MOS | TheAcsMan

Jul42014

Weekend Update – July 6, 2014

You never really know what kind of surprises the market will bring on any given day. I’ve long given up trying to use rational thought processes to try and divine what is going to happen on any given day. It’s far too humbling of an experience to continually make such attempts.

Uncertainty may be compounded a little when we all know that low trading volume has a way of exaggerating things. With an extra long holiday coming up and many traders likely to be heading up to the Hamptons to really begin the summer, a three and half day trading week wasn’t the sort of thing that was going to generate lots of trading frenzy, although it could easily create lots of excitement and moves.

So when two big events occur in such a short time span, both of which seem to inspire optimism, as long as you’re not a bond holder, you can guess a plausible outcome. That’s especially so because lately the market hasn’t been in a "good/bad news is bad/good news" kind of mentality

In what was described as "the most significant speech yet in her still young Federal Reserve Chairmanship," Yellen re-affirmed he commitment to keep interest rates at low levels even in the face of bubbles. She made it clear that in her opinion higher interest rates was not the answer to dealing with financial excesses.

If you happen to be someone who invests in stocks, rather than bonds, could you be given any better gift, other than perhaps the same gift that Yellen gave just two weeks earlier during her post – FOMC press conference?

That gift didn’t have too much staying power and it’s unclear whether a few days off in celebration of Independence Day will makes us forget the most recent gift, but it’s good to have important friends who are either directly or indirectly looking out for your financial well-being.

When seeking to try and understand why stocks continue to perform so well, one concept that is repeatedly mentioned is that it is simply the best of alternatives at the moment. If you believe that to be the case, you certainly believe it even more after this week, especially when realizing that interest rates are likely to remain low even in the face of inflationary pressures.

Borrowing from an alternate investment class credo, it seems clear that the strategy should be simply stated as "Stocks, stocks, stocks."

As if there were any doubts about that belief, the following day came the release of the monthly Employment Situation Report and it lived up to and exceeded expectations.

So it appears that despite a significant revision of GDP indicating a horrible slowdown in the first quarter, the nation’s employers just keep hiring and the unemployment rate is now down to its lowest point since September 2008, which wasn’t a very good time if you were an equity investor.

While the "U-6 Unemployment Rate," which is sometimes referred to as the "real unemployment rate" is almost double that of the more commonly reported U-3, no one seems to care about that version of reality. As in "Animal House," when you’re on a roll you go with it.

More people working should translate into more discretionary spending, more tax revenues and less government spending on social and entitlement programs. That all sounds great for stocks unless you buy into the notion that such events were long ago discounted by a forward looking market.

However, normally that sort of economic growth and heat should start the process of worrying about a rising interest rate environment, but that seems to be off the table for the near future.

Thank you, Janet Yellen.

Of course, with the market propelling itself beyond the 17000 level for the first time and closing the week on strength, what now seems like an age old problem just keeps persisting. That is, where do you find stock bargains?

I’m afraid the answer is that "you don’t," other than perhaps in hindsight.

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

Among my many faults are that I tend to be optimistic.

I don’t say that as many job applicants do in trying to turn the question about their greatest weakness into a strength in an effort to blow smoke in their prospective employer’s face.

That optimism, however, is more of a long term trait, as I’m always pessimistic in the short term. That seems consistent with someone who sells calls, especially of the short term variety. However, part of the problem is that my optimism often means that I purchase stocks too early on the heels of either bad news or performance in the belief that resurrection is at hand.

Most recently Coach (COH) has been a great example of that inappropriate optimism. Having owned shares 20 times in less than two years those purchases have frequently been made following earnings related disappointments and up until the most recent such disappointment, I haven’t found myself displaying a similar emotion. I’ve usually been pretty happy about the decision to enter into positions, although, in hindsight they were frequently initiated too early and I could have avoided some gastric erosion.

However, this time has been different in that even after an initially large price drop, the kind that in the past would have rebounded, shares just kept going lower. But also different is that the bad news didn’t end with earnings this time around.

As with another recent recommendation, Whole Foods (WFM), I believe that meaningful support has been displayed and now begins the time to start whittling down the paper losses through the addition of shares or opening a new position. Despite what will certainly be years of ongoing competition with Michael Kors (KORS) and others in vying for the customer loyalty, Coach has dumped lots of bad news into a single quarter and is poised to begin its rebound along with a recovering retail sector.

While not in retail, Mosaic (MOS) is another company that I’ve spent a year trying to whittle down the paper losses following dissolution of the potash cartel that no one ever knew had existed. In that time nine additional rounds of ownership have wiped out the losses, so now it’s time to make some money.

Shares have had some difficulty at the $50 level and recently have again fallen below. As with Coach, dividends and option premiums make it easier to exercise some patience, but they also can make it a compelling reason to initiate or add to positions. If adding at this level I would be very happy to see shares continue to trade in its narrow range and wouldn’t mind the opportunity to continually rollover option contracts as has been the case in the past, helping to erase large paper losses.

Also similar to Coach, in that I believe that all of the bad news and investor disbelief has been exhausted, is Darden Restaurants (DRI). There’s probably not much need to re-hash some of the dysfunction and what appears to be pure self-interest on the part of its CEO that has helped to keep its assets undervalued. However, at its current level I believe that there is room for share appreciation and a good time to start a position is often in advance of its ex-dividend date and nearly 5% dividend.

While Darden’s payout ratio is well above the average for S&P 500 stocks, there isn’t much concern about its ability to maintain the payouts. With only monthly options available and a reporting earnings late in the upcoming season, I would consider the use of August 2014 options, rather than the more near term monthly cycle.

Also only offering monthly options, Transocean (RIG) has been slowly building off of its recent lows, but is having difficulty breaking through the $45 level. With recent pressure on refiners as a result of a Department of Commerce decision regarding exports there may be reason to believe that there would be additional incentive to bring supply to market for export. While clearly a long term process there may be advantage to being an early believer. Transocean, which I have now owned 14 times in two years also offers a very generous dividend.

As long as in the process of tabulating the number of individual rounds of ownership, Dow Chemical (DOW) comes to mind, with 18 such positions over the past two years. The most recent was added just a few weeks ago in order to capture its dividend, but shares then went down in sympathy with DuPont (DD) as it delivered some unexpectedly bad news regarding its seed sales. Showing some recovery to close the week, Dow Chemical is an example of a stock that simply needs to have are-set of expectations in terms of what may represent a fair price. Sometimes waiting for shares to return to your notions of fairness may be an exercise in futility. While still high in my estimation based on past experience, I continue to look at shares as a relatively safe way to generate option income, dividends and share profits.

Microsoft (MSFT) is another obvious example of one of the many stocks that are at or near their highs. In that kind of universe you either have to adjust your baselines or look for those least susceptible to systemic failure. That is, of course, in the assumption that you have to be an active participant in the first place.

Since I believe that some portion of the portfolio always has to be actively participating, it’s clear that the baseline has to be raised. Currently woefully under-invested in technology, Microsoft appears to at least have relative immunity to the kind of systemic failure that should never be fully dismissed. It too offers that nice combination of option premiums and dividend to offset any potential short term disappointment.

Family Dollar Stores (FDO) reports earnings this week and must be getting tired of always being referred to as the weakest of the dollar stores. It may also already be tired of being in the cross hairs of Carl Icahn, but investors likely have no complaint regarding the immediate and substantial boost in share price when Icahn announced his stake in the company.

Shares saw some weakness as the previous week the potential buyout suitor, Dollar General (DG), considered to be the best in the class, saw its CEO announce his impending 2015 retirement. That was immediately interpreted as a delay in any buyout, at the very least and shares of both companies tumbled. While that presented an opportunity to purchase Dollar General, Family Dollar Stores are still a bit off of their Icahn induced highs of just a few weeks ago and is now facing earnings this coming week.

The option market is implying a relatively small 4.4% price move and it doesn’t quite fulfill my objective of tring to identify a position offering a weekly 1% return for a strike level outside of the implied price range. In this case, however, I would be more inclined to consider a sale of puts after earnings if the response to the report drives shares down sharply. While that may lead to susceptibility of repeating the recent experience with Coach, Carl Icahn, like Janet Yellen is a good friend to have on your side.

Finally, among the topics of the past week were the question of corporate responsibility as it comes to divulging news of the changing health status of key individuals. With the news that Jamie Dimon, Chairman and CEO of JP Morgan Chase (JPM), had been diagnosed with curable throat cancer, the question was rekindled. Fortunately, however, Dimon spared us any supposition regarding the cause of his cancer, perhaps having learned from Michael Douglas that we may not want to know such details.

While hoping for a swift and full recovery many recall when Apple (AAPL) shares briefly plunged when news of Steve Jobs’ illness was finally made public in 2009 and he took a leave of absence, opening the door for Tim Cook’s second seat at the helm of the company.

JP Morgan’s shares went down sharply on the report of Dimon’s health news on a day that the financials did quite well. To his and JP Morgan’s credit, the news, which I believe should be divulged if substantive, should not have further impact unless it changes due to some unfortunate deterioration in Dimon’s health or unexpected change of leadership.

In advance of earnings in two weeks I think at its current price JP Morgan shares are reasonably priced and in a continuing low interest rate environment and with increased regulatory safeguards should be much more protected form its own self than in past years. WHether as a short term or longer term position, I think its shares should be considered as a cornerstone of portfolios, although I wish that I had owned it more often than I have, despite 18 ventures in the past two years.

Hopefully, with Jamie Dimon continuing at the helm and in good health there will be many more opportunities to do so and revel in the process with Janet Yellen providing all the party favors we’ll need.

Traditional Stocks: Dow Chemical, JP Morgan Chase, Microsoft, Transocean

Momentum: Coach, Mosaic

Double Dip Dividend: Darden

Premiums Enhanced by Earnings: Family Dollar Stores

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.

May312014

Weekend Update – June 1, 2014

TheAcsManWeekend Update

I read an excellent article by Doug Kass yesterday. Most of all it explained the origin and definition of the expression “Minsky Moment” that had suddenly come into vogue and received frequent mention late this past week.

I enjoy Kass’ perspectives and opinions and especially admire his wide range of interests and willingness to state his positions without spinning reality to conform to a fantasy.

Perhaps it was no coincidence that the expression was finding its way back to use as Paul McCulley, late of PIMCO, who had coined the phrase, was being re-introduced to the world as the newest PIMCO employee, by a beaming Bill Gross.

The basic tenet in the Kass article was that growing complacency among investors could lead to a Minsky Moment. By definition that is a sudden collapse of asset values which had been buoyed by speculation and the use of borrowed money, although that didn’t appear to be the basis for the assertion that investors should prepare for a Minsky Moment.

Kass, however, based his belief in the possibility of an impending Minsky Moment on the historically low level of market volatility, which he used as a proxy for complacency. In turn, Kass simply stated that a Minsky Moment “sometimes occurs when complacency sets in.”

You can argue the relative foundations of those suppositions that form the basis for the belief that it may be opportune to prepare for a Minsky Moment. Insofar as it is accurate to say that sometimes complacency precedes a Minsky Moment and that volatility is a measure of complacency, then perhaps volatility is an occasional predictor of a sudden and adverse market movement.

Volatility is a complex concept that has its basis in a purely statistical and completely unemotional measure of dispersion of returns for an investment or an index. However, it has also been used as a reflection of investor calm or anxiety, which as far as I know has an emotional component. Yet volatility is also used by some as a measure the expectation of a large movement in one direction or another.

Right now, the low volatility indicates that there has been little dispersion of price, or put another way there has been very little variation in price in the recent past. Having gone nearly 2 years without a 10% correction most would agree, without the need for statistical analysis, that the variation in stock price has been largely in a single direction.

However, few will argue that volatility is a forward looking measure.

Kass noted that “fueled by new highs and easy money, market observers are now growing more optimistic.”

Coincidentally enough, on the day before the Kass article appeared, I wrote in my Daily Market Update about complacency and compared it to the 1980s and 2007.

Of course, that was done through the lens of an individual investor with money on the line and not a “market observer.”

While I’m very mindful of volatility, especially as low volatility drives down option premiums, it doesn’t feel as if the historic low volatility is reflective of individual investor complacency. In fact, even among those finding the limelight, there is very little jumping up and down about the market achieving new daily highs. The feeling of invincibility is certainly not present.

Anyone who remembers 1987 will recall that there was a 5 year period when we didn’t know the meaning of a down market. Complacency is when you have a certain smugness and believe that things will only go your way and risk is perceived to be without risk.

Anyone who remembers 2007 will also recall how bored we became by new daily record highs, almost as if they were entitlements and we just expected that to keep being the new norm.

I don’t know of many that feel the same way now. What you do hear is that this is the least liked and respected rally of all time and the continuing expectation for some kind of reversal.

That doesn’t sound like complacency.

While the Volatility Index may be accurately portraying market prices that have demonstrated little variation over a finite time frame, I don’t believe that it remotely reflects individual investor sentiment.

As opposed to earlier times when new market highs were seen as preludes to even greater rewards you may be hard pressed to find those who believe that the incremental reward actually exceeds the risk of pursuing that reward.

Put me in that latter camp.

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

One stock that I really haven’t liked very much has been Whole Foods (WFM). I say that only because it has consistently been a disappointment for me and has reflected my bad market timing. WHile I often like to add shares in positions that are showing losses and using a “Having a Child to Save a Life” strategy, I’ve resisted doing so with Whole Foods.

However, it finally seems as if the polar vortex is a thing of the past and the market has digested Whole Foods’ expansion and increased cap-ex and its strain on profits. But that’s a more long term perspective that I rarely care about. Instead, it appears as if shares have finally found a floor or at least some stability. At least enough so to consider trying to generate some income from option sales and perhaps some capital gains on the underlying shares, as well, as I believe there will be some progress toward correcting some of its recent price plunge.

Mosaic (MOS) which goes ex-dividend th
is week is one stock that I’ve been able to attenuate some of the pain related to its price drop upon news of the break-up of the potash cartel, through the use of the “Having a Child to Save a Life” strategy. Shares have slowly and methodically worked their way higher since that unexpected news, although have seen great resistance at the $50 level, where it currently trades.

While I don’t spend too much time looking at charts, Mosaic, if able to push past that resistance may be able to have a small gap upward and for that reason, if purchasing shares, I’m not likely to write calls on the entire position, in anticipation of some capital gain on shares, in addition to the dividend and option premiums.

Holly Frontier (HFC) also goes ex-dividend this week. Like so many stocks that I like to consider, it has been recently trading in a range and has occasional paroxysms of price movement. Those quick and unpredictable moves keep option premiums enticing and its tendency to restrict its range have made it an increasingly frequent target for purchase. It is currently trading near the high of my comfort level, but that can be said about so many stocks at the moment, as they rotate in and out of favor with one another, as the market reaches its own new highs.

Lowes (LOW) us one of those companies that must have a strong sense of self-worth, as it is always an also-ran to Home Depot (HD) in the eyes of analysts, although not always in the eyes of investors. It, too, seems to now be trading in a comfortable range, although that range has been recently punctuated by some strong and diverse price moves which have helped to maintain the option premiums, despite overall low market volatility.

MasterCard (MA) was one of the early casualties I experienced when initially beginning to implement a covered call strategy. I never thought that it would soar to the heights that it did and my expectations for it to drop a few hundred points just never happened, unless you don’t understand stock splits.

For some reason, while Apple (AAPL) shares never seemed too expensive for purchase, MasterCard did feel that way to me although at its peak it wasn’t very much higher than Apple at its own peak. Also, unlike Apple which will start trading its post-split shares this week, that split isn’t likely to induce me to purchase shares, while the split in MasterCard was a welcome event and re-introduced me to ownership.

With a theme of trading in a range and having its price punctuated by significant moves, MasterCard has been a nice covered option trade and I would be welcome to the possibility of re-purchasing shares after a recent assignment. With some of the uncertainty regarding its franchise in Russia now resolved and with the hopes that consumer discretionary spending will increase, MasterCard is a proverbial means to print money and generate option income.

I was considering the purchase of shares of Joy Global (JOY) on Friday and the sale of deep in the money weekly calls in the hope that the shares would be assigned early in order to capture its dividend, as Friday would have been the last day to have done so. That would have prevented exposure to the coming week’s earnings release.

Instead, following a nearly 2% price drop I decided to wait until Monday, foregoing the modest dividend in the hope that a further price drop would occur before Thursday’s scheduled earnings.

With its reliance on Chinese economic activity Joy Global may sometimes offer a better glimpse into the reality of that nation that official data. With its share price down approximately 6% in the past month and with my threshold 1% ROI currently attainable at a strike level that is outside of the lower boundary defined by the implied move, the sale of put contracts may have some appeal.

If there may be a poster child for the excesses of a market that may perhaps be a sign of an impending Minsky Moment, salesforce.com (CRM) should receive some consideration. Although there are certainly other stocks that have maintained a high profile and have seen their fortunes wax and wane, salesforce.com seems to go out of its way to attract attention.

Following a precipitous recent decline in price over the past few days shares seemed to be on the rebound. This past Friday morning came word of an alliance with Microsoft (MSFT), a company that salesforce.com’s CEO, Marc Benioff, has disparaged in the past.

While that alliance still shouldn’t be surprising, after all, it is all about business and personal conflict should take a back seat to profits, what was surprising was that the strong advance in the pre-open trading was fairly quickly reversed once the morning bell was rung.

With a sky high beta, salesforce.com isn’t a prime candidate for consideration at a time when the market itself may be at a precipice. However, for those with some room in the speculative portion of their portfolio, the sale of puts may be a reasonable way to participate in the drama that surrounds this stock. However, I would be inclined to consider rolling over put options in the event that assignment looks likely, rather than accepting assignment.

Finally, everyone seems to have an opinion about Abercrombie and Fitch (ANF). Whether its the actual clothing, the marketing, the abhorrent behavior of its CEO or the stock, itself, there’s no shortage of material for casual conversation. Over the past two years it has been one of my most frequent trades and has sometimes provided some anxious moments, as it tends to have price swings on a regular basis.

Abercrombie reported earnings last week and I had sold puts in anticipation. Unlike most times when I sell puts my interest is not in potentially owning shares at a lower price, but rather to simply generate an option premium and then hopefully move on without shares nor obligation. However, in the case of Abercrombie, if those put contracts were to have fallen below their strike levels, I was prepared to take delivery of shares.

While rolling over such puts would have been a choice, Abercrombie does go ex-dividend this week and its ability to demonstrate price recovery and essentially arise from ashes it fairly well demonstrated.

My preference would have been that Abercrombie had a mild post-earnings
loss, as it is near the higher end of where i would consider a purchase, but it’s an always intriguing and historically profitable position, despite all of the rational reasons to run fro ownership of shares.

Traditional Stocks: Lowes, MasterCard, Whole Foods

Momentum: salesforce.com

Double Dip Dividend: Abercrombie and Fitch (6/3), Holly Frontier (6/4), Mosaic (6/3),

Premiums Enhanced by Earnings: Joy Global (6/5 AM)

May102014

Weekend Update – May 11, 2014

TheAcsManWeekend Update

A few hundred years ago Sir Isaac Newton is widely credited with formulating the Law of Universal Gravitation.

In hindsight, that “discovery” shouldn’t really be as momentous as the discovery more than a century earlier that the sun didn’t revolve around the earth. It doesn’t seem as if it would take an esteemed mathematician to let the would know that objects fall rather than spontaneously rise. Of course, the Law is much more complex than that, but we tend to view things in their most simplistic terms.

Up until recently, the Law of Gravity seemed to have no practical implications for the stock market because prices only went higher, just as the sun revolved around the earth until proven otherwise. Additionally, unlike the very well defined formula that describe the acceleration that accompanies a falling object, there are no such ways to describe how stocks can drop, plunge or go into free fall.

For those that remember the “Great Stockbroker Fallout of 1987,” back then young stockbrokers could have gone 5 years without realizing that what goes up will come down, fled the industry en masse upon realizing the practical application of Newton’s genius in foretelling the ultimate direction of every stock and stock markets.

The 2014 market has been more like a bouncing ball as the past 10 weeks have seen alternating rises and falls of the S&P 500. Only a mad man or a genius could have predicted that to become the case. It’s unlikely that even a genius like Newton could have described the laws governing such behavior, although even the least insightful of physics students knows that the energy contained in that bouncing ball is continually diminished.

As in the old world when people believed that the world was flat and that its exploration might lead one to fall off the edge, I can’t help but wonder what will happen to that bouncing ball in this flat market as it deceptively has come within a whisker of even more records on the DJIA and S&P 500. Even while moving higher it seems like there is some sort of precipice ahead that some momentum stocks have already discovered while functioning as advance scouts for the rest of the market.

With earnings season nearing its end the catalyst to continue sapping the energy out of the market may need to come from elsewhere although I would gladly embrace any force that would forestall gravity’s inevitable power.

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

As a past customer, I was never enamored of Comcast (CMCSA) and jumped at the first opportunity to switch providers. But while there may be some disdain for the product and especially the service, memories of which won’t easily be erased by visions of a commercial showing a comedian riding along in a service truck, you do have to admire the company’s shares.

Having spent the past 6 months trading above $49 it has recently been range bound and that is where the appeal for me starts. It’s history of annual dividend increases, good option premiums and price stability adds to that appeal. While there is much back story at present in the world of cable providers and Comcast’s proposed purchase of Time Warner Cable (TWC) may still have some obstacles ahead, the core business shouldn’t be adversely impacted by regulatory decisions.

Also, as a one time frequent customer of Best Buy (BBY), I don’t get into their stores very often anymore. Once they switched from a perpendicular grid store layout to a diagonal one they lost me. Other people blame it on Amazon (AMZN), but for me it was all about the floor plan. But while I don’t shop there very much anymore it’s stock has been a delight trading at the $26 level.

Having had shares assigned for the fourth time in the past two months I would like to see a little bit of a price drop after Friday’s gain before buying shares again. However, with earnings coming up during the first week of the June 2014 option cycle you do have to be prepared for nasty surprises as are often delivered. There’s still more time for someone to blame cold weather on performance and this may be the retailer to do so. WIth that in mind, Best Buy may possibly be better approached through the sale of put options this week with the intent of rolling over if in jeopardy of being assigned shares prior to the earnings release.

There’s barely a week that I don’t consider buying or adding shares of Coach. I currently own shares purchased too soon after recent earnings and that still have a significant climb ahead of them to break even. However, with an upcoming dividend during the June 2014 cycle and shares trading near the yearly low point, I may be content with settling in with a monthly option contract, collecting the premium and dividend and just waiting for shares to do what they have done so reliably over the past two years and returning to and beyond their pre-earnings report level.

Mosaic (MOS) is another one of those companies that I’ve owned on many occasions over the years. Most recently I’ve been a serial purchaser of shares as its share price plunged following announcement of a crack in the potash cartel. Still owning some more expensive shares those serial purchases have helped to offset the paper losses on the more expensive shares. Following a recent price pullback after earnings I’m ready to again add shares as I expect Mosaic to soon surpass the $50 level and stay above there.

Dow Chemical (DOW) is also a company whose shares I’ve owned with frequency over the years, but less so as it moved from $42 to $50. Having recently decided that $48 was a reasonable new re-entry point that may receive some support from the presence of activist investors, the combination of premiums, dividends and opportunity for share appreciation is compelling.

Holly Frontier (HFC) has become a recent favorite replacing Phillips 66 (PSX) which has just appreciated too much and too fast. While waiting for Phillips 66 to return to more reasonable levels, Holly Frontier has been an excellent combination of gyrating price movements up and down and a subsequent return to the mean. Because of those sharp movements its option premium is generally attractive and shares routinely distribute a special dividend in addition to a regular dividend that has been routinely increased since it began three years ago.

The financial sector has been weak of late and we’ve gotten surprises from JP Morgan (JPM) recently with regard to its future investment related earnings and Bank of America (BAC) with regard to its calculation error of capital on its books. However, Morgan Stanley (MS) has been steadfast. Fortunately, if interested in purchasing shares its steadfast performance hasn’t been matched by its share price which is now about 10% off its recent high.

With its newly increased dividend and plenty of opportunity to see approval for a further increase, it appears to be operating at high efficiency and has been trading within a reasonably tight price range for the past 6 months, making it a good consideration for a covered option trade and perhaps on a serial basis.

Since I’ve spent much of 2014 in pursuit of dividends in anticipation of decreased opportunity for share appreciation, Eli Lilly (LLY) is once again under consideration as it goes ex-dividend this week. With shares trading less than 5% from its one year high, I would prefer a lower entry price, but the sector is seeing more interest with mergers, acquisitions and regulatory scrutiny, all of which can be an impetus for increasing option premiums.

Finally, it’s hard to believe that I would ever live in an age when people are suggesting that Apple (AAPL) may no longer be “cool.” For some, that was the reason behind their reported purchase of Beats Music, as many professed not to understand the synergies, nor the appeal, besides the cache that comes with the name.

Last week I thought there might be opportunity to purchase Apple shares in order to attempt to capture its dividend and option premium in the hope for a quick trade. As it work turn out that trade was never made because Apple opened the week up strongly, continuing its run higher since recent earnings and other news were announced. I don’t usually chase stocks and in this case that proved to be fortuitous as shares followed the market’s own ambivalence and finished the week lower.

However, this week comes the same potential opportunity with the newly resurgent Microsoft (MSFT). While it’s still too early to begin suggesting that there’s anything “cool” about Microsoft, there’s nothing lame about trying to grab the dividend and option premium that was elusive the previous week with its competition.

Microsoft has under-performed the S&P 500 over the past month as the clamor over “old technology” hasn’t really been a path to riches, but has certainly been better than the so-called “new technology.” Yet Microsoft has been maintaining the $39 level and may be in good position to trade in that range for a while longer. It neither needs to obey or disregard gravity for its premiums and dividends to make it a worthwhile portfolio addition.

Traditional Stocks: Comcast, Dow Chemical, Holly Frontier

Momentum: Best Buy, Coach, Morgan Stanley, Mosaic

Double Dip Dividend: Microsoft (5/13 $0.28), Eli Lilly (5/13 $0.49)

Premiums Enhanced by Earnings: none

Feb162014

Weekend Update – February 16, 2014

TheAcsManWeekend Update

Is our normal state of dysfunction now on vacation?

Barely seven trading days earlier many believed that we were finally on the precipice of the correction that had long eluded the markets.

Sometimes it’s hard to identify what causes sudden directional changes, much less understand the nature of what caused the change. That doesn’t stop anyone from offering their proprietary insight into that which may sometimes be unknowable.

Certainly there will be technicians who will be able to draw lines and when squinting really hard be able to see some kind of common object-like appearing image that foretold it all. Sadly, I’ve never been very adept at seeing those images, but then again, I even have a hard time identifying “The Big Dipper.”

Others may point to an equally obscure “Principle” that hasn’t had the luxury of being validated because of its rare occurrences that make it impossible to distinguish from the realm of “coincidence.”

For those paying attention it’s somewhat laughable thinking how with almost alternating breaths over the past two weeks we’ve gone from those warning that if the 10 year Treasury yield got up to 3% the market would react very negatively, to warnings that if the yield got below 2.6% the markets would be adverse. There may also be some logical corollaries to those views that are equally not borne out in reality.

Trying to explain what may be irrational markets, which are by and large derivatives of the irrational behaviors found in those comprising the markets, using a rational approach is itself somewhat irrational.

Crediting or blaming trading algorithms has to recognize that even they have to begin with the human component and will reflect certain biases and value propositions.

But the question has to remain what caused the sudden shifting of energy from its destruction to its creation? Further, what sustained that shift to the point that the “correction” had itself been corrected? As someone who buys stocks on the basis of price patterns there may be something to the observation that all previous attempts at a correction in the past 18 months have been halted before the 10% threshold and quickly reversed, just as this most recent attempt.

That may be enough and I suppose that a chart could tell that story.

But forget about those that are suggesting that the market is responding to better than expected earnings and seeking a rational basis in fundamentals. Everyone knows or should know that those earnings are significantly buoyed by share buybacks. There’s no better way to grow EPS than to shrink the share base. Unfortunately, that’s not a strategy that builds for the future nor lends itself to continuing favorable comparisons.

I think that the most recent advance can be broken into two component parts. The first, which occurred in the final two days of the previous trading week which had begun with a 325 point gain was simply what some would have called “a dead cat bounce.” Some combination of tiring from all of the selling and maybe envisioning some bargains.

But then something tangible happened the next week that we haven’t seen for a while. It was a combination of civility and cooperation. The political dysfunction that had characterized much of the past decade seemed to take a break last week and the markets noticed. They even responded in a completely normal way.

Early in the week came rumors that the House of Representatives would actually present a “clean bill” to raise the nation’s debt ceiling. No fighting, no threats to shut down the government and most importantly the decision to ignore the “Hastert Rule” and allow the vote to take place.

The Hastert Rule was a big player in the introduction of dysfunction into the legislative process. Even if a majority could be attained to pass a vote, the bill would not be brought to a vote unless a majority of the majority party was in favor the bill. Good luck trying to get that to occur in the case of proposing no “quid pro quo” in the proposal to raise the nation’s debt ceiling.

The very idea of some form of cooperation by both sides for the common good has been so infrequent as to appear unique in our history. Although the common good may actually have taken a back seat to the need to prevent looking really bad again, whatever the root cause for a cessation to a particular form of dysfunction was welcome news.

While that was being ruminated, Janet Yellen began her first appearance as Federal Reserve Chairman, as mandated by the Humphrey-Hawkins Bill.

Despite the length of the hearings which would have even tired out Bruce Springsteen, they were entirely civil, respectful and diminished in the use of political dogma and talking points. There may have even been some fleeting moments of constructive dialogue.

Normal people do that sort of thing.

But beyond that the market reacted in a straightforward way to Janet Yellen’s appearance and message that the previous path would be the current path. People, when functioning in a normal fashion consider good news to be good news. They don’t play speculative games trying to take what is clear on the surface to its third or fourth derivative.

Unfortunately, for those who like volatility, as I do, because it enhances option premiums, the lack of dysfunction and the more rational approach to markets should diminish the occurrence of large moves in opposite directions to one another. In the real world realities don’t shift that suddenly and on such a regular basis, however, the moods that have moved the markets have shifted furiously as one theory gets displaced by the next.

How long can dysfunction stay on vacation? Human nature being what it is, unpredictable and incapable of fully understanding reality, is why so many in need stop taking their medications, particularly for chronic disorders. I suspect it won’t be long for dysfunction to re-visit.

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).

Speaking of dysfunction, that pretty well summarizes the potash cartel. Along with other, one of my longtime favorite stocks, Mosaic (MOS) has had a rough time of things lately. In what may be one of the great blunders and miscalculations of all time, there is now some speculation that the cartel may resume cooperation, now that the CEO of the renegade breakaway has gone from house arrest in Belarus to extradition to Russia and as none of the members of the cartel have seen their fortunes rise as they have gone their separate ways.

In the interim Mosaic has traded in a very nice range after recovering from the initial shock. While I still own more expensively priced shares their burden has been somewhat eased by repetitive purchases of Mosaic and the sale of call contracts. Following an encouraging earnings report shares approached their near term peak. I would be anxious to add shares on even a small pullback, such as nearing $47.50.

One position that I’ve enjoyed sporadically owning has been MetLife (MET) which reported earnings last week. As long as interest rates are part of anyone’s equation for predicting where markets or stocks will go next, MetLife is one of those stocks that received a bump higher as interest rates started climbing concurrent with the announcement of the Federal Reserve;’s decision to initiate a taper to Quantitative Easing.

Cisco (CSCO), to hear the critics tell the story is a company with a troubled future and few prospects under the continued leadership of John Chambers. For those with some memory, you may recall that Chambers has been this route before and has been alternatively glorified, pilloried and glorified again. Currently, he has been a runner-up in the annual contest to identify the worst CEO of the year.

Personally, I have no opinion, but I do like the mediocrity in which shares have been mired. It’s that kind of mediocrity that creates a stream of option premiums and, in the case of Cisco, dividends, as well. With the string of disappointments continued at last week’s earnings report, Cisco did announce another dividend increase while it recovered from much of the drop that it sustained at first.

I’m never quite certain why I like Whole Foods (WFM). What this winter season has shown is that many people are content to stay at home any eat whatever gluten they can find rather than brave the elements and visit a local store for the healthier things in life. I think Whole Foods is now simply making the transition from growth stock to boring stock. If that is the case I expect to be owning it more often as with boring comes that price predictability that appeals to me so much.

This week’s potential dividend trades are a disparate group if you ignore that they have all under-performed the S&P 500 since its peak.

General Electric (GE) is just one of those perfect examples of being in the wrong place at the wrong time and perhaps not being in the right place at the right time. Much of General Electric’s woes when the market was crumbling in 2008 was its financial services group. Since the market bottom its shares have outperformed the S&P 500 by more than 50%, as GE has taken steps to reduce its financial services portfolio. Unfortunately that means that it won’t be in a position to benefit from any rising interest rate environment as can reasonably be expected to be in our future.

Still, coming off its recent price decline and offering a strong dividend this week its shares look inviting, even if only for a short term holding.

L Brands (LB) along with most of the rest of the retail sector hasn’t been reflective of a strong consumer economy. Having recovered about 50% of its recent fall and going ex-dividend this coming week I’m ready to watch it recover some more lost ground as its specialty retailing has appeared to have greater resilience than department store competitors.

Transocean (RIG) still hasn’t recovered from its recent ratings cut from “sector outperform” to “sector perform.” I’ve never understood the logic of that kind of assessment, particularly if the sector may still be in a position to outperform the broad market. However, equally hard to understand is the reaction, especially when the entire sector goes down in unison in response. Subsequently Transocean also received an outright “sell” recommendation and has been mired near its two year lows.

With a very healthy ex-dividend date this week I may have renewed interest in adding shares. While he has been quiet of late, at its latest disclosure, Icahn Enterprises (IEP) owned approximately 6% of Transocean and to some degree serves as a floor to share price, as does the dividend which is scheduled to increase to $3 annually.

However, as with L Brands, which also reports earnings on February 26, 2104, I would also consider an exit or rollover strategy for those that may want to mitigate earnings related risk that will present itself. Such strategies may include closing out the position below the purchase price or rolling over to a March 2014 option in order to have some additional time to ride out any storms.

There’s really not much reason to take sides in the validity of claims regarding the nature of Herbalife (HLF). It has certainly made for amusing theater, as long as you either stayed on the sidelines or selected the right side. With the recent suggestion that some on the long side of the equation have been selling shares this week’s upcoming earnings release may offer some opportunity, as shares have already fallen nearly 16%.

While the option market is only implying a 7.2% move in share price, the sale of a put can return a weekly 1% ROI even at a strike price 13.7% below the current price. That is about the largest cushion I recall seeing and does look appealing for those that may have an inclination to take on risk. I’m a little surprised of how low the implied price movement appears to be, however, the surprise is answered when seeing how unresponsive shares have been the past year upon earnings news.

Also reporting earnings this week is Groupon (GRPN), a stock that has taken on some credibility since replacing its one time CEO, who never enjoyed the same cycle of adulation and disdain as did John Chambers. While the “Daily Deal” space is no longer one that gets much attention, Groupon has demonstrated that all of the cautionary views warning of how few barriers to entry existed, were vacuous. Where there were few barriers were to exit the space.

In the meantime the options market is predicting a 13.9% move related to earnings, while a weekly 1.3% ROI could possibly be achieved with a price movement of less than 19%. While that kind of downward move is possible, there is some very strong support above there.

Finally, there is the frustration of owning AIG (AIG) at the moment. The frustration comes from watching for the second successive earnings report shares climb smartly higher in the after-hours and then completely reverse direction the following day. I continue to believe that its CEO, Robert Benmosche is something of a hero for the manner in which he has restored AIG and created an historical reference point in the event anyone ever questions some future day bailout of a systemically vital company.

None of that hero worship matters as far as any proposed purchased this coming week. However, shares may be well priced and in a sector that’s ready for some renewed interest.

Traditional Stocks: AIG, Cisco, MetLife, Whole Foods

Momentum Stocks: Mosaic

Double Dip Dividend: General Electric (ex-div 2/20), L Brands (ex-div 2/19), Transocean (ex-div 2/19)

Premiums Enhanced by Earnings: Groupon (12/20 PM) , Herbalife (2/18 PM)

Oct132013

Weekend Update – October 13, 2013

TheAcsManWeekend Update

This week I’m choosing “risk on.”

For about 6 months I’ve been overly cautious, having evolved from a fully invested trader to one starting most weeks at about 40% cash reserves and maintaining about 25-30% by week’s end after initiating new positions.

Despite the belief that something untoward was right around the corner, the desire for current income through the purchase of stocks and the sale of options has been strong enough to temper the heightened caution on an ongoing basis for much of the past half year.

With uncertainty permeating the market’s mood, eased by late last week’s glimmer of hope that perhaps a short term debt ceiling increase may be at hand, “risk on” isn’t the most likely of places to find me playing with my retirement funds, but that’s often where it’s the most interesting, especially if the risk is one of perception more than one of probability.

While we may all have different operational definitions of what constitutes “risk” I consider beta, upcoming known market or stock moving events, the unknown, past price history and relative performance. Tomorrow the formula may be entirely different, as may tolerance for risk or willingness to burn down the cash reserves.

However, trying to dispassionately look at the current market and all of the talk about a correction, one metric that I’ve been using for the past few months reminds me that we’re doing just fine and that risk is still tolerable, even in the context of uncertainty.

Although I continue to believe that we can’t just keep moving higher, I’m not quite as dour when seeing that we are essentially at the same levels the S&P 500 stood on May 21, 2013 and June 18, 2013.

Those dates reflect relative high points, each of which gave way to the FOMC minutes or a press conference by Federal Reserve Chairman Bernanke.

In fact, we’re actually at a higher level than either of those two previous peaks, now trailing only the all time high of September 18, 2013 by less than 1.5%. So all in all, not too bad, especially since that 50 Day Moving Average that was breached by the S&P 500 earlier in the week was quickly remedied and the 200 Day Moving Average remains relatively distant.

From May 21 to June 5, then from June 18 to June 24, August 2 to 27 and finally September 19 to October 6, we have gone down a combined 16.7% in a cumulative trading period of 13 weeks or the equivalent of a quarter.

What more do you want? Armageddon?

For the past few months I’ve been focusing increasingly on new positions that have been trading below the May and June highs and preferably under-performing the S&P 500 at the same time. However, within that framework I’ve focused increasingly on near term dividend paying stocks and those more likely to fall into the “Traditional” category, typically low beta and attempting to avoid any known short term risk factors.

That has meant fewer “Momentum” positions and fewer earnings related trades. But up until Friday’s continuation of the hope induced rally, I had a number of “Momentum” stocks on my radar, all of which I had already owned and anticipated being assigned, but ripe for re-purchase in the pursuit of risk heightened premiums, but with less risk than readily apparent.

As it turned out Abercrombie and Fitch (ANF) got caught up in The Gaps’ same stores problem and whip-sawed in trading and I ultimately rolled over the position. Meanwhile, Mosaic (MOS) fell as investors were somehow surprised that Potash (POT) adjusted its guidance downward to reflect lower prices stemming from a collapse of the cartel.

As it would turn out Phillips 66 (PSX) was assigned, but soared, making it too expensive for repurchase, but that can change very quickly.

This week there are two deadlines. One is the end of the October 2013 option cycle, but the other is October 17, 2013, which Treasury Secretary Jack Lew proclaimed to be the day after which none of his “tricks” would be able to sustain the Treasury’s count and be able to pay our bills.

In a word? That’s when we would see the United States go into default on its obligations.

Under Senate questioning last week Lew acquitted himself quite well and demonstrated that he wasn’t very patient with regard to suffering fools. Uncharacteristically there appeared to be less self-aggrandizing statements in the form of questions coming from the committee members.

It may not be entirely coincidental that minutes after Lew’s appearance, House Speaker Boehner’s office announced that the Speaker would be making a statement reflecting upcoming meetings with the Administration, reflecting the possibility of some agreement.

For those that remember past such budgetary crises, you’ll recall that the market typically reacted to the hopes and then crashed along with the dashed hopes, in an eerily rhythmic manner.

On Saturday morning, word came from Eric Cantor (R-VA) that President Obama rejected the House offer. Unusually, GOP leadership skipped the opportunity to step up to the microphone to push their version of righteousness.

This week, in anticipation of the possibility of dashed hopes as may come from an appearing setback, my definition of “risk on” includes positions already trading at depressed levels.

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).

For dividend lovers this week offers Footlocker (FL), Colgate (CL) and Caterpillar (CAT). All under-performing the S&P 500 YTD.

Colgate, however, is higher than its June 2013 high and has a surprisingly high beta, despite the perceived sedate nature of being a consumer defensive stock. Perhaps that combination makes it a “risk on” position for me. Coupled with a dividend that is lower than the overall S&P 500 average it may not readily appear to be worth the time, but then again, how much additional downside should accrue from a US default?

I already own two lots of Footlocker and three is generally my limit, as it precluded including Mosaic in this week’s recommendations. Footlocker doesn’t report earnings until the December 2013 option cycle, so a little bit of risk is removed, although in the world of retail you are always at risk for any of your competitors that may still report monthly comparison data, just look at the pall created by The Gap (GPS) and L Brands (LTD) this past week.

While a pall was created by L Brands and it is higher than those referenced high points it is now down a tantalizing 10% in a week’s time. I’ve already owned shares on five separate occasions this year and have been waiting for an opportunity to do so again. It is a generally reliably trading stock that had simply climbed too far and for a month’s time traveled only in a single direction. That’s rarely sustainable. The combination of premium and dividend makes L Brands worthy of consideration in a sector that has been challenged of late. The lack of weekly options makes ownership less stressed by day to day events for those otherwise inclined to like weekly options.

Not to be outdone, Joy Global (JOY) is a stock that’s been worth owning on 7 distinct occasions this year. It has consistently traded in tight range and has been able to find its way home if temporarily wandering. High beta, well underperforming the S&P 500 and lower than both of the two earlier market high points continues to make it an appealing short term selection, especially with earnings still so far off in the future.

I’ve been waiting to add shares of Caterpillar for a while, having owned it only four times in 2013, as compared to nine occasions in 2012. However, the upcoming dividend makes another purchase more likely. Despite the thesis advanced by short seller Jim Chanos against Caterpillar, it has, thus far continued to maintain its existence in a tight trading range, making it an excellent covered option candidate.

JP Morgan Chase (JPM) reported its earnings this past Friday and reported a loss for the first time under Jamie Dimon’s watch. Regardless of your position on the merits of the myriad of legal and regulatory cases which have resulted in spectacular legal fees and fines, JP Morgan has acquitted itself nicely on the bottom line. While there is still unknown, but tangible punishment ahead, for which shareholders are doubly brutalized, I think a sixth round of share ownership is warranted at this price level.

Williams Sonoma (WSM) was one of the first stocks that I purchased specifically to attempt to capture its dividend and have it partially underwritten by an option premium. It fell a bit by the wayside as weekly options appeared on the scene. However, as uncertainty creeps into the market there is a certain comfort that comes from a monthly or even longer term option contract. WHile it has come down nearly 15% in the past two months and is now priced lower than during the May and June market highs, Williams Sonoma’s dirty little secret is that it has still outperformed the S&P 500 YTD by a whisker.

SanDisk (SNDK) had its eulogy written many years ago when flash memory was written off as being simply a commodity. Always volatile, especially in response to earnings, which have seen plunges on each of those last two occasions, now may not be the time to believe that “the third time is a charm,” although I do. Despite that, my participation, if any, would be in the sale of out of the money puts, as the options market is implying a move of approximately 7% and that may not be aggressive enough, given past history.

FInally, Align Technology (ALGN) reports earnings this week. In the business of making orthodontic therapy so easy that even a monkey could do it, the company’s prospects have significantly improved as its treatment solutions are increasingly geared toward children. That’s important because their traditional customer base, adults, views orthodontic treatment as discretionary and, therefore, represents an economically sensitive purchase. But most anyone with kids knows that orthodontic treatment isn’t discretionary at all. It can be as close to life and death as you would like to experience. This kind of orthodontic care represents a new profit center for many dental offices and a boon to Align Technology. While I expect good earnings numbers, shares have already had a 13% price decline in the past two weeks. I would most likely consider entering a position by means of selling out of the money puts. In this case for a single week’s position, if unassigned, as much as a 12% price drop could still yield a 1.3% ROI, as the options market is implying a 9% earnings related move.

Traditional Stocks: JP Morgan, L Brands, Williams Sonoma

Momentum Stocks: Joy Global

Double Dip Dividend: Caterpillar (ex-div 10/17), Colgate (ex-div 10/18), Footlocker (ex-div 10/16)

Premiums Enhanced by Earnings: Align Technology (10/17 PM), SanDisk (10/16 PM)