dividend, which is currently at nearly 7%. I already own shares and have so, on and off for a few months. If I did anything, it would most likely be through the sale of well out of the money puts, seeking to return 1-1.5% for the week.

Finally, it’s yet another retailer, Michael Kors (KORS), and it is a difficult one to ignore as it reports its earnings this week. As with most all “PEE” selections, it is very capable of making large moves upon releasing earnings and providing guidance. In this case, the ratio that may lure me into committing to another retailer is a 1% ROI in exchange for a 10% or less drop in share price.

Traditional Stocks: British Petroleum, Southwestern Energy, The Limited

Momentum Stocks: Baidu, Riverbed Technology

Double Dip Dividend: British Petroleum (ex-div 2/13), DuPont (ex-div2/13), Walter Energy (ex-div 2/13)

Premiums Enhanced by Earnings: Buffalo Wild Wings (2/12 PM), Cliffs Natural (2/12 PM), Kors (2/12 AM)

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

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