Aug92014

Weekend Update – August 10, 2014

Weekend Update

Back in 2007 there was a sign that most mere mortals failed to recognize or understand as they stood in the path of peril.

A messenger delivered such a sign some seven years earlier, as well, and did so again last month.

The messenger was old, perhaps as old as the universe itself and his words and actions did foretell of the dangers that awaited, yet they were not appreciated as such, not even by the messenger, who may also have served as the executioner.

The proposed acquisitions of Chris-Craft and Dow Jones, in 2000 and 2007, respectively, were among the signs of market tops preceding terrible plunges that each saw the sacrifice of a generation of investors, some of whom are still said to be hiding as they await some sign of safety to begin investing once again.

The re-appearance of the messenger should give them some pause before considering a return to the action.

However, in a strange kind of way the “all safe” sign may have been delivered this week, as Rupert Murdoch, whose timing with his large previous acquisitions has been exquisite in its accuracy for coinciding with market tops has now sent a counter sign.

Barely a month ago, for those believing in the power of Murdoch, it was ominous that he would have proposed a buy out of Time Warner (TWX), but this week that offer was revoked, perhaps offering a respite to investors fearing another plunge from what may be destined to be a market top.

While many are speculating as to the reason for Murdoch’s change of heart, could it be that he has come to the realization that his offering price was just too high and that history, which has a habit of repeating itself, was poised to do so again?

Probably not, as once you get the taste, it’s all about the hunt and it shouldn’t come as a surprise if Murdoch either regroups, as the world appreciates that Time Warner’s share value is far less without Murdoch’s pursuit or as he seeks a new target.

As far as the revocation of the offer being a counter sign, this past week didn’t seem to receive it as such, as market weakness from last week continued amidst a barrage of international events.

But Murdoch wasn’t alone this week in perhaps having some remorse. Sprint (S), which never really made an overt bid for T-Mobile (TMUS), did however, overtly withdraw itself from that fray, just as T-Mobile was thumbing its nose at the French telecommunications company, Illiad’s (ILD) bid.

Walgreen (WAG) may have had a double dose of remorse this week as it announced that it would buy the remainder of a British drug store chain but would not be considering doing a tax inversion. They may have first regretted the speculation that they would be doing so as they undoubtedly received considerable political pressure to not move its headquarters. Seeing its shares plunge on that news may have been additional cause for remorse.

While Murdoch may have significant personal wealth tied to the fortunes of his company and may have a very vested interest in those shares prospering, that may not always be the case, as for some, it may be very easy to spend “other people’s money” in pursuit of the target and be immune to feelings of remorse.

But it’s a different story when it’s your own money in question. “Investor’s Remorse” can have applicability in both the micro and macro sense. We have all made a stock purchase that we’ve come to regret. However, in the larger sense, the remorse that may have been felt in 2000 and 2007 as Murdoch flexed his muscles was related to the agony of having remained fully invested in the belief that the market could only go higher.

When we see the potential signs of an apocalypse, such as increasing buyout offers and increasing numbers of initial public offerings while the market is hitting new highs, one has to wonder whether remorse will be the inevitable outcome. An Italian recession and the German stock exchange in correction may add to concerns.

Philosophically, my preference has long been to miss an upward climb to some degree by virtue of not being fully invested, rather than to be fully engaged during a market decline.

A drop of 10% seems like a lot, but it will seem even more when you realize that you must gain 11% just to once again reach your baseline. Having been that route I believe it’s much easier to drop 10% than it is to gain 11%. Just ask anyone who now own stocks that may have suddenly found themselves officially in “correction territory.”

As I get older I have less and less time and less appetite for remorse. I would assume that Rupert Murdoch feels the same, but he may also have a sense of immunity coupled with the secret for immortality, neither of which I enjoy.

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

This week’s selections include a number of recent targets and perhaps sources of remorse that may now find themselves better suited for those spending their own money, rather than that of other people.

Time Warner shareholders have been on a rollercoaster ride over the past three weeks as they saw a plunge on the same order as an initial surge in that time span. They may be experiencing some remorse for their leadership not being willing to consider Murdoch’s overture. The revocation of the offer, beautifully timed to dampen the good news of Time Warner’s earnings perhaps helped to limit any upside gains from earnings and adding to the feeling that Murdoch was the key to attaining “fair value,” even if that fair value may now no longer represent a premium to the initial bid.

However, with shares now back to their pre-offer level, which admittedly was at the then high for the year, the option premiums are quite high, reflecting the potential for more action. The challenge is knowing in which direction.

In the case of T-Mobile, it was a whirlwind week seeing an offer from abroad which wasn’t taken very seriously by anyone and then seeing the presumptive acquirer drop out of the game.

It’s hard to say who if anyone would have had any remorse, certainly not its out front CEO, John Legere, but no doubt shareholders experienced some, as shares plummeted in the belief that suitors were dropping like flies.

While Legere talks a boisterous game and did all he could to close the door to any future with Sprint, the reality is that T-Mobile needs both spectrum and cash and Legere needs a “sugar daddy” and one with lots of patience and tolerance.

For anyone willing to get in bed with T-Mobile, the good news is that they can have John Legere. The bad news is that they get John Legere.

But for a short term trade, suddenly T-Mobile is in correction territory and as long as there may still be prospects of capital appreciation, the option premiums are very enticing.

Walgreen shares fell nearly 15% on news that it wasn’t going to do a tax inversion, which seems far more than appropriate, as shares had their major ascent about 6 months ago long before most had ever heard of tax inversion.

I’ve been waiting for a while for Walgreen shares to return to the $60 level and the current reason hardly seems like one that would keep shares trading at that low level. Some recovery over the past two days doesn’t dampen the attraction to its shares.

Target (TGT) certainly should have experienced some remorse over the manner in which its data security practices were managed. In Target’s case, they put an additional price tag on that remorse that reversed the recent climb in shares, but was just really part of the obligatory dumping of all bad news into a single quarter to honor the ascension of a new CEO.

I’ve owned Target shares for a while waiting for it to recover from its security breach related price drop. Uncharacteristically, I haven’t added to my holdings as I usually do when prices drop because I haven’t had the level of confidence that I usually want before doing so. Now, however, I’m ready to take that plunge and don’t believe that there will be reason for further personal remorse. WIth an upcoming dividend, I don’t mind waiting for it to share in an anticipated pick up in the retail sector.

I’ve certainly had remorse over my ownership of shares in Whole Foods (WFM). While its co-CEOs are certainly visionaries, they have been facing increasing competition, are engaged in an aggressive national expansion and have one CEO that tends to make inopportune comments reflecting personal beliefs that frequently impact the stock price.

To his credit John Mackey has expressed some regrets over his choice of words in the past, but recently there has been little to inspire confidence. A recent, albeit small, price climb was attributed to a rumor of an activist position. While I have no idea of whether there’s any validity to that, Whole Foods does represent the kind of asset that may be appealing to an activist, in that it has a well regarded product, significantly depressed share price and leadership that may have lost touch with what is really important.

Mondelez (MDLZ) may or may not have any reason to feel remorse over adding activist investor Nelson Peltz onto its Board of Directors and to his decision to stop seeking a merger deal with Pepsi (PEP). Investors, however, may have some remorse as shares suddenly find themselves in correction over the past month.

That price drop brings Mondelez shares back into consideration for rotation into my portfolio, especially if looking for classically “defensive” positions in advance of an anticipated market decline. With an almost competitive dividend, a decent option premium and the possibility of some price bounce back the shares look attractive once again.

DuPont (DD) and Eli Lilly (LLY) are both ex-dividend this week and there’s rarely reason to feel remorse when a dividend can make you feel so much better, especially when well in excess of the average for S&P 500 stocks. Lilly’s recent fall in the past two weeks and DuPont’s two month’s decline offer some incentive to consider adding shares at this time and adding option premiums to the income mix while waiting for the market to return to an upward bias.

Cree (CREE) reports earnings this week and is always an exciting ride for a lucky or unlucky investor. It is a stock that either creates glee or remorse.

My most recent lot of shares came from eventually taking assignment of shares following the sale of puts after the previous earnings report, thinking that they couldn’t possibly go down any further in a significant manner. I don’t have any remorse, as I’ve been able to generate option premium revenue on having rolled the puts over and then having sold calls subsequent to assignment. I may, however, have some remorse after this coming week’s earnings.

The option market is once again looking for a significant earnings related move next week. For the trader willing to risk remorse a 1% weekly ROI may be achieved at a strike level 12% below the current price. For those less tolerant of risk, if shares do drop significantly after earnings, some consideration can be given to selling out of the money puts and being prepared to manage the position, as may become necessary.

Finally, how can you talk about remorse and not mention Halliburton (HAL)? From drilling disasters to adventures in Iraq Halliburton really hasn’t needed to be remorseful, because somehow it always found a way to prosper and move beyond the “disaster du jour.”

In hindsight, it seems so perfectly appropriate that for a period in time its CEO was future Vice President Dick Cheney, who didn’t even express any remorse for having shot a good friend in the face.

That’s the kind of leadership that we need in a company being considered for its worthiness of our personal assets, because we are capable of remorse and are pained by the prospects of engaging in it.

With some recent price weakness, as being experienced in the energy sector, now appears to be a good time to take advantage of Halliburton’s price retreat and save the remorse for others.

Traditional Stocks: Halliburton, Mondelez, Target, Time Warner, Walgreen, Whole Foods

Momentum: T-Mobile

Double Dip Dividend: DuPont (8/13), Eli Lilly (8/13)

Premiums Enhanced by Earnings: Cree (8/12 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.

May102014

Weekend Update – May 11, 2014

Weekend Update

 A few hundred years ago Sir Isaac Newton is widely credited with formulating the Law of Universal Gravitation.

In hindsight, that “discovery” shouldn’t really be as momentous as the discovery more than a century earlier that the sun didn’t revolve around the earth. It doesn’t seem as if it would take an esteemed mathematician to let the would know that objects fall rather than spontaneously rise. Of course, the Law is much more complex than that, but we tend to view things in their most simplistic terms.

Up until recently, the Law of Gravity seemed to have no practical implications for the stock market because prices only went higher, just as the sun revolved around the earth until proven otherwise. Additionally, unlike the very well defined formula that describe the acceleration that accompanies a falling object, there are no such ways to describe how stocks can drop, plunge or go into free fall.

For those that remember the “Great Stockbroker Fallout of 1987,” back then young stockbrokers could have gone 5 years without realizing that what goes up will come down, fled the industry en masse upon realizing  the practical application of Newton’s genius in foretelling the ultimate direction of every stock and stock markets.

The 2014 market has been more like a bouncing ball as the past 10 weeks have seen alternating rises and falls of the S&P 500. Only a mad man or a genius could have predicted that to become the case. It’s unlikely that even a genius like Newton could have described the laws governing such behavior, although even the least insightful of physics students knows that the energy contained in that bouncing ball is continually diminished.

As in the old world when people believed that the world was flat and that its exploration might lead one to fall off the edge, I can’t help but wonder what will happen to that bouncing ball in this flat market as it deceptively has come within a whisker of even more records on the DJIA and S&P 500. Even while moving higher it seems like there is some sort of precipice ahead that some momentum stocks have already discovered while functioning as advance scouts for the rest of the market.

With earnings season nearing its end the catalyst to continue sapping the energy out of the market may need to come from elsewhere although I would gladly embrace any force that would forestall gravity’s inevitable power.

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

As a past customer, I was never enamored of Comcast (CMCSA) and jumped at the first opportunity to switch providers. But while there may be some disdain for the product and especially the service, memories of which won’t easily be erased by visions of a commercial showing a comedian riding along in a service truck, you do have to admire the company’s shares. 

Having spent the past 6 months trading above $49 it has recently been range bound and that is where the appeal for me starts. It’s history of annual dividend increases, good option premiums and price stability adds to that appeal. While there is much back story at present in the world of cable providers and Comcast’s proposed purchase of Time Warner Cable (TWC) may still have some obstacles ahead, the core business shouldn’t be adversely impacted by regulatory decisions.

Also, as a one time frequent customer of Best Buy (BBY), I don’t get into their stores very often anymore. Once they switched from a perpendicular grid store layout to a diagonal one they lost me. Other people blame it on Amazon (AMZN), but for me it was all about the floor plan. But while I don’t shop there very much anymore it’s stock has been a delight trading at the $26 level.

Having had shares assigned for the fourth time in the past two months I would like to see a little bit of a price drop after Friday’s gain before buying shares again. However, with earnings coming up during the first week of the June 2014 option cycle you do have to be prepared for nasty surprises as are often delivered. There’s still more time for someone to blame cold weather on performance and this may be the retailer to do so. WIth that in mind, Best Buy may possibly be better approached through the sale of put options this week with the intent of rolling over if in jeopardy of being assigned shares prior to the earnings release.

There’s barely a week that I don’t consider buying or adding shares of Coach. I currently own shares purchased too soon after recent earnings and that still have a significant climb ahead of them to break even. However, with an upcoming dividend during the June 2014 cycle and shares trading near the yearly low point, I may be content with settling in with a monthly option contract, collecting the premium and dividend and just waiting for shares to do what they have done so reliably over the past two years and returning to and beyond their pre-earnings report level.

Mosaic (MOS) is another one of those companies that I’ve owned on many occasions over the years. Most recently I’ve been a serial purchaser of shares as its share price plunged following announcement of a crack in the potash cartel. Still owning some more expensive shares those serial purchases have helped to offset the paper losses on the more expensive shares. Following a recent price pullback after earnings I’m ready to again add shares as I expect Mosaic to soon surpass the $50 level and stay above there.

Dow Chemical (DOW) is also a company whose shares I’ve owned with frequency over the years, but less so as it moved from $42 to $50. Having recently decided that $48 was a reasonable new re-entry point that may receive some support from the presence of activist investors, the combination of premiums, dividends and opportunity for share appreciation is compelling.

Holly Frontier (HFC) has become a recent favorite replacing Phillips 66 (PSX) which has just appreciated too much and too fast. While waiting for Phillips 66 to return to more reasonable levels, Holly Frontier has been an excellent combination of gyrating price movements up and down and a subsequent return to the mean. Because of those sharp movements its option premium is generally attractive and shares routinely distribute a special dividend in addition to a regular dividend that has been routinely increased since it began three years ago.

The financial sector has been weak of late and we’ve gotten surprises from JP Morgan (JPM) recently with regard to its future investment related earnings and Bank of America (BAC) with regard to its calculation error of capital on its books. However, Morgan Stanley (MS) has been steadfast. Fortunately, if interested in purchasing shares its steadfast performance hasn’t been matched by its share price which is now about 10% off its recent high. 

With its newly increased dividend and plenty of opportunity to see approval for a further increase, it appears to be operating at high efficiency and has been trading within a reasonably tight price range for the past 6 months, making it a good consideration for a covered option trade and perhaps on a serial basis.

Since I’ve spent much of 2014 in pursuit of dividends in anticipation of decreased opportunity for share appreciation, Eli Lilly (LLY) is once again under consideration as it goes ex-dividend this week. With shares trading less than 5% from its one year high, I would prefer a lower entry price, but the sector is seeing more interest with mergers, acquisitions and regulatory scrutiny, all of which can be an impetus for increasing option premiums.

Finally, it’s hard to believe that I would ever live in an age when people are suggesting that Apple (AAPL) may no longer be “cool.” For some, that was the reason behind their reported purchase of Beats Music, as many professed not to understand the synergies, nor the appeal, besides the cache that comes with the name. 

Last week I thought there might be opportunity to purchase Apple shares in order to attempt to capture its dividend and option premium in the hope for a quick trade. As it work turn out that trade was never made because Apple opened the week up strongly, continuing its run higher since recent earnings and other news were announced. I don’t usually chase stocks and in this case that proved to be fortuitous as shares followed the market’s own ambivalence and finished the week lower.

However, this week comes the same potential opportunity with the newly resurgent Microsoft (MSFT). While it’s still too early to begin suggesting that there’s anything “cool” about Microsoft, there’s nothing lame about trying to grab the dividend and option premium that was elusive the previous week with its competition.

Microsoft has under-performed the S&P 500 over the past month as the clamor over “old technology” hasn’t really been a path to riches, but has certainly been better than the so-called “new technology.” Yet Microsoft has been maintaining the $39 level and may be in good position to trade in that range for a while longer. It neither needs to obey or disregard gravity for its premiums and dividends to make it a worthwhile portfolio addition.

 

Traditional Stocks: Comcast, Dow Chemical, Holly Frontier

Momentum: Best Buy, Coach, Morgan Stanley, Mosaic

Double Dip Dividend: Microsoft (5/13 $0.28), Eli Lilly (5/13 $0.49)

Premiums Enhanced by Earnings: none

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

Feb92014

Weekend Update – February 9, 2014

Weekend Update

Everything is crystal clear now.

After three straight weeks of losses to end the trading week, including deep losses the past two weeks everyone was scratching their heads to recall the last time a single month had fared so poorly.

What those mounting losses accomplished was to create a clear vision of what awaited investors as the past week was to begin.

Instead, it was nice to finish on an up note to everyone’s confusion.

When you think you are seeing things most clearly is when you should begin having doubts.

Who saw a two day 350 point gain coming, unless they had bothered to realize that this week was featuring an Employment Situation Report? The one saving grace we have is that for the past 18 months you could count on a market rally to greet the employment news, regardless of whether the news met, exceeded or fell short of expectations.

That’s clarity. It’s confusing, but it’s a rare sense of clarity that comes from being so successful in its ability to predict an outcome that itself is based upon human behavior.

As the week began with a 325 point loss in the DJIA voices started bypassing talk of a 10% correction and starting uttering thoughts of a 15-20% correction. 10% was a bygone conclusion. At that point most everyone agreed that it was very clear that we were finally being faced with the “healthy” correction that had been so long overdue.

When in the middle of that correction nothing really feels very healthy about it, but when people have such certainty about things it’s hard to imagine that they might be wrong. With further downside seen by the best and brightest we were about to get healthier than our portfolios might be able to withstand.

It was absolutely amazing how clearly everyone was able to see the future. What made things even more ominous and sustaining their view was the impending Employment Situation Report due at the end of the week. Following last month’s abysmal numbers, ostensibly related to horrid weather across the country, there wasn’t too much reason to expect much in the way of an improvement this time around. Besides, the Nikkei and Russian stock markets had just dipped below the 10% threshold that many define as a market correction and as we’re continually reminded, it’s an inter-connected world these days. It wasn’t really a question of “whether,” it was a matter of “when?”

Then there was all that talk of how high the volatility was getting, even though it had a hard time even getting to October 2013 levels, much less matching historical heights. As everyone knows, volatility comes along with declining markets so the cycle was being put in place for the only outcome possible.

After Monday’s close the future was clear. Crystal clear.

Instead, the week ended with an 0.8% gain in the S&P 500 despite that plunge on Monday and a highly significant drop in volatility. The market responded to a disappointing Employment Situation Report with what logically or even using the “good news is bad news” kind of logic should not have been the case.

Now, with a week that started by confirming the road to correction we were left with a week that supported the idea that the market is resistant to a classic correction. Instead of the near term future of the markets being crystal clear we are left beginning this coming week with more confusion than is normally the case.

If it’s true that the market needs clarity in order to propel forward this shouldn’t be the week to commit yourself. However, the only thing that’s really clear about our notions is that they’re often without basis so the only reasonable advice is to do as in all weeks – look for situational opportunities that can be exploited without regard to what is going on in the rest of the world.

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

If you’re looking for certainty, or at least a company that has taken steps to diminish uncertainty, Microsoft (MSFT) is the one. With the announcement of the appointment of Satya Nadella, an insider, to be its new CEO, shares did exactly what the experts said it wouldn’t do. Not too long ago the overwhelming consensus was that the appointment of an outsider, such as Alan Mullaly would drive shares forward, while an insider would send shares tumbling into the 20s.

Microsoft simply stayed on its path with the news of an inside candidate taking the reigns. Regardless of its critics, Microsoft’s strategy is more coherent than it gets credit for and this leadership decision was a quantum leap forward, certainly far more important than discussions of screen size. With this level of certainty also comes the certainty of a dividend and attractive option premiums, making Microsoft a perennial favorite in a covered option strategy.

The antithesis of certainty may be found in the smallest of the sectors. With the tumult in pricing and contracts being promulgated by T-Mobile (TMUS) and its rebel CEO John Legere, there’s no doubt that the margins of all wireless providers is being threatened. Verizon (VZ) has already seen its share price make an initial response to those threats and has shown resilience even in the face of a declining market, as well. Although the next ex-dividend date is still relatively far away, there is a reason this is a favorite among buy and hold investors. As long as it continues to trade in a defined range, this is a position that I wouldn’t mind holding for a while and collecting option premiums and the occasional dividend.

Lowes (LOW) is always considered an also ran in the home improvement business and some recent disappointing home sales news has trickled down to Lowes’ shares. While it does report earnings during the first week of the March 2014 option cycle, I think there is some near term opportunity at it’s current lower price to see some share appreciation in addition to collecting premiums. However, I wouldn’t mind being out of my current shares prior to its scheduled earnings report.

Among those going ex-dividend this week are Conoco Phillips (COP), International Paper (IP) and Eli Lilly (LLY). In the past month I’ve owned all three concurrently and would be willing to do so again. While International Paper has outperformed the S&P 500 since the most recent market decline two weeks ago, it has also traded fairly rangebound over the past year and is now at the mid-point of that range. That makes it at a reasonable entry point.

Conoco Phillips appears to be at a good entry point simply by virtue of a nearly 12% decline from its recent high point which includes a 5% drop since the market’s own decline. With earnings out of the way, particularly as they have been somewhat disappointing for big oil and with an end in sight for the weather that has interfered with operations, shares are poised for recovery. The premiums and dividend make it easier to wait.

Eli Lilly is down about 5% from its recent high and I believe is the next due for its turn at a little run higher as the major pharmaceutical companies often alternate with one another. With Pfizer (PFE) and Merck (MRK) having recently taken those honors, it’s time for Eli Lilly to get back in the short term lead, as it is for recent also ran Bristol Myers Squibb (BMY) that was lost to assignment this past week and needs a replacement, preferably one offering a dividend.

Zillow (Z) reports earnings this week. In its short history as a publicly traded company it has had the ability to consistently beat analyst’s estimates and then usually see shares fall as earnings were released. That kind of doubled barrel consistency warrants some consideration this week as the option market is implying an 11% move this week. While that is possible, there is still an opportunity to generate a 1% ROI for the week if the share price falls by anything less than 16%.

While I’m not entirely comfortable looking for volatility among potential new positions two that do have some appeal are Coach (COH) and Morgan Stanley (MS).

Coach is a frequent candidate for consideration and I generally like it more when it’s being maligned. After last week’s blow-out earnings report by Michael Kors (KORS) the obvious next thought becomes how their earnings are coming at the expense of Coach. While there may be truth to that and has been the conventional wisdom for nearly 2 years, Coach has been able to find a very comfortable trading range and has been able to significantly increase its dividend in each of the past 4 years in time for the second quarter distribution. It’s combination of premiums, dividends and price stability, despite occasional swings, makes it worthy of consistent consideration.

I’ve been waiting for a while for another opportunity to add shares of Morgan Stanley. Down nearly 12% in the past 3 weeks may be the right opportunity, particularly as some European stability may be at hand following the European Central Bank’s decision to continue accommodation and provide some stimulus to the continent, where Morgan Stanley has interests, particularly being subject to “net counterparty exposure.” It’s ride higher has been sustained and for those looking at such things, it’s lows have been consistently higher and higher, making it a technician’s delight. I don’t really know about such things and charts certainly aren’t known for their clarity being validated, but its option premiums do compel me as do thoughts of a dividend increase that it i increasingly in position to institute.

Finally, if you’re looking for certainty you don’t have to look any further than at Chesapeake Energy (CHK) which announced a significant decrease in upcoming capital expenditures, which sent shares tumbling on the announcement. Presumably, it takes money to make money in the gas drilling business so the news wasn’t taken very well by investors. A very significant increase in option premiums early in the week suggested that some significant news was expected and it certainly came, with some residual uncertainty remaining in this week’s premiums. For those with some daring this may represent the first challenge since the days of Aubrey McClendon and may also represent an opportunity for shareholder Carl Icahn to enter the equation in a more activist manner.

Traditional Stocks: Lowes, Microsoft, Verizon

Momentum Stocks: Chesapeake Energy, Coach, Morgan Stanley,

Double Dip Dividend: Conoco Phillips (ex-div 2/13), International Paper (ex-div 2/12), Eli Lilly (ex-div 2/12)

Premiums Enhanced by Earnings: Zillow (2/12 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.

Nov92013

Weekend Update – November 10, 2013

Weekend Update

Is there life after momentum slows?

There was no shortage of stocks taking large price hits last week, as earnings season had already begun its slowdown phase. However, for some of the better known momentum stocks the slightest mis-steps were all the reason necessary to flee with profits.

For those who live long enough, it should never come as a surprise that some things are just destined to slow down.

Momentum fits into that category, although based on the past week it’s more of a question of falling down than slowing down for some.

After the fact, no one seemed to be surprised.

In a week that saw a decrease in the ECB’s main lending rate that was widely described as being a “surprise'” later in the day came reports that most economists expected the cut. The market clearly didn’t, however, as the economists may have neglected to pass on their views.

And then there was a surprisingly large increase in non-farm payroll jobs. Somehow everyone was taken off guard and the market responded by interpreting good news as good news and finished the week with a flourish.

What surprised me, however, was that there was such a disconnect between the anticipated numbers and the actual report, which covered the period of the government shutdown. The disconnect had to do with methodology, as forecasts didn’t take into account that government statistics considered furloughed employees to be employed, since they were to receive back, through legislative action.

Oops.

In effect, Friday’s rally was based on a misunderstanding of methodology. It will also certainly be interesting to see what impact Ben Bernanke’s statement after the market’s close may have on Monday’s trading.

I think the unemployment rate probably understates the degree of slack in the labor market. I think the employment-population ratio overstates it somewhat, because there are important downward trends in participation

Unfortunately, Friday’s gains complicate the goal of finding bargain priced stocks in the coming week, but with a little water having been thrown on the fire there may be opportunity yet.

Everyone, including me, likes to look for clues and cues that have predictive value. Parallels are drawn at every opportunity to what we know from the past in the expectation that it can foretell the future.

For some the sudden increase in IPOs coming to market and the sudden fall of many momentum stocks heralds a market top. In hindsight, if it does occur, it will be regarded as “no surprise.” If it doesn’t occur within the attention span of most paying attention it will simply be conveniently ignored.

For others the reversal of fortune may represent values and not value traps.

But no matter what the case there is life after momentum slows. It’s just a question of accommodation to new circumstances.

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

eBay (EBAY) like so many stocks that I consider tends to trade in a range. While eBay is often criticized for being “range bound” there is some comfort in knowing that it is less likely to offer an unwanted surprise than many other stocks. My shares were assigned this past week and are now trading at the upper range of where I may normally initiate a position. However, having owned shares on ten separate occasions this year I would be anxious to do so again on the slightest of pullbacks.

Although hardly a momentum stock, Mondelez (MDLZ) had some earnings woes this past week, although it did recover a bit, perhaps simply being carried along by a rallying market. Shares are still a little higher than I would like for an entry point, but I expect that as a short term selection it will match market performance, while in a market turn-down it will exceed performance.

Fastenal (FAST) is another fairly sedate company, yet its stock often has some large moves. I see Fastenal as a leading indicator of economic activity, but also very sensitive to the economy. I think its most recent price weakness will be reversed as the impact of a resolution of the government’s shutdown trickles down to the economy. I currently own shares with a contract set to expire this week, but at this price am considering doubling down on what in essence can be a weekly option contract during the final week of the November 2013 cycle.

Deere (DE) is another range bound stock, that in hindsight I should have bought on numerous occasions over the past few months. Good option premiums, a good dividend and not facing some of the same external pressures as another favorite, Caterpillar (CAT), makes Deere a perennially good selection within its sector.

I currently own shares of both Eli Lilly (LLY) and International Paper (IP), both of which go ex-dividend this week. Unlike many other stocks that I discuss, I have not owned either on multiple occasions this year and my current shares are now below their cost. Both emerged unscathed after recent earnings reports, although both are down considerably from their recent highs and both have considerably under-performed the S&P 500 from the time for its first in a series of market highs on May 21, 2013. That latter criterion is one that I have been using with some regularity as the market has continued to reach new highs in an effort to identify potential late comers to the party.

Which finally brings me to the momentum stocks that have my attention this week, some of which may be best approached through the sale of put options and may be best avoided in a weakening market.

Much has been said of the “ATM effect” on Facebook (FB), as speculation that investors were selling Facebook shares to raise money to buy Twitter (TWTR) shares. Following an abrupt reversal during its conference call when there was a suggestion that adolescents were reducing their Facebook use shares have just not regained their traction. Sometimes it’s just profit taking and not driven by the allure of a newer stock in town. But assuming that the “ATM effect” has some validity and with a large gap between the Twitter IPO price and its 7% lower price on its first full day of trading, I can’t imagine now taking the opportunity to sell Facebook in order to purchase Twitter shares. On its own merits Facebook may be a momentum stock that has a cushion of protection until its next earnings report, unless an errant comment gets in the way, again.

Chesapeake Energy (CHK) is much higher than the level at which I last owned shares at $21. Waiting for a return has been fruitless and as a result, rather than having owned shares on 15 occasions, as in 2012, thus far, I’ve only had five bouts of ownership. With the melodrama surrounding its founder and ex-CEO in its past, Chesapeake may begin trading a bit more on fundamentals rather than hopes for a return to its glory days. at such, its price action may be less unidirectional than it has been over the past four months. After last week’s earnings report related drop, while still higher than I would like, I think there may be reason to consider a new entry, perhaps through the sale of put options.

Freeport McMoRan (FCX) is a stock that has been testing my patience through the year. More precisely, however, I’ve had no real issue with Freeport McMoRan’s leadership, in fact, given metal prices, it has done quite well. What I don’t understand is how it has been taking so long for markets to appreciate its strategic initiatives and long term strategies. For much of the year my shares have been non-performing, other than for dividend payments, but with a recent run higher some are generating option premium income streams. Despite the run higher, I am considering adding more shares as the entire metals complex has been showing strength and some stability, as well.

Finally, while I’ve said before that I don’t spend too much time looking at charts, a recent experience with Tesla (TSLA) was perhaps a good reason to at least acknowledge that charts can allow you to look at the past.

While it’s probably always a good week to be Elon Musk, relatively speaking last week wasn’t so good, as both Tesla and Solar City (SCTY) were treated harshly after earnings were released. The spin put around another reported car fire that its resultant heat could be garnered to power several mud huts didn’t give shares much of a boost, perhaps because that might have cannibalized SolarCity sales, with the two companies likely having much overlap in ownership.

Tesla reported earnings last week and took a drubbing through successive days.

A reader of last week’s article asked:

“George, what are your thoughts on a sale of Puts on TSLA which reports Tuesday?”

My response was:

“TSLA isn’t one that I follow, other than watching in awe.

But purely on a glance at this week’s option pricing the implied volatility is about 12% and you can get a 1% ROI on a strike that’s about 17% lower, currently $135

It looks as if it may have price support in the $134-$139 range, but it’s hard to know, because its ascent has been so steep that there may not be much of a real resting point.

In a very speculative portion of my portfolio I might be able to find some money to justify that trade.”

As it turned out Tesla closed the week at $137.95 and now has my attention. You do have to give some credit to its chart on that one. WIth disappointment over its sales, supply chain issues and reports of car fires and even Elan Musk suggesting that “Tesla’s stock price is more than we have any right to deserve,” it has fallen by nearly 21% from the time of that comment, barely 2 weeks prior to earnings. Although to be entirely fair shares did fully recover from a 7.5% decline in the aftermath of the statement in advance of earnings.

While still not knowing where the next resting point may be in the $119-$122 range, representing as much as another 13% price drop. With earnings out of the way to enhance option premiums the risk-reward proposition isn’t as skewed toward reward. However, for those looking to recapture of bit of their own momentum, despite the realization that the end may be near, a put sale can return an ROI of approximately 1.4% at a strike price nearly 6% below Friday’s close is not breached.

The nice thing about momentum slowing is that if you fall the floor isn’t as far away as it used to be.

Traditional Stocks: Deere, eBay, Fastenal, Mondelez

Momentum Stocks: Chesapeake Energy, Facebook, Freeport McMoRan, Tesla

Double Dip Dividend: Eli Lilly (ex-div 11/13), International Paper (ex-div 11/13)

Premiums Enhanced by Earnings: none

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

Disclosure: I am long CAT, CHK, DE, FAST, FCX, IP, LLY. 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.

Sep62013

Weekend Update – September 8, 2013

Weekend Update

Employment Situation Report, Taper, new Yahoo! (YHOO) logo, Syria.

Not a line from a new, less catchy Billy Joel song, but a transition week going from the quietude of summer, which was mostly focused on fundamentals to the event driven and emotional rest of the year when the world seems to be perennially on fire, jumping from crisis to crisis.

In a few days traffic in my part of the country returns back to its normal heinous condition as our nation’s elected officials return from a much deserved 37 day vacation that they were unable to truncate by a few days to address some outstanding issues.

Just to be clear, it’s the electorate that deserved the break, but now they’re back and we can settle into our more normal state of dysfunction, while decreasing our focus on such mundane things as earnings. For the record, I don’t get out onto the roads very much anymore, having given up gainful employment for a life of ticker watching, but it’s not as easy to escape the results of having exercised our democratic rights.

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