Oct62013

Weekend Update – October 6, 2013

Weekend Update

This is the time of year that one can start having regrets about the way in which votes were cast in prior elections.

Season’s Misgivings

The sad likelihood, however, is that officials elected through the good graces of incredibly gerrymandered districts are not likely to ever believe that their homogeneous and single minded neighbors represent thoughts other than what the entire nation shares.

That’s where both parties can at least agree that is the truth about the other side.

Living in the Washington, DC area the impact of a federal government shutdown is perhaps much more immediately tangible than in a “geometric shape not observed in nature” congressional district elsewhere. However, there is no doubt that a shutdown has adverse effect on GDP and that impact is cumulative and wider spreading as the shutdown continues.

It’s unfortunate that elected officials seem to neither notice nor care about direct and indirect impact on individuals and financial institutions. In war that sort of thing is sanitized by referring to it as “collateral damage.” As long as it’s kept out of sight and in someone else’s congressional district it doesn’t really exist.

Pete Najarian put it in terms readily understandable, much more so than when some tried expressing the cost of a shutdown in terms of drag on quarterly GDP.

Of course, the real challenge awaits as we once again are faced with the prospect of having insufficient cash to pay debts and obligations. But for what it’s worth at least the rest of the world gets a much needed laugh and boost in national ego, while McGraw Hill Financial (MHFI) and others ponder the price of their calling it as they see it.

At the moment, that’s probably not what the economy needs, but in the perverse world we live in that may mean continued Federal Reserve intervention in Quantitative Easing. While “handouts” are decried by many who don’t see a detriment to a government shutdown, the Federal Reserve handout is one that they are inclined to accept, as long as it helps to fuel the markets.

However, as we are ready to enter into another earnings season this week many are mindful of the fairly lackluster previous earnings season that just ended. While the markets have recently been riding a wave of unexpected good news, such as no US intervention in Syria, continued Quantitative Easing and the disappearance of Lawrence Summers from the landscape, we are ripe for disappointment. We were spared any potential disappointment on Friday morning as the release of the monthly Employment Situation Report fell victim to someone being furloughed.

So what would be more appropriate than to re-introduce the concept of stock fundamentals, such as earnings, into the equation? During this past summer, when our elected officials were on vacation, that’s pretty much where we focused our attention as the world and the nation were largely quiet places. While no one is particularly effusive about what the current stream of reports will offer, a market that truly discounts the future already has its eyes set on the following earnings season that may begin to bear the brunt of any trickle down from a prolonged government shutdown.

At the moment, sitting on cash reserves, I am willing to recycle funds from shares that have been assigned this Friday (October 4, 2013), but am not willing to dip further into the pile until seeing some evidence of a bottoming to the current process that had the S&P 500 drop 2.7% since September 19, 2013 until Friday’s nice showing pared the loss down to 2%. But I need more evidence than a tepid one day respite, just as it will take more than a resolution to the current congressional impasse to believe that we wouldn’t be better served by an unelected algorithm.

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

I’m certain many people miss the days when a purchase of shares in Apple (AAPL) was a sure thing. While I like profits as much as the next person, I also enjoy the hunt and from that perspective I think that Apple shares are far more interesting now as we just passed the one year anniversary of having reached its peak price and tax related selling capitalizing on the loss will likely slow. Suddenly it’s becoming like many other stocks and financial engineering is beginning to play a role in attempts to enhance shareholder value.

Without passing judgment on the merits of the role of activist investors it doesn’t hurt to have additional factors that can support share price, particularly at times that the market itself may be facing weakness. Apple has increasingly been providing opportunities for short term gains as its price undulates with the tide that now includes more than just sales statistics and product releases. Capital gains or shares, an attractive dividend and generous option premiums make its ownership easier to consider at current prices. However, with earnings scheduled to be reported on October 22, 2013 I would likely focus on the sale of weekly option contracts as Apple is prone to large earnings related moves.

While Apple has done a reasonable job in price recovery over the past few months amid questions regarding whether its products were still as fashionable as they had been, Abercrombie and Fitch (ANF) hasn’t yet made that recovery from its most recent earnings report that saw a more than 20% price drop. As far as I know, and I don’t get out very much, talks of it no longer being the “cool” place to buy clothes aren’t the first item on people’s conversational agenda. The risk associated with ownership is always present but is subdued when earnings reports are still off in the distance, as they are currently. In the meantime, Abercrombie and Fitch always offers option premiums that help to reduce the stress associated with share ownership.

Ironically, the health care sector hasn’t be treating me terribly well of late, perhaps being whipsawed by the fighting on Capitol Hill over the Affordable Care Act and proposed taxes on medical devices. Additionally, a government shutdown conceivably slows the process whereby regulated products can be brought to the market. Abbott Labs (ABT), whose shares were recently assigned at $35 has subsequently dropped about 5% and will be going ex-dividend this week. Although the dividend isn’t quite as rich as some of the other major pharmaceutical companies after having completed a spin-off earlier in the year, I think the selling is done and overdone.

For me, a purchase of MetLife (MET) is nothing more than replacing shares that were just assigned after Friday’s opportune price surge and that have otherwise been a reliable creator of income streams from dividends and option premiums. At the current price levels MetLife has been an ideal covered call stock having come down in price in response to fears that in a reduced interest rate environment its own earnings will be reduced.

International Paper (IP) is an example of a covered call strategy gone wrong, as the last time I owned it was about a year ago having had shares assigned just prior to its decision to go on a sustained rise higher. While frequently cited by detractors as an argument against a covered option strategy, the reality is that such events don’t happen terribly often, nor does the investor have to eschew greed as share price is escalating or exercise perfect timing. to secure profits before they evaporate. I’ve waited quite a while for its share price to drop, but it is still far from where I last owned them. Still, the current price drop helps to restore the appeal.

Being levered to China or even being perceived as levered to the Chinese economy can either be an asset or a liability, depending on what questionable data is making the rounds at any given moment. Joy Global (JOY) is one of those companies that is heavily levered to China, but even when the macroeconomic news seems to be adverse the shares are still able to maintain itself within a comfortably defined trading range. With Friday’s strong close my shares were assigned, but I would like to re-establish a position, particularly at a price point below $52.50. If it stays true to form it will find that level sooner rather than later making it once again an appealing purchase target and source of option related income.

With the start of a new earnings season one stock that I’ve been longing to own again starts out the season. YUM Brands (YUM) is an always interesting stock to own due to how responsive it is to any news or rumors coming from China. Over the past year it’s been incredibly resilient to a wide range of reports that you would think were being released in an effort to conspire against share price. Food safety issues, poor drink selection during heat waves and Chinese economic slow down have all failed to keep the share price down. While the current price is near the top of its range I think that expectations have been set on the low side. In addition to reporting earnings this week shares also go ex-dividend the following day.

A little less exciting, certainly as compared to Abercrombie and Fitch is The Gap (GPS). In a universe of retailers going through violent price swings, The Gap has been an oasis of calm. It goes ex-dividend this week and if it can maintain that tight trading channel it would be an ideal purchase as part of a covered call strategy.

While The Gap isn’t terribly exciting, Molson Coors (TAP) and Williams Co. (WMB) are even less so. While I usually start thinking about either of them in the period preceding a dividend payment they have each found a price level that has offered some stability, thereby providing some additional appeal in the process that includes sale of near the money calls.

Finally, I have a little bit of a love-hate relationship with Mosaic (MOS). The hate part is only recent as shares that I’ve owned since May 2013 have fallen victim to the collapse of the potash cartel. In a “what have you done for me lately” kind of mentality that kind of performance makes me forget how profitable Mosaic had been as a covered call holding for about 5 years. However, the recent “love” part of the equation has come from the serial purchase of shares at these depressed levels and collecting premiums in alternation with their assignment. I have been following shares higher with such purchases as there is now some reason to believe that the cartel may not be left for dead.

Traditional Stocks: International Paper, Molson Coors, Williams Co.

Momentum Stocks: Apple, Joy Global, MetLife, Mosaic

Double Dip Dividend: Abbott Labs (ex-div 10/10), The Gap (ex-div 10/11), YUM Brands (ex-div 10/9)

Premiums Enhanced by Earnings: YUM Brands (10/8 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.

Sep222013

Weekend Update – September 22, 2013

Weekend Update

Generally, when you hear the words “perfect storm,” you tend to think of an unfortunate alignment of events that brings along some tragedy. While any of the events could have created its own tragedy the collusion results in something of enormous scale.

For those that believe in the wisdom that can be garnered from the study of history, thus far September 2013 has been at variance with the conventional wisdom that tell us September is the least investor friendly month of the year.

What has thus far made this September different, particularly in contrast to our experience this past August, has been a perfect storm that hasn’t come.

Yet, but the winds are blowing.

Barely three weeks ago we were all resolved to another bout of military action, this time in Syria. History does tend to indicate that markets don’t like the period that leads up to hostilities.

Then we learned that the likely leading contender to assume the Chairmanship of the Federal Reserve, Larry Summers, withdrew his name from consideration of the position that has yet to confirm that its current Chairman will be stepping down. For some reason, the markets didn’t like prospects of Larry Summers being in charge but certainly liked prospects of his being taken out of the equation.

Then we were ready to finally bite the bullet and hear that the Federal Reserve was going to reduce their purchase of debt obligations. Although they never used the word “taper” to describe that, they have made clear that they don’t want their actions to be considered as “tightening,” although easing on Quantitative Easing seems like tightening to me.

There’s not too much guidance that we can get from history on how the markets would respond to a “taper,” but the general consensus has been that our market climb over the past few years has in large part been due to the largesse of the Federal Reserve. Cutting off that Trillion dollars each year might drive interest rates higher and result in less money being pumped into equity markets.

What we didn’t know until the FOMC announcement this past Wednesday was what the market reaction would be to any announcement. Was the wide expectation for the announcement of the taper already built into the market? What became clear was that the market clearly continues to place great value on Quantitative Easing and expressed that value immediately.

As long as we’re looking at good news our deficit is coming down fast, employment seems to be climbing, the Presidents of the United States and Iran have become pen pals and all is good in the world.

The perfect storm of good news.

The question arises as to whether any eventual bad news is going to be met with investors jumping ship en masse. But there is still one thing missing from the equation. One thing that could bring us back to the reality that’s been missing for so long.

Today we got a glimpse of what’s been missing. The accelerant, if you will. With summer now officially over, at least as far as our elected officials go, the destructive games have been renewed and it seems as if this is just a replay of last year.

Government shutdowns, debt defaults and add threats to cut off funding for healthcare initiatives and you have the makings of the perfect storm, the bad kind, especially if another domino falls.

Somewhat fortuitously for me, at least, the end of the September 2013 option cycle has brought many assignments and as a result has tipped the balance in favor of cash over open positions.

At the moment, I can’t think of a better place to be sitting as we enter into the next few weeks and may find ourselves coming to the realization that what has seemed to be too good to be true may have been true but could only last for so long.

While I will have much more cash going into the October 2013 cycle than is usually the case and while I’m fully expecting that accelerant to spoil the party, I still don’t believe that this is the time for a complete buying boycott. Even in the middle of a storm there can be an oasis of calm.

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

After Friday’s loss, I have a difficult time in not being attracted to the idea of adding shares of Caterpillar (CAT). It has been everyone’s favorite stock to deride for its dependence on the Chinese economy and for its lack of proactive leadership in the past year. Jim Chanos publicly proclaimed his love for Caterpillar as his great short thesis for the coming year. Since it has trailed the S&P 500 by 16% on a year to date basis there may be good reason to believe that money goes into Caterpillar shares to die.

However, it has been a perfect stock with which to apply a serial covered option strategy. In 13 trades beginning July 2012, for example, it has demonstrated a 44.9% ROI, by simply buying shares, collecting dividends and premiums and then either re-purchasing shares or adding to existing shares. In that same time the index was up 28%, while Caterpillar has lost 3%.

It’s near cousin Deere (DE) also suffered heavily in Friday’s market and has also been an excellent covered option trade over the past year. Enhancing its appeal this week is that it goes ex-dividend. I currently own shares, but like Caterpillar, in smaller number than usual and purchases would provide the additional benefit of averaging down cost, although I rarely combine lots and sell options based on average cost.

Also going ex-dividend this week is Dow Chemical (DOW). This has been one of those companies that for years has been one of my favorite to own using the covered option strategy. However, unlike many others, it hasn’t shown much propensity to return to lower price levels after assignment. I don’t particularly like admitting that there are some shares that don’t seem to obey the general rule of gravity, but Dow Chemical has been one of those of late. I also don’t like chasing such stocks particularly in advance of what may be a declining market. However, with the recent introduction of weekly options for Dow Chemical I may be more willing to take a short term position.

YUM Brands (YUM) is similar in that regard to Dow Chemical. I’ve been waiting for it to come down to lower price levels, but just as it had at those lower levels, it proved very resilient to any news that would send its shares downward for a sustained period. As with Caterpillar, YUM Brands is tethered to Chinese news, but even more so, as in addition to economic reports and it’s own metrics, it has to deal with health scares and various food safety issues that may have little to no direct relationship to the company. YUM Brands does help to kick off the next earnings season October 8th and also goes ex-dividend that same week.

Continuing along with that theme, UnitedHealth Group (UNH) just hasn’t returned to those levels at which I last owned shares. In fact, in this case it’s embarrassing just how far its shares have come and stayed. What I can say is that if membership in the Dow Jones Index was responsible, then perhaps I should have spent more time considering its new entrants. However, with the Affordable Care Act as backdrop and now it being held hostage by Congressional Republicans, shares have fallen about 6% in the past week.

Mosaic (MOS) is among the companies that saw its share price plummet upon news that the potash cartel was collapsing. Having owned much more expensive shares at that time, I purchased additional shares at the much lower level in the hope that their serial assignment or option premium generation would offset some of the paper losses on the older shares. Although that has been successful, I think there is continuing opportunity, even as Mosaic’s price slowly climbs as the cartel’s break-up may not be as likely as originally believed.

If you had just been dropped onto this planet and had never heard of Microsoft (MSFT) you might be excused for believing this it was a momentum kind of stock. Between the price bounces that came upon the announcement of the Nokia (NOK) purchase, CEO Ballmer’s retirement, Analyst’s Day and the announcement of a substantial dividend increase, it has gyrated with the best of them. Those kinds of gyrations, while staying within a nicely defined trading range are ideal for a covered option strategy.

Cypress Semiconductor (CY) goes ex-dividend this week. This is a stock that I frequently want to purchase but am most likely to do so when its purchase price is near a strike level. That’s especially true as volatility is low and there is less advantage toward the use of in the money options. With a nice dividend, healthy option premiums, good leadership and product ubiquity, this stock has traded reliably in the $10-12 range to also make it a very good covered option strategy stock selection.

Every week I feel a need to have something a little controversial, as long as there’s a reasonable chance of generating profit. The challenge is always in finding a balance to the risk and reward. This week, I was going to again include Cliffs Natural Resources, as I did the previous week, however a late plunge in share price, likely associated with reports that CHinese economic growth was not going to include industrial and construction related growth, led to the need to rollover those shares. I would have been happy to repurchase shares, but not quite as happy to add them.

Fortunately, there’s always JC Penney (JCP). It announced on Friday that it was seeking a new credit line, just as real estate concern Vornado (VNO) announced its sale of all its JC Penney stake at $13. Of course the real risk is in the company being unable to get the line it needs. While it does reportedly have nearly $2 billion in cash, no one wants to see starkly stocked shelves heading into the holidays. WHether through covered options or the sale of put options, JC Penney has enough uncertainty built into its future that the premium is enticing if you can accept the uncertainty and the accompanying risk.

Finally, I had shares of MetLife (MET) assigned this past week as it was among a handful of stocks that immediately suffered from the announcement that there would be no near term implementation of the “taper.” The thesis, probably a sound one was that with interest rates not likely to increase at the moment, insurance companies would likely derive less investment related income as the differential between what they earn and what they pay out wouldn’t be increasing.

As that component of the prefect storm is removed one would have to believe that among the beneficiaries would be MetLife.

Traditional Stocks: Caterpillar, MetLife, Microsoft, UnitedHealth Group

Momentum Stocks: JC Penney, Mosaic, YUM Brands

Double Dip Dividend: Cypress Semiconductor (ex-div 9/24), Deere (ex-div 9/26), Dow Chemical (ex-div 9/26)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may be 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 over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

Jul262013

Weekend Update – July 28, 2013

Weekend Update

Stocks need leadership, but it’s hard to be critical of a stock market that seems to hit new highs on a daily basis and that resists all logical reasons to do otherwise.

That’s especially true if you’ve been convinced for the past 3 months that a correction was coming. If anything, the criticism should be directed a bit more internally.

What’s really difficult is deciding which is less rational. Sticking to failed beliefs despite the facts or the facts themselves.

In hindsight those who have called for a correction have instead stated that the market has been in a constant state of rotation so that correction has indeed come, but sector by sector, rather than in the market as a while.

Whatever. By which I don’t mean in an adolescent “whatever” sense, but rather “whatever it takes to convince others that you haven’t been wrong.”

Sometimes you’re just wrong or terribly out of synchrony with events. Even me.

What is somewhat striking, though, is that this incredible climb since 2009 has really only had a single market leader, but these days Apple (AAPL) can no longer lay claim to that honor. This most recent climb higher since November 2012 has often been referred to as the “least respected rally” ever, probably due to the fact that no one can point a finger at a catalyst other than the Federal Reserve. Besides, very few self-respecting capitalists would want to credit government intervention for all the good that has come their way in recent years, particularly as it was much of the unbridled pursuit of capitalism that left many bereft.

At some point it gets ridiculous as people seriously ask whether it can really be considered a rally of defensive stocks are leading the way higher. As if going higher on the basis of stocks like Proctor & Gamble (PG) was in some way analogous to a wad of hundred dollar bills with lots of white powder over it.

There have been other times when single stocks led entire markets. Hard to believe, but at one time it was Microsoft (MSFT) that led a market forward. In other eras the stocks were different. IBM (IBM), General Motors (GM) and others, but they were able to create confidence and optimism.

What you can say with some certainty is that it’s not going to be Amazon (AMZN), for example, as you could have made greater profit by shorting and covering 100 shares of Amazon as earnings were announced. than Amazon itself generated for the quarter. It won’t be Facebook (FB) either. despite perhaps having found the equivalent of the alchemist’s dream, by discovering a means to monetize mobile platforms.

Sure Visa (V) has had a remarkable run over the past few years but it creates nothing. It only facilitates what can end up being destructive consumer behavior.

As we sit at lofty market levels you do have to wonder what will maintain or better yet, propel us to even greater heights? It’s not likely to be the Federal Reserve and if we’re looking to earnings, we may be in for a disappointment, as the most recent round of reports have been revenue challenged.

I don’t know where that leadership will come from. If I knew, I wouldn’t continue looking for weekly opportunities. Perhaps those espousing the sector theory are on the right track, but for an individual investor married to a buy and hold portfolio that kind of sector rotational leadership won’t be very satisfying, especially if in the wrong sectors or not taking profits when it’s your sector’s turn to shine.

Teamwork is great, but what really inspires is leadership. We are at that point that we have come a long way without clear leadership and have a lot to lose.

So while awaiting someone to step up to the plate, maybe you can identify a potential leader from among this week’s list. As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories (see details).

ALthough last week marked the high point of earnings season, I was a little dismayed to see that a number of this week’s prospects still have earnings ahead of them.

While I have liked the stock, I haven’t always been a fan of Howard Schultz. Starbucks (SBUX) had an outstanding quarter and its share price responded. Unfortunately, I’ve missed the last 20 or so points. What did catch my interest, however, was the effusive manner in which Schultz described the Starbucks relationship with Green Mountain Coffee Roasters (GMCR). In the past shares of Green Mountain have suffered at the ambivalence of Schultz’s comments about that relationship. This time, however, he was glowing, calling it a “Fantastic relationship with Green Mountain and Brian Kelly (the new CEO)… and will only get stronger.”

Green Mountain reports earnings during the August 2013 option cycle. It is always a volatile trade and fraught with risk. Having in the past been on the long side during a 30% price decline after earnings and having the opportunity to discuss that on Bloomberg, makes it difficult to hide that fact. In considering potential earnings related trades, Green Mountain offers extended weekly options, so there are numerous possibilities with regard to finding a mix of premium and risk. Just be prepared to own shares if you opt to sell put options, which is the route that I would be most likely to pursue.

Deere (DE) has languished a bit lately and hasn’t fared well as it routinely is considered to have the same risk factors as other heavy machinery manufacturers, such as Caterpillar and Joy Global. Whether that’s warranted or not, it is their lot. Deere, lie the others, trades in a fairly narrow range and is approaching the low end of that range. It does report earnings prior to the end of the monthly option cycle, so those purchasing shares and counting on assignment of weekly options should be prepared for the possibility of holding shares through a period of increased risk.

Heading into this past Friday morning, I thought that there was a chance that I would be recommending all three of my “Evil Troika,” of Halliburton (HAL), British Petroleum (BP) and Transocean (RIG). Then came word that Halliburton had admitted destroying evidence in association with the Deepwater disaster, so obviously, in return shares went about 4% higher. WHat else would anyone have expected?

With that eliminated for now, as I prefer shares in the $43-44 range, I also eliminated British Petroleum which announces earnings this week. That was done mostly because I already have two lots of shares. But Transocean, which reports earnings the following week has had some very recent price weakness and is beginning to look like it’s at an appropriate price to add shares, at a time that Halliburton’s good share price fortunes didn’t extend to its evil partners.

Pfizer (PFE) offers another example of situations I don’t particularly care for. That is the juxtaposition of earnings and ex-dividend date on the same or consecutive days. In the past, it’s precluded me from considering Men’s Warehouse (MW) and just last week Tyco (TYC). However, in this situation, I don’t have some of the concerns about share price being dramatically adversely influenced by earnings. Additionally, with the ex-dividend date coming the day after earnings, the more cautious investor can wait, particularly if anticipating a price drop. Pfizer’s pipeline is deep and its recent spin-off of its Zoetis (ZTS) division will reap benefits in the form of a de-facto massive share buyback.

My JC Penney (JCP) shares were assigned this past week, but as it clings to the $16 level it continues to offer an attractive premium for the perceived risk. In this case, earnings are reported August 16, 2013 and I believe that there will be significant upside surprise. Late on Friday afternoon came news that David Einhorn closed his JC Penney short position and that news sent shares higher, but still not too high to consider for a long position in advance of earnings.

Another consistently on my radar screen, but certainly requiring a great tolerance for risk is Abercrombie and Fitch (ANF). It was relatively stable this past week and it would have been a good time to have purchased shares and covered the position as done the previous week. While I always like to consider doing so, I would like to see some price deterioration prior to purchasing the next round of shares, especially as earning’s release looms in just two weeks.

Sticking to the fashion retail theme, L Brands (LTD) may be a new corporate name, but it retains all of the consistency that has been its hallmark for so long. It’s share price has been going higher of late, diminishing some of the appeal, but any small correction in advance of earnings coming during the current option cycle would put it back on my purchase list, particularly if approaching $52.50, but especially $50. Unfortunately, the path that the market has been taking has made those kind of retracements relatively uncommon.

In advance of earnings I sold Dow Chemical (DOW) puts last week. I was a little surprised that it didn’t go up as much as it’s cousin DuPont (DD), but finishing the week anywhere above $34 would have been a victory. Now, with earnings out of the way, it may simply be time to take ownership of shares. A good dividend, good option premiums and a fairly tight trading range have caused it to consistently be on my radar screen and a frequent purchase decision. It has been a great example of how a stock needn’t move very much in order to derive outsized profits.

MetLife (MET) is another of a long list of companies reporting earnings this week, but the options market isn’t anticipating a substantive move in either direction. Although it is near its 52 week high, which is always a precarious place to be, especially before earnings, while it may not lead entire markets higher, it certainly can follow them.

Finally, it’s Riverbed Technology (RVBD) time again. While I do already own shares and have done so very consistently for years, it soon reports earnings. Shares are currently trading at a near term high, although there is room to the upside. Riverbed Technology has had great leadership and employed a very rational strategy for expansion. For some reason they seem to have a hard time communicating that message, especially when giving their guidance in post-earnings conference calls. I very often expect significant price drops even though they have been very consistent in living up to analyst’s expectations. With shares at a near term high there is certainly room for a drop ahead if they play true to form. I’m very comfortable with ownership in the $15-16 range and may consider selling puts, perhaps even for a forward month.

Traditional Stocks: Deere, Dow Chemical, L Brands, MetLife, Transocean

Momentum Stocks: Abercrombie and Fitch, JC Penney

Double Dip Dividend: Pfizer (ex-div 7/31)

Premiums Enhanced by Earnings: Green Mountain Coffee Roasters (8/7 PM), Riverbed Technology (7/30 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

 

Apr212013

Weekend Update – April 21, 2013

Weekend Update

I’m finally feeling bullish. Sort of.

Two months ago I started getting a very uneasy feeling.

Normally, money burns a hole in my pocket. Sadly for the economy, that’s not the case when it comes to consumer goods, but it’s definitely the case when it comes to stocks.

Selling options, and predominantly of the weekly variety, I often have had the pleasure of awaking Monday morning to see freshly deposited cash in my account as shares upon which I had written weekly call contracts were assigned.

But that has changed recently, ever since that uneasy feeling hit.

The principal change was not immediately going out on shopping sprees on Monday mornings and instead building up cash caches. Among the changes were also the use of longer option contract periods because of the realization that so often market downturns happen suddenly and I would prefer not to be caught flat-footed or in-between contracts when and if it does occur.

But now, after what is the worst week of 2013, it may be time for yet another transition, of sorts.

As the April 2013 cycle has come to an end and many of those contracts have been assigned or rolled over to May 2013, being flush with cash at a time that some stocks have had some meaningful declines introduces temptation.

Jim Cramer used to say “there’s always a bull market somewhere.” I may still harbor the belief that the market is poised to mime the same period of 2012, but within that bearish sentiment I do see some glimmers of hope and opportunity as there is a universe of beaten down stocks that may have deserved better.

The week’s selections are categorized as either Traditional, Momentum, or “PEE” (see details). Although my preference, during this period of pessimism is to continue seeking high quality, dividend paying stocks as a defensive position, there aren’t many of those to consider this week. Instead, earnings and injured shares predominate.

Anadarko (APC) is one of those stocks that has seen a relatively large drop recently, but has been showing some strength at $79. It does report earnings on May 6, 2013, but the weekly option premium is unusually high for the period two weeks before earnings. While the monthly premiums are also attractive, this may be one of the situations where I would still consider the use of a weekly contract.

eBay (EBAY) also had a rough week. it is among those stocks that have had some significant drops that may have been overdone. Down about 7% following earnings its share price is approaching the $52.50 level where it has had some reasonable strength. It too may warrant a look at the weekly option contracts, especially if it appears as if there may be some market stability early next week.

In a similar situation, General Electric (GE) suffered a 4% earnings related loss on Friday and is down about 8% over the past 2 months. It too is approaching a price level where it has been pretty comfortable and when GE is comfortable, so am I. Flush with cash itself, GE may continue its own spending spree which is sometimes a short term share price depressant. If its current share price is maintained or goes a bit lower on Monday, it may be one of those few positions that I do not immediately cover by selling call options, but rather await some price rebound and then sell options.

I was disappointed when it was decided that Texas Instruments (TXN) would no longer have weekly options offered. However, the concern is now on hold as the monthly contracts look better and better every day, especially as volatility and premiums are increasing. Texas Instruments goes ex-dividend this week and that is a significant repository of its appeal to me. However, before it does so, it reports earnings. I don’t particularly see a compelling trade based on that event on Monday afternoon, so I would likely wait until after that occurs to decide whether the premium offered is still appealing enough to purchase shares.

Although I’m overweight in the Technology Sector, and despite the fact that its performance hasn’t been spectacular, sometimes I do find it hard to resist after price pullbacks. That was certainly the case after re-purchasing shares of Cypress Semiconductor (CY) after its deep fall upon earnings and disappointing guidance. Although IBM’s (IBM) earnings report on Friday cast a little bit of a pall over the sector some values appear to available. For the coming week, both Cisco (CSCO) and Oracle (ORCL), which I owned just a week ago prior to its assignment are again in a price range that works for me, Even as I hold uncovered shares of sector mate Riverbed Technology (RVBD) which reports earnings this week and often follows Oracle’s pattern, I believe that there are opportunities at these levels even in a weak overall market.

I always like MetLife (MET). So often, however, it seems just as I want to purchase shares the rest of the world has had the same idea and I’m reluctant to chase the stock. This past week, it along with the market settled down a bit. It always offers a fair option premium and it is a resilient performer even in the face of overall market adversity.

Although I also always like YUM Brands (YUM) that, unfortunately, doesn’t give me freedom to extend that to its products, as I’m now sworn to keeping my cholesterol within survivable levels. However, perhaps increasing my use of MetLife products might offset the use of YUM’s goods. After a fairly significant price fall, YUM Brands is back to the range that offers me as much comfort as their foods. I think that it is immune from near term Chinese economic concerns, the market having digested that along with its drumsticks.

With Apple (AAPL) sinking below $400/share and earnings set to be announced this week it’s not a far stretch of the imagination to believe that there may be significant price movement upon their release. Always a volatile holding upon earnings and guidance, there isn’t much pent up frustration any longer. Following more than a 40% drop in share price most shareholders and long time advocates have had ample opportunity to vent. Although Steve Jobs was notorious for his strategy of under-promising and over-delivering, it’s hard to imagine that expectations could get any lower. I think Apple is a good earnings play, factoring in a 10% price drop in return for nearly a 1% ROI. Relative to the market, i expect Apple to trade higher in the aftermath of its eagerly awaited news, which makes the sale of out of the money put options particularly appealing.

Netflix (NFLX) certainly would qualify as a finalist in any “comeback stock of the year” competition. I haven’t owned shares in almost 90 points. Like the other earnings related selections this week, it is certainly capable of a dramatic move when earnings and guidance are released. In this case, there may be opportunity to still derive a 1% ROI even if share price falls by as much as 25%. Risky? Yes, but Green Mountain (GMCR) has shown that momentum stocks can come back more than once. Even a significant price drop can no longer be counted upon as being a conclusion to the Netflix story. What was once considered the end of its run, Netflix has successfully gone on to its second life and could easily have a third.

Finally, Amazon (AMZN) is actually my least compelling earnings related trade in that the price drop cushion in order to achieve a 1% ROI is only about 8%. With a universal chorus deriding the razor thin margins and the P/E one has to wonder when that point will arrive that the market decides to treat Amazon as it does many other companies that spend time in rarefied environments. Still, if the cash in my pocket gets too hot this may be its final resting place.

Traditional Stocks: Anadarko, Cisco, eBay, General Electric, MetLife, Oracle

Momentum Stocks: YUM Brands

Double Dip Dividend: Texas Instruments (4/26)

Premiums Enhanced by Earnings: Amazon (4/25 PM), Apple (4/23 PM), Netflix (4/22 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.

 

Apr72013

Weekend Update – April 7, 2013

Weekend Update

I’m was beginning to feel like one of those Pacific Island soldiers that never found out World War II had ended and remained ever-presently vigilant for an impending attack that never came.

Amazingly, some held up their vow to defend for decades while I’m having difficulty after a bit more than a month waiting for a correction. Nothing big, just in line with this same time period in 2012, as I see lots of similarities to that time, not only in the parallel nature of the charts, but also in my own less than stellar performances, having been selling covered options as religiously as a sentinel keeps an eye on the horizon.

Having weathered the acute shock value of Cyprus, decreasing economic growth in China, currency manipulation in Japan and digested the initial uncertainty of the Korean Peninsula, it looked as if any sentinel for a sell-off would be a lonely soldier.

Now faced with a disappointing employment situation there’s opportunity to wonder over the weekend whether the pole has been sufficiently greased or whether this is simply the very quick mini sell-off of April 2012 that occurred just as Apple (AAPL) hit its high, then quickly recovered, just in time to lead to a 9% sell-off.

Apple had came off its April high by 5% at that point that the greater market downturn began, which is that same point that Google (GOOG) was down from its recent high point, at the close of Thursday’s trading (April 4, 2013). Coincidentally, that was the day before today’s sell-off. For those that have believed that Google has rotated into market leadership, having wrestled the position away from Apple, that may be a cause for concern. as does the fact that Google has traded below that dreaded 50 Day Moving Average.

I don’t know much about those kind of technical factors, but I do recognize that sometimes there is a basis for deja vu being more than just a feeling. What actually exists over the horizon is still anyone’s guess, but unlike those lonely soldiers you can feel relatively assured that at some point an unwelcome visitor will appear and wreak some havoc on the market. From my perspective that comes along every 52 months, so I’m not quite ready to accept that the time has come to drop defenses, but there may be room to let the guard down a bit.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories, as earnings season begins anew on April 8, 2013 (see details). Additionally, for the first time in a few weeks there is a somewhat greater emphasis on Momentum stocks, as a coming downslide might reasonably be expected to unduly impact upon issues that have thrived recently, particularly the more defensive stocks. However, I am still inclined to consider monthly contracts over weekly ones, simply for a little extra breathing room while continuing to await a market heading in a southerly direction.

One Momentum stock that has also thrived up until very recently is YUM Brands (YUM). It also happens to go ex-dividend this week and has already given back much of its gains in the absence of any news. In the past it has demonstrated itself very capable of bouncing back from both real news and speculation regarding its forward prospects. Simultaneously being held hostage to the Chinese economy and also proving to be independent of swirling winds, YUM Brands serves as a model of what can be achieved in a marketplace where the playing field is anything but level.

A real signal that something is evolving, at least from my perspective, is that I no longer classify AIG (AIG) as a Momentum stock. Over the past year, had I followed by frequent suggestions that AIG might be an appropriate covered call position, I think I could have limited my portfolio to a single stock. Robert Ben Mosche, it’s CEO is the poster child for leadership and focus. With some recent share weakness, I think it may be time to add it back to a portfolio in need of income and reasonable price stability.

A couple of months ago I made an earnings related trade in F5 Networks (FFIV) that worked out nicely. Having sold puts just prior to earnings, F5 surpassed expectations and the trade was closed in 4 days. Thursday evening after the closing bell, F5 release disappointing guidance that saw its shares fall more than 15%.

I hate guidance that comes out weeks before earnings and catches me off-guard. In the past I’ve seen Cummins Engine (CMI) and Abercrombie and Fitch (ANF) seem to regularly upset happy shareholders with that kind of timed guidance. Despite the fact that analysts seem to be in agreement that this is solely an F5 issue, it indiscriminately drags down the sector, perhaps offering opportunities.

In this case, I think the opportunities are now in both Cisco (CSCO) and Riverbed Technology (RVBD), both unduly hit in the aftermath of F5 and just a couple of weeks ago by Oracle’s (ORCL) disappointing earnings, which were also agreed to be an Oracle specific shortcoming. I currently own shares of Riverbed and would even consider adding to the position ahead of earnings later in the month.

Western Refining (WNR) returns to the list from last week, as an unrequited purchase. It is, possibly another example of how the market acts indiscriminately and emotionally. Following Valero’s (VLO) moaning about the costs of upcoming EPA initiatives for cleaner gas the market punished the entire sector, despite the fact that the EPA suggested that the costs of compliance were minimal for most refiners. The market made no distinction and assumed that all refiners would be subject to additional costs similar to the $300-400 million suggested by Valero. Unfortunately, I didn’t have the fortitude to pick up shares of Western Refining as it briefly dipped below $30 or Phillips 66 (PSX) as it fell about 10%. It didn’t stay there very long and certainly never confirmed the worst case scenario that Valero so openly shouted.

MetLife (MET) also returns from last week, which was another week of hesitancy to commit cash in favor of building reserves. There were, however, a number of times that I was ready to part with some of the cash, but ultimately resisted. As opposed to Western Refining, MetLife’s shares went down even further, so those decisions to embrace inaction may have balanced one another out. I continue to believe that shares will benefit from an increasingly healthy housing market, although that is far from MetLife’s core and highest profile business.

The financial sector was hit quite hard this past week. Since I owned shares of both Morgan Stanley (MS) and JP Morgan (JPM), I was acutely aware of their duress. However, in addition to JP Morgan and Wells Fargo (WFC) releasing earnings this Friday and perhaps representing some opportunity, Bank of America (BAC), whose shares I had assigned just a week ago has given up much of its recent run-up higher and is becoming attractive again.

Finally, Bed Bath and Beyond (BBBY) s one of my favorite stores, but not one of my favorite stocks. It has had a bit of a price rise on some buy-out speculation and it has demonstrated past ability to disappoint on earnings. Already down about 4% from its very recent high, I would be comfortable owning shares at $60 and would consider a 1.5% ROI for a 2 week holding period to be a decent reward while anticipating less than a 5% decline in share price in the after-math of earnings.

Traditional Stocks: AIG, Cisco, MetLife

Momentum Stocks: Bank of America, Riverbed Technology, Western Refining,

Double Dip Dividend: YUM Brands (ex-div 4/10)

Premiums Enhanced by Earnings: JP Morgan (4/12 AM), Pier 1 (4/11 AM), Wells Fargo (4/12 AM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.