Aug12015

Weekend Update – August 2, 2015

Weekend Update

Like many people I know who have seen the coming attractions for “Vacation,” I’m anxious to see the film having laughed out loud on the two occasions that I saw the coming attractions.

That’s one of the benefits of diminishing short term memory and ever lower standards for what I find entertaining.

My wife and I usually rotate over who gets to select the next movie we see, although it usually works out to a 3 to 1 ratio in her favor. We tend to like different genres. But on this one, we’re both in agreement.

I’m under no illusions that the upcoming “vacation” being taken by the Federal Reserve and its members will have anywhere near the hijinks that the scripted “Vacation” will likely have.

For a short while the usually very visible and very eager to share their opinion members of that august institution will not garner too much attention and the stock market will be left to its own devices to try and interpret the meaning of incoming economic data in a vacuum.

The greatest likelihood is that the Federal Reserve Governors and the members of the FOMC will also be busily evaluating the economic data that will continue to accrue during the remainder of the summer, even as they have a much abridged speaking schedule in August.

I count only 3 scheduled appearances for August, which means less opportunity to go off script or less opportunity to speak one’s own mind, regardless of how that mind may lack influence where it really matters.

That then translates into less opportunity to move markets through casual comments, observations or expressions of personal opinion, even when that opinion may carry little to no weight.

While FOMC members may be taking a vacation from their public appearances for a short while, they’ll be able to give some thought to the most recent economic data which isn’t painting a picture of an economy that is expanding to the point of worry or perhaps not even to the point of justifying action.

The GDP data reported this week came in below estimates and further there was no indication of wage growth. For an FOMC that continually stresses that it will be “data driven” one has to wonder where the justification would arise to consider an interest rate increase even as early as September.

This coming week’s Employment Situation Report could alter the landscape as could the upcoming earnings reports from retailers that will begin in about 2 weeks.

With less attention being paid to when an interest rate hike may or may not occur, perhaps more attention will be paid to the details that would trigger such an increase and interpret those details on their surface, such that good news is greeted as good news and bad news as bad. That would mean a greater consideration of fundamental criteria rather than interpretation of the first or second order changes that those fundamentals might trigger.

Meanwhile, the market continues to be very deceiving.

While the S&P 500 is only about 1.5% below its all time high and the DJIA is about 3.5% below its high, it’s hard to overlook the fact that 40% of the latter’s component companies are in bear market correction.

That seems to be such an incongruous condition and the failure to break out beyond resistance levels after successfully testing support could be pointing to a developing dynamic of higher lows, but lower highs. That’s something that technicians believe may be a precursor to a breakout, but of indeterminate direction.

A lot of good that is.

The fact remains that the market has been extremely unpredictable from week to week, exhibiting something resembling a 5 steps forward and almost 5 steps backward kind of pattern throughout 2015.

With this past week being one that moved higher and bringing markets closer to its resistance level, the coming week could be an interesting one if China remains under control and fundamentals coming from earnings and economic data paint a picture of good news.

Given my low volume of trading over the past few weeks I feel that I’ve been on an extended, but unplanned vacation. Unfortunately, there are no funny tales to recount and the weeks past feel like weeks lost.

Although I’ve never really understood those who complained about having “too much quality family time” and welcomed heading back to work, I think I now have a greater appreciation for their misery.

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

Last week I purchased shares of Texas Instruments (NASDAQ:TXN) with dividend capture in mind. However, on the day before the ex-dividend date shares surged beyond my strike price and I decided to roll those options over in a hope that I could either retain the dividend and get some additional premium, or, in the event of early assignment, simply retain the additional premium.

This week, despite semi-conductors still being embattled, I’m interested in adding shares of Intel (NASDAQ:INTC), also going ex-dividend during the week.

While patiently awaiting the opportunity to sell new calls on a much more expensive existing position, I’m very aware that Intel is one of those DJIA components in correction mode. However, I don’t believe Intel will be additionally price challenged unless caught in a downward spiraling market. While I’d love to see some rebound in price for my existing shares, I’d be more than satisfied with a quick turnaround of a new lot of shares and capture of dividend and option premium.

MetLife (NYSE:MET) is also ex-dividend this week. It, too, may be in the process of developing higher lows and lower highs, which may serve as an alert.

With interest rates under pressure in the latter half of the week, MetLife followed suit lower, with both peaking mid-week. Any consideration of adding shares of MetLife for a short term holding should probably be done in the context of the expectation for interest rates climbing. If you believe that interest rates are still headed lower, the prospect of dividend capture and option premium may not offset the risk associated with the share price being pulled toward its support level.

MetLife shares are currently a little higher priced than I would like, but with a couple of days of trading prior to the ex-dividend date, I would be more enticed to consider a dividend capture trade and the use of an extended weekly option if there is price weakness early in the week.

I haven’t owned shares of Capital One Financial (NYSE:COF) in a number of years, although it’s always on my watch list. I almost included it in last week’s selection list following it’s impressive earnings related plunge of about 13%, but decided to wait to see if it could show any attempt to stem the tide.

In a sector that has generally had positive earnings this past quarter the news that Capital One was setting aside 60% more for credit losses came as a stunner, as its profitability ratio also fell.

Some price stability came creeping back last week, however, although still leaving shares well off their highs from less than 2 weeks ago. Even after some price recovery, Capital One Financial joins along with those DJIA stocks that are in correction mode and may offer some opportunity after being oversold.

Despite still owning a much too expensive lot of shares of Abercrombie and Fitch (NYSE:ANF), I’m always attracted to its shares, even when I know that they are likely not to be good for me.

There’s something perverse about that facet of human nature that finds attraction with what most know is bound to be a train wreck, but it can be so hard to resist the obvious warning signals.

While having that expensive lot of shares the recent weakness in Abercrombie and Fitch shares that have taken it below the tight range within which it had been trading makes me want to consider adding shares for the fourth time in 2015.

The option premiums are generally attractive, befitting its penchant for large moves and there is nearly 4 weeks to go until it reports earnings, so there may be some time to manage a position in the event of an adverse price movement.

I might consider the sale of puts with Abercrombie, rather than a buy/write. The one caveat about doing so and it also pertains to being short calls, is that if the ensuing share price is sharply deviating from the strike price when looking to execute a rollover, the liquidity may be problematic and the bid-ask spreads may be overly large and detrimental to someone who feels pressure to make a trade.

Finally, for those that have real intestinal fortitude, both Green Mountain Keurig (NASDAQ:GMCR) and Herbalife (NYSE:HLF) have been in the cross hairs of well known activists and both report earnings this week.

The Green Mountain Keurig saga is a long one and began some years ago when questions arose regarding its accounting practices and issues of inventory. Thrown later into the equation were questions regarding the sale of stock by its founder who had also served as CEO and Chairman until he was fired.

What Green Mountain has shown is that second acts are possible, as it has, very possibly through a lifeline offered by Coca Cola (NYSE:KO), emerged from a seeming spiral into oblivion.

Somewhat ominously, at its recent earnings report and conference, Coca Cola made no mention of its investment in Green Mountain, which has seen its share price fall by more than 50% in the past 9 months. It has been down that path before, having fallen by about 65% just 4 years ago in 2 month period.

Are there third and fourth acts?

The options market is implying a price move of about 10.7%. Meanwhile, one can potentially obtain a 1% ROI for the week if selling a put contract at a strike as much as 14% below this past Friday’s close.

In light of how this current earnings season has punished those disappointing with their earnings, even that fairly large cushion between the implied move and the strike that could deliver a 1% ROI still leads to some discomfort. However, I would very much consider the sale of puts after the earnings report if shares do plunge.

Herbalife has had its own ongoing and long saga, as well, that may be coming toward some sort of a resolution as the FTC probe is nearly 18 months old and follows allegations of illegality made nearly 3 years ago.

Following a fall to below $30 just 6 months ago, a series of court victories by Herbalife have helped to see it realize its own second act, as shares have jumped by 65% since that time.

The options market is implying a share price move of about 16%.

Considering that any day could bring great peril to Herbalife shareholders in the event of an adverse FTC decision, that implied move isn’t unduly exaggerated, as more than business results are in play at any given moment.

However, if that intestinal fortitude does exist, especially if also venturing a trade on Green Mountain, a 1% ROI may possibly be obtained by selling puts at a strike nearly 29% below Friday’s closing price.

Now that’s a cushion, but it may be a necessary one.

If the news is doubly bad, combining disappointing earnings and the coincidental release of an FTC ruling the same week that Bill Ackman would immensely enjoy, I might recommend a vacation, if you can still afford one.

Traditional Stocks: Capital One Finance

Momentum Stocks: Abercrombie and Fitch

Double-Dip Dividend: Intel (8/5), MetLife (8/5)

Premiums Enhanced by Earnings: Green Mountain Keurig (8/5 PM), Herbalife (8/5 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.

May162015

Weekend Update – May 17, 2015

Weekend Update

The nice thing about the stock and bond markets is that anything that happens can be rationalized.

That’s probably a good thing if your job includes the need to make plausible excuses, but unless you work in the finance industry or are an elected official, the chances are that particular set of skills isn’t in high demand.

However, when you hear a master in the art of spin ply his craft, it’s really a thing of beauty and you wonder why neither you nor anyone else seemed to see things so clearly in a prospective manner.

Sometimes rationalization is also referred to as self-deception. It is a defense mechanism and occasionally it becomes part of a personality disorder. Psychoanalysts are divided between a positive view of rationalization as a stepping-stone on the way to maturity and a more destructive view of it as divorcing feeling from thought and undermining powers of reason.

In other words, sometimes rationalization itself is good news and sometimes it’s bad news.

But when it comes to stock and bond markets any interpretation of events is acceptable as long as great efforts are taken to not overtly make anyone look like an idiot for either having made a decision to act or having made a decision to be passive.

That doesn’t preclude those on the receiving end of market rationalizations to wonder how they could have been so stupid as to have missed such an obvious connection and telegraphed market reaction.

That’s strange, because when coming to real life personal and professional events, being on the receiving end of rationalization can be fairly annoying. However, for some reason in the investing world it is entirely welcomed and embraced.

In hindsight, anything and everything that we’ve observed can be explained, although ironically, rationalization sometimes removes rational thought from the process.

The real challenge, or so it seems, in the market, is knowing when to believe that good news is good and when it is bad, just like you need to know what the real meaning of bad news is going to be.

Of course different constituencies may also interpret the very same bits of data very differently, as was the case this past week as bond and stock markets collided, as they so often do in competition for investor’s confidence.

We often find ourselves in a position when we wonder just how news will be received. Will it be received on its face value or will markets respond paradoxically?

This week any wonder came to an end as it became clear that we were back to a world of rationalizing bad news as actually being something good for us.

In this case it was all about how markets viewed the flow of earnings reports coming from national retailers and official government Retail Sales statistics.

In a nutshell, the news wasn’t good, but that was good for markets. At least it was good for stock markets. Bond markets are another story and that’s where there may be lots of need for some quick rationalizations, but perhaps not of the healthy variety.

In the case of stock markets the rationalization was that disappointing retail sales and diminished guidance painted a picture of decreased inflationary pressures. In turn, that would make it more difficult for an avowed data driven Federal Reserve to increase interest rates in response. So bad news was interpreted as good news.

If you owned stocks that’s a rationalization that seems perfectly healthy, at least until that point that the same process no longer seems to be applicable.

As the S&P 500 closed at another all time high to end the week this might be a good time to prepare thoughts about whether what happens next is because we hit resistance or whether it was because of technical support levels.

^TNX Chart

On the other hand, if you were among those thought to be a member of the smartest trading class, the bond traders, you do have to find a way to explain how in the face of no evidence you sent rates sharply higher twice over the past 2 weeks. Yet then presided over rates ending up exactly where they started after the ride came to its end.

The nice thing about that, though, is that the bond traders could just dust off the same rationalization they used for surging rates in mid-March 2015.

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

Cisco (NASDAQ:CSCO) has had a big two past weeks, not necessarily reflected in its share price, but in the news it delivered. The impending departure of John Chambers as CEO and the announcement of his successor, along with reporting earnings did nothing to move the stock despite better than expected revenues and profits. In fact, unlike so many others that reported adverse currency impacts, Cisco, which does approximately 40% of its revenues overseas was a comparative shining star in reporting its results.

However, unlike so many others that essentially received a free pass on currency issues, because it was expected and who further received a free pass on providing lowered guidance, Cisco’s lowered guidance was thought to muzzle shares.

However, as the expected Euro – USD parity is somehow failing to materialize, Cisco may be in a good position to over-deliver on its lowered expectations. In return for making that commitment to its shares with the chance of a longer term price move higher, Cisco offers a reasonable option premium and an attractive dividend.

Both reporting earnings this week, Best Buy (NYSE:BBY) and Hewlett Packard (NYSE:HPQ), have fortunes that are, to a small degree, related to one another.

In two weeks I will try to position myself next to the husband of the Hewlett Packard CEO at an alumni reunion group photo. By then it will be too late to get any earnings insights, not that it would be on my agenda, since I’m much more interested in the photo.

No one really knows how the market will finally react to the upcoming split of the company, which coincidentally will also be occurring this year at the previous employer of the Hewlett Packard CEO, Meg Whitman.

The options market isn’t anticipating a modest reaction to Hewlett Packard’s earnings, with an implied move of 5.2%. However, the option premiums for put sales outside the lower boundary of that range aren’t very appealing from a risk – reward perspective.

However, if the lower end of that boundary is breached after earnings are released and approach the 52 week lows, I would consider either buying shares or selling puts. If selling puts, however and faced with the prospects of rolling them over, I would be mindful of an upcoming ex-dividend event and would likely want to take ownership of shares in advance of that date.

I currently own shares of Best Buy and was hopeful that they would have been assigned last week so as to avoid them being faced with the potential challenge of earnings. Instead, I rolled those shares over to the June 2015 expiration, possibly putting it in line for a dividend and allowing some recovery time in the event of an earnings related price decline.

However, with an implied move of 6.6% and a history of some very large earnings moves in the past, the option premiums at and beyond the lower boundary of the range are somewhat more appealing than is the case with Hewlett Packard.

As with Hewlett Packard, however, I would consider waiting until after earnings and then consider the sale of puts in the event of a downward move. Additionally, because of an upcoming ex-dividend date in June, I would consider taking ownership of shares if puts are at risk of being exercised.

It’s pretty easy to rationalize why MetLife (NYSE:MET) is such an attractive stock based on where interest rates are expected to be going.

The only issue, as we’ve seen on more than one recent occasion is that there may be some disagreement over the timing of those interest rate hikes. Since MetLife responds to those interest rate movements, as you might expect from a company that may be added to the list of “systemically important financial institutions,” there can be some downside if bonds begin trading more in line with prevailing economic softness.

In the interim, while awaiting the inevitable, MetLife does offer a reasonable option premium, particularly as it has traded range-bound for the past 3 months.

A number of years ago the controlling family of Cablevision (NYSE:CVC) thought it had a perfectly rationalized explanation for why public shareholders would embrace the idea of taking the company private.

The shareholding public didn’t agree, but Cablevision hasn’t sulked or let the world pass it by as the world of cable providers is in constant flux. Although a relatively small company it seems to get embroiled in its share of controversy, always keeping the company name in the headlines.

With a shareholder meeting later this month and shares going ex-dividend this week, the monthly option, which is all that is offered, is very attractive, particularly since there is little of controversy expected at the upcoming shareholder meeting.

Also going ex-dividend this week, and also with strong historical family ties, is Johnson and Johnson (NYSE:JNJ). What appeals to me about shares right now, in addition to the dividend, is that while they have been trailing the S&P 500 and the Health Care SPDR ETF (NYSEARCA:XLV) since early 2009, those very same shares tend to fare very well by comparison during periods of overall market weakness.

In the process of waiting for that weakness the dividend and option premium can make the wait more tolerable and even close the performance gap if the market decides that 2022 on the S&P 500 is only a way station toward something higher.

Finally, there are probably lots of ways one can rationalize the share price of salesforce.com (NYSE:CRM). Profits, though, may not be high on that list.

salesforce.com has certainly been the focus of lots of speculation lately regarding a sale of the company. However, of the two suitors, I find it inconceivable that one of them would invite the CEO, Marc Benioff back into a company that already has a power sharing situation at the CEO level and still has Larry Ellison serving as Chairman.

I share price was significantly buoyed by the start of those rumors a few weeks ago and provide a high enough level that any disappointment from earnings, even on the order of those seen with Linkedin (NYSE:LNKD), Yelp (NYSE:YELP) and others would return shares to levels last seen just prior to the previous earnings report.

The options market is implying a 7.3% earnings related move next week. After a recent 8% climb as rumors were swirling, there is plenty of room for some or even all of that to be given back, so as with both Best Buy and Hewlett Packard, I wouldn’t be overly aggressive in this trade prior to earnings, but would be very interested in joining in if sellers take charge on an earnings disappointment. However, since there is no dividend in the picture, if having sold puts and subject to possible exercise, I would likely attempt to rollover the puts rather than take assignment.

But either way, I can rationalize the outcome.

Traditional Stocks: Cisco, MetLife

Momentum Stocks: none

Double Dip Dividend: Cablevision (5/20), Johnson and Johnson (5/21)

Premiums Enhanced by Earnings: Best Buy (5/21 AM), Hewlett Packard (5/21 PM), salesforce.com (5/20 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.

Apr102015

Weekend Update – April 12, 2015

Weekend Update

This was one of those rare weeks where there wasn’t really any kind of theme to guide or move markets.

The week started with some nervousness about where the opening would take us after the previous Friday’s very disappointing Employment Situation Report statistics. On that day some were obliged to even suggest that it was a conspiracy that the report was released on Good Friday, as the markets were conveniently closed for what was supposedly known in advance to be a report that would have otherwise sent markets tumbling.

How convenient. Talk about a fairy tale.

That was as rational an outlook as was the response of the futures and bond markets trading, as they remained opened for holiday abbreviated sessions. Futures did go tumbling and interest rates plunged, leaving a gap for markets to deal with 3 days later.

But by then, after the mandatory initial response to those S&P 500 levels as the market opened, rational thought returned and the market had a very impressive turnaround beginning within minutes of the open.

Some brave souls may have remembered the market’s out-sized response to the previous month’s extraordinarily strong Employment Situation Report data that took the market down for the month to follow, only to see revisions to the data a month later. The 3 days off may have given them enough presence of mind to wonder whether the same outlandish response was really justified again.

One thing that the initial futures response did show us is that the market may be poised to be at risk regardless of what news is coming our way. One month the market views too many jobs as being extremely negative and the next month it views too few jobs as being just as negative.

Somewhere right in the middle may be the real sweet spot that represents the “No News is Good News” sentiment that may be the only safe place to be.

That is the true essence of a Goldilocks stock market, no matter what the accepted definition may be. It is a market where only the mediocre may be without risk. However, the question of whether mediocrity will be enough to continue to propel markets to new heights is usually easily answered.

It isn’t.

After a while warm porridge loses its appeal and something is needed to spice things up to keep Goldilocks returning. U.S. traded stocks have plenty of asset class competition in the event that they become mediocre or unpredictable.

The coming week may be just the thing to make or break the current malaise, that despite having the S&P 500 within about 0.7% of its all time high from just a month ago, is only 2.1% higher for 2015.

Granted that on an annualized basis that would bill respectable, but if the 2015 pattern of alternating monthly advances and declines continues we would end the year far from that annualized rate.

The catalyst could be this new earnings season which begins in earnest next week as the big banks report and then in the weeks to follow. Where the catalyst may arise is from our lowered expectations encountering a better reality than anticipated, as we’ve come to be prepared for some degree of lowered earnings due to currency considerations.

The real wild card will be the balance between currency losses and lower input costs from declining energy prices, as well as the impact, if any from currency hedges that may have been created. Much like the hedging of oil that some airlines were able to successfully implement before it became apparent how prescient that strategy would be, there may be some real currency winners, at least in relative terms.

I actually don’t really remember how the story of Goldilocks ended, but I think there were lots of variations to the story,depending on whether parents wanted to soothe or scare.

The real lesson is that you have to be prepared for either possibility.

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

WIth General Electric (NYSE:GE) getting most everyone’s attention this past Friday morning with plans to divest itself of most of its non-industrial assets, that may leave us with one fewer “systemically important” financial institution.

Too bad, for MetLife (NYSE:MET), which might find it would be less miserable with that proposed assignment if it had more company. It’s easy to understand why financial institutions would want to rid themselves of the yoke they perceive, however, it may be difficult to imagine how MetLife’s desire to avoid that designation can become reality. That is unless the battle goes a very long distance, which in turn could jeopardize a good deal of whatever confidence exists over the restraints that are intended to prevent another financial meltdown.

I believe that the eventuality of those restraints and capital requirements impacting MetLife’s assets is already factored into its share price. If so, MetLife is simply just a proxy for the direction of interest rates, which continue to be volatile as there is still uncertainty over when the eventual interest rate increases will be coming from the FOMC.

While waiting for that to happen MetLife has been trading in a fairly tight range and offering an attractive option premium and dividend. I’ve already owned shares on 3 occasions in 2015 and look forward to more opportunities while waiting to figure out if the economy is too hot or not hot enough or just right.

With the coming week being dominated by bank earnings, one that isn’t reporting until the following week is Morgan Stanley (NYSE:MS). Thus far 2015 hasn’t been especially kind to the money center banks, but it has held Morgan Stanley in particular low regard.

With its well respected CFO heading to warmer pastures it still has a fairly young CEO and lots of depth, with key people continually being exposed to different parts of the company, thereby lessening dependence on any one individual.

With earnings from other banks coming this week the option premiums on Morgan Stanley are a little higher than usual. However, since they report their own earnings before the market opens on Monday of the following week, it would be a good idea to attempt to rollover weekly contracts if not likely to be assigned or to simply sell extended weekly contracts to encompass the additionally enhanced premiums for both this week and the next

Bed Bath and Beyond (NASDAQ:BBBY) is no stranger to significant earnings related price drops. It did so again last week and the options market correctly created the price range in which the stock price varied.

While Bed Bath and Beyond is no stranger to those kind of drops, it does tend to have another common characteristic in that it frequently recovers from those price drops fairly quickly. That’s one reason that when suggesting that consideration be given to selling puts on it last week prior to earnings, I suggested that if threatened with assignment I would rather accept that than to try and rollover the put contracts.

Now that the damage has been done I think it’s safe to come back and consider another look at its shares. If recent history holds true then a purchase could be considered with the idea of seeking some capital gains from shares in addition to the option premiums received for the call sales.

SanDisk (NASDAQ:SNDK) reports earnings this week and has been on quite a wild ride of late. It has the rare distinction of scaring off investors on two occasions in advance of this week’s upcoming earnings. Despite an 11% price climb over the past week, it is still down nearly 20% in the past 2 weeks.

The option market is implying a relatively small 6.8% move in the coming week which is on the low side, perhaps in the belief that there can’t possibly be another shoe to be dropped.

Normally, when considering the sale of puts in advance of earnings I like to look for a strike price that’s outside of the range defined by the options market that will return at least a 1% ROI for the week. However, that strike level is only 7.1% lower, which doesn’t provide too much of a safety cushion.

However, I would be very interested in the possibility of selling puts on SanDisk shares after earnings in the event of a sharp drop or prior to earnings in the event of significant price erosion before the event.

Fastenal (NASDAQ:FAST) also reports earnings this coming week and didn’t change its guidance or offer earnings warnings as it occasionally does in the weeks in advance of the release.

It actually had a nice report last quarter and initially went higher, although a few weeks later, without any tangible news, it nose-dived, along with some of its competitors.

What makes Fastenal interesting is that it is almost entirely US based and so will have very little currency risk. The risk, however, is that it is currently trading near its 2 year lows, so if considering an earnings related trade, I’m thinking of a buy/write and using a May 2015 expiration, to both provide some time to recover from any further decline and to also have a chance at collecting the dividend at the end of April.

With a much more expensive lot of shares of Abercrombie and Fitch (NYSE:ANF) long awaiting an opportunity to sell some calls upon, I’m finally ready to consider adding more shares. The primary goal is to start whittling down some of the losses on those shares and Abercrombie is finally showing some signs of making a floor, at least until the next earnings report at the end of May.

With its dysfunction hopefully all behind it now with the departure of its past CEO it still has a long way to go to reclaim lost ground ceded to others in the fickle adolescent retail market. The reasonable price stability of the past month offers some reason to believe that the time to add shares or open a new position may have finally arrived. Alternatively, however, put sales may be considered, especially if shares open on a lower note to begin the week.

Finally, I don’t know why I keep buying The Gap (NYSE:GPS), except that it never really seems to go anywhere. It does have a decent dividend, but it’s premiums are nothing really spectacular.

What appeals to me about The Gap, however, is that it’s one of those few stocks that is continually under the microscope as it reports monthly sales statistics and as a result it regularly has some enhanced premiums and it tends to alternate rapidly between disappointing and upbeat same store sales.

All in all, that makes it a really good stock to consider for a covered option strategy. It’s especially nice to see a stock that does trade in a fairly tight range, even while it may have occasional hiccoughs that are fairly predictable as to when they will occur, just as their direction isn’t at all predictable.

The Gap reported those same store sales last week and this time they disappointed. That actually marked the second consecutive month of disappointment, which is somewhat unusual, but in having done so, it still hasn’t violated that comfortable range.

I already own some shares and in expectation of a better than expected report for the following month, my inclination is to add shares, but rather than write contracts expiring this week will look at those expiring on either May 8 or May 15, 2015, taking advantage of the added uncertainty coming along with the next scheduled same store sales report. In doing so I would likely think about using an out of the money strike, rather than a near the money strike in anticipation of finally getting some good news and getting back on track at The Gap.

Traditional Stocks: Bed Bath and Beyond, MetLife, Morgan Stanley, The Gap

Momentum Stocks: Abercrombie and Fitch

Double Dip Dividend: none

Premiums Enhanced by Earnings: Fastenal (4/14 AM), SanDisk (4/15 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.

Mar142015

Weekend Update – March 15, 2015

Weekend Update

Anyone who has seen the classic movie “Casablanca” will recall the cynicism of the scene in which Captain Renault says “I’m shocked, shocked to find that gambling is going on in here!” seconds before the croupier hands him his winnings from earlier.

This week, the Chief Global Investment Strategist of Blackrock (NYSE:BLK) in attempting to explain a sell-off earlier in the week said “You’ve got the dollar up about 23 percent from the summer lows, and people are realizing this is starting to bite into earnings.”

No doubt that a stronger US Dollar can have unwanted adverse consequences, but exactly what people was Russ Koesterich referring to that had only that morning come to that realization?

How in the world could people such as Koesterich and others responsible for managing huge funds and portfolios possibly have been caught off guard?

Was he perhaps instead suggesting that somehow small investors around the nation suddenly all had the same epiphany and logged into their workplace 401(k) accounts in order to massively dump their mutual fund shares in unison and sufficient volume prior to the previous day’s closing bell?

Somehow that doesn’t sound very likely.

I can vaguely understand how a some-what dull witted middle school aged child might not be familiar with the consequences of a strengthening dollar, especially in an economy that runs a trade deficit, but Koesterich could only have been referring to those who were capable of moving markets in such magnitude and in such short time order. There shouldn’t be too much doubt that those people incapable of seeing the downstream impacts of a strengthening US Dollar aren’t the ones likely to be influencing market direction upon their sudden realization.

Maybe it just doesn’t really matter when it’s “other people’s money” and it is really just a game and a question of pushing a sell button.

This past week was another in which news took a back seat to fears and the fear of an imminent interest rate increase seems to be increasingly taking hold just at the same time as the currency exchange issue is getting its long overdue attention.

While there are still a handful of companies of importance to report earnings this quarter, the next earnings season begins in just 3 weeks. If Intel (NASDAQ:INTC) is any reflection, there may be any number of companies getting in line to broadcast earnings warnings to take some of the considerable pressure off the actual earnings release.

The grammatically incorrect, but burning question that I would have asked Russ Koesterich during his interview would have been “And this comes to you as a surprise, why?”

In the meantime, however, those interest rate concerns seem to have been holding the stock market hostage as the previous week’s Employment Situation report is still strengthening the belief that interest rate increases are on the near horizon, despite any lack of indication from Janet Yellen. In addition, the past week saw rates on the 10 Year Treasury Note decrease considerably and Retail Sales fell for yet another month, even while gasoline prices were increasing.

The coming week’s FOMC meeting may provide some clarity by virtue of just occurring. With so many focusing on the word “patience” in the FOMC Statement, whether it remains or is removed will offer reason to move forward as either way the answer to the “sooner or later” question will be answered.

Still, it surprises me, having grown up believing the axiom that the stock market discounts events 6 months into the future, that it has come to the point that fairly well established economic cycles, such as the impact of changing currency exchange rates on earnings, isn’t something that had long been taken into account. Even without a crystal ball, the fact that early in this current earnings season companies were already beginning to factor in currency headwinds and tempering earnings and guidance, should at least served as a clue.

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

Years ago, before spinning off its European operations, Altria (NYSE:MO) was one of my favorite companies. While I have to qualify that, lest anyone believed that their core business was the reason for my favor, it was simply a company whose shares I always wanted to trade.

In academic medicine we used to refer to the vaunted “triple threats.” That was someone who was an esteemed researcher, clinician and teacher. There really aren’t very many of those kind of people. While Altria may represent the antithesis to what a triple threat in medicine is dedicated toward, it used to be a triple threat in its own right. It had a great dividend, great option premiums and the ability to have share appreciation, as well.

That changed once Phillip Morris (NYSE:PM) went on its own and the option premiums on the remainder of Altria became less and less appealing, even as the dividend stayed the course. I found less and less reason to own shares after the split.

However, lately there has been some life appearing in those premiums at a time that shares have fallen nearly 10% in just 2 weeks. With the company re-affirming its FY 2015 guidance just a week ago, unless it too has a sudden realization that its now much smaller foreign operations and businesses will result in currency exchange losses, it may be relatively immune from what may ail many others as currency parity becomes more and more of a reality.

Lately, American Express (NYSE:AXP) can’t seem to do anything right. I say that, as both my wife and I registered our first complaints with them after more than 30 years of membership. Fascinatingly, the events were unrelated and neither of us consulted
with the other, or shared information about the issues at hand, before contacting the company.

My wife, who tends to be very low maintenance, was nearly apoplectic after being passed to 11 different people, some of whom acted very “Un-American Express- like.”

The preceding is anecdotal and meaningless information, for sure, but makes me wonder about a company that received a premium for its use by virtue of its service.

With the loss of its largest co-branding partner to take effect in 2016, American Express has already sent out notices to some customers of its intent to increase interest rates on those accounts that are truly credit cards, but my guess is that revenue enhancements won’t be sufficient to offset the revenue loss from the partnership dissolution.

To that end the investing world will laud American Express for its workforce cutbacks that will certainly occur at some point, and service will as certainly decline until that point that the consumers go elsewhere for their credit needs.

That is known as a cycle. The sort of cycle that perhaps highly paid money managers are unable to recognize, until like currency headwinds, it hits them on the head.

Still, the newly introduced uncertainty into its near term and longer term prospects has again made American Express a potentially attractive covered option candidate, as it has just announced a dividend increase and a nearly $7 billion share buyback.

Based on its falling stock price, you would think that Las Vegas Sands (NYSE:LVS) hasn’t been able to do anything right of late, either.

Sometimes your fortunes are defined on the basis of either being at the right place at the right time or the wrong place at the wrong time. For the moment, Macao is the wrong place and this is the wrong time. However, despite the downturn of fortunes for those companies that placed their bets on Macao, somehow Las Vegas Sands has found the wherewithal to increase its quarterly dividend and is now at 5%, yet with a payout ratio that is sustainable.

The company also has operating and profit margins that would make others, with or without exposure to Macao envious, yet its shares continue to follow the experiences of the much smaller and poorer performing Wynn Resorts (NASDAQ:WYNN). That probably bothers Sheldon Adelson to no end, while it likely delights Steve Wynn, who would rather suffer with friends.

With shares going ex-dividend this week and trading near its yearly low, it’s hard to imagine news from Macao getting much worse, particularly as China is beginning to play the interest rate game in efforts to stimulate the economy. The risk, however, is still there and is reflected in the option premium.

Given the risk – benefit proposition, I ask myself “WWSD?”

What would Sheldon Do?

My guess is that he would be betting on his company to do more than just tread water at these levels.

The Gap (NYSE:GPS) fascinates me.

I don’t think I’ve ever been in one of their stores, but I know their brand names and occasionally make mental notes about the parking conditions in front of their stores. Those activities are absolutely meaningless, as are The Gap’s monthly sales reports.

I don’t think that I can recall any other company that so regularly alternates between being out of touch with what the consumer wants and being in complete synchrony. At least that’s how those monthly sales statistics are routinely interpreted and share prices goes predictably back and forth.

The good thing about all of the non-sense is that the opportunities to benefit from enhanced option premiums actually occurs up to 5 times in a 3 month period extending from one earnings report to the next, as the monthly same store sales reports also have enhanced premiums. With an upcoming dividend during the same week as the next same store sales report in early April 2015, this is a potential position that I’d consider selling a longer term option, in order to take advantage of the upcoming volatility, collect the dividend and perhaps have some additional time for the price to recoup if it reacts adversely.

MetLife (NYSE:MET) has been trading in a range lately that has simply been following interest rates for the most part. As it awaits a decision on its challenge to being designated as “systemically important” it probably is wishing for rate increases to come as quickly as possible so that it can put as much of its assets to productive use as quickly as possible before the inevitable constraints on its assets become a reality.

With interest rate jitters and uncertainty over the eventual judicial decision, MetLife’s option premiums are higher than is typically the case. However, in the world of my ideal youth, the stock market would have already discounted the probabilities of future interest rate increases and the upheld designation of the company as being systemically important.

With Intel’s announcement, this wasn’t a particularly good week for “old technology.” For Seagate Technolgy (NASDAQ:STX) the difficulties this week were just a continuation since its disappointing earnings in January. After its earnings plunge and an attempted bounce back, it is now nearly 9% lower than at the depth of its initial January drop.

That continued drop in share price is finally returning shares to a level that is getting my attention. With its dividend, which is very generous and appears to be safe, still two months away, Seagate Technology may be a good candidate for the sale of put contracts and if opening such a position and faced with assignment, I would consider trying to rollover as long as possible, either resulting in an eventual expiration of the position or being assigned and then in a position to collect the dividend.

Finally, for an unprecedented fourth consecutive week, I’m going to consider adding shares of United Continental (NYSE:UAL) as energy prices have recaptured its earlier lows. Those lows are good for UAL and other airlines and by and large the share prices of UAL and representative oil companies have moved in opposite directions.

I had shares of UAL assigned again this past Friday, as part of a pairs kind of trade established a few weeks ago. I still hold the energy shares, which have slumped in the past few weeks, but would be eager to once again add UAL shares at any pullback that might occur with a bounce back in energy prices.

The volatility and uncertainty inherent in shares of UAL has made it possible to buy shares and sell deep in the money calls and still make a respectable return for the week, if assigned.

That’s a risk – reward proposition that’s relatively easy to embrace, even as the risk is considerable.

 

Traditional Stocks: Altria, American Express, MetLife, The Gap

Momentum Stocks: Seagate Technology, United Continental

Double Dip Dividend: Las Vegas Sands (3/19)

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.

Jan242015

Weekend Update – January 25, 2015

Weekend Update

About 2 years after he began trying to convince the world that he was the biggest and baddest central banker around, unafraid to whip out any part of his arsenal to fight a slumping European economy, Mario Draghi finally has decided to let actions speak for themselves.

With only a single mandate as a master, although hampered by many national masters in the European Union, a European version of Quantitative Easing will be introduced a mere 5 years after it was begun in the United States.

While in the past the bravado of Draghi’s words have spurred our markets higher and the lack of action have led to disappointment, this week’s details of the planned intervention were more than the previous day’s rumor had suggested and after a very short period of second guessing the good news delivered, the market decided that the ECB move would be very positive for stocks and had another one of those strong moves higher that you tend to see during bear markets.

We’ve had a lot of those, lately.

Whether an ECB quantitative easing will be good for US stock markets in the longer term may be questionable, much like the FOMC’s period of QE did little to promote European equity markets, but almost certainly gave home markets an advantage.

While US markets greatly out-performed their European counter-parts from the time QE was initially announced, they were virtually identical in performance for the preceding 10 year period.

If you are among those who believe that the great returns seen by the US markets since 2009 were the result of FOMC actions, then you probably should believe that European markets may now be relatively more attractive for investors. Besides, add the current strength of the US dollar into the mix and the thoughts of bringing money back to European shores and putting it to work in local markets may be very enticing if that puts you on the right side of currency headwinds.

The only real argument against that logic is that the FOMC’s actions helped to drive interest rates lower, making equities more appealing, by contrast. However, how much lower can European rates go at this point?

Meanwhile, although there is now a tangible commitment and the initial market action was to embrace the plan with open arms and emptied wallets in a knee jerk buying spree, there’s not too much reason to believe that it will offer anything tangible for markets immediately, or at all.

In the US experience we have seen that the need for and size of the intervention and the need for its continuation or taper begins the process of wondering whether bad news is good or good news is bad and introduces more paradoxical kinds of reactions to events, as professional traders become amateur reverse psychologists.

As markets may now take some time to digest the implications of an ECB intervention for at least the next 18 months, the question at hand is what will propel US markets forward?

Thus far, expectations that the benefit of lower energy prices will be that catalysts hasn’t been validated by earnings or forward guidance, although key reports, especially in the consumer sector are still to come. One one expect that the significant upward revisions of GDP would eventually make their way into at least the top line of earnings reports by the next quarter and might find their way into guidance during this quarter’s releases.

In addition to guidance from the consumer sector, earnings news and guidance from the energy sector, if pointing to bottom lines that aren’t as bad as the stock sell-offs would have indicated, could go a long way toward pushing the broader market higher. Some early results from Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) are encouraging, however, the coming two weeks may supply much more information as a number of major oil companies report earnings.

Of course, next week we could also return to an entirely US-centric news cycle and completely forget about European solutions to European woes. First comes an FOMC Statement release on Wednesday and then GDP statistics on Friday, either of which could cast some doubt on last week’s Retail Sales statistics that took many by surprise by not reflecting the increased consumer spending most believed would be inevitable.

The real test may be whether earnings can continue to meet our expectations as buybacks that had been inflating EPS data may be slowing.

Still, focusing on earnings is so much better than having to think about fiscal cliffs and sequestration.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. Additional earnings related trades may be seen in an accompanying article.

Dow Chemical (NYSE:DOW) reports earnings this week, but I’m not looking at it as an earnings related trade in the manner that I typically do, through the sale of out of the money puts.

In this case, I’m interested in adding shares to my existing holdings in the belief that Dow Chemical shares have been unduly punished as energy prices have plunged. While it does have some oil producing partnerships with Kuwait, as its CEO Andrew Liveris recently pointed out during the quiet period before upcoming earnings, Dow Chemical is a much larger user of oil and energy than it is a producer and it is benefiting greatly from reduced energy costs.

The market, however, hasn’t been seeing it the same way that Liveris does, so there may be some positive surprises coming this week, either for investors or for Liveris, who is already doing battle with activist investors.

While I generally like to sell near the money options on new positions, in this case I’m more interested in the potential of securing some capital gains on shares and would take advantage of the earnings related enhanced option premiums by selling out of the money calls and putting some faith in Liveris’ contention.

I can’t begin to understand the management genius of Richard Kinder and his various strategic initiatives over the years, nor could I keep track of his various companies. News of his decision to step down as CEO of Kinder Morgan (NYSE:KMI) seems well timed, considering the successful consolidation of the various companies bearing his name. In what may be the last such transaction under his leadership, a very non-distressed Kinder Morgan made an acquisition of a likely more distressed privately held Harold Hamm company with interests in the Bakken Formation.

What I do understand, though, is that shares of Kinder Morgan are ex-dividend this week and despite it being in that portion of the energy sector that has been largely shielded from the price pressures seen in the sector, it is still benefiting from option premiums that reflect risk and uncertainty. Getting more reward than you deserve seems like a good alternative to the more frequently occurring situation.

In a world where “old tech” has regained respect, not many are older than Texas Instruments (NASDAQ:TXN). It, too, goes ex-dividend this week, but does so two days after its earnings are released.

With shares less than 2% below its 52 week high, I’m reluctant to buy shares when the market itself has been so tentative and prone to large and sometimes unforeseen moves in either direction. However, in the event of a sizable decline after Texas Instruments reports earnings I may be interested in purchasing shares prior to the ex-dividend date.

Fastenal (NASDAQ:FAST) is also ex-dividend this week. While I generally don’t like to add shares at a higher price, having just bought Fastenal immediately before earnings and in replacement of shares assigned the previous month at a higher price, that upcoming dividend makes it hard to resist.

Fastenal, despite everything that may be going on in the world, is very much protected from the issues of the day. Low oil prices and a strong dollar mean little to its business, although low interest rates do have meaning, insofar as they’re conducive to commercial and personal construction projects. As long as those rates remain low, I would expect those Fastenal parking lots to be busy.

While there’s nothing terribly exciting about this company it has become one of my favorite stocks, while trading in a fairly narrow range. Although priced higher than my current lot of shares, it’s priced at the average entry point of my previous 10 positions over the past 18 months

While Facebook (NASDAQ:FB) doesn’t go ex-dividend this week, it does report earnings. In its nearly 3 years as a publicly traded company Facebook hasn’t had many earnings disappointments since it learned very quickly how to monetize its mobile platforms much more quickly than even its greatest protagonists believed possible.

The option market is implying a 6.2% price move, which is low compared to recent quarters, however, that is a theme for this week for a number of other companies reporting earnings this week.

Additionally, the cushion between the lower range strike price determined by the option market and the strike level that would return my desired 1% ROI isn’t as wide as it has been in the past for Facebook. That strike is 6.8% below Friday’s closing price.

For that reason, while I’ve liked Facebook in the past as an earnings related trade and still do, the likelihood is that if executing this trade I would only do so if shares show some weakness in advance of earnings or if they do so after earnings. In those instances I’d consider the sale of out of the money put contracts. Due to the high volume of trading in Facebook options it is a relatively easy position to rollover if necessary due to a larger than expected move lower, although I wouldn’t be adverse to taking possession of shares and then managing the position with the sale of calls.

American Express (NYSE:AXP) was another casualty within the financial services sector following its earnings report this past week, missing on both analyst’s estimates and its own projections for revenue growth. That disappointment added to the decline its shares had started at the end of 2014.

Since that time, while the S&P 500 has fallen 1.5%, American Express shares had dropped nearly 11%, exacerbated by disappointing earnings, with analysts concerned about future costs, despite plans to cut 4000 employees.

The good news is that American Express has recovered from these kind of earnings drops in he past year as they’ve presented buying opportunities. Along with the price drops comes an increase in option premiums as a little bit more uncertainty about share value is introduced. That uncertainty, together with its resiliency in the face of earnings challenges may make this a good time to consider a new position.

Finally, I wasn’t expecting to be holding any shares of MetLife (NYSE:MET) as Friday’s trading came to its close, having purchased shares last week and expecting them to be assigned on Friday, until shares followed the steep decline in interest rates to require that their option contracts be rolled over.

What I did expect, seeing the price head toward $49 in the final hour of trading was to be prepared to buy shares again this week and that expectation hasn’t changed.

What is making MetLife a little more intriguing, in addition to many others in the financial sector, is the wild ride that interest rates have been on over the past 2 weeks, taking MetLife and others along. With those rides comes enhanced option premiums as the near term holds uncertainty with the direction of rates, although in the longer term it seems hard to believe that they will stay so low as more signs of the economy heating up may be revealed this week.

With shares going ex-dividend on February 4, 2015 and earnings the following week, I may consider a longer term option contract to attempt to capture the dividend, some enhanced premiums, while offering some protection from earnings
surprises through the luxury of additional time for shares to recover, if necessary.

Somewhere along the line a decision will be made regarding the designation of MetLife as a “systemically important” financial institution that is “too big to fail.” While re-affirming that designation, despite MetLife’s protests that has negative consequences, I think that has already been factored into its share price, although it may result in some more dour guidance at some point that will still come as a surprise to some.

Traditional Stocks: American Express, Dow Chemical, MetLife

Momentum Stocks: none

Double Dip Dividend: Fastenal (1/28), Kinder Morgan (1/29), Texas Instruments (1/28)

Premiums Enhanced by Earnings: Facebook (1/28 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.