Jan172015

Weekend Update – January 18, 2015

Weekend Update

This was really a wild week and somehow, with all of the negative movement, and despite futures that were again down triple digits in the previous evening’s futures trading, the stock market somehow managed to move to higher ground to bring a tumultuous week to its end.

Actually, the reason it did so is probably no mystery as the market seems to have re-coupled with oil prices, for good or for bad.

Still it was a week when stocks, interest rates, precious and non-precious metals, oil and currencies were all bouncing around wildly, as thus far, is befitting for 2015.

The tonic, one would have thought could have come from the initiation of another earnings season, traditionally led by the major banks. However “the big boys” suffered on top and bottom lines, citing disappointing results in fixed income and currency trading, as well as simply being held hostage by a low interest rate environment for their more mundane activities, like pumping money into the economy through loans.

Even worse, the unofficial spokesperson for the interest of those “too big to fail,” Jamie Dimon, seemed passively resigned to the reality that the Federal government was in charge and could do with systemically important institutions whatever it deemed appropriate, such as breaking them up.

The first sign of troubles came weeks ago as trader bonus cuts were announced. While declines in trader revenue were expected, the bonus cuts suggested that the declines were steeper than expected, particularly when the bonus cuts were greater than had only recently been announced.

Of course, that leads to the question: “If a banker can’t make money, then who can?”

That’s a reasonable question and has some basis in earnings seasons past and may provide some insight into the future.

For those who follow such things, the past few years have seen a large number of such earnings seasons start off with good news from the financial sector, only to have lackluster or disappointing results from the rest of the S&P 500, propped up by rampant buybacks.

What is rare, however, is to have the financials disappoint , yet then seeing the remainder of the market report good or better than expected earnings, particularly as the rate of increase of buybacks may be decreasing.

That is now where we stand with the second week of earnings season ready to begin when the market re-opens on Tuesday.

While there was already some clue that the major money center banks were not doing as well as perhaps expected, as bonuses were cut for many, the expectation has been that the broader economy, especially that reflecting consumer spending, would do well in an environment created by sharply falling energy prices.

Among gyrations this week were interest rates which only went lower on the week, much to the chagrin of those whose fortunes are tied to the certainty of higher rates and in face of expectations for increases, given growing employment, wage growth and the anticipated increase in consumer demand.

Funny thing about those expectations, though, as we got off to a bad start on the surprising news that retail sales for December 2014 didn’t seem to reflect any increased consumer spending, as most of us had expected, as the first dividend to come from falling energy prices.

While faith in the integrity and well being of our banking system is a cardinal tenet of our economy, it is just another representation of the certainty that investors need. That certainty was missing all of this past week as events, such as the action by the Swiss National Bank were unexpected, oil prices bounced by large leaps and falls without ob
vious provocation, copper prices plunged and gold seemed to be heating up.

How many of those did anyone expect to all be happening in a single week? Yet, on Friday, in a reversal of the futures, markets surged adding yet another of those large gains that are typically seen in bearish cycles.

Still, the coming week has its possible antidotes to what has been ailing us all through 2015. There are more earnings reports, including some more from the oil services sector, which could put some pessimism to rest with anything resembling better than expected news, such as was offered by Schlumberger (SLB) this past Friday, which also included a very unexpected dividend increase.

Also, this may finally be the week that Mario Draghi belatedly brings the European Central Bank into the previous decade and begins a much anticipated version of “quantitative easing.”

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.

Among those big boys with disappointing stories to tell was JP Morgan Chase (JPM). In a very uncharacteristic manner, CEO and Chairman Jamie Dimon didn’t exude optimism and confidence, instead seemingly accepting whatever fate would be assigned by regulators. Of course, some of that resignation comes in the face of likely new assaults on Dodd-Frank, which could only be expected to benefit Dimon and others.

Whether banks and large financial institutions are under assault or not may be subject to debate, but the assault on JP Morgan’s share price is not, as it has fallen about 11% over the past two weeks, despite a nice gain on Friday.

While still above its 52 week low, unless interest rates continue their surprising descent and go lower than 1.8% for a while, this appears to be a long sought after entry point for shares. The volatility in the financial sector is so high that even with an upcoming 4 day trading week the option premium is very rich, reflecting the continuing uncertainty.

More importantly, may be the distinction that Dimon made between good and bad volatility, with JP Morgan having been subject to the bad kind of late.

The bad kind is when you have sustained moves higher or lower and the good kind is when you see a back and forth, often with little net change. The latter is a trader’s dream and it are the traders that make it rain at JP Morgan and others. That good kind of volatility is also what option writers hope will be coming their way.

So far, 2015 is sending a signal that it may be time to take the umbrellas out of storage.

MetLife (MET), with its 30 day period to challenge its designation as a “systemically important” financial institution, decided to make that challenge. As interest rates went even lower this week, momentarily breaching the 1.8% level, MetLife’s shares continued its decline.

If Dimon is correct in his resignation that nothing can really be done when regulators want to express their whims, then we should have already factored that certainty into MetLife’s share price. It too, like JP Morgan, had a nice advance on Friday, but is still about 11% lower in the past 2 weeks and has an upcoming dividend to consider, in addition to earnings a week afterward.

Intel (INTC), a stellar performer in 2014, joined the financials in reporting disappointing earnings this past week. While it did get swept along with just about everything else higher in the final hour of trading, it had already begun its share recovery after hitting its day’s low in the first 30 minutes of trading.

After 2 very well received earnings reports the past quarters, it may have been too much to expect a third successive upside surprise. However, the giant that slid into somnolence as the world was changing around it has clearly reawakened and could make a very good covered option trade once again if it repeatedly faces upside resistance a
t $37.50.

I’m not quite certain how to characterize The Gap (GPS). I don’t know whether it’s fashionable, just offers value or is a default shopping location for families.

What I do know is that among my frequent holdings it has a longer average holding period than most others, despite having the availability of weekly options. That’s because it consistently jumps up and down in price, partially due to its habit of still reporting same store sales each month and partially for reasons that escape my ability to grasp.

Yet, it still trades in a fairly narrow range and for that reason it is a stock that I always like to consider on a decline. Because of its same store sales reports it offers an enhanced option premium on a monthly basis in addition to its otherwise average premium returns, but it also has an acceptable dividend for your troubles of holding it for any extended period of time.

As a Pediatric Dentist, you would think that I would own Colgate-Palmolive (CL) on a regular basis. However, I tend to put option premium above any sense of professional obligation. In that regard, during a sustained period of low volatility, Colgate-Palmolive hasn’t been a very appealing alternative investment. However, with volatility creeping higher, and with shares going ex-dividend this week, the premium is getting my attention.

Together with its recent 6% price decline and its relative immunity from oil prices, the time may have arrived to align professional and premium interests. However, if shares go unassigned, consideration has to be given to selecting an option expiration for a rollover trade that offers some protection in the event of an adverse price move after earnings, which are scheduled for the following week.

Among those reporting earnings this week are Cree (CREE), eBay (EBAY) and SanDisk (SNDK).

Cree is an example of a company that regularly has an explosive move at earnings and may present some opportunity if considering the sale of puts before, or even after earnings, in the event of a large decline.

I have experience with both in the past year and the process, as well as the result can be taxing. My most recent exploit having sold puts after a large decline and eventually closing that position at a loss, and both the process and the result were less than enjoyable.

That’s not something that I’d like to do again, but seeing the ubiquity of its products and the successive earnings disappointments in the past year, I’m encouraged by the fact that Cree hasn’t altered its guidance, as it has in the past in advance of earnings.

I generally prefer selling puts into a price decline, however Cree advanced by nearly 4% on Friday and reports earnings following Tuesday’s close. In the event of a meaningful decline in price before that announcement I would consider the sale of puts. The option market believes that there can be a move of 10.1% upon earnings release, however a 1% ROI can potentially be achieved even when selling a put contract at a strike that is 14.2% below Friday’s close.

Alternatively, in the event of a large drop after earnings, consideration can be given toward selling calls in the aftermath, although if past history is a guide, when it comes to Cree, what has plunged can plunge further.

SanDisk recently altered its guidance and saw its share price plunge nearly 20%. For some reason, so often after such profit warnings are provided before earnings, the market still seems surprised after earnings are released and send shares even lower.

While I’m interested in establishing a position in SanDisk, I’m not likely to do so before earnings are announced, as the option market is implying a price move of 7% and in order to achieve a 1% ROI the strike level required is only 7.5% below Friday’s closing price. That offers inadequate cushion between risk and reward. Because I expect a further decline, I would want a greater cushion, so would prefer to wait until earnings are released.

While Cree and SanDisk are volatile and, perhaps speculative, eBay is a very different breed. However, it is still prone to decisive moves at earnings and it has recently diffused disappointing earnings reports with announcements, such as the existence of an Icahn position or comments regarding a PayPal spin-off.

As opposed to most put sale, where I usually have no interest in taking ownership of shares, eBay is one that, if I sell puts and see an adverse move, would consider taking assignments, as it has been a very reliable covered call stock for the past few years, as its shares have traded in a very narrow range.

Despite a gain on Friday that trailed the market’s advance, it is about 6% below where I last had shares assigned and would be interested in initiating another new position before it becomes a less interesting and less predictable company upon its planned PayPal spin-off.

I tend to like Best Buy (BBY) when it is down or has had a large decline in shares. It has done so on a regular basis since January 2014 and did so again this past week, almost a year to the day of its nearly 33% drop.

This time it was a pin being forced into the bubble that its shares had recently been experiencing as the reality behind its sales figures indicated that margins weren’t really in the equation. Undertaking a “sales without profits” strategy like its brickless and mortarless counterpart isn’t a formula for long term success unless you have very, very deep pockets or a surprisingly disarming and infectious laugh, such as Jeff Bezos possesses.

While possibly selling all of those GoPro (GPRO) devices and other items over the holidays at little to no profit may not have been in Best Buy’s best interests, it may have helped others, for at least as long as that strategy can be maintained.

However, Best Buy has repeatedly been an acceptable buy after gaps down in its share price, although consideration can also be given to the sale of put contracts, as its price is still a bit higher than I would like to see for a re-entry.

Finally, there are probably a large number of reasons to dislike GoPro. For me, it may begin with the fact that I’m neither young, photogenic nor athletic. For others it may have to do with secondary offerings or the bent rules around its lock-up expiration. Certainly there will be those that aren’t happy about a 50% drop from its high just 3 months ago, which includes the 31% decline occurring in the days after the lock-up expiration.

While it has been on a downtrend after the most recent lock-up expiration, despite having traded higher in the days before and immediately afterward, the impetus for this week’s large decline appears to be the filing of a number of patents by Apple (AAPL) which many have construed as potentially offering competition to GoPro in the hardware space, all while GoPro is already seeking to re-invent itself or at least shift from a hardware company to a media company.

I don’t know too much about Apple and I know even less about GoPro, but Apple’s long history has shown that it doesn’t necessarily pounce into markets where there already seems to be a product that is being well received by consumers.

It prefers to pick on the weak and defenseless, albeit the ones with good ideas.

Apple has done incredibly well for itself in recognizing new technologies that might be in much greater demand if the existing products didn’t suffer from horrid design and engineering. Having a fractured manufacturer base with no predominant player has also been an open invitation to Apple to meld its design and marketing prowess and capture markets.

Whatever GoPro may suffer from, I don’t think that anyone has accused the GoPro product line of either of those shortcomings. so this most recent and pronounced decline may be unwarranted. However, GoPro does report earnings in the following week, so I would consider the potential risk associated with a position unlikely to be assigned this week. For that reason I would consider either the purchase of shares and the sale of deep in the money calls or the sale of deep out of the money puts, utilizing a weekly contract and keeping fingers crossed and strapping on for the action ahead.

Traditional Stocks: Intel, JP Morgan Chase, MetLife, The Gap

Momentum Stocks: Best Buy, GoPro

Double Dip Dividend: Colgate-Palmolive (1/21)

Premiums Enhanced by Earnings: Cree (1/20 PM), eBay (1/21 PM), SanDisk (1/21 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.

Jan92015

Weekend Update – January 11, 2015

Weekend Update

Somewhere buried deep in my basement is a 40 year old copy of the medical school textbook “Rapid Interpretation of EKG’s.”

After a recent bout wearing a Holter Monitor that picked up 3000 “premature ventricular contractions” I wasn’t the slightest bit interested in finding and dusting off that copy to refresh my memory, not having had any interest nearly 40 years ago, either.

All I really cared about was what the clinical consequence of those premature depolarizations of the heart’s ventricle meant for me and any dreams I still harbored of climbing Mount Everest.

Somewhere in the abscesses of my mind I actually did recall the circumstances in which they could be significant and also recalled that I never aspired to climb Mount Everest.

But it doesn’t take too much to identify a premature ventricular contraction, even if the closest you ever got to medical school was taking a class on Chaucer in junior college.

Most people can recognize simple patterns and symmetry. Our mind is actually finally attuned to seeing breaks in patterns and assessing even subtle asymmetries, even while we may not be aware. So often when looking askance at something that just seems to be “funny looking,” but you can’t quite put your finger on what it is that bothers you, it turns out to be that lack of symmetry and the lack of something appearing where you expect it to appear.

So it’s probably not too difficult to identify where this (non-life threatening) premature ventricular contraction (PVC) is occurring.

While stock charts don’t necessarily have the same kind of patterns and predictability of an EKG, patterns aren’t that unheard of and there has certainly been a pattern seen over the past two years as so many have waited for the classic 10% correction.

 

What they have instead seen is a kind of periodicity that has brought about a “mini-correction,” on the order of 5%, every two months or so.

The quick 5% decline seen in mid-December was right on schedule after having had the same in mid-October, although the latter one almost reached that 10% level on an intra-day basis.

But earlier this week we experienced something unusual. There seemed to be a Premature Market Contraction (NYSE:PMC), occurring well before the next scheduled mini-correction.

You may have noticed it earlier this week.

The question that may abound, especially following Friday’s return to the sharp market declines seen earlier in the week is just how clinically important those declines, coming so soon and in such magnitude, are in the near term.

In situations that impact upon the heart’s rhythm, there may be any number of management approaches, including medication, implantation of pacemakers and lifestyle changes.

The market’s sudden deviation from its recently normal rhythm may lend itself to similar management alternatives.

With earnings season beginning once again this week it may certainly serve to jump start the market’s continuing climb higher. That may especially be the case if we begin to see some tangible evidence that decreasing energy prices have already begun trickling down into the consumer sector. While better than expected earnings could provide the stimulus to move higher, rosy guidance, also related to a continuing benefit from decreased energy costs could be the real boost looking forward.

Of course, in a nervous market, that kind of good news could also have a paradoxical effect as too much of a good thing may be just the kind of data that the FOMC is looking for before deciding to finally increase interest rates.

By the same token, sometimes it may be a good thing to avoid some other stimulants, such as hyper-caffeinated momentum stocks that may be particularly at risk when the framework supporting them may be suspect.

This week, having seen 5 successive days of triple digit moves, particularly given the context of outsized higher moves tending to occur in bear market environments, and having witnessed two recent “V-Shaped” corrections in close proximity, I’d say that it may be time to re-assess risk exposure and take it easier on your heart.

Or at least on my heart.

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

Dividends may be just the medication that’s needed to help get through a period of uncertainty and the coming week offers many of those opportunities, although even within the week’s upcoming dividend stocks there may be some heightened uncertainty.

Those ex-dividend stocks that I’m considering this week are AbbVie (NYSE:ABBV), Caterpillar (NYSE:CAT), Freeport McMoRan (NYSE:FCX), Whole Foods (NASDAQ:WFM) and YUM Brands (NYSE:YUM).

AbbVie is one of those stocks that has been in the news more recently than may have been envisioned when it was spun off from its parent, Abbott Labs (NYSE:ABT), both of which are ex-dividend this week.

AbbVie has been most notably in the news for having offered an alternative to Gilead’s (NASDAQ:GILD) product for the treatment of Hepatitis C. Regardless of the relative merits of one product over another, the endorsement of AbbVie’s product, due to its lower cost caused some short term consternation among Gilead shareholders.

AbbVie is now trading off from its recent highs, offers attractive option premiums and a nice dividend. That combination, despite its upward trajectory over the past 3 months, makes it worth some consideration, especially if your portfolio is sensitized to the whims of commodities.

Caterpillar is finally moving in the direction that Jim Chanos very publicly pronounced it would, some 18 months ago. There isn’t too much question that its core health is adversely impacted as economic expansion and infrastructure projects slow, as it approaches a 20% decline in the past 2 months.

That decline takes us just a little bit above the level at which I last owned shares and its upcoming dividend this week may provide the impetus to open a position. I suppose that if one’s time frame has no limitation any thesis may find itself playing out, for Chanos‘ sake, but for a short time frame trade the combination of premium and dividend at a price that hasn’t been seen in about a year seems compelling.

It has now been precisely a year since the last time I purchased shares of YUM Brands and it is right where I last left it. Too bad, because one of the hallmarks of an ideal stock for a covered option position is no net movement but still traveling over a wide price range.

YUM Brands fits that to a tee, as it is continually the recipient of investor jitteriness over the slowing Chinese economy and food safety scares that take its stock on some regular roller coaster rides.

I’m often drawn to YUM Brands in advance of its ex-dividend date and this week is no different, It combines a nice premium, competitive dividend and plenty of excitement. While I could sometimes do without the excitement, I think my heart and, certainly the option premiums, thrive on the various inputs that create that excitement, but at the end of the day seem to have no lasting impact.

Whole Foods also
goes ex-dividend this week and while its dividend isn’t exactly the kind that’s worthy of being chased, shares seem to be comfortable at the new level reached after the most recent earnings. That level, though, simply represents a level from which shares plummeted after a succession of disappointing earnings that coincided with the height of the company’s national expansion and the polar vortex of 2014.

I think that shares will continue to climb heading back to the level to which they were before dropping to the current level more than a year ago.

For that reason, while I usually like using near the money or in the money weekly options when trying to capture the dividend, I’m considering an out of the money February 2015 monthly option in consideration of Whole Foods’ February 11th earnings announcement date.

I don’t usually follow interest rates or 10 Year Treasury notes very carefully, other than to be aware that concerns about interest rate hikes have occupied many for the entirety of Janet Yellen’s tenure as the Chairman of the Federal Reserve.

With the 10 Year Treasury now sitting below 2%, that has recently served as a signal for the stock market to begin a climb higher. Beyond that, however, declining interest rates have also taken shares of MetLife (NYSE:MET) temporarily lower, as it can thrive relatively more in an elevated interest rate environment.

When that environment will be upon us is certainly a topic of great discussion, but with continuing jobs growth, as evidenced by this past week’s Employment Situation Report and prospects of increased consumer spending made possible by their energy dividend, I think MetLife stock has a bright future. 

Also faring relatively poorly in a decreasing rate environment has been AIG (NYSE:AIG) and it too, along with MetLife, is poised to move higher along with interest rates.

Once a very frequent holding, I’ve not owned shares since the departure of Robert ben Mosche, whom I believe deserves considerable respect for his role in steering AIG in the years after the financial meltdown.

In the meantime, I look at AIG, in an increasing rate environment as easily being able to surpass its 52 week high and would consider covering only a portion of any holding in an effort to also benefit from share price advances.

Fastenal (NASDAQ:FAST) isn’t a very exciting company, but it is one that I really like owning, especially at its current price. Like so many others that I like, it trades in a relatively narrow range but often has paroxysms of movement when earnings are announced, or during the occasional “earnings warnings” announcement.

It announces earnings this week and could easily see some decline, although it does have a habit of warning of such disappointing
numbers a few weeks before earnings.

Having only monthly options available, but with this being the final week of the January 2015 option cycle, one could effectively sell a weekly option or sell a weekly put rather than executing a buy/write.

However, with an upcoming dividend early in the February 2015 cycle I would be inclined to consider a purchase of shares and sale of the February calls and then buckle up for the possible ride, which is made easier knowing that Fastenal can supply you with the buckles and any other tools, supplies or gadgets you may need to contribute to national economic growth, as Fastenal is a good reflection on all kinds of construction activity.

Bank of America (NYSE:BAC) also reports earnings this week and I unexpectedly found myself in ownership of shares last week, being unable to resist the purchase in the face of what seemed to be an unwarranted period of weakness in the financial sector and specifically among large banks.

Just as unexpectedly was the decline it took in Friday’s trading that caused me to rollover shares that i thought had been destined for assignment, as my preference would have been for that assignment and the possibility of selling puts in advance of earnings.

Now, with shares back at the same price that I liked it just last week, its premiums are enhanced this week due to earnings. In this case, if considering adding to the position I would likely do so by selling puts. However, unlike many other situations where I would prefer not to take assignment and would seek to avoid doing so by rolling over the puts, I wouldn’t mind taking assignment and then turning around to sell calls on a long position.

Finally, while it may make some sense to stay away from momentum kind of stocks, Freeport McMoRan, which goes ex-dividend this week may fall into the category of being paradoxically just the thing for what may be ailing a portfolio.

Just as stimulants can sometimes have such paradoxical effects, such as in the management of attention deficit hyperactivity disorder, a stock that has interests in both besieged metals, such as copper and gold, in addition to energy exploration may be just the thing at a time when weakness in both of those areas has occurred simultaneously and has now become well established.

Freeport McMoRan will actually report earnings the week after next and that will present its own additional risk going forward, but I think that the news will not be quite as bad as many may expect, particularly as there is some good news associated with declining energy prices, as they represent the greatest costs associated with mining efforts.

I’ve suffered through some much more expensive lots of Freeport McMoRan for the past 2 years and have almost always owned shares over the past 10 years, even during that brief period of time in which the dividend was suspended.

As surely as commodity prices are known to be cyclical in nature at some point Freeport will be on the right end of climbs in the price of its underlying resources. If both energy and metals can turn higher as concurrently as they turned lower these shares should perform exceptionally well.

After all, they’ve already shown that they can perform exceptionally poorly and sometimes its just an issue of a simple point of inflection to go from one extreme to the next.

Traditional Stocks: AIG, MetLife

Momentum Stocks: none

Double Dip Dividend: AbbVie (1/13), Caterpillar (1/15), Freeport McMoRan (1/13), Whole Foods !/14), YUM Brands (1/14)

Premiums Enhanced by Earnings: Bank of America (1/15 AM), Fastenal (1/15 AM)

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.

Dec192014

Weekend Update – December 21, 2014

Weekend Update

What a week.

There were enough events to form the basis for a remake of the Billy Joel song “We Didn’t Start the Fire.”

The range of those events this past was stunning.

Oil prices stabilizing, The Colbert Show finalizing; North Korean cyber-attack, Cuban Revolution roll back; Ruble in freefall, speculators facing margin call; FOMC removing “considerable time,” markets having a memorable climb.

Russia didn’t start the fire, but they could have flamed it.

Deep down, maybe not so deep down, there are many who wouldn’t feel too badly if its President, Vladimir Putin, began to start reeling from the precipitous decline in oil prices, as many also believe as does Eddy Elfenbein, of “Crossing Wall Street” who recently tweeted:

The problem is that it can be a precarious balance for the Russian President between the need to support his ego and the need to avoid cutting off one’s own nose while spiting an adversary.

While Putin pointed a finger at “external forces” for causing Russia’s current problems stemming from economic sanctions and plunging energy and commodity prices, thus far, ego is winning out and the initial responses by the Bank of Russia. Additionally, comments from Putin indicate a constructive and rational approach to the serious issues they face having to deal with the economic burdens of their campaigns in Ukraine and Crimea, the ensuing sanctions and the one – two punch of sliding energy and metals prices.

Compare this week’s response to the economic crisis of 1998, as many are attempting to draw parallels. However, in 1998 there was no coherent national strategy and the branches of Russian government were splintered.

No one, at least not yet, is going to defy a decree from Putin as was done with those from Yeltsin nearly a generation ago when he had no influence, much less control over Parliament and unions.

While the initial response by the Bank of Russia, increasing the key lending rate by 65% is a far cry from the strategies employed by our own past Federal Reserve Chairmen and which came to be known as the Greenspan and Bernanke puts, you can’t spell “Putin” without “put” an the “Putin Put” while a far cry from being a deliberate action to sustain our stock markets did just that last week.

Putin offered, what sounded like a sober assessment of the challenges facing Russia and a time frame for the nation to come out from under what will be pronounced recession. Coming after the middle of the night surprise rate hike that saw the Ruble plunge and international markets showing signs of panic, his words had a calming effect that steadied currency and stock markets.

Somehow, the urge to create chaos as p
art of a transfer of pain has been resisted, perhaps in the spirit of the holiday season. Who would have guessed that the plate of blinis and vodka left out overnight by the dumbwaiter would have been put to good use and may yet help to rescue this December and deliver a Santa Clause Rally, yet?

No wonder Putin has been named “Russia’s Man of the Year” for the 15th consecutive year by the Interfax news agency. It’s hard to believe that some wanted to credit Janet Yellen for this week’s rally, just for doing her part to create her own named put by apparently delaying the interest rate hikes we’ve come to expect and dread.

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

I know that if anyone chose to designate me as being “systemically important,” I would feel honored, but after that glow had worn off I would start wondering what the added burden of that honor was going to be.

That’s what MetLife (NYSE:MET) is facing as it has 30 days to respond to its designation as being a systemically important financial institution, which carries with it significantly increased regulatory oversight.

I can see why they might want to resist the designation, especially when it knows that better and more profitable days are ahead, as interest rates rises are actually going to be more likely as employment and GDP continue to increase, buoyed by low energy prices. Most would agree that with increased regulation comes decreased profit.

MetLife, like most every other stock had inexplicably been taken lower as the energy sector held the stock market hostage. Also, like most other stocks, it had a substantial recovery this week to end the week a little higher than I would like to consider entering into a position. However, on any further drop back toward $52.50 it appears to again be a good candidate for a covered call strategy.

It’s only appropriate that during the holiday season thoughts turn to food. Dunkin Brands (NASDAQ:DNKN) and Coca Cola (NYSE:KO) may stand in sharp contrast to Whole Foods (NASDAQ:WFM), but they may all have a place in a portfolio, but for different reasons.

Dunking Brands just reported earnings and shares plunged toward its 52 week lows. In doing so it reminded me of the plight of Whole Foods earlier in the year.

While a horrible winter was part of Whole Foods’ successive disappointing quarterly earnings reports, so too was their national expansion effort. That effort began to deliver some rewards after the most recent earnings report, but in the interim there were many questioning whether Whole Foods was being marginalized by growing competition.

Instead, after its most recent earnings report shares gapped up higher to the point at which they had gapped down earlier in the year, as shares now appear to be solidifying at a new higher baseline.

I don’t ordinarily think about a longer term position when adding shares, but if adding to my existing Whole Foods position, I may consider selling February 2015 call options that would encompass both the upcoming earnings report and a dividend, while also seeking some modest capital gains from the underlying shares.

Where Dunkin Donuts reminds me of Whole Foods is in its national expansion efforts and in also having now returned successive disappointing earnings while investing for the future. Just as I believe that will be a strategy with long term benefits for Whole Foods, I think Dunkin Brands will also turn their earnings story around as the expansion efforts near their conclusion.

Coca Cola represents an entirely different story as the clock is ticking away on its hope to withstand activist efforts. Those efforts appear as if they will have an initial primary focus on a CEO change.

While it may not be appropriate to group Coca Cola with Dunkin Brands and Whole Foods, certainly not on the basis of nutritional value, that actually highlights part of its problem. Like Russia, so tied to energy and mining, Coca Cola is tied to beverages and has little to no diversification in its portfolio. At the moment a large part of its product portfolio is out of favor, as evidenced by my wife, who when shopping for Thanksgiving guests said “we don’t need soda. No one drinks soda, anymore.”

That may be an exaggeration and while the long term may not be as bright for Coca Cola as some of its better diversified rivals, in the short term there is opportunity as pressure for change will mount. In the interim there will always be the option premiums and the dividends to fall back upon.

I had shares of eBay (NASDAQ:EBAY) assigned this past week and that left me without any shares for the coming week. That’s an uncommon position for me to be in, as eBay has been a favorite stock for years as it has traded in a fairly well defined range.

That range was disrupted, in a good way, by the entrance of Carl Icahn and then by the announcement of its plans to spin off its profitable PayPal unit, while it still has value.

My most recent lot assigned was the highest priced lot that I had ever owned and was also held for a significantly longer time period than others. Ordinarily I like to learn from my mistakes and wouldn’t consider buying shares again at this level, but I think that eBay will continue moving higher, hopefully slowly, until it is ready to spin off its PayPal division.

The more slowly it moves, occasionally punctuated by price drops or spikes, the better it serves as part of a covered options strategy and in that regard it has been exemplary.

While eBay doesn’t offer a dividend, and has had very little share appreciation, it has been a very reliable stock for use in a covered option strategy and should continuing being so, until the point of the spin-off.

If last week demonstrated anything, it was that the market is now able to decouple itself from oil prices, whereas in previous weeks almost all sectors were held hostage to energy. This week, by the middle of the week the market didn’t turn around and follow oil lower, as futures prices started dropping. By the same token when oil moved nicely higher to close the week, the market essentially yawned.

Energy sector stocks were a different story and as is frequently the case their recovery preceded the recovery in crude prices. Despite some nice gains last week there may be room for some more. Halliburton (NYSE:HAL) is well off from its highs, with that decline preceding the plunge felt within the sector. While its proposed buyout of Baker Hughes (NYSE:BHI) helped send it 10% higher that surge was short lived, as its descent started with details of the penalty Halliburton would pay if the deal was not completed.

While there has to be some regulatory concern the challenge of low prices and decreased drilling and exploration probably reinforces for Halliburton the wisdom of combining with Baker Hughes.

During its period of energy price uncertainty, coupled with the uncertainty of the buy out, Halliburton is offering some very enticing option premiums, both as part of a covered call trade or the sale of puts.

In addition to some stability in energy prices, there’s probably no greater gift that Putin himself could receive than higher prices for gold and copper. Just as Russia has been hit by the double hardship of reliance on energy and metals it has become clear that there isn’t too much of an economy as we may know it, but rather an energy and mining business that simply subsidizes everything else.

Freeport McMoRan (NYSE:FCX) can probably empathize with Russia’s predicament, as the purchase of Plains Exploration and Production was intended to protect it from the cycles endured by copper and gold.

Funny how that worked out, unless you are a current shareholder and have been waiting for the acquisition strategy to bear some fruit.

While it hasn’t done that, gold may be approaching a bottom and with it some of Freeport’s troubles may get diminished. At its current level and the lure of a continuing dividend and option premiums it is getting to look appealing, although it still carries the risks of a world not valuing or needing its products for some time to come.

However, when the perceived value returns and the demand returns, the results can be explosive for Freeport’s shares to the upside, just as it has dragged it much lower in a shirt period of time.

Finally, I’ll never be accused of leading a lifestyle that would lend itself to documentation through the use of a GoPro (NASDAQ:GPRO) product, but its prospects do have my heart racing more than usual this week.

I generally stay away from IPO stocks for at least 6 months, so as to get an idea of how it may trade, especially when earnings are part of the equation. Pragmatically, another issue is the potential impact of lock-up expiration dates, as well.

GoPro, in its short history as a publicly traded company has already had a storied life, including its key underwriter allowing some shares that were transferred into a charitable trust to be disposed of prior to the lock-up expiration date. Additionally, a secondary offering has already occurred at a price well above this past week’s closing price and also represented a fairly large sale by insiders.

Will the products and the lifestyle brand that GoPro would like to develop may be exciting, so far its management of insider shares hasn’t been the kind that inspires confidence, as shares are now about 42% below their high and 25% below their secondary issue pricing.

What could be worse?

Perhaps this week’s lock-up expiration on December 23, 2014.

The option market is treating the upcoming lock-up expiration as if it was an earnings event and there is a nearly 9% implied move for the week in anticipation. For those accustomed to thrill seeking there’s still no harm in using a safety harness and you can decide what strike puts on the sale of puts provides the best combination of excitement and safety.

I tend to prefer a strike price outside of the range identified by the option market that can offer at least a 1% ROI. That could mean accepting up to a 12.8% decline in price in return for the lessened thrill, but that’s thrill enough for me for one week.

Happy Holidays.

 

Traditional Stocks: Coca Cola, Dunkin Brand Group, eBay, MetLife, Whole Foods

Momentum: Freeport McMoRan, GoPro, Halliburton

Double Dip Dividend: none

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.

Oct182014

Weekend Update – October 19, 2014

Weekend Update

 After Friday’s nearly 300 point move higher, it’s absolutely inconceivable that anyone can have a clear idea of what comes next.

Even during the climbs higher over the past two years no one really had a clue of what the next day would bring, but there was an entirely different “gestalt” about the market than we have now.

During that earlier time the sum of its parts seemed somewhat irrelevant as the market as a whole was just greater than those parts and had a momentum that was impervious to the usual challenges and patterns.

The most obvious of those challenges that hadn’t come to a fruition was the obligatory periodic 10% correction. Instead, while we really didn’t know what was coming next, at least we had a clear idea of what was not coming next.

Can you say the same today?

After a month of the kind of daily moves that we really haven’t seen since the latter half of 2011, their alternating basis can only keep people off guard.

People generally fall into two categories on days when the market spikes as it did on Friday, particularly after a torrent of plunges. They either see that as evidence that we’ve turned the corner or that it’s just another trap to lure you in so that your money can wither away while feeding the beast.

For some, those optimists among us, they will have identified a capitulation as having occurred this week. They believe that kind of blow off selling marks the beginning of a return to a climb higher.

For the pessimists among us, they see that most every out-sized market one day gain has occurred during an overall downtrend.

While I remain confused about what the next week will bring, I’m not too confused about what my course of action is likely to be.

I don’t agree with the optimists that we’ve seen a capitulation. Those tend to be marked by a frenzy of selling. It’s not just a 400 point decline, it’s the rapid acceleration of the losses that shows no evidence of letting up that is usually the hallmark. The following day is also usually marked by selling during the open and then cautious buying that becomes a flood of bargain hunters.

So capitulation? Probably not, but the market very well still could have found a near term bottom this week as that 400 point loss did evaporate. That near bottom did bring us to about a 9% overall decline in the S&P 500 over the past 4 weeks, so perhaps you might hear the optimists asking “can a brother get some slack on 1%?” in the hopes that we can all move on and return to the carefree ways of 2012 and 2013.

On the other hand, those pessimists do have data on their side. You don’t need very fancy kinds of analysis to show that those 200, 300 and higher point moves over history have only served to suck money out of people’s pockets under false pretenses.

Over the past four weeks with the possible exception of the advances higher in the latter half of this past week, every strong advance led to disappointment. Every time it looked as if there was value to be had it was another value trap, as a whole.

My course of action last week was one that still has me in shock.

I didn’t execute a single new position trade last week, after having only added 2 new positions the previous week.

I’d better get used to that shock, because I don’t expect to add many, if any, new positions this week, unless there’s some reason to believe that a period, even if very short, of stability will step in.

Perhaps continuing good earnings news will be the catalyst for the market to take a breather from its recent mindless journeys to the depths and to the heights. Good news form the financial sector, some good indications from industrials and some good news from the technology companies that really matter could be a wonderful prelude to improved retail earnings.

Or maybe none of that will matter and we’ll again focus on things like moving averages, support levels, mixed messages from Federal Reserve Governors and news of continuing economic dysfunction in the European Union, all while watching the smartest guys in the room, the bond traders have their own gyrations as interest rates on 10 Year Treasury notes resemble a yo-yo, having had an enormous 10% spread in the past week.

Most of all, I want to focus on not being duped and trying to put uncovered positions to work. That means continuing to try and resist what appear to be screaming bargains, even after Friday’s march higher and higher.

But, we’re only human and can only resist for so long.

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

As I look at prices, even after some runs higher on Friday, what’s not to like? That still doesn’t mean, however, that you have to end up committing to anything.

What makes the temptation even stronger, despite a big drop in volatility on Friday, are the option premiums that can now be had when selling. The challenge, however, is finding the option buyer, as call volume is diminished, probably reflecting a paucity of belief that there will be sudden price jumps in underlying shares.

Part of the strategy accommodation that may be made if grappling with paper losses following the past four weeks is to now consider using out of the money strike prices that will still return the same ROI on the premium portion, but also potentially add some meaningful capital gains on the shares.

As with last week, I’m not terribly interested in the back story behind the week’s selections, but more in the recent price history, with particular attention to those that may have been overly and inappropriately punished.

MetLife (MET) is one of those among so many, that l have been waiting to repurchase. With the recent interest rate gyrations that actually brought the 10 Year rate below 2% there may be some rational to the price drop seen in MetLife, but with the 10% increase in rates some life was breathed back into floundering shares.

eBay (EBAY) is still a company that is always on my radar screen. Whether that will continue to be the case after the PayPal spin-off may be questionable, but for now, at its new low, low price, having taken a little bit of a beating from its just posted earnings, it really is beginning to feel irresistible.

Among sectors getting my attention this week is Healthcare. Following the drop in Merck (MRK), Baxter International (BAX) and the continued weakness of Walgreen (WAG).

With a 10% drop in shares of Merck in the past week, taking it to an 8 month low in the absence of any meaningful news one has to wonder when will the craziness end? Now in
its own personal correction phase it wouldn’t be entirely an ill-conceived idea to believe that shares have either no reason to continue under-performing the market. With an attractive dividend and option premiums reflecting that downward spiral, Merck is one position that could warrant resisting the need to resist.

Baxter International is also in its own personal correction, although its time frame as been a month for that 10% decline. Despite having just released earnings and offering improved guidance shares continued to flail even as most everything else was showing some recovery. While there may be some logical explanation my interest in entertaining it may be subsumed by an interest in picking up shares.

Walgreen continues to be mired down at a price level to which it plunged after calling off any potential tax inversion plans. Being stuck in that trading range, however, has helped Walgreen to outperform the S&P 500 since it hit its highs last month. For it to continue trading in that range might be the kind of comfort that could provide some smiles even while everything else around is crumbling, particularly if the upcoming dividend is captured, as well.

Marathon Oil (MRO) is just another of those really hard hit energy stocks that has to cause some head shaking as it is in a personal correction and then some, even after 2 days of strength. The list need not end with Marathon Oil if considering adding energy sector positions, as there is no shortage of viable candidates. FOr me, Marathon Oil is one position that I’ve longed to return to my portfolio, but do understand that there may continue to be some downward pricing pressure in oil, before the inevitable bounce higher.

FInally, how can you not at least consider taking sides in the great Apple (AAPL) saga? Whether there will be a gold mine ahead as the new products hit the stores or deep disappointment, its earnings report this week is not likely to reflect anything other than great phone sales and lagging sales in most, if not all other product lines.

The option market, however, isn’t expecting too much action, with an implied price movement of only 4.4% next week. With barely a 1% premium at a strike level right at the lower edge defined by the implied move there isn’t really any enhancement in its premiums, especially as there is a general increase in volatility buoying most option premiums.

However, the sale of puts at the lower level strike may offer the opportunity to enter a position, particularly in front of the upcoming dividend at a better price than has been seen in over 2 months, or may simply offer a decent one week return.

Traditional Stocks: Baxter International, eBay, Marathon Oil, Merck, MetLife, Walgreen

Momentum: none

Double Dip Dividend: none

Premiums Enhanced by Earnings: Apple (10/20 AM)

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.

Aug162014

Weekend Update – August 17, 2014

Daily Market Update

It’s hard to know whether the caption seen with this screen capture this past Friday morning was just an unfortunate mistake or an overly infatuated producer trying to send a not so subtle message to an on air personality who may not be that exciting when the teleprompter isn’t present.

There’s also the possibility that it was simply a reflection of the reality for the week. Coming to the mid-point of August and people every where grasping for the last bits of summer, it was an extraordinarily slow week for scheduled economic news and a slow week for trading. The most prevalent stories for the week were regarding the death of a beloved comic genius and that of a national figures and unknowns injecting a little icy cold fun into supporting research into the mysteries of a horrible disease.

In that vacuum the stock market was on its way to having its best week in nearly two months.

In that context, there was no doubt that boring was indeed, sexy.

For me, not so much. Boring was more like a full length burlap sack that was far too tight around the neck. Just a few short weeks ago after a deluge of market moving news I found myself wishing for quietude, only to learn that you do have to be careful what you wish for.

As a covered option trader I much prefer weeks that the market is struggling or flat. Even mild to moderate declines are better than strong moves forward, if my covered positions cause me to be left behind. I can usually do without those “best weeks ever” kind of hyperbole.

Luckily, lately Fridays have had a way of shaking things up a little bit, particularly when it comes to reversing course.

Although its probably a coincidence but seemingly market moving news from Russia seems to prefer Fridays, something noted a few months ago and not having slowed down too much.

That was certainly the case to end out the week where I was getting left behind. News, however, of a possible military action cast a pall on the markets and quickly reversed a decent gain earlier in the day.

In the perverse world of hedging your bets, sometimes those surprises are the antidote to getting left behind, so what is likely bad news for many may be more happily received by others. In some cases it’s really that bad news that’s sexy.

By the same token I wasn’t overly pleased when the market regained much of what it had lost. For me, in addition to renewing the gap between personal performance and the market, it also pointed to a market unclear as to its direction.

Even though it’s volatility that drives the premiums that can make the sale of options enticing, I really like clarity. After Friday’s events there was no clarity, other than the validation of the belief that the market is clearly on edge. At best, the market demonstrated ambivalence and that is far from being sexy.

What may be sexy is a recognition of the market’s unwillingness to give into the jitteriness and its continuing to pursue a climb higher. But then again, that wouldn’t be the first time something stupid was done in pursuit of something alluring.

I wouldn’t mind it being on the edge or deigning to walk on the wild side. That’s understandable, maybe even sexy. What is much less understandable is how forgiving the market has been, especially as it entered yet another weekend of uncertainty, yet pulled back from its retreat in a show of confidence.

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

When the market first caught word of the possible military action in Ukraine the response was fairly swift and saw nearly a 200 point market reversal.

While that move may reflect investor jitteriness and a disdain for the uncertainty that may be in store, the broad brush was fairly indiscriminate and not only took stocks with significant international exposure lower, but also took those relatively immune for a ride, even if they were already well off of their previous highs.

While I understand why MasterCard (MA) and its shareholders may have particular angst about events in Russia, I’m not certain that the same should have extended to those with interests in Best Buy (BBY) or Fastenal (FAST).

They all fell sharply and didn’t share in the subsequent recovery later in the day.

I already own Best Buy and anticipated it being assigned this past week, only to have to roll the option contracts over. While it does report earnings next week and is frequently a candidate for large moves, I think that at its Ukraine depressed price there is some spring back to supplement the always healthy option premium.

Fastenal is a very unsexy kind of stock and it does seem quite boring. I suppose that for some people its stores and catalogue of thousands of handy items may actually be very exciting. It is, however, a very exciting stock if you learn to look beyond the superficial. As a buy and hold position it has had a few instances of opportune buying over the past year. However, as a vehicle for a covered option strategy it has had many of those opportunities and I regret not having taken more advantage.

During a trading period of 14 months, while the S&P 500 has gone 18% higher, while Fastenal had gone nearly 14% lower. Not exactly the kind of stock you would find very appealing, even in very low light and deprived of oxygen. However, being opportunistic and using a covered option strategy it has delivered a 43% ROI in that period.

While Best Buy and Fastenal may have been innocent victims of Friday’s decline, MasterCard has been battling with Russian related problems for the
past few months, as there had been some suggestion that the Russian banking system would create its own network of credit cards. That notion has since been dismissed, but there may be little emanating from Russia at the moment that could be taken at face value.

MasterCard shares are still a little higher than I find attractive, but it’s always in the eye of the beholder. Ever since its stock split it has traded in a nicely defined range and has moved back and forth with regularity within that range. If you like covered options, that is a really sexy characteristic.

I also understand why MetLife (MET) fell precipitously on Friday. Already owning shares and having expected its assignment, I rolled it over prematurely as it started to quickly lose altitude as the 10 year Treasury rate started plummeting. The thesis with MetLife, that has been consistently borne out is that it prospers with a rising rate environment.

Shares did recover by the close of the session and despite it being near the top of the range that I would consider a share purchase, I may be ready to add to my existing position.

I also understand why Starbucks (SBUX) may be at risk with any escalation of events in Europe. It is also a potential victim to an Italian recession and declining German GDP. However, despite those potential concerns, it actually withstood the torrents of Friday’s trading and I think is poised to trade near its current levels, which s ideal for use in a covered option trade.

I have been sitting on shares of both Freeport McMoRan (FCX) and Mosaic (MOS) for quite a while. Although the former shares are in profit they are still greatly lagging the S&P 500 for the same period. The latter is still at a loss, not having recovered from the dissolution of the potash cartel, but I’ve traded numerous intermediate positions, as is frequently done to support a paper loss.

Both, however, I believe are ready to move higher and at the very least offer appealing dividends if forced to wait. That has been a saving grace for my existing shares and could easily be so with future shares, that also provide attractive premiums. If finding entry at just the right price that combination can truly be sexy.

I’m not really certain why GameStop (GME) is still in business, but that’s been the conventional wisdom for years. The last time I was involved in shares was through the sale of puts after a plunge when Wal-Mart (WMT) announced that it would intrude of GameStop’s business and offer Wal-Mart store credits for used games. Based upon their own earnings report last week, looks like that strategy didn’t move the needle very much, however.

Still, GameStop keeps on going. It reports earnings this coming week and it was 5% lower in Friday’s trading. If considering the sale of puts before earnings, I especially find those kinds of plunges before earnings to be very sexy. With an implied move of about 7.8%, a 1% ROI may be able to be achieved by selling a put contract at a strike level 9.2% below Friday’s closing price.

In the event of an impending assignment, however, I would look for any opportunity to roll over the put contracts, but would also be mindful of an upcoming dividend payment sometime in September, which could be a good reason to take possession of shares if unable to get extricated from the short put position.

Finally, after a week of retailers reporting their sales and earnings figures, it’s not really clear whether the increased employment numbers are creating a return to discretionary spending. It’s equally not clear that Sears Holdings (SHLD), which reports earnings this week is really a retailer, but it reports earnings this week, as well. 

For years, and possibly still so, it has been extolled for its real estate strategies as it spins off or plans to spin off the only portions of its retail operations that seem to work.

However, in the world of trading for option income none of that really matters, although it may be an entertaining side bar. 

The option market is currently assigning an implied price move of approximately 9.4%, while a 1% ROI for the week may potentially be made by selling a put contract 11.8% below Friday’s closing price.

As I knew deep down in high school, even losers can be sexy in the right light. Sears Holdings could be one of those losers you can learn to love.

 

Traditional Stocks: Fastenal, MasterCard, MetLife, Starbucks

Momentum: Best Buy, Freeport McMoRan, Mosaic

Double Dip Dividend: none

Premiums Enhanced by Earnings: GameStop (8/21 PM), Sears Holdings (8/21 AM)

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.