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May32014

Weekend Update – May 4, 2014

The instant the Employment Situation Report was released and news of the creation of 288,000 new jobs was known, the spin and the interpretations started like wild.

Even partisans have to notice how detached they and their counterparts are from a true grasp of reality as they contrive ways to take credit or lay blame without regard to truth, in the expectation that no one will notice.

Whenever substantive economic news is released you can be certain of the immediate race to blanket the media with a version of the "truth" and talking points to reinforce one side’s continuing infallibility over the other.

Never before has the "participation rate" received so much attention as those seeking to downplay the robust numbers found their voice. Others focused on having cake and eating it too, while pointing to increased jobs and increasing insurance enrollments under the Affordable Care Act.

It’s always the same and thrives in a world where classic comments like "I was for … before I was against it," barely get noticed and flip-flops are never considered as anything other than recreational footwear.

For those paying attention those flip-flops have been increasingly frequent in the markets as "risk off" and "risk on" are again concepts in vogue. They alternate with one another for investor favor on a very regular basis as there’s little indication of direction, other than the expectation by some that the relentless move higher will simply continue.

With better numbers than expected the initial positive reaction from the market quickly gave way to the interpretation of their meaning with regard to the Federal Reserve’s Qualitative Easing taper and the forward momentum was quickly lost. As the day progressed it was clear that the thought process of the past, that "good news is bad news" and bad news will make us wealthy, was returning.

More importantly, however, in helping to shape up the day was the fact that it was a Friday. Just as Tuedays are once again pre-ordained to be market gainers, so too are Fridays recently consigned to the loss camp.

Over the past two months you could be equally certain that the final trading day of the week was most likely a Friday and that the trading week would end with renewed concerns of some escalating conflict involving Russia. Why things seem to stay quiet during the week and then come to a head on Fridays is somewhat of a mystery, but that’s been the clear trend since the onset on the crisis in Crimea.

Amazingly, yet another week that was fairly quiet during the first four trading days saw a flare up of tensions overseas on Friday and again had an impact on the markets, taking some luster off what were otherwise predominantly positive weeks. The key is that it has only been the luster, thus far, as the market hasn’t been taken down to its bare, perhaps rusting metal base.

So powerful has this trend been that another well established trend is flailing by comparison. After an impressive run of nearly two years where the markets were statistically significantly more likely to have a higher move on the date of the release of the Employment Situation Report, this Friday marked the second consecutive month where that wasn’t the case, although the pattern of the entire week of the report release being positive continued.

While economic reports are released, the FOMC announces and Russia foments, earnings are being released. Thus far, there hasn’t been very much to suggest that there is a growing economy, yet we keep reaching new market highs. The recent GDP report didn’t add anything to that belief, either, although as the ever optimistic like to point out, "it is a backward looking measure," as if forward looking measures have greater validity than that which was actually measured, rather than fantasized about.

We’ve seen this scenario before. While there are signs of tiring market the retreats to safety, such as utilities or consumer staples hasn’t lasted very long and risk is re-embraced after only the briefest of absences. While the most risky of all have been exhibiting some bubble-like behavior that brings back memories of days past and those memories aren’t necessarily good ones.

While the uncertainty continues, to me it also continues to be surprising of the relative confidence that exists that saw this Friday close with only a modest loss. While the precious metals market was demonstrating some nervousness the equity markets thought it safe to go home for the weekend and discounted the likelihood of a meltdown in overseas decorum, despite the signs that it was already occurring.

In the past, that would have been unusual, but now it is just more of the same, as nothing can stop the relentless march higher.

We’ve all heard that before, too.

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

While I’m not thrilled about the prospects about buying Apple (AAPL) shares after their significant run higher fueled by the announcement of a 7 to 1 split and an 8% increase in the dividend, I do like its reasonably predictable pattern of behavior in its peri-ex-dividend period. While not a certainty, that behavior tends to see price increasing going into the ex-dividend date and then shortly thereafter. With that ex-dividend date this week I would like to consider a purchase and hopefully a quick exit from the position.

While many are of the belief that Apple shares will continue their appreciation after the split, I think those waiting for the split are likely to be disappointed as the money will have been made by those taking some profits by selling their appreciated shares to those clamoring for a piece of the pie.

Lately, pharmaceutical companies are hot. Imagine being so confident that you would consider a $100 billion buyout offer to be insufficient. Yet, while they are in play there are also concerns about even more regulatory pressure, but this time over sky high pricing for potentially life saving drugs.

Bristol Myers Squibb (BMY) straddles the worlds of "big pharma" and bio-pharma and its shares have found a nice home in this price range for the past 6 months. With earnings having been reported I think this is a good time to enter or add shares, not just for the option premium, but also for share appreciation as the sector is suddenly of interest.

MetLife (MET) also just reported earnings and is currently trading a little above the mid-point of its recent comfortable range. It has actually held up nicely while interest rates have fallen and the 10 Year was testing the 2.5% level. MetLife would have been expected to also lose some luster in a falling rate environment, but it has shown very nice resilience. In addition to its usually attractive option premium shares are ex-dividend this week, compounding its lure.

Starbucks (SBUX) also is ex-dividend this week and I’ve resigned myself over the past month that shares won’t be returning, hopefully, to the levels that I previously thought represented fair pricing. I’ve only owned 3 lots of shares in 2014, but each time I hear Howard Schultz speak the more inspired I get regarding his vision for the company that goes well beyond ingestibles. It has become one of those companies upon which I like to use out of the money call options when adding shares, as I think there is always room for its short term appreciation.

eBay (EBAY) is one of those companies that so many people love to disparage. Of course it’s decision to repatriate foreign cash this week and pay taxes is somewhat puzzling, although perhaps should be cheered as being patriotic, it evokes policy discussion, particularly as other companies seek tax inversion benefits by moving offshore.

Certainly Carl Icahn can’t be terribly pleased with what eBay is doing, as he likely interprets the decision as a squandering of his billions, so I expect things to heat up at eBay. However, even without the tax issue and even without Carl Icahn as part of the equation, eBay has been as reliant of a covered option play as can be found and with some patience can be a very reliable partner in the creation of an income stream. The only thing that would make its shares more appealing to me would be the initiation of a dividend, so I hope Carl Icahn is reading.

Chesapeake Energy (CHK), speaking of Carl Icahn, reports earnings this week. It has long been one of my very favorite covered option trades, but my last lot was assigned more than $2 ago. As opposed to many trades that I like to make when earnings are announced and which are done through the sale of put contracts, with no desire to own shares, I wouldn’t mind ownership of shares.

As the week begins its trading it will simply be a question of whether a covered call position or the sale of puts provides a better rate of return and future prospects for continuing generation of income or quick closure. At the moment I’m more inclined to consider the sale of puts, however the initial market sentiment may shift my own, especially if shares open and stay higher.

Also reporting earnings this week is Nu Skin (NUS). Unlike Chesapeake, and much more like Herbalife (HLF), I’m not terribly interested in owning shares. NuSkin last reported earnings just 2 months ago after a delay of about a month in reporting its previous earnings. That;s never a good thing. In addition, its business practices are also occasionally called into question even by governments, as it has significant interests in China, which has alleged that the business ay be a pyramid scheme.

NuSkin, for its part, has re-started its distributor recruitment after nearly 3 months of abeyance in China. WHile earnings may adversely impacted, and its shares certainly dived after the initial news in January 2014, I believe that it is already baked into expectations. What I do expect is positive guidance, even though there’s possibly reason not to believe much from companies in those kind of business. While I can’t make a compelling case for owning shares, there may be a case for selling puts prior to earnings or for the more cautious, doing so after earnings if there is a plunge in reaction to the report.

GameStop (GME) reports earnings later this month. Since January 2014 its chart looks very similar to NuSkin, which is not meant as a compliment. It is one of those companies that makes you wonder how it is that it still exists in this world of streaming data. it’s most recent challenge was news of Wal-Mart (WMT) getting into the used video game business in exchange for Wal-Mart vouchers. I sold puts at that time following the sharp drop in shares and happily saw the position quickly expire,as so often the initial response has little reason to head in the same direction as cooler heads prevail.

With well known short interest that is always mentioned in the same breath as its name, GameStop had fully recovered from its Wal-Mart induced loss, but has recently faltered again. It appears to have some decent price support within about $3 of its current price and the kind of option premiums that could make that risk – reward proposition appealing for some, although May 22, 2014 earnings do add to the potential risk.

Finally, I was watching the action of JP Morgan (JPM) closely during the final hour of trading on Friday. That’s because I was expecting shares to be assigned, but a late decline in shares was threatening to see it dip below the $55.50 strike level. Ultimately shares closed at $55.58, but after the closing bell immediately slumped about a dollar lower as it announced the expectation that its trading revenues would drop 20% in the next quarter and that it had some exposure in the Russian market.

Part of the covered call strategy that I like to employ is the serial or recurrent purchase of positions. Nothing seems to work better than having shares assigned and then buying them back at lower prices.

Those kinds of opportunities are always serendipitous and you certainly can’t take credit when they occur, but they do occur with reasonable frequency. Any further erosion in shares on Moinday morning may be a good opportunity to welcome shares back after a weekend apart.

Traditional Stocks: Bristol Myers Squibb, eBay, JP Morgan Chase

Momentum: GameStop

Double Dip Dividend: Apple (5/8) , MetLife (5/7), Starbucks (5/6)

Premiums Enhanced by Earnings: Chesapeake Energy (5/6 PM) , NuSkin (5/6 AM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

Apr52014

Weekend Update – April 6, 2014

TheAcsManWeekend Update

This week started on such a positive note with the reassuring words of a dove, yet ended so harshly.

This time of the year it’s supposed to be the other way around with the lamb having the final word as months of a less threatening nature await ahead.

Instead, after Friday’s close, whatever optimism may have been generated by setting even more record highs earlier in the week, had given way to caution and perhaps preparation for some ill winds.

Back when I was in college it wasn’t meant as a compliment if you were referred to as being a “dove.” and the proverbial lamb was always being led to slaughter. In fact, if you were called a “dove,” that was only in polite circles. Otherwise, the words used were far more descriptive and derisive.

By the same token, the doves out there may not have had the kindest of words for the hawks, but in nature, it’s usually the hawk that triumphs. In fact, recalling the recent mauling of a peace dove that had been just released by Pope Francis and some children, it didn’t really even require a hawk. A seagull and a lowly crow were enough for the task.

This week, though, it was the dove that ruled the day and set the tone for the week. Well, at least most of it, until its fragile nature beset itself.

A fragile market can be equally susceptible even to less formidable foes, as Friday’s sell-off had little basis and came on the day of the Employment Situation Report, which for the past 20 months or so has been strongly correlated to a higher moving market on the day of release and for the week as a whole. While the week as a whole did show an advance, the former correlation stood for only a short time before strong selling set in.

Whatever doubts there may have been regarding where Janet Yellen stood on that continuum from dove to hawk following her initial press conference, she made it clear that on issues of the Federal Reserve’s actions to help lower the unemployment rate, she was an unabashed dove and while there may be more dissenting voting members than before sitting on the Federal Reserve, she still controls the hawks, but probably keeps at least one eye wary at all times.

The stock market loved that re-affirmation of policy the way we love the beauty of a dove, even though like short sellers, we may privately relish its obliteration by a swooping predator hawk.

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

While this was an especially brutal week for stocks on the NASDAQ and particularly for many of those stocks that had borne a disproportionate amount of everyone’s attention as they moved ever higher, many others were included in whatever wrath took hold.

With earnings season beginning this coming week there may be some return to fundamentals, however, disappointments, particularly if weather hasn’t been fully factored in or discounted may further exploit market fragility.

MasterCard (MA) was one such casualty of the stampede. There was little to account for its 2.5% drop on Friday, bringing it to its 5 month low. The previous week, faced with some potentially adverse decisions regarding swipe fees it reacted well, yet this week it did otherwise without any new challenges being sent its way. While it goes ex-dividend on Monday it’s puny dividend isn’t something that’s likely to be missed by those entering into new positions as shares find themselves at a 5 month low. Believing that last week’s selling was overdone I would consider a slightly longer option contract and the use of an out of the money strike as a means to allow some time for price repair while collecting an option premium while waiting.

While not falling quite as much as MasterCard on Friday, shares of Starbucks (SBUX) also succumbed to selling pressure. While the past week was filled with news regarding other players entering into the breakfast marketplace, including offering free cups of coffee, there was really an absence of Starbucks specific news. While breakfast taco waffles may garner some attention, Starbucks has become as much a way of life as it has a product provider. It’s current price is one where it has shown considerable strength and it too may warrant the use of slightly longer term option contracts and an out of the money strike.

Apollo Education (APOL) was a stock that I highlighted last week as a possible earnings trade. As usual, I prefer those through the sale of well out of the money put contracts prior to earnings, especially if share price is trending downward prior to earnings. In Apollo’s case shares had instead shown strength prior to the earnings release, so I stayed away from selling puts at that time. After earnings shares did sustain a drop and I then sold some out of the money puts in the hope that the drop wouldn’t continue beyond another few strike levels. While there was almost a need to roll them over on Friday as the market was crumbling, Apollo shares showed resilience, even as the market did not.

While I still don’t have much confidence in the product it offers nor the manner in which it generates its revenues, that’s largely irrelevant, as it continues to offer some reasonable returns even if shares continue to experience some decline. Once again, however, I would most likely consider the sale of puts rather than an outright purchase of shares and concomitant sale of calls.

There’s probably very little that can be added to make a discussion of Herbalife (HLF) newsworthy, but when there is, it will really be worth paying attention. While Herbalife has been a good target of put sellers following the severe price drop in the wake of regulatory and legal investigations that are being escalated, it has recovered very nicely with the realization that any real news is likely to be in the distance. It too, is a position that I would likely consider entry through the sale of out of the money puts.

This week’s dividend stocks for consideration are two that
I haven’t owned for a while, as I’ve been waiting for them to return to more reasonable price levels. Sometimes the realization comes that waiting only prevents being an active participant. Aetna (AET) Abbott Labs (ABT) have long been absent from my portfolio despite continually thinking about adding them back.

With a large number of existing positions already going ex-dividend this week I’m not as anxious to add any additional ones. However, of those two, Abbott Labs is more appealing for having a higher dividend rate and for having already come off some recent price peaks. In need of additional health care sector stocks, Abbott also carries that personal appeal at this point in time. However, it reports earnings the following week so my preference, if purchasing shares, would be a quick holding and given its current option premium would even be willingly accepting of an early assignment.

Aetna has simply left me behind in the dust as I’ve been waiting for it to return to what I believed was a fair price, but apparently the market has long disagreed. While it may be some time until we all realize whether new healthcare mandates are a positive or negative for the insurers, the one thing that most everyone can agree is that the long term is always positive when your fee structure is highly responsive to actuarial data. Add to that an increasing interest rate environment and the future may be bright for insurers.

Among the shares that I had assigned this past week were Comcast (CMCSA) and Coach (COH). Following the week ending sell-off I was grateful to have as many assignments as there were, especially to replenish cash reserves in the event of buying opportunities ahead. However, among those assigned, these two are ones that I’m eager to re-incorporate into my portfolio.

Comcast, despite my personal feelings about the product and service, has just been a spectacular growth story and has had great guidance under the control of the Roberts family. My celebration of “Comcast Liberation Day” a few years ago didn’t mean that I would boycott share ownership or overlook its attributes as an investment. It’s recent 10% price drop in the past two months from its highs has offered an opportunity to find some more realistic entry points. While I’ve been following shares for quite some time, it only recently began offering weekly and expanded weekly options. For me, that was the signal, combined with the reduced share price to start initiating positions. I envision a similar opportunity with Comcast shares on a serial basis as I have experienced with Coach.

Coach remains a stock that I feel like I could happily buy most week in and out as long as it’s trading in a $48-$54 range and have done so repeatedly when it has done so. Despite a near absence of positive news in almost two years and the company having been written off as a loser in the competitive wars, especially with Michael Kors (KORS), for those who can recognize that multiple small stock gains can be very meaningful it has been a consistent performer. With earnings approaching at the end of the month I would be less inclined to use longer term option contracts at this time, as Coach has had a recent history of sharp and unpredictable moves following earnings.

While Coach has been unable to do anything right in the eyes of many, until recently, Under Armour (UA) could do no wrong. WHile it’s still not clear whether the design of their latest skating wear for US Olympians was in any way related to their disappointing performance, Under Armour’s CEO, Kevin Plank, was a perfect study in how to present his company when under public scrutiny.

While it received a downgrade about 3 weeks ago and subsequently fell more than 7% in that aftermath, it fell an additional 9% from that sentinel point late this week as it was carried along with the rest of the deluge. As with many others the selling was in the absence of substantive news.

With earnings season beginning this coming week, Under Armour is among those announcing early in the process on April 17, 2014. It’s volatility is commanding a health option premium at a time when many others are languishing, however, the risk may be compounded during the following week. For that reason, if considering the purchase of shares I would likely use a weekly contract and if necessary roll that over to a longer term contract in anticipation of that enhanced risk. As earnings approach, Under Armour may also turn out to be a potential earnings related trade through the sale of out of the money put options.

Finally, a number of years ago I was studying two stocks with an eye toward adding one to my regular rotation in need of another energy sector position. They were Anadarko (APC) and Apache (APA). For a while I would get their stock symbols confused and really had a difficult time discerning their differences. I still have no real idea of what those differences may be, but for some reason I gravitated toward Anadarko.

This week, that dalliance may have come to an end, at least for the time being, as my shares were assigned following an untimely and unexpected end to the Tronox litigation that was an unwelcome part of its Kerr McGee purchase.

Whatever positive comments I would normally make about Anadarko relative to its prospects for trading in a range and offering an attractive premium can now be transferred to Apache. The best part, though, is that Apache is approximately 10% below its recent high and can make me forget about Anadarko for now.

Traditional Stocks: Apache, Comcast, MasterCard, Starbucks

Momentum Stocks: Apollo Educational, Coach, Herbalife, Under Armour

Double Dip Dividend: Aetna (4/8), Abbott Labs (4/11)

Premiums Enhanced by Earnings: none

Feb232014

Weekend Update – February 23, 2014

TheAcsManWeekend Update

When this past week was all said and done, it was hard to discern that anything had actually happened.

Sure, there was an Olympics being staged and fomenting revolution in Ukraine, but it was a week when even the release of FOMC minutes failed to be news. Earnings season was winding down, the weather was in abeyance and the legislative docket was reasonably non-partisan.

I could have spent last week watching the grass grow if it hadn’t been covered in a foot of snow.

In its own way, despite the intermediate and alternating moves approaching triple digits, the past week was a perfect example of reversion to the mean. For those that remember 2011, it was that year in a microcosm.

The coming week promises to be no different, although eight members of the Federal Reserve are scheduled to speak. While they can move markets with intemperate or unfiltered remarks, which may become more meaningful as “hawks” assume more voting positions, most people will likely get their excitement from simply reading the just released 2008 transcripts of the Federal Reserve’s meetings as the crisis was beginning to unfold. While you can learn a lot about people in times of crisis, other than potential entertainment value the transcripts will do nothing to add air to the vacuum of the past week. What they may contain about our new Chairman, Janet Yellen, will only confirm her prescience and humor, and should be a calming influence on investors.

As a covered option investor last week was the way I would always script things if anyone would bother opening the envelope to read what was inside. While I have no complaints about 2012 or 2013, as most everyone loves a rising market, 2011 was an ideal market as the year ended with no change. Plenty of intermediate movement, but in the end, signifying nothing other than the opportunity to seemingly and endlessly milk stocks for their option premiums that were nicely enhanced by volatility.

Although I’ve spent much of the past year expecting, sometimes even waiting at the doorstep for the correction to come, the past few weeks have been potentially dangerous ones as I’ve had optimism and money to spend. That can be a bad combination, but the past 18 months have demonstrated a pattern of failed corrections, at least by the standard definition, and rebounds to new and higher highs.

While there may be nothing to see here, there may be something to see there as the market may again be headed to new neighborhoods.

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). A companion article this week explores some additional earnings related trades.

In a week that Wal-Mart (WMT) again disappointed with its earnings report, once again the market failed to follow its lead. In the past year Wal-Mart has repeatedly disappointed, yet the market has disconnected form its leadership, other than for a brief two hours of panic a few months ago when Wal-Mart announced some increasing inventory levels. That panic quickly resolved once Wal-Mart explained their interpretation of inventory levels.

However, one does have to wonder under what economic circumstances does Wal-Mart not meet expectations? Is the economy thriving and people are moving to other retailers, such as Target (TGT) or even Sears (SHLD) or are they moving to Family Dollar Store (FDO)? WHile it is possible that Wal-Mart may simply be suffering from its own bad economic and internal forecasting, there isn’t much reason to be sanguine about retailing. My money is on Family Dollar.

One source that I use for information lists Family Dollar as going ex-dividend this week, however, I haven’t found that to be corroborated anywhere else and historically the first quarter ex-dividend date is in the second week of March. If shares do go ex-dividend this week I would have significant enthusiasm for adding shares, but even in the absence of that event I’m inclined to make that purchase.

Coming off two successive weeks of garnering more than the usual number of dividends, this week is relatively slim pickings. Weyerhauser (WY) and Molson Coors (TAP) both go ex-dividend this week, but both are near the bottom of my list for new purchases this week.

While I like Molson Coors, at the moment the product holds some more appeal than the stock, which is trading near its yearly high point. However, with earnings now out of the way and Canadians around the world celebrating Olympic victories, what better way to show solidarity than to own shares, even if just for a week? Other than potential technical indicators which may suggest an overbought condition, there isn’t too much reason to suspect that in a flat or higher moving market during the coming week, Molson Coors shares will decline mightily. With shares as the body and a head composed of a nice premium and dividend, it just may be time to indulge.

Weyerhauser is a perfectly boring stock. Often, i mean that in a positive sense, but in this case I’m not so certain. I’ve owned shares since May 2013 and would be happy to see them assigned. Despite Weyerhauser offering a dividend this week, my interests are more aligned with re-establishing a position in International Paper (IP). In addition to offering a weekly option, which Weyerhauser does not, its options liquidity and pricing is superior. While it is trading near its yearly high, it has repeatedly met resistance at that level. As a result, while eager to once again own shares, I would be much more willing to do so even with just a slight drop in price.

While offering only a monthly option is a detriment as far as Weyerhauser is concerned, it may be a selling point as far as Cypress Semiconductor (CY) goes. I like to consider adding shares when it is near a strike price as it was after Friday’s close. Shares can be volatile, but it tends to find its way back, especially when home is $10. WHile earnings aren’t due until April 17, 2014, that is just one day before the end of the monthly cycle. Therefore, if purchasing shares of Cypress at this time, I would be prepared to set up for ownership through the May 2014 cycle in the event that shares aren’t assigned when the March cycle comes to an end, in order to avoid being caught in a vortex if a disappointment is at hand. The dividend and the premiums will provide some solace, however.

Although I had shares of Fastenal (FAST) assigned this past week and still own some more expensive shares, this company, which I believe is a proxy for economic activity, has been a spectacular covered call trade and has lent itself to serial ownership as it has reliably traded in a defined range. It doesn’t report earnings until April 10, 2014, but it does have a habit of announcing altered guidance a few weeks earlier. That can be annoying if it comes at the end of an option cycle and potentially removes the chance of assignment or even anticipated rollover, but it’s an annoyance I can live with. After two successive quarters of reduced guidance my expectation is for an improved outlook.

I haven’t owned shares of Deere (DE) for a few months as it had gone on a ride higher, just as Caterpillar (CAT), another frequent holding, is now doing. Deere is now trading at the upper range of where I typically am interested in establishing a position, but after a 7% decline, it may be time to add shares once again. It consistently offers an option premium that has appeal and in the event of longer than anticipated ownership its dividend eases the wait for assignment.

While I would certainly be more interested in Starbucks (SBUX) if its shares were trading at a lower level, sometimes you have to accept what may be a new normal. I had nearly a year elapse before coming to that realization and missed many opportunities in that time with these shares. It does, however, appear that the unbridled move higher has come to an end and perhaps shares are now more likely to be range bound. As with the market in general it’s that range that others may view as mediocrity of performance that instead may be alternatively viewed as the basis for creating an annuity through the collection of option premiums and dividends.

I’ve never been accused of having fashion sense, so it’s unlikely that I would ever own any Deckers (DECK) products at the right time. One minute they sell cool stuff, the next minute they don’t and then back again. Just like the story of most stocks themselves.

What is clear is that they have become cool retailers again and impressively, shares have recovered from a recent large decline. With earnings due to be announced this week the option market is implying a 12.3% potential movement in shares. In the meantime, if you can set your sights on a lowly 1% ROI for the week’s worth of risk a 16.3% drop can still leave you without the obligation to purchase the shares if having sold puts.

Less exciting, at least in terms of implied moves, is T-Mobile (TMUS). It also reports earnings this week and there has to be some thought to what price T-Mobile is paying and will be paying for its very aggressive competitive stance. While its CEO John Legere, may be a hero to some for taking on the competition, that may very quickly fade with some disappointing earnings and cautionary guidance. the option market is pricing a relatively small move of 8.7%, while current option pricing can return a 1% ROI on a strike level 9.5% lower than Friday’s close. Although that’s not much of a margin of difference, I may be more inclined to consider the sale of puts if shares drop substantively on Monday in advance of Tuesday morning’s announcement. Alternatively, if not selling puts in advance of earnings and shares do significantly fall following earnings, there may be potential to do the put sale at that time.

Finally, Abercrombie and Fitch (ANF) reports earnings this week. It is one of the most frustrating and exhilirating of stocks and I currently own two lots. My personal rule is to never own more than three, so I still have some room to add shares, or more likely sell puts in advance of its earnings. Abercrombie and FItch is a nice example of how dysfunction and lowered expectations can create a stock that is so perfectly suited for a covered option strategy. Its constant gyrations create enhanced option premiums that are also significantly impacted by its history of very large earnings related price changes.

For those that have long invested in shares the prospect of a sharp decline upon earnings can’t come as a surprise. However, with a 10.7% implied price move this coming week, one can still achieve a 1% ROI if shares fall less than 15.3%, based on Friday’s closing price.

Traditional Stocks: Deere, Family Dollar Store, Fastenal, International Paper, Starbucks

Momentum Stocks: Cypress Semiconductor

Double Dip Dividend: Molson Coors (ex-div 2/26)

Premiums Enhanced by Earnings: Abercrombie and Fitch (2/26 AM), Deckers (2/27 PM), T-Mobile (2/25 AM)

Oct272013

Weekend Update – October 27, 2013

TheAcsManWeekend Update

Watching Congressional testimony being given earlier this week by representatives of the various companies who were charged with the responsibility of assembling a functioning web site to coordinate enrollment in the Affordable Care Act it was clear that no one understood the concept of responsibility.

They did, however, understand the concept of blame and they all looked to the same place to assign that blame.

As a result there are increased calls for the firing or resignation of Kathleen Sebelius, Secretary of Health and Human Services. After all, she, in essence, is the CEO.

On the other hand, it was also a week that saw one billionaire, Bill Gross, the “Bond King” of PIMCO deign to give unsolicited advice to another billionaire, Carl Icahn, in how he should use his talents more responsibly. But then again, the latter made a big splash last week by trying to convince a future billionaire, Tim Cook, of the responsible way to deal with his $150 billion of cash on hand. Going hand in hand with a general desire to impart responsibility is the tendency to wag a finger.

Taking blame and accepting responsibility are essentially the same but both are in rare supply through all aspects of life.

This was an incredibly boring week, almost entirely devoid of news, other than for earnings reports and an outdated Employment Situation Report. The torrent of earnings reports were notable for some big misses, lots of lowered guidance and a range of excuses that made me wonder about the issue of corporate responsibility and how rarely there are cries for firings or resignations by the leaders of companies that fail to deliver as expected.

For me, corporate responsibility isn’t necessarily the touchy-feely kind or the environmentalist kind, but rather the responsibility to know how to grow revenues in a cost-efficient manner and then make business forecasts that reflect operations and the challenges faced externally. It is upon an implied sense of trust that individuals feel a certain degree of comfort or security investing assets in a company abiding by those tenets.

During earnings season it sometimes becomes clear that living up to that responsibility isn’t always the case. For many wishing to escape the blame the recent government shutdown has been a godsend and has already been cited as the reason for lowered guidance even when the business related connection is tenuous. Instead of cleaning up one’s own mess it’s far easier to lay blame.

For my money, the ideal CEO is Jamie Dimon, of JP Morgan Chase (JPM). Burdened with the legacy liabilities of Bear Stearns and others, in addition to rogue trading overseas, he just continues to run operations that generate increasing revenues and profits and still has the time to accept responsibility and blame for things never remotely under his watch. Of course, the feeling of being doubly punished as an investor, first by the losses and then by the fines may overwhelm any feelings of respect.

Even in cases of widely perceived mismanagement or lack of vision, the ultimate price is rarely borne by the one ultimately responsible. Instead, those good earnings in the absence of revenues came at the expense of those who generally shouldered little responsibility but assumed much of the blame. While Carl Icahn may not be able to make such a case with regard to Apple, the coziness of the boardroom is a perfect place to abdicate responsibility and shift blame.

Imagine how convenient it would be if the individual investor could pass blame and its attendant burdens to those wreaking havoc in management rather than having to shoulder that burden of someone else’s doing as they watch share prices fall.

Instead, I aspire to “Be Like Jamie,” and just move on, whether it is a recent plunge by Caterpillar (CAT) or any others endured over the years.

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).

Andrew Liveris, CEO of Dow Chemical (DOW) was everyone’s favorite prior to the banking meltdown and was a perennial guest on financial news shows. His star faded quickly when Dow Chemical fell to its lows during the financial crisis and calls for his ouster were rampant. Coincidentally, you didn’t see his ever-present face for quite a while. Those calls have halted, as Liveris has steadily delivered, having seen shares appreciate over 450% from the market lows, as compared to 157% for the S&P 500. Shares recently fell after earnings and is closing in to the level that I would consider a re-entry point. Now offering weekly option contracts, always appealing premiums and a good dividend, Dow Chemical has been a reliable stock for a covered option strategy portfolio and Andrew Liveris has had a reliable appearance schedule to match.

A company about to change leadership, Coach (COH) has been criticized and just about left for dead by most everyone. Coach reported earnings last week and for a short while I thought that the puts I had sold might get assigned or be poised for rollover. While shares recovered from their large drop, I was a little disappointed at the week ending rally, as I liked the idea of a $48 entry level. However, given its price history and response to the current level, I think that ownership is still warranted, even with that bounce. Like Dow Chemical, the introduction of weekly options and its premiums and dividend make it a very attractive stock in a covered call strategy. Unlike Dow Chemical, I believe its current price is much more attractive.

I’m not certain how to categorize the CEO of Herbalife (HLF). If allegations regarding the products and the business model prove to be true, he has been a pure genius in guiding share price so much higher. Of course, then there’s that nasty fact that the allegations turned out to be true.

Herbalife reports earnings this week and if you have the capacity for potential ownership the sale of out of the money puts can provide a 1.2% return even of shares fall 17%. The option market is implying a 10% move. That is the kind of differential that gets my attention and may warrant an investment, even if the jury is still out on some of the societal issues.

In the world of coffee, Dunkin Brands (DNKN) blamed K-Cups and guided toward the lower end of estimates. Investors didn’t care for that news, but they soon got over it. The category leader, Starbucks (SBUX) reports earnings this week. I still consider Howard Schultz’s post-disappointing earnings interview of 2012 one of the very best in addressing the issues at hand. But it’s not Starbucks that interests me this week. It’s Green Mountain Coffee Roasters (GMCR). Itself having had some questionable leadership, it restored some credibility with the appointment of its new CEO and strengthening its relationships with Starbucks. Shares have fallen about 25% in the past 6 weeks and while not reporting its own earnings this week may feel some of the reaction to those from Starbucks, particularly as Howard Schultz may characterize the nature of ongoing alliances. Green Mountain shares have returned to a level that I think the adventurous can begin expressing interest. I will most likely do so through the sale of puts, with a strike almost 5% out of the money being able to provide a 1.2% ROI. The caveat is that CEO Brian Kelley may soon have his own credibility tested as David Einhorn has added to his short position and has again claimed that there are K-cup sales discrepancies. Kelley did little to clear up the issue at a recent investor day meeting.

Baxter International (BAX) has held up reasonably well through all of the drama revolving around the medical device tax and the potential for competition in the hemophilia market by Biogen Idec (BIIB). WIth earnings out of the way and having approached its yearly low point I think that it is ready to resume a return to the $70 range and catching up to the S&P 500, which it began to trail in the past month when the issues of concern to investors began to take root.

MetLife (MET) has settled into a trading range over the past three months. For covered calls that is an ideal condition. It is one of those stocks that I had owned earlier at a much lower price and had assigned. Waiting for a return to what turned out to be irrationally low levels was itself irrational, so I capitulated and purchased shares at the higher level. In fact, four times in the past two months, yielding a far better return than if shares had simply been bought and held. Like a number of the companies covered this week it has that nice combination of weekly option contracts, appealing premiums and good dividends.

Riverbed Technology (RVBD) reports earnings this week, along with Seagate Technology (STX). Riverbed is a long time favorite of mine and has probably generated the greatest amount of premium income of all of my past holdings. However, it does require some excess stomach lining, especially as earnings are being released. I currently own two higher cost lots and uncharacteristically used a longer term call option on those shares locking in premium in the face of an earnings report. However, with recent price weakness I’m re-attracted to shares, particularly when a 3 week 1.7% ROI can be obtained even if shares fall by an additional 13%. In general, I especially like seeing price declines going into earnings, especially when considering the sale of puts just in advance of earnings. Riverbed Technology tends to have a history of large earnings moves, usually due to providing pessimistic guidance, as they typically report results very closely aligned with expectations.

Seagate Technology reports earnings fresh off the Western Digital (WDC) report. In a competitive world you might think that Western Digital’s good fortunes would come at the expense of Seagate, but in the past that hasn’t been the case, as the companies have traveled the same paths. With what may be some of the surprise removed from the equation, you can still derive a 1% ROI if Seagate shares fall less than 10% in the earnings aftermath through the sale of out of the money put contracts.

ConAgra (CAG) and Texas Instruments (TXN) both go ex-dividend this week. I think of them both as boring stocks, although Texas Instruments has performed nicely this year, while ConAgra has recently floundered. On the other hand, Texas Instruments is one of those companies that has fallen into the category of meeting earnings forecasts in the face of declining revenues by slashing worker numbers.

Other than the prospect of capturing their dividends I don’t have deeply rooted interest in their ownership, particularly if looking to limit my new purchases for the week. However, any opportunity to get a position of a dividend payment subsidized by an option buyer is always a situation that I’m willing to consider.

Finally, as this week’s allegation that NQ Mobile (NQ), a Chinese telecommunications company was engaged in “massive fraud” reminds us, there is always reason to still be circumspect of Chinese companies. While the short selling firm Muddy Waters has been both on and off the mark in the past with similar allegations against other companies they still get people’s attention. The risk of investing in companies with reliance on China carries its own risk. YUM Brands (YUM) has navigated that risk as well as any. With concern that avian flu may be an issue this year, that would certainly represent a justifiable shifting of blame in the event of reduced revenues. At its recent lower price levels YUM Brands appears inviting again, but may carry a little more risk than usual.

Traditional Stocks: Baxter International, Dow Chemical, MetLife

Momentum Stocks: Coach, Green Mountain Coffee Roasters, YUM Brands

Double Dip Dividend: ConAgra (ex-div 10/29), Texas Instruments (ex-div 10/29)

Premiums Enhanced by Earnings: Herbalife (10/28 PM), Riverbed Technology (10/28 PM), Seagate Technology (10/28 PM)

Jul262013

Weekend Update – July 28, 2013

TheAcsManWeekend Update

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Momentum Stocks: Abercrombie and Fitch, JC Penney

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

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

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