Sep202014

Weekend Update – September 21, 2014

Weekend Update

Somewhere along the line most of us have tried the proven strategy of hanging out with people who were uglier or stupider than we perceived ourselves to be, in order to make ourselves look better by comparison.

There’s nothing really wrong in admitting that to be the case. It’s really the ultimate in victimless opportunism and can truly be a win-win for everyone involved.

The opportunist hopes to break away from that crowd and the crowd feels elevated by its association, or so goes the opportunist’s rationalization.

Markets are no different and this past week was as good of an example of that tried and tested phenomenon as you might ever find. In this case, the opportunist was the US equity market, but it really can rarely be a win-win situation.

Bonds, currencies and precious metals?

Ugly and stupid.

There were three potentially market rocking stories this week that could have struck fear in stock investors, but neither an upcoming FOMC statement, a pending independence referendum in Scotland, nor history’s largest IPO could do what common sense said should occur, particularly with liquidity being threatened from multiple directions.

You can probably thank the less than attractive alternatives for making stocks look so good to investors.

U.S. equity markets just did what we’ve become so accustomed to, other than for brief moments over the past two years, as the week ended on yet another new record high with the DJIA moving higher each day of the week.

Last week was like a perfect storm, except that the winds blew from all different directions during the latter half of the week.

The week started a bit ominously, but after a while it was clear that selling was narrow in scope and appeared to be limited to profit taking in some of the year’s big gainers, ostensibly to raise cash for any hoped for Alibaba (BABA) allocation, that was unlikely to materialize for most retail investors.

But when the competition is weak, it doesn’t take much to shine and stand out from the crowd. With the week’s first challenge being whether the FOMC was going to accelerate their time table for raising interest rates, all it took was The Wall Street Journal’s Jon Hilsenrath expressing the belief that the phrase “considerable time,” would remain intact to allow stocks to stand out from the crowd.

Never mind that Hilsenrath had yet to demonstrate an inside track to the Yellen Federal Reserve, as he seemed to have had during the Bernanke era. Also forget about the fact that the FOMC has been using that phrase since March 2014 and sooner or later it has to give way to the relization that “considerable time” has already passed. That’s best left to deal with at some other time in the future.

Neither of those were important as all of the other options were looking worse.

With the outcome of the independence referendum being far from certain stocks had been smart enough not to have predicted the eventual outcome and put itself in jeopardy if independence was ratified. Instead the risk was borne by currencies and foreign stock markets.

Precious metals? Who in the world has been putting new money into precious metals of late?

So stocks looked great, but after getting a makeover last week, suddenly the crowd may not look so unappealing. Even precious metals may find some suitors because they just don’t want to chase after stocks and wind up getting disappointed.

Who knew that the high school experience could have taught so much about the behavior of stocks?

The behavior of stocks this week, was also similar to how high school “A-listers” may have acted when pulling in someone from the “losers.” The welcome isn’t always a full and complete embrace and somewhat circumspect or still maintaining an aura of superiority.

^SPX ChartIn this case the “A-list” DJIA greatly outperformed other major indexes this past week as the advance didn’t fully embrace a broader selection of stocks.

Despite last week’s nice gains against the odds, in this perfect storm, everything went right. Yet the embrace was with less conviction than it appeared.

That doesn’t mean that I want to go and join the losers, but I may be circumspect of the superficial appearance of those “A-listers” as next week is about to begin.

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

By comparison, Yahoo (YHOO) looks even less appealing now that it has given up a portion of its stake in Alibaba.

I purchased a small Yahoo position late this past Thursday, when noticing that the in the money option premium was rising even as shares were declining.

The following day I closed those positions shortly after Alibaba started trading as the gain in shares wasn’t matched by a similar gain the premium, resulting in a net credit greater than allowing the position to be assigned.

The funny thing was that the position never would have been assigned as reportedly Yahoo shares were being used a proxy to shorting Alibaba and share price went substantially lower, as a result, even while the value of Yahoo’s remaining stake in Alibaba appreciated by about an additional 37% from the IPO price.

While that kind of short selling strategy may continue, Yahoo is also reportedly becoming the focus of attention from other sources, while it may still stand to benefit from its continuing Alibaba position.

With lots of attention being directed toward its still unproven CEO, Marissa Mayer, as to what she will do with the IPO proceeds, I expect that the Yahoo option premium will remain elevated as so many factors are now coming into play.

While I like those prospects and expect to re-purchase shares, I don’t think that I’ll be allocating too much to this position because of all of the uncertainty involved, but do like the evolving soap opera.

When it comes to comparisons, there’s little that Blackberry (BBRY) can do to make itself look appealing. Where exactly can it hang out to be able to stand out in the crowd and get the attention of those that vote on popularity? Still, under the leadership of John Chen, Blackberry has ended its slide toward oblivion and at least gives appearances of now having a s
trategy and the ability to execute.

Blackberry reports earnings this coming week and thanks to a lift provided by a Morgan Stanley (MS) analyst out-performed the NASDAQ 100 for the week. 

The option market has assigned an implied move of 9.7% for the coming week and at Friday’s closing price a 1% ROI could be obtained even if shares fell by 13.7%. That kind of comparison makes Blackberry look good to me.

While maybe not looking good in comparison to its chief competitor, CVS Health (CVS) on the basis of its self proclaimed status of the guardians of the nation’s health after belatedly eliminating the sale of cigarettes from its stores, Walgreen looks food to me. That’s especially the case now that it seems to be settling into a trading range after it, too, belatedly, decided against a tax inversion strategy.

Walgreen, as with many other stocks trading in a range, but occasionally punctuated by substantive price moves related to earnings or other events, offers a nice option premium that may exceed the current risk of share ownership.

Until recently the comparison to gold during the summer worked out well for Market Vectors Gold Miners ETF (GDX), having out-performed the SPDR Gold Trust (GLD). More recently, however, the Miners Index has had an abysmal month of September and is approaching a 2 year low. However, its beta is still quite low and shares are now trading below their yearly mid-point range, while offering a premium that may offset what I believe to be limited downside risk.

I don’t look at ETF vehicles very often, but this one may be right in terms of timing and price. The availability of expanded weekly options, strike prices in $0.50 increments and manageable bid-ask spreads makes this potentially a good candidate for serial rollover if it finds some support and begins trading in a range.

Fastenal (FAST) is one of those stocks that may not have much glamour and may not stand out sufficiently to get noticed. To me, though, it is a superstar in the world of covered options as it has traded reliably within a range and consistently returned to the mid-point of that range, where it currently resides.

Having rolled over shares this past Friday after a mid-session drop below the strike, I watched as it recovered enough to close above the strike. Had it been assigned, as originally thought would occur, I knew that at its current price I wanted to re-purchase shares. Instead, now I want to add shares, but being mindful that it will report earnings in just a few weeks.

Despite Alibaba’s successful IPO, it’s still difficult for me to have too much confidence in stocks that have either a heavy reliance on the Chinese economy or are Chinese companies. Fortunately or unfortunately, I do make exceptions for both situations, although far fewer for the latter.

Joy Global (JOY) has extensive interests in China and is very dependent on continued growth of the Chinese economy, which is difficult to measure with reliability. Of course with our own GDP being reported this coming Friday, we know all too well, based on the recent pattern of revisions, that data should always be viewed warily.

With some weakness in this sector, witness the recent drop in Caterpillar (CAT), Joy Global is approaching correction territory over the past month and is beginning to once again look appealing, not having owned shares in nearly a year. These shares can be volatile, but with patience and an inner sense of serenity, the option premiums can atone for moments of anxiety.

Despite still holding a very expensive lot of Coach (COH) shares for far too long, it is still one of my favorite stocks over the longer term time frame, having owned it on 21 occasions over 25 months.

Smarting from the pain of that lot I still hold, it took a while before finding the courage to purchase an additional lot, but that recent lot was assigned this past week and I’m ready to add another in its place, as it seems that Coach has found some support at its current level. In the past Coach has been an excellent covered option trade when it traded in a range. The reason for it offering attractive option premiums was due to its predictably large earnings related moves. However, in the past, it had a wonderful habit of its price reverting to the mean.

If so, I don’t mind executing serial trades, reaping premiums and the occasional premium to help offset the existing paper loss. As the luster from Kors (KORS) seems to be waning there is also less populist battering of Coach, which remains very popular internationally. It’s commitment to maintaining its dividend makes it easy to hold shares while awaiting what I hope is an inevitable, albeit, unusually slow recovery.

Whole Foods (WFM) is another of those companies that I own that is currently well below its purchase price. As with Coach, I eventually found the courage to purchase more shares and have done so 4 times in the past 3 months, as it appears to have also found some price support.

Recently its premiums have become more attractive as the company has become a topic of speculation regarding activist intervention. While I don’t think there’s too much to come of that speculation, I do believe that shares are poised to continue climbing and hopefully in a slow and sustained manner. It goes ex-dividend this week and while not the most generous of dividends it does supplement the potential return offered by also selling call options on shares sufficiently to make it an attractive consideration.

Finally, Oracle (ORCL) is back in the news and in the last couple of years that hasn’t really been a good thing. After a number of disappointing earnings reports over that time, its Chairman and CEO, Larry Ellison, blasted those around him, finding plenty of places to lay blame. His absence from last year’s earnings report and conference in order to attend Oracle Team USA’s effort in the Americas Cup race struck me as inappropriate.

Now the news of Ellison stepping down as CEO, while retaining the Chairmanship, preceded this most recent quarter’s disappointing earnings. It also  was a prelude to the announcement of a power sharing plan with the appointment of co-CEOs, because we all know how much high achievers like to share power and glory.

Yet, with this past Friday’s price decline in Oracle it is again becoming a potentially attractive purchase candidate, particularly with an upcoming, albeit modest dividend coming on October 6, 2014.

That happens to be a Monday, and I wish there were more such Monday opportunities for those stocks that I follow. Those are often the best of the “Double Dip Dividend” selections, as early assignment to capture the dividend must occur on the preceding Friday and typically means receiving an entire week’s option premium, while being able to reinvest the exercise proceeds to generate even more income.

 

Traditional Stocks: Fastenal, Market Vectors Gold Miners ETF, Oracle, Walgreen

Momentum: Coach, Joy Global, Yahoo

Double Dip Dividend: Whole Foods (9/24 $0.12)

Premiums Enhanced by Earnings: Blackberry (9/23 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.

Sep182013

Ellison Fiddles While Oracle Burns

Articles

Maybe I belong to a different generation, but I have certain expectations regarding behavior and responsibility, especially when other’s are your subordinates and maybe even extending to your shareholders.

As a short term holding I’ve always looked to Oracle (ORCL) as a potential addition to my portfolio that relies on the use of a covered call strategy.

While I have often thought of buying Oracle shares, in 2013 I’ve only done so twice, this most recent occasion being in advance of its earnings report. In hindsight, however, I wish I had done so much more frequently because of how mediocre its price performance has been.

As a covered option trader I like mediocrity, at least when it comes to share price. That’s the perfect price behavior to be able to buy shares and sell calls or simply sell puts and collect premiums, sometimes dividends and sometimes small capital gains on shares with relatively little fear of large price swings downward. With little movement in underlying shares you can do so over and over again.

Oracle was truly perfect, that is of course, as long as you ignore the two earnings reports prior to Wednesday evening’s numbers being released.

Any company can see its shares tumble after releasing earnings or providing guidance. In fact, it doesn’t even take bad numbers to do so. All it takes is for disappointment or unmet expectations to permeate the crowd. After all, the saying “buy on the rumor and sell on the news” got its start in the aftermath of what would seem like paradoxical behavior from investors.

So I think a company can sometimes be excused for what happens to its shares after earnings.

What I have a harder time excusing is the excoriating finger pointing that came on that occasion six moths ago when Oracle shares plummeted in what appeared to be a company specific issue, as its competitors didn’t fair as poorly in their reports and didn’t suffer similar market misfortunes.

Larry Ellison, the CEO, blamed his salesforce for the quarter. He cited their lack of urgency which allowed third quarter sales to slip into the fourth quarter. I don’t really now how Oracle’s sales force is compensated, but deferring sales is not a typical strategy.

When the next earnings report was released this time Ellison blamed Oracle’s performance on the poor global economic environment, stating “It was clearly an economic issue, not a product, competitive issue,” during the ensuing conference call. That, of course, despite the fact, that once again the competition seemed to not experience the same issues. I guess those sales that previously had been said to slip into this quarter remained slipped.

Surely they would show up for the next earnings report.

AS CEO it’s probably easier pointing fingers at others. That’s certainly the strategy that ruling despots use when there’s a need to deflect criticism or place blame to account for the wheat crop shortage.

At the very least Ellison has at least been visible, perhaps too visible. The world learned of his purchase of 97% of the Hawaiian island, Lanai and wondered at that point whether his attention would be diverted from the job of running Oracle, notwithstanding the presence of its President, Mark Hurd.

He was all too visible recently when referring to Google (GOOG) CEO Larry Page as “acting evil” and questioned the ability of Apple (AAPL) to survive in the absence of Steve Jobs.

In a way, perhaps that kind of presence is preferable to the CEO that fails to make any statements following tragic events on one of his cruise liners, not once, but on two occasions. Maybe Ellison won some new customers over with his goodwill.

But here we were, on the day that Oracle was primed to report earnings yet again. For my money, and I did buy shares on Monday, it was inconceivable to me that someone with as much at stake, especially on a reputational level would allow a third successive disappointing report. Whether by slashing costs, financial optics or perhaps by virtue of those sales that slipped from one quarter to the next and then to this one, I was certain that there would be no repeat of the embarrassing price slides the last two times.

Funny thing, though.

Instead of being an integral part of the earnings report and guidance, Larry Ellison was cheering on the crew of Oracle Team USA in a losing effort at today’s America’s Cup race.

Again, call me old fashioned, but I like to see my CEOs involved in what may have a substantive effect on my fortunes.

The good news is that Oracle didn’t have a meltdown after reporting its earnings. In fact shares went higher until reversing the course when the conference call started and the new disappointments were made known, including guiding significantly lower growth than had been expected.

To give Ellison some benefit of the doubt, perhaps he knew that the initial response would be relatively muted and his presence was unnecessary. Besides, was he going to be able to have credibility going back to the well again and blaming macroeconomic business conditions?

Not with me, he wouldn’t.

With two days to go until expiration of the weekly options I had sold I expect to be able to extricate myself from the position relatively easily and show a profit for the effort.

In all likelihood I’ll also look for any other opportunity to purchase shares because sometimes mediocrity is the gift that just keeps giving. As long as Ellison will be fiddling and paying attention elsewhere, I don’t mind an Oracle that simply treads water and stays in place, although I’m sure that the Larry Ellison of old would never have accepted or allowed that kind of an existence.

Herb Greenberg, of TheStreet.com is once again soliciting nominations for the worst CEO of the year. As far as I know the rules don’t exclude absentee CEOs. While Oracle is only trailing the S&P 500 by approximately 19% YTD and is certainly performing better than other companies with less than capable management, the shame factor is worthy of your vote.

Sep142013

Weekend Update – September 15, 2013

Weekend Update

Month after month of seeing market gains finally came to an end in August. The streak had started in November 2012 and for those who are prone to remember oddities, we even had a string of 20 consecutive gaining Tuesdays during that span.

Of course we also eclipsed the 2007 Dow Jones and S&P 500 highs and subsequently did so on repeated occasions, all while “Chicken Littles” like me kept waiting for the correction that never came.

The small head fake correction that began near the end of May was barely a blip and was quickly erased as more new highs were established, but the trading patterns of August seemed to indicate that perhaps the rally was getting tired and the market not only began sputtering, but also lost ground as Syrian related tensions were in the air.

Anxious to see a modest correction so that I would finally have something constructive to do with the cash I had been raising, I wasn’t terribly happy with what would come in September, with the first seven trading days having seen gains.

Not only did they make gains, but there were three consecutive triple digit gains. Adding insult to injury was the root cause of those triple digit gains.

While avoiding the use of military force, at least in the near term, is somewhat comforting, the very idea that a Russian proposed plan could avert military action against Syria was about as implausible as anything that occurred in the 20th or 21st centuries, with the possible exception of the Russian President speaking directly to American citizens through an op-ed piece in the New York TImes (NYT).

Russian peace plan? Can those words even possibly all be in a single paragraph?

But with fear centered around uncertainty regarding military action against Syria temporarily tabled, the market ignored August and also ignored the historical nature of Septembers past. By Friday morning, just seconds after the opening bell, all of August’s losses had been recovered.

Somehow, I am neurologically incapable of saying “Thank you, Vladimir.”

Instead, the increasingly nervous part of me wonders what there is that awaits that will continue to send markets higher? Are there unseen catalysts or are there now more opportunities for disappointment, particularly if Russian efforts, inspired by an off the cuff remark by Secretary of State Kerry, prove to be inadequate?

I’ve been asking questions in a similar vein for months now, but the answer has always been in the affirmative, even if the catalysts weren’t always apparent.

Of course, now there’s also the question of the market’s reaction to the expected announcement of the nomination of Lawrence Summers as the next Federal Reserve Chairman. The rumor that such an announcement would come today was denied, but that should come as no surprise, as President Obama had his heart set on doing so by attaching a banner to a Tomahawk missile.

If Syria fails to deliver a market correction and neither fear of the “Taper” nor the nomination of Summers can do so, at least we will have Congress back and fully engaged so that a new round of budget crises can at least allow the market to bounce up and down, which is far more healthy for someone relying on a covered option strategy. If that happens, I can hold my head up high and point to a momentary drop lower and sat “See? That correction.”

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’ve only opened a limited number of new positions in the last few weeks and don’t anticipate seeing that pattern change this week, unless there is a substantive near term correction to last week’s price increases. Those increases, for example, are the reason why I have no Double Dip Dividend selections this coming week, as the risk of experiencing some price pullbacks outweighs the benefits of garnering option premiums and dividends. As it is, instead of the usual number of potential selections, this week’s list contains only 5 names.

Certainly a controversial place to begin looking in the new week is Apple (AAPL). I purchased shares last week following the large drop on Wednesday when disappointment began to settle in for varied reasons. The small recovery that I was expecting never really came, but instead of being disappointed by the inability to quickly close my position, I think that there is simply continued opportunity to pick up additional shares. However, as opposed to the rare instance of having purchased shares and not immediately having sold calls, I do plan to do so this time around if adding shares.

Apple, while not necessarily making significant changes to its product line is making significant changes to the way it conducts its business. From a trade-in program, to less expensive models, to not taking pre-orders on the upcoming iPhone 5S, to dividends and buybacks, they are shaking up their daily approach to existence on all fronts. From my vantage point the short term emphasis is that “cash is king” and that share price matters. I especially like Tim Cook’s philosophy that market share isn’t as important as having enough money to be in control of one’s destiny. The recent product announcements should see to it that the cash keeps pouring in and helps to secure that destiny.

Continuing with the controversial theme is Cliffs Natural Resources (CLF). I had written about the possibility of adding shares recently, but did not do so. Instead, I continued selling calls on a lower priced lot of shares to try and continue to offset substantial paper losses from older lots. That’s a slow process but I think at this current level the process can be speeded up by adding more shares. Highly levered to economic news from China does add to the risk of ownership, but Cliffs has been demonstrating some price stability at this level.

I may as well add to the controversy with Phillip Morris (PM). Whatever your opinions are about ownership of a company that directly results in countless premature deaths, it’s hard to overlook their move to increase the dividend and the reasonably narrow range in which shares trade. Combine those attributes with an appealing option premium and you have a combination that’s hard to resist and doesn’t even require nicotine to keep you hooked.

They say that there’s no such thing as bad publicity, although JP Morgan (JPM) may disagree. However, if you want to see the poster child for resilience you don’t have to look much further than this company. After an avalanche of bad news, having inherited the burden from Goldman Sachs (GS), JP Morgan has somehow been able to keep its share price respectably positioned. This week it announced plans to commit nearly $6 Billion toward legal defenses and compliance. In addition to an option premium that provides some comfort, shares will be ex-dividend during the October 2013 option cycle so I may consider using a longer term option sale and would actually welcome early assignment.

Finally, while earnings season is set to begin again in just a few weeks, Oracle (ORCL) is a laggard and reports this week. With the upcoming report the company will have had six months to make some changes, whether substantive or purely optical, to create a more positively received report. Following two successive negative reports that were not well received by the market, I think that its inconceivable that Larry Ellison would allow his name to be badly tarnished again by anything other than his own words and actions. No doubt that he is unhappy with share performance since that first disappointment.

While I usually like to consider earnings related trades on the basis of selling deep out of the money puts, Oracle may work equally well as an outright purchase and sale of calls. In the event of another price meltdown I would not go out of my way to greet Ellison if you see him in Lanai, although I don’t believe the police department was included with the sale of the island.

Traditional Stocks: JP Morgan Chase, Phillip Morris

Momentum Stocks: Apple, Cliffs Natural Resources

Double Dip Dividend: none

Premiums Enhanced by Earnings: Oracle (9/11 PM)

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.

Disclosure: I am long AAPL, CLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may initiate positions, add shares or sell puts in AAPL, CLF, JPM, ORCL and PM

Aug242013

Weekend Update – August 25, 2013

Weekend Update

You’re only as good as your earnings. Having stopped making an honest living a little on the early side, I still need to make money, or otherwise my wife would insist that I do something other than watch a moving stock ticker all day.

Since there’s far too much competition on the highway exit near our home and my penmanship has deteriorated due to excessive keyboard use, I’ve come to realize that stock derived earnings, predominantly from the sale of options and accrual of dividends, are the only thing keeping me from joining those less fortunate.

I’m under no delusions. I am only as good as my earnings, just as Bob Greifeld, CEO of NASDAQ (NDAQ) should be under no delusions, as he is only as good as his response to the most recent NASDAQ failing.

On that count, I may have the advantage, although he may have better hygiene and a wardrobe that includes a clean hoodie.

There was a time that we thought of stocks in very much the same earnings centric way. If earnings were good the stock was good. There was a time that we didn’t dwell quite as much on the macro-economic data and we certainly didn’t spend time thinking about Europe or China.

However, after this most recent earnings season, which will come to an end a few days before the next season is kicked off on October 8, 2013, maybe it’s a good thing that it’s only during the otherwise slow summer months when other news is sparse, that we focus on earnings.

If you’ve been paying attention, this hasn’t been a particularly encouraging month, especially as far as retail sales go, which are about as good a reflection of discretionary spending as you can find. Beyond that, listening to guidance can make shivers run down one’s spine as less than rosy earnings pictures are being painted for the future. The very future that our markets are supposed to be discounting.

As it is the S&P 500 is now about 0.3% below the earlier all time high that was hit on May 21, 2013. That in turn gave way to a rapid 5.7% fall and equally rapid 8.6% recovery to new highs. By all historical measures that post-May 21st drop was small as compared to the gains since November 2012 and we are right back to that level.

Perhaps once summer is over and our elected officials return to Washington, DC, not only would they have an opportunity to see me at a highway exit, but they may also get back to doing the things that create the dysfunction that makes earnings less salient.

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

Most of the positions considered this week are themselves lower than they were at the low point following the May 21st peak and have underperformed the S&P 500 since that time. For the moment, as I contribute to cling to the idea that there will be some additional market weakness, my comfort level is increased by focusing on positions that don’t have as much to fall.

I’ve been anxious to buy either Cisco (CSCO) or Oracle (ORCL) ever since Cisco’s disappointing earnings report. During more vibrant markets a drop in the share price of an otherwise good company would stand out as a buying opportunity. However, recently there has been more competition among those companies suffering precipitous earnings related price drops. While striving to keep my cash reserves at sufficient levels to allow me to go on a wild spending spree, I’ve resisted opportunities in CIsco and Oracle. Both, however, are getting more and more appealing as their prices sink further.

Oracle will report its earnings right before the end of the September 2013 option cycle and I have a very hard time believing that it could be three disappointments in a row, especially after some high profile remarks by CEO Larry Ellison regarding leadership at Apple (AAPL) that could come back to haunt him, even if only in terms of comparative share performance.

A technology company that always intrigues me, if at the price point relative to its option contract strikes, is Cypress Semiconductor (CY). It’s products and technology are quietly everywhere. However, its CEO, T.J. Rodgers has become precisely the opposite, as he is increasingly appearing in the media and offering political and policy opinions that make you wonder whether he is getting detached from the business, as perhaps may be said of Ellison. In Cypress Semiconductor’s case I think the business is small and focused enough that it can withstand some diversions. It is one of the few positions that has outperformed the S&P 500 since May 21st.

Among companies reporting earnings this week is salesforce.com (CRM), which also has Larry Ellison connections. the most recent of which is a great example of how business and strategic needs may trump personal feelings. For those who would innocently suffer collateral damage otherwise, that is the way it should be, as two companies seek to have the sum of their parts create additional value. While I do own shares of salesforce.com, I would be inclined to consider the sale of puts as a means to add additional shares and achieve an earnings stream of 1% for the week while awaiting the market’s reaction to earnings. My only hesitancy is that the strike at which that return can be achieved as more close to the strike of the implied move downward than I would ordinarily like.

Having recently lost shares of Eli Lilly (LLY) to early assignment in order to capture its dividend, I’ve wanted to re-purchase shares. Along with Bristol Myers Squibb (BMY) that I have been wanting to add for a while, they both offer attractive option premiums and are both 5% below their May 21st prices, which I believe limits their short term risk, during a period that I prefer to be somewhat defensive. Additionally, Bristol Myers offers extended weekly options that can be used as part of a broader strategy to attempt and stagger option expiration dates and perhaps infusions of cash back into portfolios for new purchases.

Sinclair Broadcasting Group (SBGI) is a local television broadcasting powerhouse that just purchased the important Washington, DC ABC affiliate. But it is far more than a local presence, as it has quietly become the nation’s largest operator of television stations, barely 4 years after fears of bankruptcy. Of course its recent buying spree may put pressures on the bottom line, but for now it is coming off a nearly 8% earnings related price decline and goes ex-dividend this week. Both of those work for me.

JP Morgan (JPM) which is increasingly becoming the poster child for everything wrong with big banks, at least from the point of view of regulators and the Department of Justice, finally showed a little bit of price stability by mid-week. Although I don’t know how any initiatives directed toward JP Morgan will work out, I’m reasonably sure that talk of looking at Jamie Dimon as a potential Treasury Secretary won’t be rekindled anytime soon. At current price levels, however, I think shares warrant another look.

While I’m not a terribly big fan of controversy, I think it may be time to publicly proclaim support for Cliffs Natural Resources (CLF). Having suffered through ownership beginning prior to the dividend cut, it has been an uncomfortable experience, ameliorated a bit by occasional purchase of additional shares and sacrificing them for their option premiums. Beginning with a report approximately 6 weeks ago that China had purchased a massive amount of nickel in the London commodity market, Cliffs has been slowly showing strength that may suggest demand for iron ore is increasing. Held hostage to our perceptions of the health of the Chinese economy, which can vary wildly from day to day, Cliffs’ share price can be equally volatile, but I believe will be rewarding for the strong of stomach.

Finally, Abercrombie and Fitch (ANF) was widely criticized as no longer being “cool.” That suits me just fine, figuratively, but not literally, as I resist wearing anyone’s logo with compensation. However, after joining other teen retailers in receiving earnings related punishment, I sold puts on its shares and happily saw them expire. Long a favorite stock of mine on which to generate option premium income, I think it’s at a price level that may offer some stability even with a demographic customer base that may not offer the same stability. This has been a great company to practice serial covered call writing, as long as you have a parallel strategy during the week of earnings release. In this case, that leaves three months of evaluating opportunities and perhaps even receiving a dividend before the next quarterly challenge.

Traditional Stocks: Bristol Myers Squibb, Cisco, Cypress Semiconductor, Eli Lilly, JP Morgan, Oracle

Momentum Stocks: Cliffs Natural Resources

Double Dip Dividend: Abercrombie and Fitch (ex-div 8/29), Sinclair Broadcasting (ex-div 8/28)

Premiums Enhanced by Earnings: salesforce.com (8/29 PM)

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.

 

Aug92013

Weekend Update – August 11, 2013

Weekend Update

I like to end each week taking a look at the upcoming week’s economic calendar just to have an idea of what kind of curveballs may come along. It’s a fairly low value added activity as once you know what is in store for the coming week the best you can do is guess about data releases and then further guess about market reactions.

Just like the professionals.

That’s an even less productive endeavor in August and this summer we don’t even have much in the way of extrinsic factors, such as a European banking crisis to keep us occupied in our guessing. In all, there have been very few catalysts and distractions of late, hearkening back to more simple times when basic rules actually ruled.

In the vacuum that is August you might believe that markets would be inclined to respond to good old fundamentals as histrionics takes a vacation. Traditionally, that would mean that earnings take center stage and that the reverse psychology kind of thinking that attempts to interpret good news as bad and bad news as good also takes a break.

Based upon this most recent earnings season it’s hard to say that the market has fully embraced traditional drivers, however. While analysts are mixed in their overall assessment of earnings and their quality, what is clear is that earnings don’t appear to be reflective of an improving economy, despite official economic data that may be suggesting that is our direction.

That, of course, might lead you to believe that discordant earnings would put price pressure on a market that has seemingly been defying gravity.

Other than a brief and shallow three day drop this week and a very quickly corrected drop in May, the market has been incredibly resistant to broadly interpreting earnings related news negatively, although individual stocks may bear the burden of disappointing earnings, especially after steep runs higher.

But who knows, maybe Friday’s sell off, which itself is counter to the typical Friday pattern of late is a return to rational thought processes.

Despite mounting pessimism in the wake of what was being treated as an unprecedented three days lower, the market was able to find catalysts, albeit of questionable veracity, on Thursday.

First, news of better than expected economic growth in China was just the thing to reverse course on the fourth day. For me, whose 2013 thesis was predicated on better than expected Chinese growth resulting from new political leadership’s need to placate an increasingly restive and entitled society, that kind of news was long overdue, but nowhere near enough to erase some punishing declines in the likes of Cliffs Natural Resources (CLF).

That catalyst lasted for all of an hour.

The real surprising catalyst at 11:56 AM was news that JC Penney (JCP) was on the verge of bringing legendary retail maven Allen Questrom back home at the urging of a newly vocal Bill Ackman. The market, which had gone negative and was sinking lower turned around coincident with that news. Bill Ackman helped to raise share price by being Bill Ackman.

Strange catalyst, but it is August, after all. In a world where sharks can fall out of the sky why couldn’t JC Penney exert its influence, especially as we’re told how volatile markets can be in a light volume environment? Of course that bump only lasted about a day as shares went down because Bill Ackman acted like Bill Ackman.The ensuing dysfunction evident on Friday and price reversal in shares was, perhaps coincidentally mirrored in the overall market, as there really was no other news to account for any movement of stature.

With earnings season nearly done and most high profile companies having reported, there’s very little ahead, just more light volume days. As a covered option investor if I could script a market my preference would actually be for precisely the kind of market we have recently been seeing. The lack of commitment in either direction or the meandering around a narrow range is absolutely ideal, especially utilizing short term contracts. That kind of market present throughout 2011 and for a large part of 2012 has largely been missing this year and sorely missed. Beyond that, a drop on Fridays makes bargains potentially available on Mondays when cash from assigned positions is available.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum, with no “PEE” selections this week. (see details).

For an extended period I’ve been attempting to select new positions that were soon to go ex-dividend as a means to increase income, offset lower option premiums and reduce risk, while waiting for a market decline that has never arrived.

This week, I’m more focused on the two selections that are going ex-dividend this coming week, but may have gotten away after large price rises on Thursday.

Both Cliffs Natural Resources and Microsoft (MSFT) were beneficiaries of Chinese related news. In Cliffs Natural’s case it was simply the perception that better economic news from China would translate into the need for iron ore. In Microsoft’s case is was the introduction of Microsoft Office 365 in China. Unfortunately, both stocks advanced mightily on the news, but any pullback prior to the ex-dividend dates would encourage me to add shares, even in highly volatile Cliffs, with which I have suffered since the dividend was slashed.

A bit more reliable in terms of dividend payments are Walgreens (WAG), Chevron (CVX) and Phillips 66 (PSX).

Although I do like Walgreens, I’ve only owned it infrequently. However, since beginning to offer weekly options I look more frequently to the possibility of adding shares. Despite being near its high, the prospect of a short term trade in a sector that has been middling over the past week, with a return amplified by a dividend payment, is appealing.

Despite being near the limit of the amount of exposure that I would ordinarily want in the Energy Sector, both Chevron and Phillips 66 offer good option premiums and dividends. The recent weakness in big oil makes me gravitate toward one of its members, Chevron, however, if forced to choose between just one to add to my portfolio, I prefer Phillips 66 due to its greater volatility and enhanced premiums. I currently own Phillips 66 shares but have them covered with September call contracts. In the event that I add shares I would likely elect weekly hedge contracts.

If there is some validity to the idea that the Chinese economy still has some life left in it, Joy Global (JOY), which is currently trading near the bottom of its range offers an opportunity to thrive along with the economy. Although the sector has been relatively battered compared to the overall market, option premiums and dividends have helped to close that gap and I believe that the sector is beginning to resemble a compressed spring. On a day when Deere (DE) received a downgrade and Caterpillar was unable to extend its gain from the previous day, Joy Global moved strongly higher on Friday in an otherwise weak market.

Oracle (ORCL) is one of the few remaining to have yet reported its earnings and there will be lots of anticipation and perhaps frayed nerves in advanced for next month’s report, which occurs the day prior to expiration of the September 2013 contract.

You probably don’t need the arrows in the graph above to know when those past two earnings reports occurred. Based Larry Ellison’s reaction and finger pointing the performance issues were unique to Oracle and one could reasonably expect that internal changes have been made and in place long enough to show their mark.

Fastenal (FAST) is just a great reflection of what is really going on in the economy, as it supplies all of those little things that go into big things. Without passing judgment on which direction the economy is heading, Fastenal has recently seemed to established a lower boundary on its trading range after having reported some disappointing earnings and guidance. Trading within a defined range makes it a very good candidate to consider for a covered option strategy

What’s a week without another concern about legal proceedings or an SEC investigation into the antics over at JP Morgan Chase (JPM)? While John Gotti may have been known as the “Teflon Don,” eventually after enough was thrown at him some things began to stick. I don’t know if the same fate will befall Jamie Dimon, but he has certainly had a well challenged Teflon shell. Certainly one never knows to what degree stock price will be adversely impacted, but I look at the most recent challenge as just an opportunity to purchase shares for short term ownership at a lower price than would have been available without any legal overhangs.

Morgan Stanley (MS), while trading near its multi-year high and said to have greater European exposure than other US banks, continues to move forward, periodically successfully testing its price support.

With any price weakness in JP Morgan or Morgan Stanley to open the week I would be inclined to add both, as I’ve been woefully under-invested in the Finance sector recently.

While retailers, especially teen retailers had a rough week last week, Footlocker (FL) has been a steady performer over the past year. A downgrade by Goldman Sachs (GS) on Friday was all the impetus I needed and actually purchased shares on Friday, jumping the gun a bit.

Using the lens of a covered option seller a narrow range can be far more rewarding than the typical swings seen among so many stocks that lead to evaporation of paper gains and too many instances of buying high and selling low. Some pricing pressure was placed on shares as its new CEO was rumored a potential candidate for the CEO at JC Penney. However, as that soap opera heats up, with the board re-affirming its support of their one time CEO and now interim CEO, I suspect that after still being in limbo over poaching Martha Stewart products, JC Penney will not likely further go where it’s unwelcome.

Finally, Mosaic (MOS) had a good week after having plunged the prior week, caught up in the news that the potash cartel was falling apart. Estimates that potash prices may fall by 25% caused an immediate price drop that offered opportunity as basically the fear generated was based on supposition and convenient disregard for existing contracts and the potential for more rationale explorations of self-interest that would best be found by keeping the cartel intact.

The price drop in Mosaic was reminiscent of that seen by McGraw Hill FInancial (MHFI) when it was announced that it was the target of government legal proceedings for its role in the housing crisis through its bond ratings. The drop was precipitous, but the climb back wonderfully steady.

I subsequently had Mosaic shares assigned in the past two weeks, but continue to hold far more expensively priced shares. I believe that the initial reaction was so over-blown that even with this past week’s move higher there is still more ahead, or at least some price stability, making covered options a good way to generate return and in my case help to whittle down paper losses on the older positions while awaiting some return to normalcy.

Traditional Stocks: Fastenal, Footlocker, JP Morgan, Morgan Stanley, Oracle

Momentum Stocks: Joy Global, Mosaic

Double Dip Dividend: Chevron (ex-div 8/15), Phillips 66 (ex-div 8/14), Walgreen (ex-div 8/16)

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.