Oct292016

Weekend Update – October 30, 2016

Weekend Update

It’s good to have certainty in all matters of life.

I think.

There’s no doubt that stock market investors like to have certainty, or at the very least they really don’t like uncertainty.

Personally, when it comes to investing and the opportunities present when pursuing the sale of options, I like that intersection between certainty and uncertainty, especially if there is a volley back and forth, but the range is well defined.

That’s because that volley gives rise to more generous option premiums even as the risk may not reflect what is being paid.

Within that context, I’ve liked 2016, other than the brief reaction served up in response to the December 2015 interest rate increase decision by the FOMC.

With 2016 coming to an end in just 2 months and after the past week of corporate earnings, it was still hard to know where the economy was standing and whether the FOMC might have better justification to finally implement another rate increase, as we’ve all been expecting for almost a year.

So far, this most recent earnings season hasn’t provided very much of a pattern of good news on top and bottom line beats and there hasn’t very much in the way of optimistic guidance being given.

What certainty was missing over the past week with regard to the direction of the economy gave way to some certainty on Friday, however.

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Feb62016

Weekend Update – February 7, 2016

Weekend Update

If the recently deceased Harlem Globetrotters’ great player, Meadowlark Lemon had been alive today and helping the equally great band, The Byrds, re-write their classic song, it would likely get a new title.

The title would perfectly describe what this past week was a all about.

“Spin, Spin, Spin.”

Whether it was post-Iowa Caucus result speeches by the candidates or President Obama’s comments in the aftermath of Friday’s disappointing Employment Situation Report and downward revision to the previous month, it’s easy to see the spin going around and around.

No wonder the stock market is getting dizzy and dizzier, despite its heights getting lower and lower.

With confusion coming from Iowa regarding the definition of “winning” from both sides of the aisle you could easily be excused for shaking your head as the week started.

Then, when a picture of decreasing employment numbers alongside increasing jobless claims numbers was painted as reflecting an increasingly robust economy you could have been further excused for shaking your head into the week’s end.

Politicians who want an opportunity to create a legacy, as well as lame duck politicians who want to cement a legacy are very adept at spin and the ability to portray everything in terms of black and white.

The other side is always wrong and the facts are as portrayed and not as fact.

For stock investors life was much easier when only having to deal with the paradoxical association between oil and stocks.

You simply awoke in the morning and saw where West Texas Intermediate was trading and knew that the stock market would go in the same direction.

Now they’re back into having to decide whether news they hear is good or bad and whether to react appropriately to that news or paradoxically.

Of course, that would be easier if news was really presented on a factual basis and not so quickly subjected to overwhelmingly sanctimonious spin.

With the notion that evidence of a slow down in the economy would make the likelihood of further Federal Reserve rate hikes less, bad news was once again being taken as good news. The predominance of oil, however, as a factor in the market’s direction may have been obscuring some of that newly rediscovered fractured thought process.

With the market having spent the week going back and forth with numerous large intra-day moves and some large daily moves, it all came down to Friday’s trading to determine the fate of the DJIA for the week, as it had only been 34 points lower heading into the final day of trading. That week included one day with a loss of 290 points and the following day with a gain of 193 points.

If you were among those for whom confidence could have been inspired by those kind of movements, then any kind of upcoming spin could have led you in any direction.

Of course, the direction also depended on whether you are now of the increasing frame of mind that good news is bad news.

While we awaited Friday morning’s Employment Situation Report release and the DJIA had been down only 0.2%, the broader indexes weren’t faring quite as well.

The S&P 500 had already been 1.3% lower on the week and the NASDAQ 100 was down 2.6%.

With Friday morning’s release, the data, while disappointing was likely not weak enough to give cause for much celebration for those looking for good reason to dismiss the possibility of future interest rate hikes in 2016.

What may have cast a pall on the market was the Presidential spin that focused on the 4.9% jobless rate and wage growth.

If you were among those interpreting bad news as being good, you had to interpret that kind of spin as being good news.

And that can only be bad as the FOMC had certainly not closed the door on further interest rate increases in its recent statement.

While the DJIA lost an additional 1.3% to end the week, the NASDAQ 100 tacked on an additional 3.4% to its already sizable loss for the week, while the S&P 500 lost an additional 1.9%.

Good luck trying to spin that as we begin to prepare for the coming week.

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

Having suffered the direct blow from decrease oil prices and the indirect blow from what those decreasing prices have wrought upon the market, it’s not easy to consider adding another energy position.

Who can begin to count the number of times over the past 15 months that it didn’t look as if we had hit a once in a generation kind of rock bottom bargain price for a barrel of oil?

With ConocoPhillips (NYSE:COP) having just slashed its dividend, you do have to wonder whether British Petroleum (NYSE:BP) could be next.

WHile its dividend this week is presumably safe, it’s harder to make that case for the remainder of 2016 if rude prices continue to test lows. In its defense, British Petroleum is better diversified than ConocoPhillips is after having spun off its refining assets a few years ago, but the risk of insufficient cash flow is still there.

What is also there is a very nice option premium in reflection of further risk.

Looking at the option premiums, I am inclined to look at more than a weekly option contract, as is normally my approach for positions going ex-dividend during the week.

The exaggerated volatility of the past 2 weeks is really enhancing the premium and the dividend is extraordinary, while likely having more safety than the option market may be surmising.

Also ex-dividend this week are DuPont (NYSE:DD) and International Paper (NYSE:IP).

While DuPont has gone considerably higher in the past two weeks, I believe that in the absence of general market weakness it can recapture much of what had been lost following the announcement of a complex deal with Dow Chemical (NYSE:DOW).

With some strength also seen in Dow Chemical recently, I took the opportunity to sell calls on uncovered shares and is a portion of the strategic theme for this week, I used an out of the money strike price and a longer term time frame than I would normally consider in an effort to lock in some higher volatility driven option premiums and to regain lost share value.

The same approach holds for if considering a purchase of International Paper.

While it’s recent earnings report exceeded expectations and met whisper numbers, its stock price trend for the past year has been decidedly lower and lower, even in the absence of structural or operating issues.

While its payout ratio is getting uncomfortably high, the generous premium should continue to be safe and I might consider locking in the premium for a longer term, perhaps to even encompass an additional ex-dividend date in May 2016, although upcoming earnings would also have to be considered if doing so.

For that reason, I might even consider going out to a July 2016 expiration in the anticipation that some of that lost luster in its price will be regained by then,

Although not ex-dividend this week, EMC Corporation (NYSE:EMC) is among some of those fallen angels in the technology sector and which are beginning to celebrate their newly found volatility with some enhanced option premiums.

Somehow lost in the story with EMC is that there is a buyout offer that appears to be on track for completion and at a price that is substantially higher than Friday’s closing price.

I’m not one to play in the same arena with those expert in the science and art of arbitrage, but this one seems to offer some opportunity, even as the deal isn’t expected to close until the end of the year.

While there may still be regulatory hurdles head, EMC appears to be a willing partner and while awaiting a decision, there are still some dividends to be had.

For that reason, I might consider buying shares and selling a longer term and significantly out of the money option contract. Since I also already have existing shares at $30, I might consider combining lots and selling calls at a strike below the cost of the original lot, not counting accumulated premiums and dividends.

Finally, I just don’t think that I can any longer resist buying shares of eBay (NASDAQ:EBAY) at this level.

eBay was one of my more frequent holdings until the announcement of its definitive plan to spin off its profitable PayPal (NASDAQ:PYPL) unit.

What could be more appropriate when talking about the week’s spin than to look at a post-spin eBay?

For years I loved holding eBay as it made little net movement, even as it had occasional spikes and plunges usually earnings related. All that meant was that it had an attractive option premium, with relatively little risk associated with it, as long as you didn’t mind those occasional plunges that were inevitably reversed.

WIth no real challenge ahead of it other than market risk in general, eBay is now at its post spin-off low and is offering a great option premium for what I perceive to be low risk.

WIth those premiums so attractive, but mindful that there may be near term market risk, I would probably think in terms of selling longer term and out of the money call contracts on any shares that I purchased.

While the market could continue to be further dragged down by declining oil prices and while games are still being played with what economic data really means and how it should be interpreted, you do have to wonder how any of that impacts eBay.

I know that I do.

Traditional Stocks: eBay, EMC Corporation

Momentum Stocks: none

Double-Dip Dividend: British Petroleum (2/10 $0.59), DuPont (2/10 $0.38), International Paper (2/11 $0.38)

Premiums Enhanced by Earnings:

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.

Nov72015

Weekend Update – November 8, 2015

Weekend Update

For a very brief period of time before October’s release of the Employment Situation Report and for about 90 minutes afterward, the stock market had started doing something we hadn’t seen for quite a while.

Surprisingly, traders had been interpreting economic news in a rational sort of way. Normally, you wouldn’t have to use the word "surprisingly" to describe that kind of behavior, but for the preceding few years the market was focused on just how great the Federal Reserve’s monetary policy was for equity investors and expressed fear at anything that would take away their easy access to cheap money or would make alternative investments more competitive.

The greatest increment of growth in our stock market over the past few years occurred when bad news was considered good and good news was considered good.

To be more precise, however, that greatest increment of growth occurred when there was the absence of good economic news in the United States and the presence of good economic news in China.

What that meant was that good economic news in the United States was most often greeted as being a threat. Meanwhile back in the good old days when China was reporting one unbelievable quarter after another, their good economic news fueled the fortunes of many US companies doing business there.

Then the news from China began to falter and we were at a very odd intersection when the market was achieving new highs even as so many companies were in correction mode as a Chinese slowdown and supremacy of American currency conspired to offset the continuing gift from the FOMC.

At the time of the release of October’s Employment Situation Report the market initially took the stunningly low number and downward revisions to previous months as reflecting a sputtering economy and added to the losses that started some 6 weeks earlier and that had finally taken the market into a long overdue correction.

90 minutes later came an end to rational behavior and the market rallied in the belief that the bad news on employment could only mean a continuation of low interest rates.

In other words, stock market investors, particularly the institutions that drive the trends were of the belief that fewer people going back to work was something that was good for those in a position to put money to work in the stock market.

Of course, they would never come right out and say that. Instead, there was surely some proprietary algorithm at work that set up a cascading avalanche of buy orders or some technical factors that conveniently removed all human emotion and empathy from the equation.

As bad as the employment numbers seemed, the real surprise came a few weeks later as the FOMC emerged from its meeting and despite not raising rates indicated that employment gains at barely above the same level everyone had taken to be disappointing would actually be sufficient to justify an interest rate increase.

The same kind of reversal that had been seen earlier in the month after the Employment Situation Report was digested was also seen after the most recent FOMC Statement release had started settling into the minds of traders. However, instead of taking the market off in an inappropriate direction, there came the realization that an increase in interest rates can only mean that the economy is improving and that can only be a good thing.

Fast forward a couple of weeks to this past week and with the uncertainty of the week ending release of the Employment Situation Report the market went nicely higher to open the first 2 days of trading.

There seemed to be a message being sent that the market was ready to once again accept an imminent interest rate increase, just as it had done a few months prior.

That seemed like a very adult-like sort of thing to do.

The real surprise came when the number of new jobs was reported to be nearly double that of the previous month and was coupled with reports of the lowest unemployment rate in almost 8 years and with a large increase in wages.

Most any other day over the past few years and that combination of news would have sent the market swooning enough to make even the fattest finger proud.

With all of those people now heading back to work and being in a position to begin spending their money in a long overdue return to conspicuous consumption, this coming week’s slew of national retailers reporting earnings may provide some real insight into the true health of the economy.

While the results of the past quarter may not yet fully reflect the improving fortunes of the workforce, I’m more inclined to listen closely to the forecasting abilities of Terry Lundgren, CEO of Macy’s (M) and his fellow retail chieftains than to most any nation’s official data set.

Hopefully, the good employment news of last week will be one of many more good pieces to come and will continue to be accepted for what they truly represent.

While the cycle of increasing workforce participation, rising wages and increased discretionary spending may stop being a virtuous one at some point, that point appears to be far off into the future and for now, I would trade off the high volatility that I usually crave for some sustained move higher that reflects some real heat in the economy.

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

What better paired trade could there be than Aetna (AET) and Altria (MO)?

I don’t mean that in terms of making the concurrent trades by taking a long position in one and a short position in the other, but rather on the basis of their respective businesses.

In the long term, Altria products will likely hasten your death while still making lots of money in the process and Aetna’s products will begrudgingly try to delay your death, being now forced to do so even when the costs of doing so will exceed the premiums being paid.

Either way, you lose, although there may be some room for a winner or two in either or both of these positions as they both had bad weeks even as the broader market finished higher for the 6th consecutive week.

Both have, in fact, badly trailed the S&P 500 since it started its rally after the October Employment Situation Report.

Aetna, although still sporting a low "beta," a measure of volatility, has been quite volatile of late and its option premium is reflecting that recent volatility even as overall volatility has returned to its historically low levels for the broader market.

With Aetna having recently reported earnings and doing what so many have done, that is beating on earnings, but missing on revenues, it had suffered a nearly 8% decline from its spike upon earnings.

That seems like a reasonable place to consider wading in, particularly with optimistic forward guidance projections and a very nice selection of option premiums.

Walgreens Boots Alliance (WBA) is ex-dividend this week. Although its dividend is well below that of dividend paying stocks in the S&P 500 its recent proposal to buy competitor Rite Aid (RAD) has increased its volatility and made it more appealing of a dividend related trade.

With some displeasure already being expressed over the buyout, Walgreens Boots Alliance will surely do the expected and sell or close some existing stores of both brands and move on with things. But until then, the premiums will likely continue somewhat elevated as Walgreens seeks to further spread its footprint across the globe.

With about a 10% drop since reporting earnings at the end of October there isn’t too much reason to suspect that it will be single out from the broader market to go much lower, unless some very significant and loud opposition to its expansion plans surfaces. With the Thanksgiving holiday rapidly approaching, I don’t think that those objections are going to be voiced in the next week or two.

International Paper (IP) is also ex-dividend this coming week and I think that I’m ready to finally add some shares to an existing lot. Like many other stocks in the past year, it’s road to recovery has been unusually slow and it is a stock that has been among those falling on hard times even as the market rallied to its highs.

While it has recovered quite a bit from its recent low, International Paper has given back some of that gain since reporting earnings last week.

Its price is now near, although still lower than the range at which I like to consider buying or adding shares. The impending dividend is often a catalyst for considering a purchase and that is definitely the case as it goes ex-dividend in a few days.

Its premium is not overly generous, as the option market isn’t perceiving too much uncertainty in the coming week, but the stock does offer a very nice dividend and I may consider using an extended option to try and make it easier to recoup the share price drop due to its dividend distribution. 

Macy’s reports earnings this week and it has had a rough ride after each of its last two earnings reports. When Macy’s is the one reporting store closures, you know that something is a miss in retail or at least some real sea change is occurring.

The fact that the sea change is now showing profits at Amazon (AMZN) for a second consecutive quarter may spell bad things for Macy’s.

The options market must see things precisely that way, because it is implying a 9.2% move in Macy’s next week, which is unusually large for it, although no doubt having taken those past two quarters into account.

Normally, I look for opportunities to sell puts on those companies reporting earnings when I can achieve a 1% ROI on that sale by selecting a strike price outside of the range implied by the option market.

In this case that’s possible, although utilizing a strike that’s 10% below Friday’s close doesn’t offer too large of a margin for error.

However, I think that CEO Lundgren is going to breathe some life into shares with his guidance. I think he understands the consumer as well as anyone, just as he had some keen insight long before anyone else, when explaining why the energy and gas price dividend being received by consumers wasn’t finding its way to retailers, nearly a year ago.

Finally, the most interesting trade of the week may be Target (TGT).

Actually, it may be a trade that takes 2 weeks to play out as the stock is ex-dividend on Monday of the following week and then reports earnings two days later.

Being ex-dividend on a Monday means that if assigned early it would have to occur by Friday of this coming week. However, due to earnings being released the following week the option premiums are significantly enhanced.

What that offers is the opportunity to consider buying shares and selling an extended weekly, deep in the money call with the aim of seeing the shares assigned early.

For example, at Friday’s close of $77.21, the sale of a November 20, 2015 $75.50 call would provide a premium of $2.60.

That would leave a net of $0.89 if shares were assigned early, or an ROI of 1.15% for the 5 day holding, with shares more likely to be assigned early the more Target closes above $76.06 by the close of Friday’s trading.

However, if not assigned early that ROI could climb to 1.9% for the 2 week holding period even if Target shares fall by as much as 2.2% upon earnings.

So maybe it’s not always a misplaced sense of logic to consider bad news as being a source for good things to come.

 

Traditional Stocks: Aetna, Altria

Momentum Stocks: none

Double-Dip Dividend: International Paper (11/12 $0.44), Target (11/16 $0.56), Walgreens Boots Alliance (11/12 $0.36)

Premiums Enhanced by Earnings: Macy’s (11/11 AM)

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

Aug82015

Weekend Update – August 9, 2015

Weekend Update

In an age of rapidly advancing technology, where even Moore’s Law seems inadequate to keep up with the pace of advances, I wonder how many kids are using the same technology that I used when younger.

It went by many names, but the paper “fortune teller” was as good a tool to predict what was going to happen as anything else way back then.

Or now.

It told your fortune, but for the most part the fortunes were binary in nature. It was either good news that awaited you later in life or it was bad news.

I’m not certain that anything has actually improved on that technology in the succeeding years. While you may be justified in questioning the validity of the “fortune teller,” no one really got paid to get it right, so you could excuse its occasional bad forecasting or imperfect vision. You were certainly the only one to blame if you took the results too seriously and was faced with a reality differing from the prediction.

The last I checked, however, opinions relating to the future movements of the stock market are usually compensated. Those compensations tend to be very generous as befitting the rewards that may ensue to those who predicate their actions on the correct foretelling of the fortunes of stocks. However, since it’s other people’s money that’s being put at risk, the compensations don’t really reflect the potential liability of getting it all wrong.

Who would have predicted the concurrent declines in Disney (NYSE:DIS) and Apple (NASDAQ:AAPL) that so suddenly placed them into correction status? My guess is that with a standard paper fortune teller the likelihood of predicting the coincident declines in Disney and Apple placing them into correction status would have been 12.5% or higher.

Who among the paid professionals could have boasted of that kind of predictive capability even with the most awesome computing power behind them?

If you look at the market, there really is nothing other than bad news. 200 Day Moving Averages violated; just shy of half of the DJIA components in correction; 7 consecutive losing sessions and numerous internal metrics pointing at declining confidence in the market’s ability to move forward.

While this past Friday’s Employment Situation Report provided data that was in line with expectations, wages are stagnant If you look at the economy, it doesn’t really seem as if there’s the sort of news that would drive an interest rate decision that is emphatically said to be a data driven process.

Yet, who would have predicted any of those as the S&P 500 was only 3% away from its all time highs?

I mean besides the paper fortune teller?

Seemingly paradoxical, even while so many stocks are in personal correction, the Volatility Index, which many look at as a reflection of uncertainty, is down 40% from its 2015 high.

As a result option premiums have been extraordinarily low, which in turn has made them very poor predictors of price movements of late, as the implied move is based upon option premium levels.

Nowhere is that more obvious than looking at how poorly the options market has been able to predict the range of price movements during this past earnings season.

Just about the only thing that could have reasonably been predicted is that this earnings season who be characterized by the acronym “BEMR.”

“Beat on earnings, missed on revenues.”

While a tepid economy and currency exchange have made even conservative revenue projections difficult to meet, the spending of other people’s money to repurchase company shares has done exactly what every CEO expected to be the case. Reductions in outstanding shares have boosted EPS and made those CEOs look great.

Even a highly p[aid stock analyst good have predicted that one.

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

Not too surprisingly after so many price declines over the past few weeks, so many different stocks look like bargains. Unfortunately, there’s probably no one who has been putting money at risk for a while who hasn’t been lured in by what seemed to be hard to resist prices.

It’s much easier to learn the meaning of “value trap” by reading about it, rather than getting caught in one.

One thing that is apparent is that there hasn’t been a recent rush by those brave enough to “buy on the dip.” They may sim
ply be trading off bravery for intelligence in order to be able to see yet another day.

With my cash reserves at their lowest point in years, I would very much like to see some positions get assigned, but that wish would only be of value if I could exercise some restraint with the cash in hand.

One stock suffering and now officially in correction is Blackstone (NYSE:BX). It’s descent began with its most recent earnings report. The reality of those earnings and the predictions for those earnings were far apart and not in a good way.

CEO Schwarzman’s spin on performance didn’t seem to appease investors, although it did set the tone for such reports as “despite quarterly revenues and EPS that were each 20% below consensus. That consensus revenue projection was already one that was anticipating significantly reduced levels.

News of the Blackstone CFO selling approximately 9% of his shares was characterized as “unloading” and may have added to the nervousness surrounding the future path of shares.

But what makes Blackstone appealing is that it has no debt on its own balance sheet and its assets under management continue to grow. Even as the real estate market may present some challenges for existing Blackstone properties, the company is opportunistic and in a position to take advantage of other’s misery.

Shares command an attractive option premium and the dividend yield is spectacular. However, I wouldn’t necessarily count on it being maintained at that level, as a look at Blackstone’s dividend payment history shows that it is a moving target and generally is reduced as share price moves significantly lower. The good news, however, is that shares generally perform well following a dividend decrease.

Joining Blackstone in its recent misery is Bed Bath and Beyond (NASDAQ:BBBY). While it has been in decline through 2015, its most recent leg of that decline began with its earnings report in June.

That report, however, if delivered along with the most recent reports beginning a month ago, may have been met very differently. Bed Bath and Beyond missed its EPS by 1% and met consensus expectations for revenue.

Given, however, that Bed Bath and Beyond has been an active participant in share buybacks, there may have been some disappointment that EPS wasn’t better.

However, with more of its authorized cash to use on share buy backs, Bed Bath and Beyond has been fairly respectful in the way it uses other people’s money and has been more prone to buying shares when the stock price is depressed, in contrast to some others who are less discriminating. As shares are now right near a support level and with an option premium recognizing some of the uncertainty, these shares may represent the kind of value that one of its ubiquitous 20% of coupons offers.

The plummet is Disney shares this week following earnings is still somewhat mind boggling, although short term memory lapses may account for that, as shares have had some substantial percentage declines over the past few years.

Disney’s decline came amidst pervasive weakness among cable and content providers as there is a sudden realization that their world is changing. Words such as “skinny” and “unbundling” threaten revenues for Disney and others, even as revenues at theme parks and movie studios may be bright spots, just as for Comcast (NASDAQ:CMCSA).

As with so many other stocks as the bell gets set to ring on Monday morning, the prevailing question will focus on value and relative value. Disney’s ascent beyond the $100 level was fairly precipitous, so there isn’t a very strong level of support below its current price, despite this week’s sharp decline. That may provide reason to consider the sale of puts rather than a buy/write, if interested in establishing a position. Additionally, a longer term time frame than the one week that I generally prefer may give an opportunity to generate some income with relatively low risk while awaiting a more attractive stock price.

While much of the attention has lately been going to PayPal (NASDAQ:PYPL) and while I am now following that company, it’s still eBay (NASDAQ:EBAY) that has my focus, after a prolonged period of not having owned shares. Once a mainstay of my holdings and a wonderful covered option trade it has become an afterthought, as PayPal is considered to offer better growth prospects. While that may be true, I generally like to see at least 6 months of price history before considering a trade in a new company.

However, as a covered option trader, growth isn’t terribly important to me. What is important is discovering a stock that can have some significant event driven price movements in either direction, but with a tendency to predictably revert to its mean. That creates a situation of attractive option premiums and rel
atively defined risk.

eBay is now again trading in a narrow range after some of the frenzy associated with its PayPal spin-off, albeit the time frame for that assessment is limited. However, as it has traded in a relatively narrow range following the spin-off, the option premium has been very attractive and I would like to consider shares prior to what may be an unwanted earnings surprise in October.

Sinclair Broadcasting (NASDAQ:SBGI) reported earnings last week beating both EPS and revenue expectations quite handily. However, the market’s initial response was anything but positive, although shares did recover about half of what they lost.

Perhaps shares were caught in the maelstrom that was directed toward cable and content providers as one thing that you can predict is that a very broad brush is commonly used when news is at hand. But as a plebian provider of terrestrial television access, Sinclair Broadcasting isn’t subject to the same kind of pressures and certainly not to the same extent as their higher technology counterparts.

I often like to consider the purchase of shares just before Sinclair Broadcasting goes ex-dividend, which it will do on August 28th. However, with the recent decline, I would consider a purchase now and selling the September 18, 2015 option contract at a strike level that could generate acceptable capital gains in addition to the dividend and option premium, while letting the cable and content providers continue to take the heat.

It seems only appropriate on a week that is focused on an old time paper fortune teller that some consideration be given to International Paper (NYSE:IP) as it goes ex-dividend this week. With its shares down nearly 17% from their 2015 high, the combination of perceived value, very fair option premium and generous dividend may be difficult to pass up at this time, while having passed it up on previous occasions during the past month.

International Paper’s earnings late last month fell in line with others that “BEMR,” but it shares remained largely unchanged since that report and shares appear to have some price support at its current level.

You may have to take my word for it, but Astra Zeneca (NYSE:AZN) is going ex-dividend this week. That information didn’t appear in any of the 3 sources that I typically use and my query to its investor relations department received only an automated out of office response. The company’s site stated that a dividend announcement was going to be made when earnings were announced on July 30th, but a week after earnings the site didn’t reflect any new information. Fortunately,someone at NASDAQ knew what I wanted to know.

Astra Zeneca pays its dividends twice each year, the second of which will be ex-dividend this week and is the smaller of the two distributions, yet still represents a respectable 1.3% payment.

I already own shares and haven’t been disappointed by shares lagging its peers. What I have been disappointed in, however, has been it’s inability to mount any kind of sustained move higher and the inability to sell calls on those shares, particularly as there had been some liquidity issues.

The recent stock split, however, has ameliorated some of those issues and there appears to be some increased options trading volume and smaller bid-ask discrepancies. Until that became the case, I had no interest in adding shares, but am now more willing to do so, also in anticipation of some performance catch-up to its other sector mates.

The promise that seemed to reside with shares of Ali Baba (NYSE:BABA) not so long ago has long since withered along with many other companies whose fortunes are closely tied to the Chinese economy.

Ali Baba reports earnings this week and the option market is predicting only a 6.7% price move. That seems to be a fairly conservative assessment of the potential for exhilaration or the potential for despair. However, a 1% ROI through the sale of a weekly put option is not available at a strike that’s below the bottom of the implied range.

For that reason, I would approach Ali Baba upon earnings in the same manner as with Green Mountain Keurig’s (NASDAQ:GMCR) earnings report. That is to only consider action after earnings are released and if shares drop below the implied lower end of the range. There is something nice about letting others exercise a torrent of emotion and fear and then cautiously wading into the aftermath.

Finally, during an earnings season that has seen some incredible moves, especially to the downside, Cree (NASDAQ:CREE) should feel right at home. It has had a great habit of surprising the options market, which is supposed to be able to predict the range of a stock’s likely price move, on a fairly regular basis.

With its products just about every where that you look you would either expect its revenues and earnings to be booming or you might think that it was in the throes of becoming commoditized.

What Cree used to be able to do was to trade in a very stable manner for prolonged periods after an earnings related plunge and then recover much of what it lost as subsequent earnings were released. That hasn’t been so much the case in the past year and its share price has been in continued decline in 2015, despite a momentary bump when it announced plans to spin-off a division to “unlock its full value.”

The option market is implying a 9.4% move when earnings are announced this coming week. By historical standards that is a low estimation of what Cree shares are capable of doing. While one could potentially achieve a 1% weekly ROI at a strike price nearly 14% below Friday’s closing price, as with Ali Baba, I would wait for the lights to go out on the share’s price before considering the sale of short term put options.

Traditional Stocks: Bed Bath and Beyond, Blackstone, Disney, eBay, Sinclair Broadcasting

Momentum Stocks: none

Double-Dip Dividend: Astra Zeneca (8/12 $0.45), International Paper (8/12 $0.40)

Premiums Enhanced by Earnings: Ali Baba (8/12 AM), Cree (8/11 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.

Jul42015

Weekend Update – July 5, 2015

Weekend Update

I used to work with someone who used the expression “It’s as clear as mud,” for just about every occasion, even the ones that had obvious causes, answers or paths forward.

Initially, most of us thought that was just some kind of an attempt at humor until eventually coming to the realization that the person truly understood nothing.

Right now, I feel like that person, although the fact that it took a group of relatively smart people quite a while to realize that person had no clue, may be more of a problem.

It should have been obvious. That’s why we were getting the big bucks, but the very possibility that someone who was expected to be capable, was in reality not capable, wasn’t even remotely considered, until it, too, became painfully obvious.

I see parallels in many of life’s events and the behavior of stock markets. As an individual investor the “clear as mud” character of the market seems apparent to me, but it’s not clear that the same level of diminished clarity is permeating the thought processes of those who are much smarter than me and responsible for directing the use of much more money than I could ever dream.

What often brings clarity is a storm that washes away the clouds and that perfect storm may now be brewing.

Whatever the outcome of the Greek referendum and whatever interpretation of the referendum question is used, the integrity of the EU is threatened if contagion is a by-product of the vote and any subsequent steps to resolve their debt crisis.

Most everyone agrees that the Greek economy and the size of the debt is small potatoes compared to what other dominoes in the EU may threaten to topple, or extract concessions on their debt.

Unless the stock market has been expressing fear of that contagion, accounting for some of the past week’s losses, there should be some real cause for concern. If those market declines were only focused on Greece and not any more forward looking than that, an already tentative market has no reason to do anything other than express its uncertainty, especially as critical support levels are approached.

Moving somewhat to the right on the world map, or the left, depending on how much you’re willing to travel, there is news that The People’s Republic of China is establishing a market-stabilization fund aimed at fighting off the biggest stock selloff in years and fears that it could spread to other parts of the economy. Despite the investment of $120 billion Yuan (about $19.3 billion USD) by 21 of the largest Chinese brokerages, the lesson of history is that attempts to manipulate markets tends not to work very well for more than a day or so.

That lesson seems to rarely be learned, as market forces can be tamed about as well as can forces of nature.

The speculative fervor in China and the health of its stock markets can create another kind of contagion that may begin with US Treasury Notes. Whether that means an increased escape to their safety or cashing in massive holdings is anyone’s guess. Understanding that is far beyond my ken, but somehow I don’t think that those much smarter than me have any clue, either.

Back on our own shores, this week is the start of another earnings season, although that season never really seems to end.

While I’ve been of the belief that this upcoming series of reports will benefit from a better than expected currency exchange situation, as previous forward guidance had been factoring in USD/Euro parity, the issue at hand may be the next round of forward guidance, as the Euro may be coming under renewed pressure.

Disappointing earnings at a time that the market is only 3% below its all time highs together with international pressures seems to paint a clear picture for me, but what do I know, as you can’t escape the fact that the market is only 3% below those highs.

The upcoming week may be another in a succession of recent weeks that I’ve had a difficult time finding a compelling reason to part with any money, even if that was merely a recycling of money from assigned positions.

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

Much of my interests this week are driven purely by performance relative to the S&P 500 over the previous 5 trading days and the belief that the extent of those price moves were largely unwarranted given the storm factors.

One exception, in that it marginally out-performed the S&P 500 last week, is International Paper (NYSE:IP). However, that hasn’t been the case over the past month, as the shares have badly trailed the market, possibly because its tender offer to retire high interest notes wasn’t as widely accepted as analysts had expected and interest payment savings won’t be realized to the anticipated degree.

Subsequently, shares have traded at the low end of a recent price cut target range. As it’s done so, it has finally returned to a price that I last owned shares, nearly a year ago and this appears to be an opportune time to consider a new position.

With that possibility, however, comes an awareness that earnings will be reported at the end of the month, as analysts have reduced their paper sales and expectations and profit margins have been squeezed as demand has fallen and input costs have risen.

DuPont’s (NYSE:DD) share decline wasn’t as large as it seemed as hitting a new 52 week low. That decline was exaggerated by about $3.20 after the completion of their spin-off of Chemours (NYSE:CC).

As shares have declined following the defeat of Nelson Peltz’s move to gain a seat on the Board of Directors, the option premium has remained unusually high, reflecting continued perception of volatility ahead. At a time when revenues are expected to grow in 2016 and shares may find some solace is better than expected currency exchange rates.

Cypress Semiconductor (NASDAQ:CY) has been on my wish list for the past few weeks and continues to be a possible addition during a week that I’m not expecting to be overly active in adding new positions.

What caused Cypress Semiconductor shares to soar is also what was the likely culprit in its decline. That was the proposed purchase of Integrated Silicon Solution (NASDAQ:ISSI) that subsequently accepted a bid from a consortium of private Chinese investors.

What especially caught my attention this past week was an unusually large option transaction at the $12 strike and September 18, 2015 expiration. That expiration comes a couple of days before the next anticipated ex-dividend date, so I might consider going all the way out to the December 18, 2015 expiration, to have a chance at the dividend and also to put some distance between the expiration and earnings announcements in July and October.

Potash (NYSE:POT) is ex-dividend this week and was put back on my radar by a reader who commented on a recent article about the company. While I generally lie to trade Mosaic (NYSE:MOS), the reader’s comments made me take another look after almost 3 years since the last time I owned shares.

The real difference, for me at least, between the 2 companies was the size of the dividend. While Potash has a dividend yield that is about twice the size of that of Mosaic, it’s payout ratio is about 2.7 times the rate of that of Mosaic.

While that may be of concern over the longer term, it’s not ever-present on my mind for a shorter term trade. When I last traded Potash it only offered monthly options. Now it has weekly and expanded weekly offerings, which could give opportunity to manage the position aiming for an assignment prior to its earnings report on July 30th.

During a week that caution should prevail, there are a couple of “Momentum” stocks that I would consider for purchase, also purely on their recent price activity.

It’s hard to find anything positive to say about Abercrombie and Fitch (NYSE:ANF). However, if you do sell call options, the fact that it has been trading at a reasonably well defined range of late while offering an attractive dividend, may be the best nice thing that can be said about the stock.

I recently had shares assigned and still sit with a much more expensive lot of shares that are uncovered. I’ve had 2 new lots opened in 2015 and subsequently assigned, both at prices higher than the closing price for the past week. There’s little reason to expect any real catalyst to move shares much higher, at least until earnings at the end of next month. However, perhaps more importantly, there’s little reason to expect shares to be disproportionately influenced by Greek or Chinese woes.

Trading in a narrow range and having a nice premium makes Abercrombie and Fitch a continuing attractive position, that can either be done as a covered call or through the sale of puts.

Bank of America (NYSE:BAC) is another whose shares were recently assigned and has given back some of its recent price gains while banks have been moving back and forth along with interest rates.

With the uncertainty of those interest rate movements over the next week and with earnings scheduled to be released the following week, I would consider a covered call trade that utilizes the monthly July 17, 2015 option, or even considering the August 21, 2015 expiration, to get the gift of time.

Finally, Alcoa (NYSE:AA) reports earnings this week after having sustained a 21.5% fall in shares in the past 2 months. That’s still not quite as bad as the 31% one month tumble it took 5 years ago, but shares have now fallen 36% in the past 7 months.

The option market is implying a 5% price movement next week, which on the downside would bring shares to an 18 month low.

Normally, I look for the opportunity to sell a put option in advance of earnings if I can get a 1% ROI for a weekly contract at a strike price that’s below the lower level determined by the option market’s implied movement. I usually would prefer not to take possession of shares and would attempt to delay any assignment by rolling over the short put position in an effort to wait out the price decline.

In this case the ROI is a little bit less than 1% if the price moves less than 6%, however, at this level, I wouldn’t mind taking ownership of shares, especially if Alcoa is going to move back to a prolonged period of share price stagnation as during 2012 and 2013.

That was an excellent time to be selling covered calls on the shares as premiums were elevated as so many were expecting price recovery and were willing to bet on it through options.

You can’t really go back in time, but sometimes history does repeat itself.

At least that much is clear.

Traditional Stocks: Cypress Semiconductor, DuPont, International Paper

Momentum Stocks: Abercrombie and Fitch, Bank of America

Double-Dip Dividend: Potash (7/8)

Premiums Enhanced by Earnings: Alcoa (7/8 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.