Apr252014

Weekend Update – April 27, 2014

Weekend Update

“The Bear” is waking up.

Whether you interpret that to mean that Russia is seeking to return to some of its faded and faux glory left behind as its empire crumbled, or that the stock market is preparing for a sustained downward journey, neither one likes to feel threatened.

As we prepare for the coming week the two bears may be very much related, at least if you believe in such things as “cause and effect.”

It now seems like almost an eternity when the first murmurings of something perhaps going on in Crimea evoked a reaction from the markets.

On that Friday, 2 months ago, when news first broke, the DJIA went from a gain of 120 points to a loss of 20 in the final hour of trading, but somehow managed to recapture half of that drop to cap off a strong week.

Whatever happened to not going home long on the brink of a weekend of uncertainty?

Since that time the increased tensions always seemed to come along on Fridays and this past was no different, except that on this particular Friday it seems that many finally went home with lighter portfolios in hopes of not having lighter account balances on Monday morning.

As often is the case these kind of back and forth weeks can be very kind to option sellers who can thrive when wandering aimlessly. However, while we await to see what if any unwanted surprises may come this weekend, the coming week packs its own potential challenges as there will be an FOMC announcement on Wednesday and the Employment Situation Report is released on Friday. Although neither should be holding much in the way of surprise, it is often very surprising to see how the market reacts to what is often the lack of news even when that is the expectation.

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

With the prospects of some kind of uncomfortable beginning to the coming week there may be reason to stay away from those companies or sectors that might have enhanced risk related to any kind of escalating “tit for tat” that may occur if events in and around Ukraine and Russia deteriorate.

Bed Bath and Beyond (BBBY), which as far as I know has little exposure east of Bangor and west of Los Angeles, is one of those companies that suffered the wrath of a disappointed market. Like many that stumble, but whose underlying business, execution or strategies aren’t inherently flawed, there comes a point that price stability and even growth returns. While it has only been 2 weeks since earnings, Bed Bath and Beyond has withstood any further stresses from a wounded market and has thus far settled into some stability. While some may question the legitimacy of using this past winter’s weather as an excuse for slumping sales, I’m not willing to paint with a broad brush. In fact, I would believe that retailers like Bed Bath and Beyond, typically not located in indoor malls would be more subject to weather related issues than mall based, one stop shopping centers.

Having been to a number of other countries and having seen the high regard in which coffee is held, it’s not very likely that Keuring Green Mountain (GMCR) would feel any serious loss if exports to Russia were blocked as part of sanctions. At the current high levels, I’m surprised to be considering shares again, but I have had a long and happy history with this very volatile stock that has taken on significantly greater credibility with its new CEO.

Because of its volatility its option premiums are always attractive, but risk will be further enhanced as earnings are scheduled to be reported the following week. Shares are approaching that level they stood before its explosive rise after the most recent earnings report.

Aetna (AET) for a brief moment looked to be one of those reporting earnings that was going to capitalize on good news. Following a nice advance on the day of earnings it started on this past fateful Friday with another 1.5% advance on top of a nearly 6% advance the day before. Within 10 minutes and well before the market started its own decline, that early gain was completely gone.

As pro-Russian militias may say if they believed that any expatriate nationals might be threatened in France, “C’est la vie.” While that is certainly the case, such unexpected moves re-offer opportunity as the health care insurers are in a position to bounce back from some recent weakness. With earnings now out of the way and little bad news yet to be reported regarding the Affordable Healthcare Act transition, Aetna can get back to what health insurance companies have always been good at doing, besides lobbying. Although it’s dividend is on the low side, Aetna is a company that I could envision as a long term core holding.

Dow Chemical (DOW) also reported earnings this past week and beat projections the old fashioned way. They cut costs in the face of falling revenues. While that says nothing good about an economy that is supposed to be growing, Dow Chemical’s value may be enhanced as it has activists eyeing it for possible break-up. On the other end, defending the status quo is a hardened CEO who is likely to let little fall through the cracks as he pursues his own vision. While shares are trading near their highs the activist presence is potentially helpful in keeping shares trading within a range which entices me to consider shares now, after a small drop, rather than waiting for a larger one on order to re-open a position. With its option premiums, generous dividend and opportunity for share appreciation, Dow Chemical is one stock that I would also consider for longer term holding.

I’m on the fence over Cypress Semiconductor (CY). I currently own shares and always like the idea of having some just as it trades near it strike price. It has a good recent habit of calling $10 its home and works hard to get back to that level, whether well above or well below. However, befitting its high beta it fell about 5% on Friday and has placed itself quite a distance from its nearest strike. While I generally like paying less for shares, in the case of Cypress I may be more enticed by some price migration higher in order to secure a better premium and putting shares closer to a strike that may make it easier to roll over option contracts to June 2014, if necessary. Holding shares until June may offer me enough time after all of these years to learn what Cypress Semiconductor actually does, although I’m familiar with its increasingly vocal CEO.

This is another week replete with earnings. For those paying attention last week a number of companies were brutalized last week when delivering earnings or guidance, as the market was not very forgiving.

Among those reporting earnings this week are Herbalife (HLF), Twitter (TWTR) and Yelp (YELP).

There’s not much you can say about Herbalife, other than it may be the decade’s most unpredictable stock. Not so much in terms of revenues, but rather in terms of “is it felonious or isn’t it felonious?” With legal and regulatory issues looming ahead the next bit of truly bad news may come at any moment, so it may be a good thing that earnings are reported on Monday. At least that news will be out of the way. Unlike many other volatile names, Herbalife actually move marginally higher to end the week, rather than plunging along with the rest. My preference, if trading on the basis of earnings, would be to sell puts, particularly if there is a substantive price drop preceding earnings.

Twitter lost much of the steam it had picked up in the early part of the week and finished at its lows. I already have puts on shares having sold them about a month ago and rolled them forward a few times in the hopes of having the position expire before earnings.

However, with its marked weakness in the latter part of the week I’m interested in the possibility of selling even more puts in advance of earnings on Tuesday. However, if there is price strength on Monday, I would be more inclined to wait for earnings and would then consider the sale of puts if shares drop after earnings are released.

Yelp is among those also having suffered a large drop as the week’s trading came to its close. as with Twitter, the option market is implying a large earnings related move in price, with an implied volatility of nearly 15%. However, a drop of less than 21% may still be able to deliver a 1.1% return.

For those that just can’t get enough of earnings related trades when bad news can be the best news of all, a more expanded list of potential trades can be seen.

Finally, Intel (INTC) and Microsoft (MSFT) are part of what now everyone is affectionately referring to as “old tech.” A few months ago the same people were somewhat more derisive, but now “old tech” is everyone’s darling. Intel’s ex-dividend date is May 5, 2014, meaning that shares would need to be owned this week if hoping to capture the dividend. Microsoft goes ex-dividend during the final week of the May 2014 cycle.

Both stocks have been frequent holdings of mine, but both have recently been assigned. Although they are both trading near the top of their price ranges, the basic appeal still holds, which includes generous dividends and satisfactory premiums. Additionally, bit also have in common a new kind of leadership. Intel is much more focused on operational issues, befitting the strength of its new CEO, while Microsoft may finally simply be ready to “get it” and leverage its great assets, recognizing that there may be some real gems beyond Windows.

Traditional Stocks: Momentum Stocks: Aetna, Bed Bath and Beyond, Dow Chemical, Microsoft

Momentum: Cypress Semiconductor, Keurig Green Mountain

Double Dip Dividend: Intel (ex-div 5/5)

Premiums Enhanced by Earnings: Herbalife (4/8 PM), Twitter (4/27 PM), Yelp (4/30 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.

Apr52014

Weekend Update – April 6, 2014

Weekend Update

This week started on such a positive note with the reassuring words of a dove, yet ended so harshly.

This time of the year it’s supposed to be the other way around with the lamb having the final word as months of a less threatening nature await ahead.

Instead, after Friday’s close, whatever optimism may have been generated by setting even more record highs earlier in the week, had given way to caution and perhaps preparation for some ill winds.

Back when I was in college it wasn’t meant as a compliment if you were referred to as being a “dove.” and the proverbial lamb was always being led to slaughter.  In fact, if you were called a “dove,” that was only in polite circles. Otherwise, the words used were far more descriptive and derisive.

By the same token, the doves out there may not have had the kindest of words for the hawks, but in nature, it’s usually the hawk that triumphs. In fact, recalling the recent mauling of a peace dove that had been just released by Pope Francis and some children, it didn’t really even require a hawk. A seagull and a lowly crow were enough for the task.

This week, though, it was the dove that ruled the day and set the tone for the week. Well, at least most of it, until its fragile nature beset itself.

A fragile market can be equally susceptible even to less formidable foes, as Friday’s sell-off had little basis and came on the day of the Employment Situation Report, which for the past 20 months or so has been strongly correlated to a higher moving market on the day of release and for the week as a whole. While the week as a whole did show an advance, the former correlation stood for only a short time before strong selling set in.

Whatever doubts there may have been regarding where Janet Yellen stood on that continuum from dove to hawk following her initial press conference, she made it clear that on issues of the Federal Reserve’s actions to help lower the unemployment rate, she was an unabashed dove and while there may be more dissenting voting members than before sitting on the Federal Reserve, she still controls the hawks, but probably keeps at least one eye wary at all times.

The stock market loved that re-affirmation of policy the way we love the beauty of a dove, even though like short sellers, we may privately relish its obliteration by a swooping predator hawk.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum categories, with no “PEE” selections this week (see details).

While this was an especially brutal week for stocks on the NASDAQ and particularly for many of those stocks that had borne a disproportionate amount of everyone’s attention as they moved ever higher, many others were included in whatever wrath took hold.

With earnings season beginning this coming week there may be some return to fundamentals, however, disappointments, particularly if weather hasn’t been fully factored in or discounted may further exploit market fragility.

MasterCard (MA) was one such casualty of the stampede. There was little to account for its 2.5% drop on Friday, bringing it to its 5 month low. The previous week, faced with some potentially adverse decisions regarding swipe fees it reacted well, yet this week it did otherwise without any new challenges being sent its way. While it goes ex-dividend on Monday it’s puny dividend isn’t something that’s likely to be missed by those entering into new positions as shares find themselves at a 5 month low. Believing that last week’s selling was overdone I would consider a slightly longer option contract and the use of an out of the money strike as a means to allow some time for price repair while collecting an option premium while waiting.

While not falling quite as much as MasterCard on Friday, shares of Starbucks (SBUX) also succumbed to selling pressure. While the past week was filled with news regarding other players entering into the breakfast marketplace, including offering free cups of coffee, there was really an absence of Starbucks specific news. While breakfast taco waffles may garner some attention, Starbucks has become as much a way of life as it has a product provider. It’s current price is one where it has shown considerable strength and it too may warrant the use of slightly longer term option contracts and an out of the money strike.

Apollo Education (APOL) was a stock that I highlighted last week as a possible earnings trade. As usual, I prefer those through the sale of well out of the money put contracts prior to earnings, especially if share price is trending downward prior to earnings. In Apollo’s case shares had instead shown strength prior to the earnings release, so I stayed away from selling puts at that time. After earnings shares did sustain a drop and I then sold some out of the money puts in the hope that the drop wouldn’t continue beyond another few strike levels. While there was almost a need to roll them over on Friday as the market was crumbling, Apollo shares showed resilience, even as the market did not.

While I still don’t have much confidence in the product it offers nor the manner in which it generates its revenues, that’s largely irrelevant, as it continues to offer some reasonable returns even if shares continue to experience some decline. Once again, however, I would most likely consider the sale of puts rather than an outright purchase of shares and concomitant sale of calls.

There’s probably very little that can be added to make a discussion of Herbalife (HLF) newsworthy, but when there is, it will really be worth paying attention. While Herbalife has been a good target of put sellers following the severe price drop in the wake of regulatory and legal investigations that are being escalated, it has recovered very nicely with the realization that any real news is likely to be in the distance. It too, is a position that I would likely consider entry through the sale of out of the money puts.

This week’s dividend stocks for consideration are two that
I haven’t owned for a while, as I’ve been waiting for them to return to more reasonable price levels. Sometimes the realization comes that waiting only prevents being an active participant. Aetna (AET) Abbott Labs (ABT) have long been absent from my portfolio despite continually thinking about adding them back.

With a large number of existing positions already going ex-dividend this week I’m not as anxious to add any additional ones. However, of those two, Abbott Labs is more appealing for having a higher dividend rate and for having already come off some recent price peaks. In need of additional health care sector stocks, Abbott also carries that personal appeal at this point in time. However, it reports earnings the following week so my preference, if purchasing shares, would be a quick holding and given its current option premium would even be willingly accepting of an early assignment.

Aetna has simply left me behind in the dust as I’ve been waiting for it to return to what I believed was a fair price, but apparently the market has long disagreed. While it may be some time until we all realize whether new healthcare mandates are a positive or negative for the insurers, the one thing that most everyone can agree is that the long term is always positive when your fee structure is highly responsive to actuarial data. Add to that an increasing interest rate environment and the future may be bright for insurers.

Among the shares that I had assigned this past week were Comcast (CMCSA) and Coach (COH). Following the week ending sell-off I was grateful to have as many assignments as there were, especially to replenish cash reserves in the event of buying opportunities ahead. However, among those assigned, these two are ones that I’m eager to re-incorporate into my portfolio.

Comcast, despite my personal feelings about the product and service, has just been a spectacular growth story and has had great guidance under the control of the Roberts family. My celebration of “Comcast Liberation Day” a few years ago didn’t mean that I would boycott share ownership or overlook its attributes as an investment. It’s recent 10% price drop in the past two months from its highs has offered an opportunity to find some more realistic entry points. While I’ve been following shares for quite some time, it only recently began offering weekly and expanded weekly options. For me, that was the signal, combined with the reduced share price to start initiating positions.  I envision a similar opportunity with Comcast shares on a serial basis as I have experienced with Coach.

Coach remains a stock that I feel like I could happily buy most week in and out as long as it’s trading in a $48-$54 range and have done so repeatedly when it has done so. Despite a near absence of positive news in almost two years and the company having been written off as a loser in the competitive wars, especially with Michael Kors (KORS), for those who can recognize that multiple small stock gains can be very meaningful it has been a consistent performer. With earnings approaching at the end of the month I would be less inclined to use longer term option contracts at this time, as Coach has had a recent history of sharp and unpredictable moves following earnings.

While Coach has been unable to do anything right in the eyes of many, until recently, Under Armour (UA) could do no wrong. WHile it’s still not clear whether the design of their latest skating wear for US Olympians was in any way related to their disappointing performance, Under Armour’s CEO, Kevin Plank, was a perfect study in how to present his company when under public scrutiny. 

While it received a downgrade about 3 weeks ago and subsequently fell more than 7% in that aftermath, it fell an additional 9% from that sentinel point late this week as it was carried along with the rest of the deluge. As with many others the selling was in the absence of substantive news.

With earnings season beginning this coming week, Under Armour is among those announcing early in the process on April 17, 2014. It’s volatility is commanding a health option premium at a time when many others are languishing, however, the risk may be compounded during the following week. For that reason, if considering the purchase of shares I would likely use a weekly contract and if necessary roll that over to a longer term contract in anticipation of that enhanced risk. As earnings approach, Under Armour may also turn out to be a potential earnings related trade through the sale of out of the money put options.

Finally, a number of years ago I was studying two stocks with an eye toward adding one to my regular rotation in need of another energy sector position. They were Anadarko (APC) and Apache (APA). For a while I would get their stock symbols confused and really had a difficult time discerning their differences. I still have no real idea of what those differences may be, but for some reason I gravitated toward Anadarko.

This week, that dalliance may have come to an end, at least for the time being, as my shares were assigned following an untimely and unexpected end to the Tronox litigation that was an unwelcome part of its Kerr McGee purchase.

Whatever positive comments I would normally make about Anadarko relative to its prospects for trading in a range and offering an attractive premium can now be transferred to Apache. The best part, though, is that Apache is approximately 10% below its recent high and can make me forget about Anadarko for now.

Traditional Stocks: Apache, Comcast, MasterCard, Starbucks

Momentum Stocks: Apollo Educational, Coach, Herbalife, Under Armour

Double Dip Dividend: Aetna (4/8), Abbott Labs (4/11)

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.

Mar162014

Weekend Update – March 16, 2014

Weekend Update

Most of us have, at one time or another believed that we were carrying the weight of the world on our shoulders. The reality will always be that unless we are the President of the United States with a decision to be made regarding pressing that red button, those feelings are somewhat exaggerated and unlikely to be borne out in fact.

It’s probably not an exaggeration, however, to suggest that in the past week the burden of the world weighed down heavily on the U.S. stock markets.

Slowing growth and questionable economic statistics from China and an unfolding crisis in Crimea were the culprits identified this week that sapped the momentum out of our markets. The complete list of “reasons” for last week’s performance was compiled by Josh Brown, but ultimately it all came down to our shoulders. Perhaps like a regressive tax the individual investor may feel an exaggerated impact as well when the market behaves badly and may also take longer to recover from the heavy load of losses.

In addition to the global issues then there were also issues of regulation, seeing the SEC and FTC weigh in on Herbalife (HLF), dueling words of umbrage from billionaires over eBay (EBAY) and litigation from the New York State Attorney General’s Office over General Motor’s (GM) role in potentially avoidable vehicular deaths.

What there wasn’t was anything positive or optimistic to be said during the week, other than sooner or later Spring will arrive. For the first time since the last real attempt at a correction nearly two years ago the market closed lower in each trading session of the past week.

While the weekend may change my opinion, as additional news may be forthcoming as Russian war games on Ukraine’s borders play themselves out and a Crimean referendum is held, I find myself optimistic for the coming week.

I usually try to find ten potential trades for each coming week. Last week I struggled to find just nine. This week my preliminary list was nearly twenty and I had a difficult time narrowing down to ten stocks.

That hasn’t happened in a while.

Certainly, as has been discussed in previous weeks following a downward moving market, the challenge is discerning between value and value traps. In that regard this past week is no different, but for inspiration, I look to the option seller’s best friend.

That would be volatility. It creates the kind of premiums that can make me salivate and it is the lack of volatility that makes me wonder whether anyone really cares anymore about the need for stock markets to react appropriately to fundamental factors, as opposed to simply moving higher under all circumstances.  

Since late 2011 we’ve been used to seeing historically low levels of volatility with occasional spikes representing market downturns. For those following along you know that there haven’t been many of those downturns in the past 20 months, although we did just recently quickly recover from an equally quick 7% loss. Those downturns saw spikes in volatility.

Suddenly there has been a lot of discussion about increasing volatility and for those that get excited about technical analysis, much is made of the significance of Volatility Index breaking above the 200 Day Moving Average.

What you don’t hear, however, are the video playbacks of all of the times the Volatility Index has surpassed that 200 Day Moving Average and it did not lead to a market breakdown, as suggested by many.

Instead, a quick look at the past year seems to indicate an alternating current of spikes in volatility between larger spikes and smaller ones. Simply put, I think we’re experiencing a regularly scheduled smaller spike in volatility.

I could be wrong, but that’s what hedging is all about.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum categories, with no “PEE” selections this week (see details).

As with last week, despite the uncertainty that may usher in the coming week I see some possibilities even with some higher beta positions, on a selective basis.

While I’ve been trying to emphasize dividend paying positions for the past three months, the only potential such trades that had any appeal for me this week fell into the higher beta category.

While Best Buy (BBY) is probably immune to any direct impact from an overseas crisis, it has had no difficulty in creating its own and has certainly created a crisis of faith before regaining some respectability under new leadership. But for those that have held shares that all seems so long ago after some disappointing earnings reports. Hit especially hard this most recent earnings season, Best Buy has two months left to acquit itself and another two weeks to have their cash registers ring loudly to offset any weather related disappointments. In the meantime shares do go ex-dividend this week and have been trading in a narrow range of late. In the absence of any news it may be expected to keep doing so long enough to capture a dividend and perhaps a premium or two.

Las Vegas Sands (LVS) also goes ex-dividend this week and is also a higher beta stock. While I have traded this stock w
ith some frequency, it’s been a while since doing so as it resists going much lower. While it is at a relative low to its recent high after a 7% decline, it has still had a fairly uninterrupted trajectory. Like Best Buy, there’s not too much reason to suspect that events in Crimea will serve as a direct contagion, the higher beta may be its own heavy weight in the event of a market decline, but like cockroaches, gambling will survive even nuclear holocaust, as may Sheldon Adelson, the Chairman. It may also survive some weakness in China, as there’s no better place to bury your misery than in their Maxao casinos.

It’s usually a fallacy in the making when you use logic to convince yourself of the rationale to buy a stock. That includes the belief that if you liked a stock at one price it must certainly be even more likeable at a lower price. Yet that’s where I find myself with General Electric (GE), whose shares were just assigned from me a week ago and now find themselves priced below that earlier strike price. However, in the case of General Electric, unless there are some horrific surprises around the corner or a complete market meltdown, it’s hard to imagine that it could be classified as being a value trap at this new lower price. Down 4% in the past week and 10% YTD, if the market is heading lower, GE will have been ahead of the curve. While it’s option premium doesn’t reflect much in the way of volatility it does represent a reasonable means to surpass the performance of a flat market.

While retail has been a place that money has gone to die of late, you get a feeling that things may be reversing, at least in the minds of analysts when even Coach (COH), a literal punching leather bag for all, receives an upgrade. While my shares of Coach were assigned this week, as were my shares of Kohls (KSS), I’m ready to repurchase both in their current range, as the long fall down deserves at least a short climb higher.

Coach has shown itself to be able to faithfully defend the $46 level despite so many assaults over the past two years. That ability to consistently bounce back has made it a great covered option position, whether through outright purchase or the sale of puts.

Kohls represents exactly what I like in my stocks. That is a non-descript existence and just happily going along its way without making too much fuss, other than an occasional earnings related outburst. Dependable is far more important than being flashy and as a stock and as a company, Kohls hugs that middle lane reliably, but still provides a competitive premium thanks to those occasional outbursts.

If the thesis that retail is ready for a comeback has more of a basis than just as reflected in share price, but also reflects pent up spending from a harsh winter, MasterCard (MA) is a prime beneficiary. While already somewhat protected from the ravages of weather by virtue of being able to spend your money with just a simple mouse click, there are just some things that need to be done in the real world. Trading well below its pre-split price until recently I had not owned shares in years. Now more readily purchased in scale, I look forward to the opportunity to purchase and re-purchase these shares with some degree of regularity, WHile its dividend is paltry, there is certainly room for growth to rise to the levels of Visa (V) and Discover Financial Services (DFS). However, notwithstanding any potential bump in share price along with a dividend hike, the option premiums can make the wait worthwhile.

In a week of no industry specific news, following a flurry of changes in industry dynamics initiated by T-Mobile (TMUS), Verizon (VZ) fell 3% bringing it down to a level from which it has found significant strength. While General Electric may face some potential liability with events in Crimea or a deteriorating economy in China, I don’t see quite the same liability for Verizon. Instead, whatever burdens it has to carry will come from an increasingly competitive landscape as it and AT&T (T) are continually pushed by T-Mobile and perhaps Sprint (S). In the meantime, while trading in a range and finding support at $46, there’s always the additional lure of a 4.5% dividend.

While Verizon isn’t terribly exciting it meets its match in Intel (INTC). However, the excitement that comes from growth isn’t absolutely necessary to generate predictable profits. Intel is especially well suited when it’s share price is very close to a strike level. If volatility continues to rise the opportunity to purchase Intel expands as the price range at which it may be purchased increases, while still offering an attractive option premium which can be further enhanced by an attractive dividend.

While it was only a matter of time until retail would begin to dig its way out from under the piles of snow, no sector has brutalized me more this past year than the one that requires digging. Freeport McMoRan (FCX) is among that group that hasn’t been terribly kind to me, despite my belief that it would be the “stock of the year” for 2013.

With copper itself being brutalized this past week, despite gold’s relative strength, Freeport McMoRan has itself had the weight of the market’s response to the less than robust Chinese economy to shoulder. But the one thing that you can always count on is that data from China can easily correct reality and that explains the seemingly recurrent see-saw ride that we have been on in those sectors that are tied to their data. The true plunge in copper prices, if sustained, will not be good news for Freeport McMoRan, whose generous dividend payout could conceivably be jeopardized.

On the other hand, shares are now at a level that has repeatedly created substantial returns for those willing to test the waters.

Finally, not many companies, especially those with a newly appointed CEO had as bad a week as General Motors. You might think that having paid its first dividend in years this past Friday there would be reasons to rejoice, but finding yourself at the top of the headlines related to customer deaths isn’t an enviable place, nor one conducive to a thriving share price. When the Attorney General of any state piles on that doesn’t help.

However, with a chorus of those clamoring for General Motors to re-test the $30 level purely on a technical basis there may be reason enough to believe that won’t be the case. Having timed a purchase of shares as inopportunely as possible, I’d like nothing more than to see that position restored to some respect.

As with the recent news that the FTC will b
e investigating allegations that Herbalife was engaged in a Ponzi scheme, the bad news for General Motors, while coming as an acute event, will take a long while to play out, regardless of the merits of the cases or the human tragedies caught up in what is now a story of fines, punishment andperhaps even acquittal.

Traditional Stocks: Coach, General Electric, General Motors, Intel, Kohls, MasterCard, Verizon

Momentum Stocks: Freeport McMoRan

Double Dip Dividend: Best Buy (ex-div 3/18), Las Vegas Sands (ex-div 3/18)

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.

Feb162014

Weekend Update – February 16, 2014

Weekend Update

Is our normal state of dysfunction now on vacation?

Barely seven trading days earlier many believed that we were finally on the precipice of the correction that had long eluded the markets.

Sometimes it’s hard to identify what causes sudden directional changes, much less understand the nature of what caused the change. That doesn’t stop anyone from offering their proprietary insight into that which may sometimes be unknowable.

Certainly there will be technicians who will be able to draw lines and when squinting really hard be able to see some kind of common object-like appearing image that foretold it all. Sadly, I’ve never been very adept at seeing those images, but then again, I even have a hard time identifying “The Big Dipper.”

Others may point to an equally obscure “Principle” that hasn’t had the luxury of being validated because of its rare occurrences that make it impossible to distinguish from the realm of “coincidence.”

For those paying attention it’s somewhat laughable thinking how with almost alternating breaths over the past two weeks we’ve gone from those warning that if the 10 year Treasury yield got up to 3% the market would react very negatively, to warnings that if the yield got below 2.6% the markets would be adverse. There may also be some logical corollaries to those views that are equally not borne out in reality.

Trying to explain what may be irrational markets, which are by and large derivatives of the irrational behaviors found in those comprising the markets, using a rational approach is itself somewhat irrational.

Crediting or blaming trading algorithms has to recognize that even they have to begin with the human component and will reflect certain biases and value propositions.

But the question has to remain what caused the sudden shifting of energy from its destruction to its creation? Further, what sustained that shift to the point that the “correction” had itself been corrected? As someone who buys stocks on the basis of price patterns there may be something to the observation that all previous attempts at a correction in the past 18 months have been halted before the 10% threshold and quickly reversed, just as this most recent attempt.

That may be enough and I suppose that a chart could tell that story.

But forget about those that are suggesting that the market is responding to better than expected earnings and seeking a rational basis in fundamentals. Everyone knows or should know that those earnings are significantly buoyed by share buybacks. There’s no better way to grow EPS than to shrink the share base. Unfortunately, that’s not a strategy that builds for the future nor lends itself to continuing favorable comparisons.

I think that the most recent advance can be broken into two component parts. The first, which occurred in the final two days of the previous trading week which had begun with a 325 point gain was simply what some would have called “a dead cat bounce.” Some combination of tiring from all of the selling and maybe envisioning some bargains.

But then something tangible happened the next week that we haven’t seen for a while. It was a combination of civility and cooperation. The political dysfunction that had characterized much of the past decade seemed to take a break last week and the markets noticed. They even responded in a completely normal way.

Early in the week came rumors that the House of Representatives would actually present a “clean bill” to raise the nation’s debt ceiling. No fighting, no threats to shut down the government and most importantly the decision to ignore the “Hastert Rule” and allow the vote to take place.

The Hastert Rule was a big player in the introduction of dysfunction into the legislative process. Even if a majority could be attained to pass a vote, the bill would not be brought to a vote unless a majority of the majority party was in favor the bill. Good luck trying to get that to occur in the case of proposing no “quid pro quo” in the proposal to raise the nation’s debt ceiling.

The very idea of some form of cooperation by both sides for the common good has been so infrequent as to appear unique in our history. Although the common good may actually have taken a back seat to the need to prevent looking really bad again, whatever the root cause for a cessation to a particular form of dysfunction was welcome news.

While that was being ruminated, Janet Yellen began her first appearance as Federal Reserve Chairman, as mandated by the Humphrey-Hawkins Bill.

Despite the length of the hearings which would have even tired out Bruce Springsteen, they were entirely civil, respectful and diminished in the use of political dogma and talking points. There may have even been some fleeting moments of constructive dialogue.

Normal people do that sort of thing.

But beyond that the market reacted in a straightforward way to Janet Yellen’s appearance and message that the previous path would be the current path. People, when functioning in a normal fashion consider good news to be good news. They don’t play speculative games trying to take what is clear on the surface to its third or fourth derivative.

Unfortunately, for those who like volatility, as I do, because it enhances option premiums, the lack of dysfunction and the more rational approach to markets should diminish the occurrence of large moves in opposite directions to one another. In the real world realities don’t shift that suddenly and on such a regular basis, however, the moods that have moved the markets have shifted furiously as one theory gets displaced by the next.

How long can dysfunction stay on vacation? Human nature being what it is, unpredictable and incapable of fully understanding reality, is why so many in need stop taking their medications, particularly for chronic disorders. I suspect it won’t be long for dysfunction to re-visit.

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

Speaking of dysfunction, that pretty well summarizes the potash cartel. Along with other, one of my longtime favorite stocks, Mosaic (MOS) has had a rough time of things lately. In what may be one of the great blunders and miscalculations of all time, there is now some speculation that the cartel may resume cooperation, now that the CEO of the renegade breakaway has gone from house arrest in Belarus to extradition to Russia and as none of the members of the cartel have seen their fortunes rise as they have gone their separate ways.

In the interim Mosaic has traded in a very nice range after recovering from the initial shock. While I still own more expensively priced shares their burden has been somewhat eased by repetitive purchases of Mosaic and the sale of call contracts. Following an encouraging earnings report shares approached their near term peak. I would be anxious to add shares on even a small pullback, such as nearing $47.50.

^TNX ChartOne position that I’ve enjoyed sporadically owning has been MetLife (MET) which reported earnings last week. As long as interest rates are part of anyone’s equation for predicting where markets or stocks will go next, MetLife is one of those stocks that received a bump higher as interest rates started climbing concurrent with the announcement of the Federal Reserve;’s decision to initiate a taper to Quantitative Easing.

Cisco (CSCO), to hear the critics tell the story is a company with a troubled future and few prospects under the continued leadership of John Chambers. For those with some memory, you may recall that Chambers has been this route before and has been alternatively glorified, pilloried and glorified again. Currently, he has been a runner-up in the annual contest to identify the worst CEO of the year.

Personally, I have no opinion, but I do like the mediocrity in which shares have been mired. It’s that kind of mediocrity that creates a stream of option premiums and, in the case of Cisco, dividends, as well. With the string of disappointments continued at last week’s earnings report, Cisco did announce another dividend increase while it recovered from much of the drop that it sustained at first.

I’m never quite certain why I like Whole Foods (WFM). What this winter season has shown is that many people are content to stay at home any eat whatever gluten they can find rather than brave the elements and visit a local store for the healthier things in life. I think Whole Foods is now simply making the transition from growth stock to boring stock. If that is the case I expect to be owning it more often as with boring comes that price predictability that appeals to me so much.

This week’s potential dividend trades are a disparate group if you ignore that they have all under-performed the S&P 500 since its peak.

General Electric (GE) is just one of those perfect examples of being in the wrong place at the wrong time and perhaps not being in the right place at the right time. Much of General Electric’s woes when the market was crumbling in 2008 was its financial services group. Since the market bottom its shares have outperformed the S&P 500 by more than 50%, as GE has taken steps to reduce its financial services portfolio. Unfortunately that means that it won’t be in a position to benefit from any rising interest rate environment as can reasonably be expected to be in our future.

Still, coming off its recent price decline and offering a strong dividend this week its shares look inviting, even if only for a short term holding.

L Brands (LB) along with most of the rest of the retail sector hasn’t been reflective of a strong consumer economy. Having recovered about 50% of its recent fall and going ex-dividend this coming week I’m ready to watch it recover some more lost ground as its specialty retailing has appeared to have greater resilience than department store competitors. 

Transocean (RIG) still hasn’t recovered from its recent ratings cut from “sector outperform” to “sector perform.” I’ve never understood the logic of that kind of  assessment, particularly if the sector may still be in a position to outperform the broad market. However, equally hard to understand is the reaction, especially when the entire sector goes down in unison in response. Subsequently Transocean also received an outright “sell” recommendation and has been mired near its two year lows.

With a very healthy ex-dividend date this week I may have renewed interest in adding shares. While he has been quiet of late, at its latest disclosure, Icahn Enterprises (IEP) owned approximately 6% of Transocean and to some degree serves as a floor to share price, as does the dividend which is scheduled to increase to $3 annually.

However, as with L Brands, which also reports earnings on February 26, 2104, I would also consider an exit or rollover strategy for those that may want to mitigate earnings related risk that will present itself. Such strategies may include closing out the position below the purchase price or rolling over to a March 2014 option in order to have some additional time to ride out any storms.

There’s really not much reason to take sides in the validity of claims regarding the nature of Herbalife (HLF). It has certainly made for amusing theater, as long as you either stayed on the sidelines or selected the right side. With the recent suggestion that some on the long side of the equation have been selling shares this week’s upcoming earnings release may offer some opportunity, as shares have already fallen nearly 16%.

While the option market is only implying a 7.2% move in share price, the sale of a put can return a weekly 1% ROI even at a strike price 13.7% below the current price. That is about the largest cushion I recall seeing and does look appealing for those that may have an inclination to take on risk. I’m a little surprised of how low the implied price movement appears to be, however, the surprise is answered when seeing how unresponsive shares have been the past year upon earnings news.

Also reporting earnings this week is Groupon (GRPN), a stock that has taken on some credibility since replacing its one time CEO, who never enjoyed the same cycle of adulation and disdain as did John Chambers. While the “Daily Deal” space is no longer one that gets much attention, Groupon has demonstrated that all of the cautionary views warning of how few barriers to entry existed, were vacuous. Where there were few barriers were to exit the space. 

In the meantime the options market is predicting a 13.9% move related to earnings, while a weekly 1.3% ROI could possibly be achieved with a price movement of less than 19%. While that kind of downward move is possible, there is some very strong support above there.

Finally, there is the frustration of owning AIG (AIG) at the moment. The frustration comes from watching for the second successive earnings report shares climb smartly higher in the after-hours and then completely reverse direction the following day. I continue to believe that its CEO, Robert Benmosche is something of a hero for the manner in which he has restored AIG and created an historical reference point in the event anyone ever questions some future day bailout of a systemically vital company.

None of that hero worship matters as far as any proposed purchased this coming week. However, shares may be well priced and in a sector that’s ready for some renewed interest.

Traditional Stocks: AIG, Cisco, MetLife, Whole Foods

Momentum Stocks: Mosaic

Double Dip Dividend: General Electric (ex-div 2/20), L Brands (ex-div 2/19), Transocean (ex-div 2/19)

Premiums Enhanced by Earnings: Groupon (12/20 PM) , Herbalife (2/18 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.

Oct272013

Weekend Update – October 27, 2013

Weekend Update

Watching Congressional testimony being given earlier this week by representatives of the various companies who were charged with the responsibility of assembling a functioning web site to coordinate enrollment in the Affordable Care Act it was clear that no one understood the concept of responsibility.

They did, however, understand the concept of blame and they all looked to the same place to assign that blame.

As a result there are increased calls for the firing or resignation of Kathleen Sebelius, Secretary of Health and Human Services. After all, she, in essence, is the CEO.

On the other hand, it was also a week that saw one billionaire, Bill Gross, the “Bond King” of PIMCO deign to give unsolicited advice to another billionaire, Carl Icahn, in how he should use his talents more responsibly. But then again, the latter made a big splash last week by trying to convince a future billionaire, Tim Cook, of the responsible way to deal with his $150 billion of cash on hand. Going hand in hand with a general desire to impart responsibility is the tendency to wag a finger.

Taking blame and accepting responsibility are essentially the same but both are in rare supply through all aspects of life.

This was an incredibly boring week, almost entirely devoid of news, other than for earnings reports and an outdated Employment Situation Report. The torrent of earnings reports were notable for some big misses, lots of lowered guidance and a range of excuses that made me wonder about the issue of corporate responsibility and how rarely there are cries for firings or resignations by the leaders of companies that fail to deliver as expected.

For me, corporate responsibility isn’t necessarily the touchy-feely kind or the environmentalist kind, but rather the responsibility to know how to grow revenues in a cost-efficient manner and then make business forecasts that reflect operations and the challenges faced externally. It is upon an implied sense of trust that individuals feel a certain degree of comfort or security investing assets in a company abiding by those tenets.

During earnings season it sometimes becomes clear that living up to that responsibility isn’t always the case. For many wishing to escape the blame the recent government shutdown has been a godsend and has already been cited as the reason for lowered guidance even when the business related connection is tenuous. Instead of cleaning up one’s own mess it’s far easier to lay blame.

For my money, the ideal CEO is Jamie Dimon, of JP Morgan Chase (JPM). Burdened with the legacy liabilities of Bear Stearns and others, in addition to rogue trading overseas, he just continues to run operations that generate increasing revenues and profits and still has the time to accept responsibility and blame for things never remotely under his watch. Of course, the feeling of being doubly punished as an investor, first by the losses and then by the fines may overwhelm any feelings of respect.

Even in cases of widely perceived mismanagement or lack of vision, the ultimate price is rarely borne by the one ultimately responsible. Instead, those good earnings in the absence of revenues came at the expense of those who generally shouldered little responsibility but assumed much of the blame. While Carl Icahn may not be able to make such a case with regard to Apple, the coziness of the boardroom is a perfect place to abdicate responsibility and shift blame.

Imagine how convenient it would be if the individual investor could pass blame and its attendant burdens to those wreaking havoc in management rather than having to shoulder that burden of someone else’s doing as they watch share prices fall.

Instead, I aspire to “Be Like Jamie,” and just move on, whether it is a recent plunge by Caterpillar (CAT) or any others endured over the years.

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

Andrew Liveris, CEO of Dow Chemical (DOW) was everyone’s favorite prior to the banking meltdown and was a perennial guest on financial news shows. His star faded quickly when Dow Chemical fell to its lows during the financial crisis and calls for his ouster were rampant. Coincidentally, you didn’t see his ever-present face for quite a while. Those calls have halted, as Liveris has steadily delivered, having seen shares appreciate over 450% from the market lows, as compared to 157% for the S&P 500. Shares recently fell after earnings and is closing in to the level that I would consider a re-entry point. Now offering weekly option contracts, always appealing premiums and a good dividend, Dow Chemical has been a reliable stock for a covered option strategy portfolio and Andrew Liveris has had a reliable appearance schedule to match.

A company about to change leadership, Coach (COH) has been criticized and just about left for dead by most everyone. Coach reported earnings last week and for a short while I thought that the puts I had sold might get assigned or be poised for rollover. While shares recovered from their large drop, I was a little disappointed at the week ending rally, as I liked the idea of a $48 entry level. However, given its price history and response to the current level, I think that ownership is still warranted, even with that bounce. Like Dow Chemical, the introduction of weekly options and its premiums and dividend make it a very attractive stock in a covered call strategy. Unlike Dow Chemical, I believe its current price is much more attractive.

I’m not certain how to categorize the CEO of Herbalife (HLF). If allegations regarding the products and the business model prove to be true, he has been a pure genius in guiding share price so much higher. Of course, then there’s that nasty fact that the allegations turned out to be true.

Herbalife reports earnings this week and if you have the capacity for potential ownership the sale of out of the money puts can provide a 1.2% return even of shares fall 17%. The option market is implying a 10% move. That is the kind of differential that gets my attention and may warrant an investment, even if the jury is still out on some of the societal issues.

In the world of coffee, Dunkin Brands (DNKN) blamed K-Cups and guided toward the lower end of estimates. Investors didn’t care for that news, but they soon got over it. The category leader, Starbucks (SBUX) reports earnings this week. I still consider Howard Schultz’s post-disappointing earnings interview of 2012 one of the very best in addressing the issues at hand. But it’s not Starbucks that interests me this week. It’s Green Mountain Coffee Roasters (GMCR). Itself having had some questionable leadership, it restored some credibility with the appointment of its new CEO and strengthening its relationships with Starbucks. Shares have fallen about 25% in the past 6 weeks and while not reporting its own earnings this week may feel some of the reaction to those from Starbucks, particularly as Howard Schultz may characterize the nature of ongoing alliances. Green Mountain shares have returned to a level that I think the adventurous can begin expressing interest. I will most likely do so through the sale of puts, with a strike almost 5% out of the money being able to provide a 1.2% ROI. The caveat is that CEO Brian Kelley may soon have his own credibility tested as David Einhorn has added to his short position and has again claimed that there are K-cup sales discrepancies. Kelley did little to clear up the issue at a recent investor day meeting.

Baxter International (BAX) has held up reasonably well through all of the drama revolving around the medical device tax and the potential for competition in the hemophilia market by Biogen Idec (BIIB). WIth earnings out of the way and having approached its yearly low point I think that it is ready to resume a return to the $70 range and catching up to the S&P 500, which it began to trail in the past month when the issues of concern to investors began to take root.

MetLife (MET) has settled into a trading range over the past three months. For covered calls that is an ideal condition. It is one of those stocks that I had owned earlier at a much lower price and had assigned. Waiting for a return to what turned out to be irrationally low levels was itself irrational, so I capitulated and purchased shares at the higher level. In fact, four times in the past two months, yielding a far better return than if shares had simply been bought and held. Like a number of the companies covered this week it has that nice combination of weekly option contracts, appealing premiums and good dividends.

Riverbed Technology (RVBD) reports earnings this week, along with Seagate Technology (STX). Riverbed is a long time favorite of mine and has probably generated the greatest amount of premium income of all of my past holdings. However, it does require some excess stomach lining, especially as earnings are being released. I currently own two higher cost lots and uncharacteristically used a longer term call option on those shares locking in premium in the face of an earnings report. However, with recent price weakness I’m re-attracted to shares, particularly when a 3 week 1.7% ROI can be obtained even if shares fall by an additional 13%. In general, I especially like seeing price declines going into earnings, especially when considering the sale of puts just in advance of earnings. Riverbed Technology tends to have a history of large earnings moves, usually due to providing pessimistic guidance, as they typically report results very closely aligned with expectations.

Seagate Technology reports earnings fresh off the Western Digital (WDC) report. In a competitive world you might think that Western Digital’s good fortunes would come at the expense of Seagate, but in the past that hasn’t been the case, as the companies have traveled the same paths. With what may be some of the surprise removed from the equation, you can still derive a 1% ROI if Seagate shares fall less than 10% in the earnings aftermath through the sale of out of the money put contracts.

ConAgra (CAG) and Texas Instruments (TXN) both go ex-dividend this week. I think of them both as boring stocks, although Texas Instruments has performed nicely this year, while ConAgra has recently floundered. On the other hand, Texas Instruments is one of those companies that has fallen into the category of meeting earnings forecasts in the face of declining revenues by slashing worker numbers.

Other than the prospect of capturing their dividends I don’t have deeply rooted interest in their ownership, particularly if looking to limit my new purchases for the week. However, any opportunity to get a position of a dividend payment subsidized by an option buyer is always a situation that I’m willing to consider.

Finally, as this week’s allegation that NQ Mobile (NQ), a Chinese telecommunications company was engaged in “massive fraud” reminds us, there is always reason to still be circumspect of Chinese companies. While the short selling firm Muddy Waters has been both on and off the mark in the past with similar allegations against other companies they still get people’s attention. The risk of investing in companies with reliance on China carries its own risk. YUM Brands (YUM) has navigated that risk as well as any. With concern that avian flu may be an issue this year, that would certainly represent a justifiable shifting of blame in the event of reduced revenues. At its recent lower price levels YUM Brands appears inviting again, but may carry a little more risk than usual.

Traditional Stocks: Baxter International, Dow Chemical, MetLife

Momentum Stocks: Coach, Green Mountain Coffee Roasters, YUM Brands

Double Dip Dividend: ConAgra (ex-div 10/29), Texas Instruments (ex-div 10/29)

Premiums Enhanced by Earnings: Herbalife (10/28 PM), Riverbed Technology (10/28 PM), Seagate Technology (10/28 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.