Weekend Update – January 12, 2014

Confusion Reigns.

January is supposed to be a very straightforward month. Everyone knows how it’s all supposed to go.

The market moves higher and the rest of the year simply follows. Some even believe it’s as simple as the first five trading days of the year setting the tone for the remainder still to come.

Since the market loves certainty, the antithesis of confusion, the idea of a few days or even a month ordaining the outcome of an entire year is the kind of certainty that has broad appeal.

But with the fifth trading day having come to its end on January 8th, the S&P 500 had gone down 11 points. Now what? Where do we turn for certainty?

To our institutions, of course, especially our central banking system which has steadfastly guided us through the challenges of the past 6 years. The year started with some certainty as Federal Reserve Chairman nominee Janet Yellen was approved by a vote that saw fewer negative votes cast than when her predecessor Ben Bernanke last stood for Senate approval, although there were far fewer total votes, too. On a positive note, while there was voting confusion among political lines, there was only certainty among gender lines.

While Dr. Yellen’s confirmation was a sign to many that a relatively dovish voice would predominate the FOMC, even as some more hawkish governors become voting members this year, the announcement that Dr. Stanley Fischer was being nominated as Vice-Chair sends a somewhat different message and may embolden the more hawkish elements of the committee.

That seems confusing. Why would you want to do that? But then again, why would you have pulled the welcome mat out from under Ben Bernanke?

Then on Friday morning came the first Employment Situation Report of the new year and no one was remotely close in their guesses. Nobody was so pessimistic as to believe that the fewest new jobs created in 14 months would be the result.

But the real confusion was whether that was good news or bad news. Did we want disappointing employment statistics? How would the “new” Federal Reserve react? Would they step way from the taper or embrace it as hawks exert their philosophical position?

More importantly, how is a January Rally supposed to take root in the remaining 14 trading days in this kind of muddled environment?

Personally, I like the way the year has begun, there’s not too much confusion about that being the case, despite my first week having been mediocre. While the evidence is scant that the first five days has great predictive value, there is evidence to suggest that there is no great predictive value for the remainder of the year if January ends the month lower. I like that because my preference is alternating periods of certainty and confusion, as long as the net result remains near the baseline. That is a perfect scenario for a covered option strategy and also tends to increase premiums as volatility is enhanced.

I prefer to think of it as counter-intuitive rather than confusing.

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).

There’s not much confusion when it comes to designating the best in large retail of late. Most everyone agrees that Macys (M) has been the best among a sorry bunch, yet even the best of breed needed to announce large layoffs in order to get a share price boost after being range bound. However, this week the embattled retail sector seems very inviting despite earnings disappointments and the specter of lower employment statistics and spending power.

Finding disappointments among retailers isn’t terribly difficult, as even Bed Bath and Beyond (BBBY), which could essentially do nothing wrong in 2013 more than made up for that by reporting its earnings report. While earnings themselves were improved, it was the reduced guidance that seems to have sent the buyers fleeing. There was no confusion regarding how to respond to the disappointment, yet its plummet brings it back toward levels where it can once again be considered as a source of option premium income, in addition to some opportunity for share appreciation.

L Brands (LB) shares are now down approximately 12% in the past 6 weeks. It is one of those stocks that I’ve owned, but have been waiting far too long to re-own while waiting for its price to return to reasonable levels. Like Bed Bath and Beyond it offered lower guidance for the coming quarter after heavy promotions that are likely to reduce margins.

Target (TGT) has had enough bad news to last it for the rest of the year. While it recently reported that it sales had been better than expected prior to the computer card data hack, it also acknowledged that there was a tangible decline in shopping activity in its aftermath. Its divulging that as many as 70 million accounts may have been compromised, it seemed to throw all bad news into the mix, as often incoming CEOs do with write-downs, so as to make the following quarter look good in comparison. For its part, Target, recovered nicely on Friday from its initial price decline and has been defending the $62.50 line that I believe will be a staging point higher.

Sears Holdings (SHLD) on the other hand doesn’t even pretend to be a ret
ailer. The promise of great riches in its real estate holdings is falling on deaf ears and its biggest proponent and share holder, Eddie Lampert, has seen his personal stake reduced amid hedge fund redemptions. Shares plummeted after reporting disappointing holiday sales. What’s confusing about Sears Holding is how there is even room for disappointment and how the Sears retail business continues, as it has recently been referred to as a “national tragedy.”

But I have a soft spot in my heart for companies that suffer large event driven price drops. Not that I believe there is sustainable life after such events, but rather that there are opportunities to profit from other people like me who smell an opportunity and add support to the share price. However, my time frame is short and I don’t necessarily expect investor largesse to continue.

I did sell puts on Sears Holding on Friday, but would not have done so if the event and subsequent share plunge had been earlier in the option cycle. Sears Holdings, only offers monthly options and in this case there is just one week left in that cycle. If faced with the possibility of assignment I would hope to be able to roll the puts options forward, but do have some concerns about a month long exposure, despite what would likely be an attractive premium.

While there’s no confusion about the nature of its products, Lorillard’s (LO) recent share decline, while not offering certainty of its end, does offer a more reasonable entry point for a company that offers attractive option premiums even when its very healthy dividend is coming due. Like Sears Holdings, Lorillard only offers monthly option contracts, but in this case I have no reservations about holding shares for a longer time period if not assigned.

Conoco Phillips (COP) has been eclipsed in my investing attention by the enormous success of its spin-off Phillips 66 (PSX), but had never fallen off my radar screen. While waiting for evidence that the same will occur to Phillips 66 through its own subsequent spin-off of Phillips 66 Partners (PSXP), my focus has returned to the proud parent, whose shares appear to be ready for some recovery. However, with a dividend likely during the February 2014 option cycle, I don’t mind the idea of shares continuing to run in place and generate option income in a serial manner.

Perhaps not all retailers are in the same abysmal category. Lowes (LOW), while not selling much in the way of fashions or accessories and perennially being considered an also ran to Home Depot, goes ex-dividend this week and has traded reliably at its current level, making it a continuing target for a covered option strategy. I’ve owned in 5 times in 2013, usually for a week or two, and wonder why I hadn’t owned it more often. Following its strong close to end the week I would like to see a little giveback before making a purchase. Additionally, since the ex-dividend date is on a Friday, I’m more likely to consider selling an option expiring the following week or even February, so as to have a greater chance of avoiding early assignment of having sold an in the money option.

Whole Foods (WFM) also goes ex-dividend this week, but its paltry dividend alone is a poor reason to consider share ownership. However, its inexplicable price drop after having already suffered an earnings related drop makes it especially worthy of consideration. While I already own more expensively priced shares and often use lesser priced additional lots in a sacrificial manner to garner option premiums to offset paper losses, I’m inclined to shift the emphasis on share gain over premium at this price level. Reportedly Whole Foods sales suffered during the nation wide cold snap and that may be something to keep in mind at the next earnings report when guidance for the next quarter is offered.

Although earnings season will be in focus this week, especially with big money center banks all reporting, I have no earnings selections this week. Instead, I’m thinking of adding shares of Alcoa (AA) which had fared very nicely after being dis-invited from membership in the DJIA and not so well after leading off earnings season on Thursday.

While I typically am niot overly interested in longer term oiutlooks, CEO Klaus Kleinfeld’s suggestion that demand is expected to increase strongly in 2014 could help to raise Alcoa’s margins. Even a small increase would be large on a percentage basis and could easily be the fuel for shares to continue their post DJIA-explusion climb.

Finally, I was a bit confused as Verizon’s (VZ) shares took off mid-day last week and took it beyond the range that I thought my shares wouldn’t be assigned early in order to capture the dividend. In the absence of news the same didn’t occur with shares of AT&T which was also going ex-dividend the next day and other cell carriers saw their shares drop. In hindsight, the drop in shares the next day, well beyond the impact of dividends, was just as confusing. Where there is certainty, however, is that shares are now more reasonably priced and despite their recent two day gyrations trade with low volatility compared to the market, making them a good place to park money for the defensive portion of a portfolio.

Traditional Stocks: Bed Bath and Beyond, Conoco Phillips, L Brands, Lorillard, Target, Verizon

Momentum Stocks: Alcoa, Sears Holdings

Double Dip Dividend: Lowes (ex-div 1/17), Whole Foods (ex-div 1/14)

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.

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Weekend Update – November 24, 2013

Sometimes the strategy is self-defense. Sometimes it’s just doing what you need to do to keep beta at bay.

I don’t know about other people, but I’m getting a little more nervous than usual watching stocks break the 16000 level on the Dow Jones and the 1800 level on the S&P 500.

What’s next 5000 NASDAQ? Well that’s not so ludicrous. All it would take is 4 years of 6% gains and we would could set the time machine back to a different era.

In hindsight I know what I would do at the 5000 level.

For those old enough to remember the predictions of Dow 35000 all we need is a repeat of the past 56 months and we’re finally there and beyond.

This being a holiday shortened trading week adds a little bit to the stress level, because of the many axioms you hear about the markets. The one that I believe has as much validity as the best of them is that low volume can create artificially large market moves. When so many are instead focusing on the historical strength of markets during the coming week, I prefer to steer clear of any easy guide to riches.

When faced with a higher and higher moving market you could be equally justified in believing that momentum is hard to stop as you could believe that an inflection point is being approached. The one pattern that appears clear of late is that a number of momentum stocks are quickly decelerating when faced with challenges.

When I find myself a little ill at ease with the market’s height, I focus increasingly on “beta,” the measure of a stock’s systemic risk compared to the overall market. I want to steer clear of stock’s that may reasonably be expected to be more volatile during a down market or expectations of a declining market.

As a tool to characterize short term risk beta can be helpful, if only various sources would calculate the value in a consistent fashion. For example, Tesla (TSLA), which many would agree is a “momentum” stock, can be found to have a beta ranging from 0.33 to 1.5. In other words, depending upon your reference source you can walk away believing that either Tesla is 50% more volatile than the market or 67% less volatile.

Your pick.

While “momentum” and “beta” don’t necessarily have correlation, common sense is helpful. Tesla or any other hot stock du jour, despite a reported beta of 0.33, just doesn’t seem to be 67% less volatile than the overall market, regardless of what kind of spin Elon Musk might put on the risk.

During the Thanksgiving holiday week I don’t anticipate opening too many new positions and am focusing on those with low beta and meeting my common sense criteria with regard to risk. Having had many assignments to close out the November 2013 option cycle I decided to spread out my new purchases over successive weeks rather than plow everything back in at one time and risk inadvertently discovering the market’s peak.

Additionally, I’m more likely to look at either expanded option possibilities or monthly options, rather than the weekly variety this week. In part that’s due to the low premiums for the week, but also to concerns about having positions with options expiring this week caught in a possible low volume related downdraft and then being unable to find suitable new option opportunities in future weeks. If my positions aren’t generating revenue they’re not very helpful to me.

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).

While eschewing risk may be in order when you think a market top is at hand, sometimes risky behavior can be just the thing when it comes to assembling a potentially profitable mix of stocks. In this case the risky behavior comes from the customers of Lorillard (LO), Philip Morris (PM) and Molson-Coors (TAP).

With word that Europeans may finally be understanding the risks associated with tobacco and may be decreasing use of their ubiquitously held cigarettes, Philip Morris shares had a rough week. The 6% drop accompanying what should be good news from a public health perspective brings shares back to a much more inviting level. Shares did successfully test an $85 support level and subsequently bounced back a bit too much for my immediate interest, but I would welcome another move toward that level, particularly as I would prefer an entry cost right near a monthly strike level.

Lorillard, on the other hand, has essentially no European exposure, but perhaps in sympathy gave up just a little bit from its 52 week high after a sustained run higher over the past 6 weeks. While there is certainly downside risk in the event of a lower moving market, shares do go ex-dividend this week and think of all of those people lighting up after a hearty Thanksgiving meal. The near term risk factors identified for Europe aren’t likely to have much of an impact in the United States market, where the only real risk factors may be use of the products.

That Thanksgiving meal may very well be complemented with a product from Molson Coors. I imagine there will also be those using a Molson Coors product while using a Lorillard product, perhaps even dousing one in the other. Shares, which are down nearly 5% from its recent highs go ex-dividend this week. Because of the strike prices available, Molson Coors is one position that I may consider using a November 29, 2013 option contract, as many more strike levels are available, something that is useful when attempting to capture both a decent option premium and the dividend, while also enticing assignment of shares.

Speaking of risky behavior, the one exception to the central theme of staying away from high beta names is the consideration of adding shares of Walter Energy (WLT). While the last 9 months have seen its shares plummet, the last three months have been particularly exciting as shares had gone up by as much as 75%. For those with some need for excitement this is certainly a candidate, with a beta value 170% greater than the average of all other recommended positions this week, the stock is no stranger to movement. But speaking of movement, although I don’t look at charts in any depth, there appears to be a collision in the making as the 50 dma is approaching the 200 dma from below. Technicians believe that is a bullish indicator. Who knows. What I do know is that the coal, steel and iron complex, despite a downgrade this past Friday of the steel sector, has been building a higher base and I believe that the recent pullback in Walter Energy is just a good opportunity for a quick trade, perhaps using the sale of puts rather than covered calls.

While not falling into the category of risky behavior, Intel’s (INTC) price movement this week certainly represents odd behavior. Not being prone to exceptionally large moves of late on Thursday it soared 3%, which by Intel’s standards really is soaring. It then fell nearly 6% the following day. While the fall was really not so odd given that Intel forecast flat revenues and flat operating profits, it was odd that the price had gone up so much the previous day. Buying on Thursday, in what may have been a frenzied battle for shares was a nice example of how to turn a relatively low risk investment into one that has added risk.

But with all of the drama out of the way Intel is now back to a more reasonable price and allows the ability to repurchase shares assigned the previous week at $24 or to just start a new position.

While I would have preferred that Joy Global (JOY) had retreated even further from its recent high, its one year chart is a nearly perfect image of shares that had spent the first 6 months of the year above the current price and the next 6 months below the current price, other than for a brief period in each half year when the relationship was reversed. Joy GLobal is an example of stock have a wide range of beta reported, as well, going from 1.14 to 2.17. However, it has also traded in a relatively narrow range for the past 6 months, albeit currently near the high end of that range.

With earnings scheduled later in the December 2013 option cycle there is an opportunity to attempt to thread a needle and capture the dividend the week before earnings and avoid the added risk. However, I think that Joy Global’s business, which is more heavily reliant on the Chinese economy may return to its recent highs as earnings are delivered.

Lowes (LOW) reported earnings this past week, and like every previous quarter since the dawn of time the Home Depot (HD) versus Lowes debate was in full force and for yet another quarter Lowes demonstrated itself to be somewhat less capable in the profit department. However, after its quick return to pricing reality, Lowes is once again an appealing portfolio addition. I generally prefer considering adding shares prior to the ex-dividend date, but the share price slide is equally compelling.

Hewlett Packard (HPQ) is one of those stragglers that has yet to report earnings, but does so this week. Had I known 35 years ago that a classmate would end up marrying its future CEO, I would likely not have joined in on the jokes. It is also one of those companies that I swore that I would never own again as it was one of my 2012 tax loss positions. I tend to hold grudges, but may be willing to consider selling puts prior to earnings, although the strike price delivering a 1% ROI, which is my typical threshold, is barely outside of the implied price move range of 8%. It’s not entirely clear to me where Hewlett Packard’s future path may lead, but with a time perspective of just a week, I’m not overly concerned about the future of the personal computer, even if Intel’s forecasts have ramifications for the entire industry.

Lexmark (LXK) is a company that I like to consider owning when there is also an opportunity to capture a dividend. That happens to be the case this week. When it announced that it was getting out of the printer business investors reacted much as you would have imagined. They dumped shares, which for most people are electronically maintained and not in printed form. After all, why own a printer company that says that printers are a dead end business? Who knew that Lexmark had other things in mind, as it has done quite nicely focusing on business process and content management solutions. While it has been prone to large earnings related moves or when shocking the investment community with such news as it was abandoning its most recognizable line of business, it has also been a rewarding position, owing to dividends and option premiums. However, always attendant is the possibility of a large news related move that may require some patience in awaiting recovery.

Finally, I find myself thinking about adding shares of eBay (EBAY) again this week, just as last week and 10 other times this past year. Perhaps I’m just obsessed with another CEO related missed opportunity. Shares didn’t fare too well based upon an analyst’s report that downgraded the company saying that shares were “range bound at $49-$54.” While that may have been the equivalent of a death siren, for me that was just validation of what had been behind the decision to purchase and repurchase shares of eBay on a regular basis. While being range bound is an anathema to most stock investors, it is a dream come true to a covered option writer.

Happy Thanksgiving.

Traditional Stocks: eBay, Intel, Lowes, Philip Morris

Momentum Stocks: Joy Global, Walter Energy

Double Dip Dividend: Lexmark (ex-div 11/26), Lorillard (ex-div 11/26), Molson-Coors (ex-div 11/26)

Premiums Enhanced by Earnings: Hewlett Packard (11/26 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.

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Copyright 2013 TheAcsMan

Weekend Update – August 4, 2013

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.

 

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Copyright 2013 TheAcsMan

Weekend Update – June 30, 2013

The hard part about looking for new positions this week is that memories are still fresh of barely a week ago when we got a glimpse of where prices could be.

When it comes to short term memory the part that specializes in stock prices is still functioning and it doesn’t allow me to forget that the concept of lower does still exist.

The salivating that I recall doing a week ago was not related to the maladies that accompany my short term memory deficits. Instead it was due to the significantly lower share prices.

For the briefest of moments the market was down about 6% from its May 2013 high, but just as quickly those bargains disappeared.

I continue to beat a dead horse, that is that the behavior of our current market is eerily reminiscent of 2012. Certainly we saw the same kind of quick recovery from a quick, but relatively small drop last year.

What would be much more eerie is if following the recovery the market replicated the one meaningful correction for that year which came fresh off the hooves of the recovery.

I promise to make no more horse references.

Although, there is always that possibility that we are seeing a market reminiscent of 1982, except that a similar stimulus as seen in 1982 is either lacking or has neigh been identified yet. In that case the market just keeps going higher.

I listened to a trader today or was foaming at the mouth stating how our markets can only go higher from here. He based his opinion on “multiples” saying that our current market multiple is well below the 25 times we saw back when Soviet missiles were being pointed at us.

I’ll bet you that he misses “The Gipper,” but I’ll also bet that he didn’t consider the possibility that perhaps the 25 multiple was the irrational one and that perhaps our current market multiple is appropriate, maybe even over-valued.

But even if I continue to harbor thoughts of a lower moving market, there’s always got to be some life to be found. Maybe it’s just an involuntary twitch, but it doesn’t take much to raise hope.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend or Momentum categories. With earnings season set to begin July 8, 0213, there are only a handful of laggards reporting this coming week, none of which appear risk worthy (see details).

I wrote an article last week, Wintel for the Win, focusing on Intel (INTC) and Microsoft (MSFT). This week I’m again in a position to add more shares of Intel, as my most recent lots were assigned last week. Despite its price having gone up during the past week, I think that there is still more upside potential and even in a declining market it will continue to out-perform. While I rarely like to repurchase at higher prices, this is one position that warrants a little bit of chasing.

While Intel is finally positioning itself to make a move into mobile and tablets and ready to vanquish an entire new list of competitors, Texas Instruments (TXN) is a consistent performer. My only hesitancy would be related to earnings, which are scheduled to be announced on the first day of the August 2013 cycle. Texas Instruments has a habit of making large downward moves on earnings, as the market always seems to be disappointed. With the return of the availability of weekly options I may be more inclined to consider that route, although I may also consider the August options in order to capitalize somewhat on premiums enhanced by earnings anticipation.

Already owning shares of Pfizer (PFE) and Merck (MRK), I don’t often own more than one pharmaceutical company at a time. However, this week both Eli Lilly (LLY) and Abbott Labs (ABT) may join the portfolio. Their recent charts are similar, having shown some weakness, particularly in the case of Lilly. While Abbott carries some additional risk during the July 2013 option cycle because it will report earnings, it also will go ex-dividend during the cycle. However, Lilly’s larger share drop makes it more appealing to me if only considering a single purchase, although I might also consider selling an August 2013 option even though weekly contracts are available.

I always seem to find myself somewhat apologetic when considering a purchase of shares like Phillip Morris (PM). I learned to segregate business from personal considerations a long time ago, but I still have occasional qualms. But it is the continued ability of people to disregard that which is harmful that allows companies like Phillip Morris and Lorillard (LO), which I also currently own, to be the cockroaches of the market. They will survive any kind of calamity. It’s recent under-performance makes it an attractive addition to a portfolio, particularly if the market loses some ground, thereby encouraging all of those nervous smokers to sadly rekindle their habits.

The last time I purchased Walgreens (WAG) was one of the very few times in the past year or two that I didn’t immediately sell a call to cover the shares. Then, as now, shares took, what I believed to be an unwarranted large drop following the release of earnings, which I believed offered an opportunity to capture both capital gains and option premiums during a short course of share ownership. It looks as if that kind of opportunity has replicated itself after the most recent earnings release.

Among the sectors that took a little bit of a beating last week were the financials. The opportunity that I had been looking for to re-purchase shares of JP Morgan Chase (JPM) disappeared quickly and did so before I was ready to commit additional cash reserves stored up just for the occasion. While shares have recovered they are still below their recent highs. If JP Morgan was not going ex-dividend this trade shortened week, I don’t believe that I would be considering purchasing shares. However, it may offer an excellent opportunity to take advantage of some option pricing discrepancies.

I rarely use anecdotal experience as a reason to consider purchasing shares, but an upcoming ex-dividend date on Darden Restaurants (DRI) has me taking another look. I was recently in a “Seasons 52” restaurant, which was packed on a Saturday evening. I was surprised when I learned that it was owned by Darden. It was no Red Lobster. It was subsequently packed again on a Sunday evening. WHile clearly a small portion of Darden’s chains the volume of cars in their parking lots near my home is always impressive. While my channel check isn’t terribly scientific it’s recent share drop following earnings gives me reason to believe that much of the excess has already been removed from shares and that the downside risk is minimized enough for an entry at this level.

While I did consider purchasing shares of Conoco Phillips (COP) last week, I didn’t make that purchase. Instead, this week I’ve turned my attention back to its more volatile namesake, Phillips 66 (PSX) which it had spun off just a bit more than a year ago. It has been a stellar performer in that time, despite having fallen nearly 15% since its March high and 10% since the market’s own high. It fulfills my need to find those companies that have fared more poorly than the overall market but that have a demonstrated ability to withstand some short term adverse price movements.

Finally, I haven’t recommended the highly volatile silver ETN products for quite a while, even though I continue to trade them for my personal accounts. However, with the sustained movement of silver downward, I think it is time for the cycle to reverse, much as it had done earlier this year. The divergence between the performance of the two leveraged funds, ProShares UltraShort Silver ETN (ZSL) and the ProShares Ultra Silver ETN (AGQ) are as great as I have seen in recent years. I don’t think that divergence is sustainable an would consider either the sale of puts on AGQ or outright purchase of the shares and the sale of calls, but only for the very adventurous.

Traditional Stocks: Abbott Labs, Eli Lilly, Intel, Mosaic, Phillip Morris, Texas Instruments, Walgreens

Momentum Stocks: Phillips 66, ProShares UltraSilver ETN

Double Dip Dividend: Darden Restaurants (ex-div 7/8), JP Morgan (ex-div 7/2)

Premiums Enhanced by Earnings: none

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.

 

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Copyright 2013 TheAcsMan

Weekend Update – May 26, 2013

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.

 

Click here for reuse options!
Copyright 2013 TheAcsMan