The recently deceased Hall of Fame catcher, Yogi Berra, had many quotes attributed to him, some of which he admitted were uttered by him.
One of those allegedly genuine quotes had Yogi Berra giving directions to his home, ending with the words “when you get to the fork in the road, take it.”
People have likely written PhD dissertations on the many levels of meaning that could be contained in that expression in the belief that there was something more deep to it when it was originally uttered.
We’ll probably never know whether the original expression had an underlying depth to it or was simply an incomplete thought that took on a life of its own.
Nearly each month during the Janet Yellen reign as Chairman of the Federal Reserve we’ve been wondering what path the FOMC would take when faced with a potential decision.
Each month it seems that investors felt that they were being faced with a fork in the road and there was neither much in the way of data to decide which way to go, just as the FOMC was itself looking for the data that justifies taking action.
While that decision process hasn’t really taken on a life of its own, the various and inconsistent market responses to the decisions all resulting in a lack of action have taken on a life of their own.
Over much of Yellen’s tenure the market has rallied in the day or days leading up to the FOMC Statement release and I had been expecting the same this past week, until having seen that surge in the final days of the week prior.
Once that week ending surge took place it was hard to imagine that there would still be such unbridled enthusiasm prior to the release of the FOMC’s decision. It was just too much to believe that the market would risk even more on what could only be a roll of the dice.
Last week the market stood at the fork in the road on Monday and Tuesday and finally made a decision prior to the FOMC release, only to reverse that decision and then reverse it again.
I don’t think that’s what Yogi Berra had in mind.
With the FOMC’s non-decision now out of the way and in all likelihood no further decision until at least December, the market is now really standing at that fork in the road.
With retail earnings beginning the week after next we could begin seeing the first real clues of the long awaited increase in consumer spending that could be just the data that the FOMC has been craving to justify what it increasingly wants to do.
The real issue is what road will the market take if those retail earnings do show anything striking at all. Will the market take the “good news is bad news” road or the “good news is good news” path?
Trying to figure that out is probably about as fruitless as trying to understand what Yogi Berra really meant.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
When it comes to stocks, I’m often at my happiest when I can go in and out of the same stocks on a serial basis.
While it may be more exciting to discover a new stock or two every week to trust with your money, when it comes to making a choice, I’d much rather take the boring path at the fork.
For those inclined to believe that Yogi Berra meant to tell his prospective guests that they shouldn’t worry when they got to the fork in the road, because both paths could lead to his home, I’m inclined to believe that the boring path will have fewer bumps in its road.
Morgan Stanley, which was ex-dividend last week, has now recovered about half of what it lost when it reported earnings earlier in the month. Its decline this past Friday and hopefully a little more as the new week gets set to begin, would again make it an attractive stock to (“re”)-consider.
While volatility has been declining, Morgan Stanley’s premium still continues elevated, even though there’s little reason to believe that there will be any near term reason for downward price pressure. In fact, a somewhat hawkish FOMC statement might give reason to suspect that the financial sector’s prospects may be brighter in the coming quarter than they were in this quarter past.
Seagate Technology, w
hich reported earnings last week is ex-dividend this week and I would like to take advantage of either the very generous dividend, the call option premium or both.
For the past 2 weeks I had sold puts, but was prepared to take assignment rather than rolling over the short put option position in the event of an adverse price movement.
That was due to the upcoming ex-dividend date and an unwillingness as a put seller to receive a lower premium than would ordinarily be the case if no dividend was in the equation. Just as call buyers often pay a greater premium than they should when a stock is going ex-dividend, put sellers frequently receive a lower premium when selling in advance of an ex-dividend date.
I would rather be on the long end of a pricing inefficiency.
But as Seagate Technology does go ex-dividend and while its volatility remains elevated there are a number of potential combinations, all of which could give satisfactory returns if Seagate spends another week trading in a defined range.
Based upon its Friday closing price a decision to sell a near the money $38 weekly contract, $37.50 or $37 contract can be made depending on the balance between return and certainty of assignment that one desires.
For me, the sweet spot is the $37.50 contract, which if assigned early could still offer a net 1.2% ROI for a 2 day holding period.
I would trade away the dividend for that kind of return. However, if the dividend is captured, there is still sufficient time left on a weekly contract for some recovery in price to either have the position assigned or perhaps have the option rolled over to add to the return.
MetLife (NYSE:MET) is ex-dividend this week and then reports earnings after the closing bell on that same day.
Like Morgan Stanley, it stands to benefit in the event that an interest rate increase comes sooner rather than later.
Since the decision to exercise early has to be made on the day prior to earnings being announced this may also be a situation in which a number of different strike prices may be considered for the sale of calls, depending on the certainty with which one wants to enter and exit the position, relative top what one considers an acceptable ROI for what could be as little as a 2 day position.
Since MetLife has moved about 5% higher in the past 2 weeks, I’d be much more interested in opening a position in advance of the ex-dividend date and subsequent earnings announcement if shares fell a bit more to open the week.
If you have a portfolio that’s heavy in energy positions, as I do, it’s hard to think about adding another energy position.
Even as I sit on a lot of British Petroleum (NYSE:BP) that is not hedged with calls written against those shares, I am considering adding more shares this week as British Petroleum will be ex-dividend.
Unlike Seagate Technology and perhaps even MetLife, the British Petroleum position is one that I would consider because I want to retain the dividend and would also hope to be in a position to participate in some upside potential in shares.
That latter hope is one that has been dashed many times over the past year if you’ve owned many energy positions, but there have certainly been times to add new positions over that same past year. If anything has been clear, though, is that the decision to add new energy positions shouldn’t have been with a buy and hold mentality as any gains have been regularly erased.
With much of its litigation and civil suit woes behind it, British Petroleum may once again be like any other energy company these days, except for the fact that it pays a 6.7% dividend.
If not too greedy over the selection of a strike price in the hopes of participating in any upside potential, it may be possible to accumulate some premiums and dividends, before someone in a position to change their mind, decides to do so regarding offering that 6.7% dividend.
Finally, if there’s any company that has reached a fork in the road, it’s Lexmark (NYSE:LXK).
A few years ago Lexmark re-invented itself, just as its one time parent, International Business Machines (NYSE:IBM), did some years earlier.
The days about being all about hardware are long gone for both, but now there’s reason to be circumspect about being all about services, as well, as Lexmark is considering strategic alternatives to its continued existence.
I have often liked owning shares of Lexmark following a sharp drop and in advance of its ex-dividend date. It
won’t be ex-dividend until early in the December 2015 cycle and there may be some question as to whether it can afford to continue that dividend.
However, in this case, there may be some advantage to dropping or even eliminating the dividend. It’s not too likely that Lexmark’s remaining investor base is there for the dividend nor would flee if the dividend was sacrificed, but that move to hold on to its cash could make Lexmark more appealing to a potential suitor.
With an eye toward Lexmark being re-invented yet again, I may consider the purchase of shares following this week’s downgrade to a “Strong Sell” and looking at a December 2015 contract with an out of the money strike price and with a hope of getting out of the position before the time for re-invention has passed.
In Lexmark’s case, waiting too long may be an issue of sticking a fork in it to see if its finally done.
Traditional Stocks: Morgan Stanley
Momentum Stocks: Lexmark
Double-Dip Dividend: British Petroleum (11/4 $0.60), MetLife (11/4 $0.38), Seagate Technology (11/4 $0.63)
Premiums Enhanced by Earnings: MetLife (11/4 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.