Weekend Update – March 31, 2013

It’s said that George Eastman, founder of Eastman Kodak (EKDKQ), was quite methodical as he approached the end of his life and was prepared to put his escape plan into action.

“My work here is done” may be a very logical way to approach any kind of transition, although it doesn’t have to be taken to the extreme that Eastman felt was appropriate under his circumstances. Be prepared, but don’t be crazy.

I’ve been transitioning a portfolio for almost a month in anticipation of the market taking a break and perhaps giving back some of its gains; maybe even a lot of its gains.

Doing so has made me much less fun to be around, but circumstances do change and being prepared for plausible scenarios means having exit strategies and surviving to see them do as planned until it’s time to exit the exit strategy. Once my work is done I can’t wait to get back to work.

I for one was glad to see the first quarter of 2013 come to an end. Fortunately, as a covered option seller, my remaining life span may not be sufficient to see another opening yearly quarter such as this past one, as the last such period was in 1987.

You may or may not remember how that year ended, but let’s just say that a single day 500 point drop back then was a lot more meaningful than it would be today.

I wasn’t prepared back then, in fact, that was the last time I used a margin account. I may end up being wrong this time around, but in watching markets for a number of years, both as a casual observer and as an active participant it’s reasonably clear that the good times don’t just keep rolling.

Selling covered calls is a great strategy when applied methodically, but it does meet its match in markets that just do nothing other than going higher. Hopefully April will usher in some greater variety in outcomes, as the past few weeks, despite having established records in both the Dow Jones and S&P 500 have been showing some signs of tentative behavior.

Part of being a less fun person has meant initiating fewer new positions each week. The first step to creating an environment that wouldn’t entice me to spend money on new positions was to cut off the funding just like you might with any addict. Luckily, most stock traders won’t resort to petty crime and pawning the belongings of loved ones to feed the habit, although that margin account can be very appealing and the answer to an easy fix.

I cut off my flow of funds by moving from weekly to extended weekly or monthly options. Longer contracts means less weekly contracts available to be assigned and less opportunity for new weekly cash to be available to “feed the beast.”.

Unfortunately, I also curtailed my cash flow by some unseemly timing in the purchase of new positions this past quarter, such as Petrobras (PBR) and Cliffs Natural Resources (CLF) that are sitting awaiting opportunities to have call contracts written against them.

The next part of the transition was focusing on reliable dividend paying stocks. The kind your grandfather would feel comfortable owning. Last week, all new positions went ex-dividend last week or this coming week. They’re not very exciting to own, but dividends, especially when their ensuing share price reduction is partially offset by option premiums are especially welcome.

Keeping more cash in reserve, moving away from “Momentum” positions, longer contracts and seeking near term dividends is the exit strategy and my transition is nearly complete.

Now comes the waiting and the period of self-doubt, which includes wondering when it’s time to abandon a thesis. In the meantime, increasing cash reserves doesn’t mean a total prohibition against finding potential new opportunities. After all, being prepared doesn’t have to take you to extremes. Once you’ve reached a crazy state of preparedness it’s hard to turn around to see the light.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend or Momentum categories, with no selections in the “PEE” category, as earnings season begins anew on April 8, 2013 (see details). Additionally, as in previous weeks there is a greater emphasis on stocks that offer monthly contracts only, eschewing the usual preference for the relatively higher ROI of weekly options for the guarantee of premiums for a longer period in order to ride out any turbulence.

Some of this week’s selections are stocks that I already own but may consider adding to existing positions. One such stock is Deere (DE) which left me somewhat exasperated this past Thursday, the final day of a holiday shortened trading week.

At almost precisely noon shares of Deere dropped by about $1.40 in about 8 minutes, taking it from the realm of stocks poised for assignment. The plunge happened while the market was stable and most other heavy machinery and equipment makers were actually going higher. There was no news to account for the sudden and sustained drop. Neither in real time nor hours after.

Caterpillar (CAT) is one of the stocks that has an ignominious reputation during this record setting quarter. It was among the worst performers of the quarter and was routinely tagged as a laggard on those days that the broad market performed well. I recently purchased shares having waited all quarter for them to reach the price point that was very kind to me in 2012. It accompanied Deere for a small portion of the former’s inexplicable retreat but recovered sufficiently to avoid being tagged yet again.

Bristol Myers Squibb (BMY) and Medtronic (MDT) fit into two ongoing themes. Looking for near term dividend paying shares and belonging to the broadly defined healthcare sector. While healthcare has been the leading sector for the trailing year, I think there are still short term opportunities, even with a specter of a declining market. While both Bristol Myers and Medtronic have had significant advances lately, the combination of dividend and premium continue to make it appealing.

MetLife (MET), also a recent holding, fits into my broad definition of “healthcare” if you stretch that definition to an extreme. Part of my positive outlook for its shares is related to what I believe will be growth in its home insurance business. Of course, I rarely think in terms of fundamentals and certainly don’t have a long term perspective on its shares, but it is well positioned to maintain price stability even in a stock market of reduced stability.

Wells Fargo (WFC) and JP Morgan (JPM) are two very different banks. JP Morgan goes ex-dividend this week and has been beleaguered with domestic attacks from elected officials and international attacks as Cyprus may or may not add risk to global banks, such as JP Morgan.

On the other hand, Wells Fargo is as pure of a domestic play as you can find at a size that still makes it “too big to fail.” With news of improving real estate sales all over the country the Wells Fargo money machine is poised to re-create the glory days that so abruptly ended 5 years ago.

I’ve been looking for an excuse to purchase Lowes (LOW) for the past few weeks and have watched its price show some mild erosion during that time

Dow Chemical (DOW) has been one of my favorite stocks for a long time. I purchased additional shares last week to capture its dividend and after looking at its performance over the past 10 months feel guilty thinking that it’s a “boring” stock.

In fact, it’s been absolutely the poster child for what makes a covered call strategy a successful one. While its stock price has virtually remained unchanged since May 2012, the active cycle of buying shares, selling calls, assignment, buy shares, etc.. has resulted in a nearly 40% ROI.

Finally, Western Refining (WNR) is a company whose shares I briefly owned recently at a much lower price. It was one that got away during the uni-directional market of the first quarter. Its price has come down a bit and I think may now be at its “new normal” making it perhaps an antidote to Petrobras in a sector that has some catching up to do.

Traditional Stocks: Caterpillar, Deere, Dow Chemical, JP Morgan, Lowes, MetLife, Wells Fargo

Momentum Stocks: Western Refining

Double Dip Dividend: Bristol Myers (ex-div 4/3), JP Morgan (ex-div 4/3), Medtronic (ex-div 4/3)

Premiums Enhanced by Earnings: none

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

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

 

Weekend Update – February 24, 2013

We all engage in bouts of wishful thinking.

On an intellectual level I can easily understand why it makes sense to not be fully invested at most moments in time. There are times when just the right opportunity seems to come along, but it stops only for those that have the means to treat that opportunity as it deserves.

I also understand why it is dangerous to extend yourself with the use of margin or leverage and why it’s beneficial to resist the need to pass up that opportunity.

What I don’t understand is why those opportunities always seem to arise at times when the well has gone dry and margin is the only drink of water to be found.

Actually, I do understand. I just wish things would be different.

I rely on the continuing assignment of shares and the re-investment of cash on a weekly basis. My preference is for anywhere from 20-40% of my portfolio to be turned over on a weekly basis.

But this past week was simply terrible on many levels. Whether you want to blame things on a deterioration of the metals complex, hidden messages in the FOMC meeting or the upcoming sequester, the market was far worse than the numbers indicated, as the down volume to up volume was unlike what we have seen for quite a while.

On Wednesday the performances of Boeing (BA), Hewlett Packard (HPQ) and Verizon (VZ), all members of the Dow Jones Industrials Index helped to mask the downside, as the DJIA and S&P 500 diverged for the day. Thursday was more of the same, except Wal-Mart (WMT) joined the very exclusive party. So far, this week is eerily similar to the period immediately following the beginning of 2012 climb and immediately preceding a significant month long decline of nearly 10%,beginning May 2012.

That period was also preceded by the indices sometimes moving in opposite directions or differing magnitudes and those were especially accentuated during the month long decline.

So what I’m trying to say is that with all of the apparent bargains left in the carnage of this trading shortened week, I don’t have anywhere near the money that I would typically have to plow in head first. I wish I did; but I don’t. I also wish I had that cash so that I wouldn’t necessarily be in a position to have it all invested in equities.

Although that margin account is overtly beckoning me to approach, that’s something that I’ve developed enough strength to resist. But at the same time, I’m anxious to increase my cash position, but not necessarily for immediate re-investment.

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

Cisco (CSCO) was one of those stocks that I wanted to purchase last week, but like most in a wholly unsatisfying week, it wasn’t meant to be. With earnings out of the way and some mild losses sustained during the past week, it’s just better priced than before.

Although there have been periods of time that I’ve owned shares of both Caterpillar (CAT) and Deere (DE), up until about $10 ago on each stock there has rarely been a time over the past 5 years that I haven’t owned at least one of them. This past week saw some retreat in their prices and they are getting closer to where I might once again be comfortable establishing ownership.

Lockheed Martin (LMT) is one of those stocks that I really wished had offered weekly option premiums. Back in the days when there was no such vehicle this was one of my favorite stocks. This week it goes ex-dividend and that always gets me to give a closer look, especially after some recent price drops. Dividends, premiums and a price discount may be a good combination.

Dow Chemical (DOW) has been in my doghouse of late. That’s not any expression of its quality as a company, nor of its leadership. After all, back when the market last saw 14,000, Dow Chemical was among those companies whose shares, dividends and option premiums helped me to survive those frightening days. But after 2009 had gotten well entrenched and started heading back toward 14000, the rest of the market just left Dow behind. Then came weekly options and Dow Chemical didn’t join that party. More recently, as volatility has been low, it’s premiums have really lagged. But now, at its low point in the past two months for no real reason and badly lagging the broad market, it once again looks inviting.

Lorillard (LO) was on my radar screen about a month ago, but as so often happens when it came time to make a decision there appeared to be a better opportunity. This week Lorillard goes ex-dividend. Unfortunately, it no longer offers a weekly option, but this is one of those companies that if not assigned this month will likely be assigned soon, as tobacco companies have this knack for survival, much more so than their customers.

MetLife (MET) was on last week’s radar screen, but it was a week that very little went according to script. Maybe this week will be better, but like the tobacco companies that are sometimes the bane of insurance companies, even when paying out death benefits, somehow these companies survive well beyond the ability of their customers.

United Healthcare (UNH) simply continues the healthcare related theme. Already owning shares of Aetna (AET), I firmly believe that whatever form national healthcare will take, the insurance companies will thrive. Much as they have done since Medicaid and Medicare appeared on the national landscape and they moaned about how their business models would be destroyed. After 50 years of moaning you would think that we would all stop playing this silly game.

The Gap (GPS) reports earnings this week, along with Home Depot (HD) as opposed to most companies that I consider as potential earnings related trades, there isn’t a need to protect against a 10-20% drop. At least I don’t think there is that kind of need. But whereas the concern of holding shares of some of those very volatile companies is real, that’s not the case with these two. Even with unexpected price movements eventually ownership will be rewarded. The fact that Home Depot gained 2% following Friday’s upgrade by Oppenheimer to “outperform” always leads me to expect a reversal upon earnings release.

On the other hand, when it comes to MolyCorp (MCP) there’s definitely that kind of need to protect against a 20% price decline. Always volatile, MolyCorp got caught in last week’s metal’s meltdown, probably unnecessarily, since it really is a different entity. Yet with an SEC overhang still in its future and some investor unfriendly moves of late, MolyCorp doesn’t have much in the way of good will on its side.

Nike (NKE) goes ex-dividend this week and its option premiums have become somewhat more appealing since the stock split.

Salesforce.com (CRM) is another of those companies that I’m really not certain what it is that they do or provide. I know enough to be aware that there is drama regarding the relationship between its CEO, Mark Benioff and Oracle’s mercurial CEO, Larry Ellison, to get people’s attention and become the basis of speculation. I just love those sort of side stories, they’re so much more bankable that technical analysis. In this case, a xx% drop in share price after earnings could still deliver a 1% ROI.

Finally, two banking pariahs are potential purchases this week. I’ve owned both Citibank (C) and Bank of America (BAC) in the past month and have lost both to assignment a few times. As quickly as their prices became to expensive to repurchase they have now become reasonably priced again.

Although Friday’s trading restored some of the temporarily beaten down stocks a bit, a number still appear to be good short term prospects. I emphasize “short term” because I am mindful of a repeat of the pattern of May 2012 and am looking for opportunities to move more funds to cash.

I don’t know if Friday’s recovery is a continuation of that 2012 pattern, but if it is, that leads to concern over the next leg of that pattern.

For that reason I may be looking at opportunities to increase cash levels as a defensive move. In the event that there are further signals pointing to a strong downside move, I would rather be out of the market and miss a continued upside move than go along for the ride downward and have to work especially hard to get back up.

I’ve done that before and don’t feel like having to do it again.

Traditional Stocks: Caterpillar, Cisco, Deere, Dow Chemical, MetLife, United Healthcare

Momentum Stocks: Citibank

Double Dip Dividend: Bank of America (ex-div 2/27), Lockheed Martin (ex-div 2/27), Lorillard (ex-div 2/27), Nike (ex-div 2/28)

Premiums Enhanced by Earnings: Home Depot (2/26 AM), MolyCorp (2/28 PM), Salesforce.com (2/28 PM), The Gap (2/28 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.

 

Weekend Update – February 17, 2013

It’s all relative.

Sometimes it’s really hard to put things into perspective. Our mind wants to always compare objects to one another to help understand the significance of anything that we encounter. Having perspective, formed by collecting and remembering data and the environment that created that data helps to titrate our reaction to new events.

My dog doesn’t really have any useful perspective. He thinks that everyone is out to take what’s his and he reacts by loudly barking at everyone and everything that moves. From his perspective, the fact that the mailman always leaves after he has barked out reinforces that it was the barking that made him leave.

The stock market doesn’t really work the way human perspective is designed to work. Instead, it’s more like that of a dog. Forget about all of the talk about “rational Markets.” They really don’t exist, at least not as long as investors abandon rational thought processes.

It’s all about promises, projections and clairvoyance. Despite the superficial lip service given to quarterly comparisons no one really predicates their investing actions on the basis of what’s come and gone.

During earnings season one can see how all perspective may be lost. It’s hard to account for sudden and large price moves when there’s little new news. Although I can understand the swift reaction resulting in a 20% drop when Cliffs Natural Resources (CLF) announced that it was slashing its dividend, filing for a secondary stock offering and also creating a new class of mandatory convertible shares, I can’t quite say that the same understanding exists when Generac (GNRC) drops 10% following earnings and guidance that was universally interpreted as having “waved no red flags.”

Of course, the use of perspective and especially logic based upon perspective,  can be potentially costly. For example, it’s been my perspective that Cliffs and Walter Energy (WLT) often follow a similar path.

What has been true for the past year has actually been true for the past five years. So it came as a surprise to me, at least from my perspective that the day after Cliffs Natural plunged nearly 20%, that Walter Energy, which reports earnings on February 20, 2013 would rise 6% in the absence of any news. From my perspective, that just seemed irrational.

But of course, perspective, by its nature has to be individually based. That may explain why Forbes, using its unique perspective on time, published an article on February 12, 2013, just hours before Cliffs released its earnings, that it had been named as the “Top Dividend Stock of the S&P Metals and Mining Select Industry Index”, according to Dividend Channel. In this case, Cliffs was accorded that august honor for its “strong quarterly dividend history.”

Apparently, history doesn’t extend back to 2009, when the dividend was cut by 55%, but it’s all in your perspective of things. I’m not certain where Cliffs stands in the ratings 24 hours later.

What actually caught my attention the most this past week is how performance can take a back seat to  perspectives on liability, especially in the case of Halliburton (HAL) and Transocean (RIG). On Thursday, it was announced that a Federal judge approved a mere $400 million criminal settlement against it for its seminal part in the Deepwater Horizon blowout. That’s in addition to the already $1 Billion in fines it has been assessed. In return, Transocean climbed nearly 4%, while it’s frenemy Halliburton, on no news of its own climbed 6%. Poor British Petroleum (BP) which has already doled out over $20 Billion and is still on the line for more, could only muster an erasure of its early 2% decline. For Transocean, at least, the perception was that the amount wasn’t so onerous and that the end of liability was nearing.

From one perspective reckless environmental action may be a good strategy to ensure a reasonably healthy stock performance. At least that’s worked for Halliburton, which has outperformed the S&P 500 since May 24, 2010, the date of the accident.

I usually have one or more of the “Evil Troika” in my portfolio, but at the moment, only British Petroleum is there, at its lagged its mates considerably over the past weeks. Sadly, Transocean will no longer be offering weekly options, so I’m less likely to dabble in its shares, even as Carl Icahn revels in the prospects of re-instating its dividend.

Perhaps the day will come when stocks are again measured on the basis of real fundamentals, like the net remaining after revenues and expenses, rather than distortions of performance and promises of future performance, but I doubt that will be the case in my lifetime.

In fact, the very next day on Friday, both Transocean and Walter Energy significantly reversed course. On Friday, the excuse for Transocean’s 5% drop was the same as given for Thursday’s 4% climb. Walter Energy was a bit more nebulous, as again, there was no news to account for the 3% loss.

So what’s your perspective on why the individual investor may be concerned?

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

Technology stocks haven’t been blazing the way recently, as conventional wisdom would dictate as a basic building block for a burgeoning bull market. My biggest under-performing positions are in technology at the moment, patiently sitting on shares of both Microsoft (MSFT) and Intel (INTC). Despite Tuesday’s ex-dividend date for Microsoft, I couldn’t bear to think of adding shares. However, despite a pretty strong run-up on price between earnings reports, Cisco (CSCO) looks mildly attractive after a muted response to its most recent earnings report. Even if its shares do not move, the prospect of another quiet week yet generating reasonable income on the investment for a week is always appealing.

Although I was put shares of Riverbed Technology (RVBD) this week, which is not my favorite way of coming to own shares, it’s a welcome addition and I may want to add more shares. That’s especially true now that Cisco, Oracle (ORCL) and Juniper (JNPR) have either already reported or won’t be reporting their own earnings during the coming option cycle. With those potential surprises removed from the equation there aren’t too many potential sources of bad news on the horizon. The healing from Riverbed’s own fall following earnings can now begin.

MetLife (MET) is, to me a metaphor for the stock market itself. Instead of ups and downs, it’s births and deaths. Like other primordial forms of matter, such as cockroaches, life insurance will survive nuclear holocaust. That’s an unusual perspective with which to base an investing decision, but shares seem to have found a comfortable trading range from which to milk premiums.

Aetna (AET) on the other hand, may just be a good example of the ability to evolve to meet changing environments. Regardless of what form or shape health care reform takes, most people in the health care industry would agree that the health care insurers will thrive. Although Aetna is trading near its yearly high, with flu season coming to an end, it’s time to start amassing those profits.

It’s not easy to make a recommendation to buy shares of JC Penney (JCP). It seems that each day there is a new reason to question its continued survival, or at least the survival of its CEO, Ron Johnson, who may be as good proof as you can find that the product you’re tasked with selling is what makes you a “retailing genius.” But somehow, despite all of the extraneous stories, including rumored onslaughts by those seeking to drive the company into bankruptcy and speculation that Bill Ackman will have to lighten up on his shares as the battle over Herbalife (HLF) heats up, the share price just keeps chugging along. I think there’s some opportunity to squeeze some money out of ownership by selling some in the money options and hopefully being assigned before earnings are reported the following week.

The Limited (LTD) is about as steady of a retailer as you can find. I frequently like to have shares as it is about to go ex-dividend, as it is this coming week. With only monthly options available, this is one company that I don’t mind committing to for that time period, as it generally offers a fairly low stressful holding period in return for a potential 2-3% return for the month.

While perhaps one may make a case that Friday’s late sell-off on the leak of a Wal-Mart (WMT) memo citing their “disastrous” sales might extend to some other retailers, it’s not likely that the thesis that increased payroll taxes was responsible, also applied to The Limited, or other retailers that also suffered a last hour attack on price. Somehow that perspective was lacking when fear was at hand.

McGraw Hill (MHP) has gotten a lot of unwanted attention recently. If you’re a believer in government led vendettas then McGraw Hill has some problems on the horizon as it’s ratings agency arm, Standard and Poors, raised lots of ire last year and is being further blamed for the debt meltdown 5 years ago. It happens to have just been added to those equities that trade weekly calls and it goes ex-dividend this week. In return for the high risk, you might get am attractive premium and a dividend and perhaps even the chance to escape with your principal intact.

I haven’t owned shares of Abercrombie and Fitch (ANF) for a few months. Shares have gone in only a single direction since the last earnings report when it skyrocketed higher. With that kind of sudden movement and with continued building on that base, you have to be a real optimist to believe that it will go even higher upon release of earnings.

What can anyone possibly add to the Herbalife saga? It, too, reports earnings this week and offers opportunity whether its shares spike up, plunge or go no where. I don’t know if Bill Ackman’s allegations are true, but I do know that if the proposition that you can make money regardless of what direction shares go is true, then I want to be a part of that. Of course, the problem. among many, is that the energy stored within the share price may be far greater than the 17% or so price drop that the option premiums can support while still returning an acceptable ROI.

Also in the news and reporting earnings this week is Tesla (TSLA). This is another case of warring words, but Elon Musk probably has much more on the line than the New York Times reporter who test drove one of the electric cars. But as with Herbalife and other earnings related plays, with the anticipation of big price swings upon earnings comes opportunity through the judicious sale of puts or purchase of shares and sale of deep in the money calls.

From my perspective these are enough stocks to consider for a holiday shortened week, although as long as earnings are still front and center, both Sodastream (SODA) and Walter Energy may also be in the mix.

The nice thing about perspective is that while it doesn’t have to be rational it certainly can change often and rapidly enough to eventually converge with true rational thought.

If you can find any.

Traditional Stocks: Aetna, Cisco, MetLife

Momentum Stocks: JC Penney, RIverbed Technology

Double Dip Dividend: The Limited (ex-div 2/20), McGraw Hill (ex-div 2/22)

Premiums Enhanced by Earnings: Abercrombie and Fitch (2/22 AM), Herbalife (2/19 AM), Tesla (2/20 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. 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.