Aug302013

Weekend Update – September 1, 2013

Weekend Update

Behind every “old wives’ tale” there has to be a kernel of truth. That’s part of the basis for it being handed down from one generation to the next.

While I don’t necessarily believe that the souls of dead children reside in toads or frogs, who knows? The Pets.com sock puppet was real enough for people to believe in it for a while. No one got hurt holding onto that belief.

The old saw “Sell in May and go away,” has its origins in a simpler time. Back when The Catskills were the Hamptons and international crises didn’t occur in regular doses. There wasn’t much reason to leave your money in the stock market and watch its value predictably erode under the hot summer sun back in the old days.

Lately, some of those old wives’ tales have lost their luster, but the Summer of 2013 has been pretty much like the old days. With only a bare minimum of economic news and that part of the world that could impact upon our stock market taking a summer break, it has been an idyllic kind of season. In fact, with the market essentially flat from Memorial Day to Labor Day it was an ideal time to sell covered options.

So you would think that Syria could have at least waited just another week until the official end to the summer season, before releasing chemical weapons on its own citizens and crossing that “red line,” that apparently has meaning other than when sunburn begins and ends.

Or does it?

On Monday, Secretary of State John Kerry made it clear where the United States believed that blame lay. He used a kind of passion and emotion that was completely absent during his own Presidential campaign. Had he found that tone back in 2004 he might be among that small cadre of “President Emeritus” members today. On Friday he did more of the same and sought to remove uncertainty from the equation.

Strangely, while Kerry’s initial words and intent earlier in the week seemed to have been very clear, the market, which so often snaps to judgment and had been in abeyance awaiting his delayed presentation, didn’t know what to do for nearly 15 minutes. In fact, there was a slightly positive reaction at first and then someone realized the potentially market adverse meaning of armed intervention.

Finally, someone came to the realization that any form of warfare may not be a market positive. Although selling only lasted a single day, attempts to rally the markets subsequently all faded into the close as a variant on another old saying – “don’t stay long going into the weekend,” seemed to be at play.

That’s especially true during a long weekend and then even more true if it’s a long weekend filled with uncertainty. As it becomes less clear what our response will be, paradoxically that uncertainty has led to some calm. But at some point you can be assured that there will be a chorus of those questioning President Obama’s judgment and subsequent actions and wondering “what would Steve Jobs have done.”

John Kerry helped to somewhat answer that question on Friday afternoon and the market ultimately settled on interpreting the message as being calming, even though the message implied forceful action. What was clear in watching the tape is that algorithms were not in agreement over the meaning of the word “heinous.”

With the market having largely gone higher for the past 20 months the old saying seeking to protect against uncertainty during market closures has been largely ignored during that time.

But now with uncertainty back in the air and the summer season having come to its expected end, it is back to business as usual.

That means that fundamentals, such as the way in which earnings have ruled the market this past summer take a back seat to “events du jour” and the avalanche of economic reports whose relevance is often measured in nano-seconds and readily supplanted by the next bit of information to have its embargo lifted.

This coming week is one of great uncertainty. I made fewer than the usual number of trades last week and if i was the kind that would be prone to expressing regret over some of them, I would do so. I expect to be even more cautious this week, unless there is meaningful clarity introduced into the equation. While wishing for business as usual, that may not be enough for it to become reality.

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

While I currently own more expensive shares of Caterpillar (CAT), I almost always feel as if it’s a good time to add shares. Caterpillar has become everyone’s favorite stock to disparage, reaching its peak with famed short seller Jim Chanos’ presentation at the “Delivering Alpha Conference” a few weeks ago. as long as it continues trading in a $80-$90 range it is a wonderful stock for a covered call writing strategy and it has reliably stayed in that range.

Joy Global (JOY) reported its earnings last week and beat analysts estimates and reaffirmed its 2014 guidance. Nonetheless it was brutalized in the aftermath. Although already owning shares I took the opportunity to sell weekly put options in the belief that the reaction was well overdone.

If the reports of an improving Chinese economy are to be believed, and that may be a real test of faith, then Joy Global stands to do well. Like Caterpillar, it has traded in a reasonably narrow range and is especially attractive in the $48-53 neighborhood.

eBay (EBAY) is simply on sale, closing the week just below the $50 level. With no news to detract from its share price and having traded very well in the $50 -53 range, it’s hard to justify why it fell along with other stocks in the uncertainty that attended the concerns over Syria. It’s certainly hard to draw a straight line from Syria related fears to diminished earnings at eBay.

By the recent measure that I have been using, that is the comparison to the S&P 500 performance since May 21, 2013, the market top that preceded a small post-Ben Bernanke induced correction, eBay has well underperformed the index and may be relatively immune from short term market pressure.

Baxter International (BAX) is one of those stocks that I like to own and am sad to see get assigned away from me. Every job has its negative side and while most of the time I’m happy seeing shares assigned, sometimes when it takes too long for them to return to a reasonable price, I get forlorn. In this case, timing is very serendipitous, because Baxter has fallen in price and goes ex-dividend this week.

Coach (COH) also goes ex-dividend this week and that increases its appeal. At a time when retail has been sending very mixed messages, and at a time when Coach’s position at the luxury end is being questioned as Michael Kors (KORS) is everyone’s new darling, COach is yet another example of a stock that trades very well in a specific range and has been very well suited to covered option portfolios.

In general, I’ve picked the wrong year to be bullish on metals and some of my patience is beginning to wear thin, but I’ve been seeing signs of some stability recently, although once again, the risk of putting too much faith into a Chinese recovery may carry a steep price. BHP Billiton (BHP) is the behemoth that all others bow to and may soon receive the same kind of fear and respect from the potash industry, as it is a prime reason the cartel has lost some of its integrity. BHP Billiton also goes ex-dividend this week and is now about 6% below its recent price spurt higher.

Seagate Technology (STX) isn’t necessarily for the faint of heart. but it is down nearly 20% from its recent high, at a time when there is re-affirmation that the personal computer won’t be disappearing anytime soon. While many of the stocks on my radar screen this week have demonstrated strength within trading ranges, Seagate can’t necessarily lay claim to the same ability and you do have to be mindful of paroxysms of movement which could take shares down to the $32 level.

While Seagate Technology may offer the thrills that some people need and the reward that some people want, Walgreen (WAG) may be a happy compromise. A low beta stock with an option premium that is rewarding enough for most. Although Walgreen has only slightly under-performed the S&P 500 since May 21st, I think it’s a good choice now, given potential immunity from the specific extrinsic issues at hand, particularly if you are under-invested in the healthcare sector.

Another area in which I’m under-invested is in the Finance sector. While it hasn’t under-performed the S&P 500 recently, Bank of New York Mellon (BK) is still about 7% lower in the past 5 weeks and offers a little less of a thrill in ownership than some of my other favorites, JP Morgan Chase (JPM) and Morgan Stanley (MS). Sometimes, it’s alright giving up on the thrills, particularly in return for a competitive option premium and the ability to sleep a bit sounder at night.

Finally, with the excitement about Steve Ballmer finally leaving Microsoft (MSFT) after what seems like an eternity of such calls, the share price has simply returned to a more inviting re-entry levels. In fact, when Ballmer announced his decision to leave the CEO position in 12 months, I did something that I rarely do. I bought back my call options at a loss and then sold shares at the enhanced share price. Occasionally you see a shares appreciation outstrip the appreciation in the in the money premium and opportunities are created to take advantage of the excitement not being reflected in future price expectations.

At the post-Ballmer excitement stage there is still reason to consider share ownership, including the anticipation of another dividend increase and option premiums while awaiting assignment of shares

Traditional Stocks: Bank of New York Mellon, Caterpillar, eBay, Microsoft, Walgreen

Momentum Stocks: Joy Global, Seagate Technology

Double Dip Dividend: Baxter International (ex-div 9/4), BHP Billiton (ex-div 9/4), Coach (ex-div 9/5)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may be 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 over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

Aug22013

Weekend Update – August 4, 2013

Weekend Update

To summarize: The New York Post rumors, “The Dark SIde” and the FOMC.

This was an interesting week.

It started with the always interesting CEO of Overstock.com (OSTK) congratulating Steve Cohen, the CEO of SAC Capital, on his SEC indictment and invoking a reference to Star Wars to describe Cohen’s darkness, at least in Patrick Byrne’s estimations.

It ended with The New York Post, a one time legitimate newspaper suggesting that JC Penney (JCP) had lost the support of CIT (CIT), the largest commercial lender in the apparel industry, which is lead by the charisma challenged past CEO of The NYSE (NYX) and Merrill Lynch, who reportedly knows credit risk as much as he knows outrageously expensive waiting room and office furniture.

The problem is that if CIT isn’t willing to float the money to vendors who supply JC Penney, their wares won’t find their way into stores. Consumers like their shopping trips to take place in stores that actually have merchandise.

At about 3:18 PM the carnage on JC Penney’s stock began, taking it from a gain for the day to a deep loss on very heavy volume, approximately triple that of most other days.

Lots of people lost lots of money as they fled for the doors in that 42 minute span, despite the recent stamp of approval that George Soros gave to JC Penney shares. His money may not have been smart enough in the face of yellow journalism fear induced selling.

The very next morning a JC Penney spokesperson called the New York Post article “untrue.” It would have helped if someone from CIT chimed in and set the record straight. While the volume following the denial was equally heavy, very little of the damage was undone. As an owner of shares, Thane’s charisma would have taken an incredible jump had he added clarity to the situation.

So someone is lying, but it’s very unlikely that there will ever be a price to be paid for having done so. Clearly, either the New York Post is correct or JC Penney is correct, but only the New York Post can hide behind journalistic license. In fact, it would be wholly irresponsible to accuse the article of promoting lies, rather it may have recklessly published unfounded rumors.

By the same token, if the JC Penney response misrepresents the reality and is the basis by which individuals chose not to liquidate holdings, the word “criminal” comes to my mind. I suppose that JC Penney could decide to create a “Prison within a Store” concept, if absolutely necessary, so that everyday activities aren’t interrupted.

For the conspiracy minded the publication of an article in a “reputable” newspaper in the final hour of trading, using the traditional “unnamed sources” is problematic and certainly invokes thoughts of the very short sellers demonized by Patrick Byrne in years past.

Oh, and in between was the release of the FOMC meeting minutes, which produced a big yawn, as was widely expected.

I certainly am not one to suggest that Patrick Byrne has been a fountain of rational thought, however, it does seem that the SEC could do a better job in allaying investor concerns about an unlevel playing field or attempts to manipulate markets. Equally important is a need to publicly address concerns that arise related to unusual trading activity in certain markets, particularly options, that seem to occur in advance of what would otherwise be unforeseen circumstances. Timing and magnitude may in and of themselves not indicate wrongdoing, but they may warrant acknowledgement for an investing public wary of the process. A jury victory against Fabrice Tourre for fraud is not the sort of thing that the public is really looking for to reinforce confidence in the process, as most have little to no direct interaction with Goldman Sachs (GS). They are far more concerned with mundane issues that seem to occur with frequency.

Perhaps the answer is not closer scrutiny and prosecution of more than just high profile individuals. Perhaps the answer is to let anyone say anything and on any medium, reserving the truth for earnings and other SEC mandated filings. Let the rumors flow wildly, let CEOs speak off the top of their heads even during “quiet periods” and let the investor beware. By still demanding truth in filings we would still be at least one step ahead of China.

My guess is that with a deluge of potential misinformation we will learn to simply block it all out of our own consciousness and ignore the need to have reflexive reaction due to fear or fear of missing out. In a world of rampantly flying rumors the appearance of an on-line New York Post article would likely not have out-sized impact.

Who knows, that might even prompt a return to the assessment of fundamentals and maybe even return us to a day when paradoxical thought processes no longer are used to interpret data, such that good news is actually finally interpreted as good news.

I conveniently left out the monthly Employment Situation Report that really ended the week, but as with ADP and the FOMC, expectations had already been set and reaction was muted when no surprises were in store. The real surprise was the lack of reaction to mildly disappointing numbers, perhaps indicating that we’re over the fear of the known.

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

One of last week’s earnings related selections played true to form and dropped decidedly after earnings were released. Coach (COH) rarely disappoints in its ability to display significant moves in either direction after earnings and in this case, the disappointment was just shy of the $52.50 strike price at which I had sold weekly puts. However, with the week now done and at its new lower price, I think Coach represents a good entry point for new shares. With its newest competitor, at least in the hearts of stock investors, Michael Kors (KORS) reporting earnings this week there is a chance that Coach may drop if Kors reports better than expected numbers, as the expectation will be that it had done so at Coach’s expense. For that reason I might consider waiting until Tuesday morning before deciding whether to add Coach to the portfolio.

Although I currently own two higher priced lots of its shares, I purchased additional shares of Mosaic (MOS) after the plunge last week when perhaps the least known cartel in the world was poised for a break-up. While most people understand that the first rule of Cartel Club is that no one leaves Cartel Club, apparently that came as news to at least one member. The shares that I purchased last week were assigned, but I believe that there is still quite a bit near term upside at these depressed prices. While theories abound, such as decreased fertilizer prices will lead to more purchases of heavy machinery, I’ll stick to the belief that lower fertilizer prices will lead to greater fertilizer sales and more revenue than current models might suggest.

Barclays (BCS) is emblematic of what US banks went through a few years ago. The European continent is coming to grips with the realization that greater capitalization of its banking system is needed. Barclays got punished twice last week. First for suggesting that it might initiate a secondary offering to raise cash and then actually releasing the news of an offering far larger than most had expected. Those bits of bad news may be good news for those that missed the very recent run from these same levels to nearly $20. Shares will also pay a modest dividend during the August 2013 option cycle, but not enough to chase shares just for the dividend.

Royal Dutch Shell (RDS.A) released its earnings this past Thursday and the market found nothing to commend. On the other hand the price drop was appealing to me, as it’s not every day that you see a 5% price drop in a company of this caliber. For your troubles it is also likely to be ex-dividend during the August 2013 option cycle. While there is still perhaps 8% downside to meet its 2 year low, I don’t think that will be terribly likely in the near term. Big oil has a way of thriving, especially if we’re at the brink of economic expansion.

Safeway (SWY) recently announced the divestiture of its Canadian holdings. As it did so shares surged wildly in the after hours. I remember that because it was one of the stocks that I was planning to recommend for the coming week and then thought that it was a missed opportunity. However, by the time the market opened the next morning most of the gains evaporated and its shares remained a Double Dip Dividend selection. While its shares are a bit higher than where I most recently had been assigned it still appears to be a good value proposition.

Baxter International (BAX) recently beat earnings estimates but wasn’t shown too much love from investors for its efforts. I look at it as an opportunity to repurchase shares at a price lower than I would have expected, although still higher than the $70 at which my most recent shares were assigned. In this case, with a dividend due early in September, I might consider a September 17, 2013 option contract, even though weekly and extended weekly options are available.

I currently own shares of Pfizer (PFE), Abbott Labs (ABT) and Eli Lilly (LLY) in addition to Merck (MRK), so I tread a little gingerly when considering adding either more shares of Merck or a new position in Bristol Myers Squibb (BMY), while I keep an eye of the need to remain diversified. Both of those, however, have traded well in their current price range and offer the kind of premium, dividend opportunity and liquidity that I like to see when considering covered call related purchases. As with Baxter, in the case of Merck I might consider selling September options because of the upcoming dividend.

Of course, to balance all of those wonderful healthcare related stocks, following its recent price weakness, I may be ready to add more shares of Lorillard (LO) which have recently shown some weakness. The last time its shares showed some weakness I decided to sell longer term call contracts that currently expire in September and also allow greater chance of also capturing a very healthy dividend. As with some other selections this month the September contract may have additional appeal due to the dividend and offers a way to collect a reasonable premium and perhaps some capital gains while counting the days.

Finally, Green Mountain Coffee Roasters (GMCR) is a repeat of last week’s earnings related selection. I did not sell puts in anticipation of the August 7, 2013 earnings report as I thought that I might, instead selecting Coach and Riverbed Technology (RVBD) as earnings related trades. Inexplicably, Green Mountain shares rose even higher during that past week, which would have been ideal in the event of a put sale.

However, it’s still not to late to look for a strike price that is beyond the 13% implied move and yet offers a meaningful premium. I think that “sweet spot” exists at the $62.50 strike level for the weekly put option. Even with a 20% drop the sale of puts at that level can return 1.1% for the week.

The announcement on Friday afternoon that the SEC was charging a former Green Mountain low level employee with insider trading violations was at least a nice cap to the week, especially if there’s a lot more to come.

Traditional Stocks: Barclays, Baxter International, Bristol Myers Squibb, Lorillard, Merck, Royal Dutch Shell, Safeway

Momentum Stocks: Coach, Mosaic

Double Dip Dividend: Barclays (ex-div 8/7)

Premiums Enhanced by Earnings: Green Mountain Coffee Roasters (8/7 PM)

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

 

Jul202013

Weekend Update – July 21, 2013

Weekend Update

This week may have marked the last time Ben Bernanke sits in front of far less accomplished inquisitors in fulfilling his part of the obligation to provide congressional testimony in accordance with law.

The Senate, which in general is a far more genteel and learned place was absolutely fawning over the Federal Reserve Chairman who is as good at playing close to the vest as anyone, whether its regarding divulging a time table for the feared “tapering” or an indication of whether he will be leaving his position.

If anything should convince Bernanke to sign up for another round it would be to see how long the two-faced good will last and perhaps give himself the opportunity to remind his detractors just how laudatory they had been. But I can easily understand his taking leave and enjoying the ticker tape, or perhaps the “taper tick” parade that is due him.

But in a week when Treasury Secretary Jack Lew and Bernanke had opportunities to move the markets with their appearances, neither said anything of interest, nor anything that could be mis-interpreted.

Instead, at the annual CNBC sponsored “Delivering Alpha Conference” the ability of individuals such as Jim Chanos and Nelson Peltz to move individual shares was evident. What is also evident is that based upon comparative performance thus far in 2013, there aren’t likely to be many ticker tape parades honoring hedge fund managers and certainly no one is going to honor an index.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. There are many potential earnings related trades this week beyond those listed in this article for those interested in that kind of trade. (see details).

A portion of this week’s selections reflect the recently wounded, but certainly not mortally, from recent disappointing earnings. While there may not be any victory tours coming anytime soon for some of them, it’s far too short sighted to not consider the recent bad news as a stepping stone for short term opportunism.

In terms of absolute dollars lost, it’s hard to imagine the destruction of market capitalization and personal wealth at the hands of Microsoft (MSFT), Intel (INTC) and eBay (EBAY). While no one is writing an epitaph for eBay, there are no shortage of obituary writers for Microsoft and Intel. However, although most all businesses will someday go that path, I don’t think that any of that triumvirate are going to do so anytime soon, although Microsoft’s nearly 11% drop on Friday was more than the option market anticipated. It was also more than an innocent cough and may not be good for Steve Ballmer’s health.

Since my timeframe is usually short, although I do currently have shares of Intel that will soon pass their one year anniversary, I don’t think their demise or even significantly more deterioration in share price will be anytime soon. All offer better value and appealing option premiums for the risk of a purchase. Additionally, both Intel and Microsoft have upcoming dividends during the August cycle that simply adds to the short term appeal. My eBay shares were assigned on Friday, but I have been an active buyer in the $50-52.50 range and welcomed its return to that neighborhood.

I currently own some shares of Apple (AAPL) and sold some $450 August 17, 2013 calls in anticipation of its upcoming earnings. While I normally prefer the weekly options, the particular shares had an entry of $445 and haven’t earned their keep yet from cumulative option premiums. The monthly option instead offered greater time protection from adverse price action, while still getting some premium and perhaps a dividend, as well. However, with earnings this week, the more adventurous may consider the sentiment being expressed in the options market that is implying a move of approximately 5% upon earnings. Even after Friday’s 1% drop following some recent strength, I found it a little surprising at how low the put premiums are compared to call options, indicating that perhaps there is some bullish sentiment in anticipation of earnings. I simply take that as a sign of the opposite and would expect further price deterioration.

I’m always looking to buy or add shares of Caterpillar (CAT). I just had some shares assigned in order to capture the dividend. After Chanos‘ skewering of the company and its rapid descent as a direct result, I was cheering for it to go down a bit further so that perhaps shares wouldn’t be assigned early. No such luck, even after such piercing comments as “they are tied to the wrong products, at the wrong time.” I’m not certain, but he may have borrowed that phrase from last year when applied to Hewlett Packard (HPQ). For me, the various theses surrounding dependence on China or the criticisms of leadership have meant very little, as Caterpillar has steadfastly traded in a well defined range and have consistently offered option premiums upon selling calls, as well as often providing an increasingly healthy dividend. To add a bit to the excitement, however, Caterpillar does report earnings this week, so some consideration may be given to the backdoor path to potential ownership through the sale of put options.

While Chanos approached his investment thesis from the short side, Nelson Peltz made his case for Pepsico’s (PEP) purchase of Mondelez (MDLZ). My shares of Mondelez were assigned today thanks to a price run higher as Peltz spoke. I never speculate on the basis of takeover rumors and am not salivating at the prospect of receiving $35-$38 per share, as Peltz suggested would be an appropriate range for a, thus far, non-receptive Pepsico to pay for Mondelez ownership. Despite the general agreement that margins at Mondelez are low, even by industry standards, it has been trading ideally for call option writers and I would consider repurchasing shares just to take advantage of the option premiums.

Fastenal (FAST) is just one of those companies that goes about its business without much fanfare and it’s shares are still depressed after offering some reduced guidance and then subsequently reporting its earnings. It goes ex-dividend this week and offers a decent monthly option premium during this period of low volatility. Without signs of industrial slowdowns it is a good place to park assets while awaiting for some sanity to be restored to the markets.

Although I’ve never been accused of having fashion sense Abercrombie and Fitch (ANF) and Michael Kors (KORS) are frequently alluring positions, although always carrying downside risk even when earnings reports are not part of the equation. I have been waiting for Kors to return to the $60 level and it did show some sporadic weakness during the past week, but doggedly stayed above that price.

Abercrombie and Fitch is always a volatile position, but offers some rewarding premiums, as long as the volatility does strike and lead to a prolonged dip. It reports earnings on August 14, 2013 and may also provide some data from European sales and currency impacts prior to that. Kors also reports earnings during the AUgust cycle and ant potential purchases of either of these shares must be prepared for ownership into earnings if weekly call contracts sold on the positions are not assigned.

Finally, it’s hard to find a stock that has performed more poorly than Cliffs Natural Resources (CLF). Although no one has placed blame on its leadership, in fact, they have been lauded for expense controls during demand downturns, it didn’t go unnoticed that shares rallied when the CEO announced his upcoming retirement. It also didn’t go unnoticed that China, despite being in a relative downturn, purchased a large portion of the nickel, a necessary ingredient for steel, available on the London commodity market. For the adventurous, Cliffs reports earnings this week and seems to have found some more friendly confines at the $16 level. The option market expects a 9% move in either direction. A downward move of that amount or less could result in a 1% ROI for the week, if selling put options. I suspect the move will be higher.

Traditional Stocks: Caterpillar, eBay, Intel. Microsoft, Mondelez

Momentum Stocks: Abercrombie and Fitch, Michael Kors

Double Dip Dividend: Fastenal (ex-div 7/24 $0.25)

Premiums Enhanced by Earnings: Apple (7/23 PM), Cliffs Natural Resources (7/25 PM)

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

Disclosure: I am long AAPL, FAST, CAT, CLF, INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

 

May262013

Weekend Update – May 26, 2013

Weekend Update

That was the crash, dummy.

“I’ll know it when I see it,” is a common refrain when you’re at a loss for just the right descriptors or just can’t quite define what it is that should be obvious to everyone.

While there are definitions for what constitutes a recession, for example, an individual may have a very good sense of personally being in one before anyone else recognizes or confirms its existence.

Certainly there’s also a distinction between a depression and a recession, but it’s not really necessary to know the details, because you’ll probably know when you’ve transitioned from one to another.

The same is probably true when thinking about the difference between a market crash and a market correction. While people may not agree on a standard definition of what constitutes either, a look at your own portfolio balance can be all the definition that you need.

I’ve been waiting, even hoping for a correction for over two months now. That hoping came to a crescendo as a covered option writer with the expiration of many May 2013 contracts and finding more cash than I would have liked faced with the aspects of either being re-invested at a top or sitting idly.

Then came Federal Reserve Chairman Ben Bernanke’s congressional testimony and the mixed signals people perceived. Was it tapering or not tapering? Was it now or later?

What came as a result was what some called a “Key Reversal Day.” That is a day when the market reaches new highs and then suddenly reverses to go even lower than the previous day’s low. It’s thought that the greater the range of movement and the greater the trading volume the more reliable of an indicator is the reversal,

On both counts the aftermath of the reaction to Bernanke’s words, or as the “Bond King” Bill Gross of PIMCO called “talking out of both sides of his mouth” was significant.

Was that the beginning of the long over-due correction? After all we are now in the 52nd month of the current bull run, which has been the duration of the past two.

With news that the Japanese market lost more than 7% overnight following our own key reversal day was the sense that the correction may take on crash-like qualities, but instead our own markets almost had another key reversal day, but this time in the other direction. After an early 150 point drop and subsequent recovery all that was missing was to have exceeded the previous day’s high point.

Correction? Crash? That was so yesterday. It’s time to move on, dummy

While hopeful that some kind of correction might bring some meaningful opportunities to pick up some bargains, the correction was too shallow and the correction to the correction was too quick.

So this week is more of the same. Nearly 50% cash and no place to go other than to be mindful of a great 1995 article by Herb Greenberg that has some very timeless investing advice in the event of a crash, having drawn upon some Warren Buffett, Bob Stovall and Jeremy Siegel wisdom.

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

Already owning shares of both Deere (DE) and Caterpillar (CAT), as I often do, a frequent companion is their more volatile counter-part, Joy Global (JOY). Always sensitive to news regarding the Chinese economy, Joy Global reports earnings this week, as well, which certainly adds to its risk profile. Most recently the news coming out of China has pointed toward slowing growth, although historically the Chinese data have demonstrated as much ability to contradict themselves longitudinally as the US data. I believe bad news is already incorporated into the current prices of the heavy machinery sector and all three of these companies are trading within a long established price range that provides me some level of comfort, even in a declining market. For that reason, I may also add shares of Deere, particularly if it approaches $85.

Morgan Stanley (MS) has gone along the uphill ride with the rest of the financial sector in recent weeks. It was among the many stocks whose shares I lost to assignment at the end of the May 2013 cycle, but it too, has been a constant portfolio companion. It tends to have greater European exposure than its US competitors, but for the time being it appears as if much of the European drama is abating. Over the past year it’s shares have traded in a wide range but has shown great resilience when the price has been challenged and has offered very attractive premiums to help during the periods of challenge.

Unlike the prior week, this past week wasn’t very good for the retailers. WIth earnings now past, one of the elite, JW Nordstrom (JWN) goes ex-dividend this week. While it still has downside room, even after a 3% earnings related drop along with the rest of the more “high end” oriented retailer sector, it will likely out-perform other lesser retailers in the event of a market pause.

Also in the higher end range, Michael Kors (KORS) has been one of my recent favorites, although I must admit I didn’t see the reason for the excitement on a retail level during a recent early morning trip to the mall. No matter, I’m not in their demographic. What I do know is that their shares move with great ease in either direction, other reversing course during the trading session and it offers an appealing option premium. That premium is a bit more enhanced as it reports earnings this week and I may look to establish a position after having shares also assigned recently.

I approach any purchases in the Technology sector with some concern for being over-invested in such shares. Although Cypress Semiconductor (CY) is now trading 10% higher from where I had shares recently assigned on two previous occasions it continues to offer a reasonably attractive options premium and trades in a stable price range.

Lexmark (LXK) is now well above the strike price that I had shares recently assigned. It’s appeal is enhanced by being ex-dividend this week and the knowledge that it appears to have gotten beyond the initial shock that this “printer maker” was getting out of the “Printer maker” business. Thus far, it appears as if the transition to a more content management and solutions oriented company is proceeding smoothly.

Also going ex-dividend this week is one of the little known, but largest owner of television stations around the nation. Sinclair Broadcasting (SBGI). It may be in position to pick up a rare gem as an ABC station in Washington, DC is rumored to be available for purchase. While it has appreciated significantly in the past two months, it’s shares are down approximately 7% from recent highs.

Not that I would suggest lighting up one of their products while watching a fine situation comedy being broadcast by SInclair, but Lorillard (LO), which assuages some of its health related guilt by offering a rich dividend, does go ex-dividend this week. It too, has been trading higher of late, but is down just a bit from its recent high.

Finally, Salesforce.com (CRM) reported earnings after this past Thursday’s (May 23, 2013) closing bell. The market assessed an 8% penalty for its disappointing numbers, but that should just be a minor bump in their road and not likely a deep pothole. Unfortunately, I didn’t execute the earnings related put sale trade last week as I thought I might, which would have returned 1% even in the face on an 8% drop in share price, but this week brings new opportunity, only on the share purchase and option sale side.

In fact, I was so convinced by the previous paragraph that I sent out that Trading Alert on Friday rather than waiting for Tuesday.



Traditional Stocks: Cypress Semiconductor, Deere, Morgan Stanley, Salesforce.com

Momentum Stocks: none

Double Dip Dividend: JW Nordstrom (ex-div 5/29), Lexmark (ex-div 5/29), Lorillard (ex-div 5/29), Sinclair Broadcasting ex-div 5/29)

Premiums Enhanced by Earnings: Joy Global (5/30 AM), Michael Kors (5/29 AM)

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

 

Mar102013

Weekend Update – March 10, 2013

Weekend Update

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: Caterpillar, Lowes

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

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

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

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