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Jan22015

Weekend Update – January 4, 2015

If you follow the various winning themes for the past year, any past year for that matter, the one thing that seems fairly consistent is that the following year is often less than kind to the notion that good things can just keep happening unchanged.

Often the crowd has a way of ruining good things, whether it’s a pristine and previously unknown hidden corner of a national park or an obscure trend or pattern in markets.

Back in the days when people used to invest in mutual funds the sum total of many people’s “research” was to pick up a copy of Money Magazine and see which was the top performing fund or sector for the year and shift money to that fund for the following year.

That rarely worked out well.

You don’t have to think too far back to remember such things as “The January Effect” or “Dogs of the Dow.” The more they were written about and discussed, and the more widely they were embraced, the less effective they were.

The “Santa Claus Rally” wasn’t very different, at least this year, even as the final day of that period for a brief while looked as if it might end with an upward flourish, but that too disappointed.

Remember “Sell in May and then go away”?

Like most things, the more you anticipate joining in on all of the fun that others have been having, the more likely you’re going to be disappointed.

The latest patterns getting attention are the “years ending in 5” and “Presidential election cycles in years ending in 5.” They may have some history to back up the observations, but seemingly overlooked is the close association between those two events, that are not entirely independent of one another.

Since 2015 happens to be both a year ending in “5” and the year preceding a presidential election, it is clear that the only direction can be higher. What that leaves is the debate over how to get to the promised land. That, of course, is the issue of the merits of active versus passive management of stock portfolios.

For purposes of clarity, the only “merit” that really matters is performance.

Those who have used a simple passive strategy over the past two years, perhaps as simple as being entirely invested in the SPDR S&P 500 Trust (NYSEARCA:SPY) to the exclusion of everything else, would have been hoisted on the shoulders of the crowd while hedge fund managers would have been trampled underneath.

The past two years haven’t been especially kind to hedge fund managers, b
ut they have been trampled for very different reasons in that time.

In 2013 who but a super-human kind of investor could have kept up with the S&P 500 while also trying to decrease risk? It’s not terribly easy to match a 30% gain. Hedging has its costs and if markets go only higher those costs simply eat into profits.

In 2014, though, it was a different issue, as the only people who really prospered, in what was still a good year, were those who didn’t try to outsmart markets, as it was almost impossible to even begin classifying the market in 2014. The continual sector rotation either required lots of luck to be continually on the right side of trades or lots of real skill and talent.

Luck runs out. Skill and talents have greater staying power and there’s a reason that only a handful of money managers are well known and regarded for more than a year at a time.

What is fascinating about the market is that even as it ended the year with a very respectable gain those who tried to finesse the market by actively trading don’t have the same kind of elation about its performance.

Just ask them.

So the question is whether the simplicity of a passive strategy is going to again be superior to an active strategy in 2015

As an active trader I’d like to think that passivity will be passé as the new year begins. Of course, you do have to wonder how that arbitrary divide that begins after New Years can actually create an environment with a different character, but somehow that arbitrary divide creates a situation where very few years are like the year preceding it.

I have reason to believe that I have neither skill nor luck, so can only count on the observation that a good thing becomes less of a good thing with time.

Popularity is superficial, while history runs deep.

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

I also like to think that I’ve never really had an original thought.

This week’s potential stock selections to begin 2015 may be an excellent example of the lack of originality, as all of the names are either recent selections, purchases or assigned positions. Add to that their general lack of exciting qualities and you have a really impotent one – two punch to start the year.

With earnings season set to begin the week after this coming week there’s plenty of time for excitement. However, with the upcoming week featuring an FOMC Statement release and the Employment Situation Report, there’s already enough excitement in the upcoming week to want to add to it.

The scheduled events of this week also offer more than enough opportunity to add to this past week’s broad weakness, particularly if the FOMC emphasizes strong GDP data or there is unusually large employment growth, either of which could signal interest rate increases ahead.

In that kind of environment, even if widely expected, the immediate reaction would likely be a shock to the system and I would prefer my exposure to be offset by the security of size and quality. Characteristics that coincidentally may be found in components of the S&P 500, so favored by passivists.

Among those are three members of the DJIA.

General Electric (NYSE:GE), Intel (NASDAQ:INTC) and Verizon (NYSE:VZ) are among this week’s list.

Intel is a little bit of an anomaly to be included in the list, as it was the best performing of the DJIA stocks in 2014 and might, therefore, be reasonably expected to lag in 2015. However, I think that those who would have been prone to pile into the stock because of its performance in the past year would have already done so, as its most recent performance has trailed the S&P 500.

What appeals to me about Intel’s shares for a very short term trade is that the crowd turned very suddenly on them on Friday, giving up nearly all of an almost 3% gain earlier in the trading session. With that arbitrary divide creating its own unique trading dynamics, Intel may not receive quite the same attention as General Electric and Verizon, as those may garner notice because they are among those “dogs” that still have faithful adherents.

But beyond that, Intel still has a fundamentally positive story behind its climb in 2014 and may again be well aligned with the fortunes of a Microsoft (NASDAQ:MSFT), as it continues on its return to relevance. For a short term trade in advance of its upcoming earnings report on January 15, 2015, I wouldn’t mind it trading listlessly in return for the option premium.

General Electric is simply at a price point that I find attractive, having recently had shares assigned. It certainly hasn’t been a very attractive stock over the years for much of anything other than a covered option strategy, but it has been well suited for that, as long as it can continue to trade in a relatively narrow range.

Verizon will be ex-dividend this week and is down nearly 9% from its high in November. Bruised a little due to increasing competition among mobile providers and sustaining the expenses of subsidizing the iPhone, it will report earnings in less than 3 weeks and I might want to either be out of any position prior to then, or if not, use an extended weekly option if having to rollover a position to acquire some additional premium in protection, in the event of an adverse response to earnings.

Dow Chemical (NYSE:DOW) has had its fortunes most recently closely aligned to the energy sector. WHile owning a more expensive lot, I’ve traded other lots as shares have fallen in an effort to generate quick returns from option premiums and share appreciation.

As those shares again approach $45.50 I would like to do so again, but recognizing that oil is at a precarious level, as it gets closer to the $50 level, which if breached, could pull Dow Chemical even lower.

That increased volatility due to the uncertainty in the energy sector has made the option premiums much more appealing. However, even with that challenge, Dow Chemical has the advantage of a highly competent and long serving CEO who is increasingly responsive to the marketplace as he has activists breathing down his neck.

The Mosaic (NYSE:MOS) story isn’t one of being held hostage by an energy cartel and falling prices, as is the case with Dow Chemical, but rather it fell prey to the collapse of the much less well known potash cartel.

Hopefully, the time frame will be far shorter for Dow Chemical than it has been for Mosaic, as I’ve been sitting on some much more expensive shares for quite a while. In the interim, however, Mosaic has offered many opportunities for entering into new positions in the hopes of quick assignment and capturing option premiums, dividends and some occasional capital gains on shares.

While its next dividend is till some months away, it is now quickly again in the price range at which I like to consider adding shares again, although it could still go even lower. However, as long as it does continue trading in this relatively narrow range, it is capable of generating serial option premiums and even if its performance may seem mediocre on a yearly basis, its ROI can be very attractive.

I don’t get terribly excited about food stocks, but when looking for some relative calm, both Campbell Soup (NYSE:CPB) and Kelloggs (NYSE:K) may offer some respite from any tumult that may confront the market next week.

Both were recently assigned and at these levels I wouldn’t mind owning them again. In the case of Campbell Soup, that means the opportunity to capture its dividend and not be concerned about its next earnings until the March 2015 option cycle.

Kellogg is a stock that I would consider buying more often, however, the decision is related to how closely its price is to one of the strike levels on its monthly options.

Unlike Campbell Soup which has strikes at $1 intervals and many weekly options have $0.50 intervals, Kellogg options utilize $2.50 intervals, which can make the premiums relatively unattractive if the share price is at a distance from the strike at the time of the proposed sale of option contracts.

Finally, my plan to add shares of eBay (NASDAQ:EBAY) a couple of weeks agowent unrequited. The fact that its shares are now 2% lower doesn’t necessarily make me salivate over the prospects about adding shares now, as the past two weeks could have represented lost opportunities to generate option premiums and in a position to do so again in the coming week, as shares seem to be settling in at this higher level.

The coming year may be a fascinating one for eBay as the speculation grows about the planned spin off of PayPal, which may never make it to an IPO as it may be coveted by another company.

Of course, who might benefit from that detour is also open to question as eBay itself may be in the crosshairs of an acquiring behemoth.

For now, I still like owning eBay shares and usually selling near or in the money calls, but I would increasingly consider setting aside a portion of those shares for the kind of capital gains that so many have moaned about not having seen over the years as slings and arrows have consistently been thrown in eBay’s direction.

Traditional Stocks: Dow Chemical, eBay, General Electric, Intel, Kellogg, Mosaic

Momentum Stocks: none

Double Dip Dividend: Campbell Soup (1/8), Verizon (1/7)

Premiums Enhanced by Earnings: none

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.

Dec122014

Weekend Update – December 14, 2014

TheAcsManWeekend Update

On a cruise ship you only know the answer to the question of “How low can you go” once you’ve met the physical limits of your body and the limit of your ability to balance yourself.

Other than losing a little self-respect, maybe a little embarrassment in front of a bunch of drunken strangers, there’s not too much downside to playing the game.

When it comes to the price of oil the answer isn’t so clear, mostly because the answer seemed so clear for each of the past few weeks and has turned out to be anything other than clear. Besides the lack of clarity, the game has consequences that go well beyond self-respect and opening yourself up to embarrassment.

While we all know that at some point the law of “Supply and Demand” will take precedence over the intrusion of a cartel, the issue becomes one of time and how long it will take to set in motion the actions that are in response to the great opportunities created by low cost energy.

Until a few days ago we thought we were in recently uncharted territory, believing that the reduction in oil prices was due to an increase in supply that itself was simply due to increasing production in the United States.

However, with Friday’s release of China’s Industrial Production data, as well as an earlier remark by a Saudi Arabian Oil Minister, there was reason to now believe that the demand side of the equation may not have been as robust as we had thought.

While there’s not a strong correlation between sharply declining oil prices and recession, that has to now be considered, at least for much of the rest of the world.

The United States, on the other hand, may be going in a very different direction as is the rest of the world, until such factors as the relative strength of the US dollar begin to catch up with our good fortunes, as an example of yet another kind of cycle that has real meaning on an every day basis in an ever more inter-connected world.

While there may not be a substantive decoupling between the US and other world economies, at the moment all roads seem to be leading to our shores and cheap oil can keep that road a one way path longer than is usually the case with economic cycles.

When considering the amount of evil introduced into the world as a result of oil profits supporting nefarious activities and various political agenda in countries many of us never even knew existed, the idea that energy self-reliance is paramount strategically becomes tangible. It also should make us wonder why we’ve essentially ignored doing anything for the past 40 years and why we would delay, even for another second the ability to break free from a position of submissiveness.

While most free market capitalists don’t like the idea of a government hand, there is something to be said for government support of US oil production and exploration activities particularly when they are suffering from low prices due to their successes and might have to curtail activity, as some in the world would like to see.

Insofar as the success of US producers adds to the tools with which we may face the rest of the sometimes less than friendly world, there is reason for our government to act as an anti-cartel a
t times and keep prices artificially low, while protecting local producers from short term pain they endure that helps to make the nation lass susceptible to pressures from other nations who are more than happy to control our destiny.

Great time to increase the Strategic Petroleum reserve, anyone?

In the meantime, though, that pain is being shared among investors in most every sector, as the volatility index, which usually moves in a direction opposite the market, is again moving higher as it has a habit of doing every two months, or so.

As an option seller that’s one bar I like seeing moved higher and higher, until someone asks the obvious question”

“How high will it go?”

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

From just about every perspective the stocks considered this week reads as a “Who’s Who of Losers.”

Sometimes there are good reasons, other times the reasons aren’t quite as clear, but even as oil prices may be playing a game of “how low can you go,” individual stocks across all sectors are being taken along for a nasty ride, that thus far has been nothing more than a 3.5% move from its recent high.

McDonalds (NYSE:MCD) is an example of a stock that continually finds itself on the wrong side of $100 and periodically finds itself on the wrong side of public opinion, as well. At the moment, it’s on the wrong side of each of those challenges and there is probably an association between the two.

While the news can get worse for McDonalds, a DJIA component, as it releases more US and international sales data, it is finally doing something that its franchisees have been wanting for quite a while, as it returns to some sense of simplicity in its menu. That simplicity will help reign in costs that can then reign in customers who have to balance cost and health consciousness.

Another DJIA component, Verizon (NYSE:VZ) also had a bad week, as it lowered profit forecasts and is feeling the pain of its competition with other carriers. It is also feeling the pain of underwriting the true costs of the wildly popular iPhone 6.

Having patiently waited for shares to return to the $47.50 level, it breezed right through that, heading straight to its low point for 2014.

With an upcoming dividend and option premiums increasing along with the volatility of its share price, Verizon is again becoming appealing, although there will be the matter off those earnings next month, that we’ve already been warned about, but are still likely to come as a surprise when reality hits.

Yet another DJIA component, Caterpillar (NYSE:CAT) was on everyone’s “worst company and worst CEO” list and was even famously Jim Chanos’ short of the year back in July 2013. As most know, shares have traded well above those July 2013 levels and even with its recent 20% decline, it is still well above those levels.

While Caterpillar has some Chinese exposure there is often a reaction that is out of proportion to that exposure and that brings opportunity. I have long liked shares at $85, but it has been a long time since that level has been seen, much to Jim Chaos’ dismay. On the other hand, $90 may be close enough to consider initiating a position following this most recent round of weakness.

While EMC Corporation (NYSE:EMC) isn’t close to being a member of the DJIA it certainly wasn’t shielded from the losses, as it fell 6.5% on the week that was harsh to the technology sector, despite it being difficult to draw a straight line connecting oil and technology sectors.

Just a week or two ago I was willing to buy EMC shares at $30, but now, as with so many stocks, the question of “how low will it go?” must be raised, even if there is no logical reason to suspect anything lower, as long as it’s majority owned VMWare (NYSE:VMW) can do better than a 12% decline for the week.

The China story is reflected in 3 stocks highlighted this week and none of the stories are very good. Neither Joy Global (NYSE:JOY), Las Vegas Sands (NYSE:LVS) nor YUM Brands (NYSE:YUM) had very good weeks, as a combination of stories from China struck at the core of their respective businesses.

Las Vegas Sands goes ex-dividend this week and despite its name, has significant interests in Macao. The gaming news coming from Macao has been a stream of negativity for the past 4 months, including such issues as the impact of smoking bans on casino income.

I already own 2 lots of Las Vegas Sands and have traded in and out of some additional lots these past few months, It’s Chinese exposure certainly has risk at the moment, but the dividend and premiums at this very low price level can serve as a good entry point or even to average down on existing shares.

YUM Brands has had years of experience in the Chinese marketplace and has had numerous challenges and obstacles come its way. Public health scares of airborne diseases, tainted food supplies and more, in addition to the normal cycles that economies go through.

Somehow, YUM Brands has been able to survive an onslaught of challenges, although it has been relatively slow in boun
cing back from the latest food safety related issue. It lowered its profit forecasts this past week and took a very large hit, however, it subsequently recovered about half of the loss during the final two days of the week when the broader market was substantially lower.

Joy Global reports earnings next week and tumbled on Friday upon release of Chinese government data. The drop would seem consistent with Joy Global’s interests in China. However, what has frequently been curious is that Joy Global often paints a picture of its activity and importantly its forward activity in a light different from “official” government reports.

Following Friday’s pessimistic report from China, Joy Global plunged to its 5 year low in advance of earnings. Ideally, that is a more favorable condition if considering a position in advance of earnings, particularly if selling puts, as the concern for further drops can amplify the premiums on the puts and potentially provide a more appealing entry point for shares.

Blackberry (NASDAQ:BBRY) also reports earnings next week and it, too, has fallen significantly in the past month, having declined nearly 20% in that time.

I’m not really certain that anyone knows what its CEO John Chen has in mind for the company, but most respect his ability to do something constructive with the carcass that he was left with, upon arriving on the scene.

My intuition tells me that his final answer will be a sale to a Chinese company, as a last resort, and that will understandably be met with lots of resistance on both security and nationalism concerns. Until then, there’s always hope for making some money from the shares, but once that kind of sale is scuttled, the Blackberry story will have sailed.

For now, however, the option market is implying an 11.6% move in shares upon earnings news. Meanwhile, a 1.5% weekly ROI can be achieved through the sale of puts if shares do not fall more than 15%

Finally, after nothing but horrid news from the energy sector over the past weeks, at some point there comes a time when it just seems appropriate to pull the trigger and commit to a turnaround that is hopefully coming sooner, rather than later.

There is no shortage of names to choose from among, in that regard, but the one that stands out for me is the one that was somewhat ahead of the curve and has taken more pain than others, by virtue of having eliminated its dividend, which had been unsustainably high for quite a while.

Seadrill (NYSE:SDRL) is now simply an offshore drilling and services company, that is beleaguered like all of the rest, but not any longer encumbered by its dividend.

What it offers may be a good example of just how low something can go and still be a viable and respectable company, while offering a very attractive option premium that reflects the risk or the opportunity that is implied to come along with ownership of shares.

Although the bar on Seadrill’s price may still be lowered if more sector bad news is forthcoming, Seadrill may also be the first poised to pop higher once that
cycle reawakens.

Traditional Stocks: Caterpillar, EMC Corporation, McDonalds, Verizon

Momentum: Seadrill, YUM Brands

Double Dip Dividend: Las Vegas Sands (12/16 $0.50)

Premiums Enhanced by Earnings: Joy Global (12/17 AM), Blackberry (12/19 AM)

Sep132014

Weekend Update – September 14, 2014

TheAcsManWeekend Update

Two weeks ago the factors that normally move markets were completely irrelevant. Instead, investors focused much of their attention on the tragic story that ended with the passing of Joan Rivers, while allowing the market to go on auto-pilot.

The fact that economic and geo-political news was ignored during that week wasn’t really much of a concern as markets went on to secure their fifth straight weekly gain.

This past week was essentially another one where the the typical kind of news we look to was irrelevant, at least as far as gaining our attention. This week most of our efforts focused on the unfortunate story of a talented, but abusive football player and the introduction of new products from Apple (AAPL).

There was a time, not so very long ago, when that football player was considered a soft spoken role model. In fact, somewhere is a photo of my wife, in a Baltimore Ravens jersey, and he at a charitable event, one of many that he attended and supported.

Amazingly, as the home Baltimore Ravens played their game on Thursday night, there were reportedly many female fans wearing the jersey of that abusive player, even though there were plenty of offers and incentives to exchange such jerseys in for pizza, drinks and other items.

The memory of the past is apparently more relevant than the reality of the present, sometimes.

There was a time, also not so very long ago, that Apple’s fate was the same as the fate of the markets, except that when Apple went higher, the market lagged and when Apple went lower, the market outpaced in the decline. Now, its ability to lead is less evident and so its place in the week’s news was mostly as a products release event, rather than as a marking moving event.

Those days of past are now irrelevant and Apple’s reality is tied and the market routinely part ways.

Unfortunately, that football player’s brutish actions made the new iPhone 6’s planned publicity campaign appear to be ill-conceived. Equally unfortunate was that this past week’s irrelevancies weren’t sufficient to allow markets to return to auto-pilot and instead snapped that weekly winning streak, as fears of liquidity may have captured investor’s attention.

Weeks filled with irrelevancy are likely to come to an end as the coming week is filled with lots of challenges that could easily build upon the relatively mild losses that broke that successive streak of weekly gains.

In the coming week there is an FOMC statement release as well as the Chairman’s press conference. Many are expecting some change in wording in the FOMC statement that would indicate a willingness to commence interest rate increases sooner than originally envisioned. That could have an adverse impact on equity markets as a drying up of liquidity could result.

Perhaps even more of a impetus for decreased liquidity is the planned Ali Baba (BABA) IPO. Likely to be the largest ever for US markets, the money to pay for those shares has to be coming from someplace and could perhaps have contributed to this week’s preponderance of selling. It’s not too likely that a lot of money will be coming off the sidelines for these share purchases, so it’s reasonable to expect that funds have been and will be diverted.

Unfortunately, the IPO comes at the end of the week, so I don’t expect much in the way of discretionary spending to buy markets before that, unless some nice surprise in the way the FOMC’s statement is interpreted.

Let’s not also forget this week’s referendum on Scotland’s independence. No one knows what to expect and a nervous market doesn’t like surprises, nor sudden adverse shifts in currency rates.

It’s hard to know whether these events will be more relevant than some of the irrelevancies of preceding weeks, but they certainly represent upcoming challenges.

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

This is a week that I don’t have too much interest in earnings or in “momentum” kind of stocks, unless there’s also a dividend involved in the equation. Having watched some well known and regarded companies take their knocks during this past week, yet fully aware that the market is not even 2% below its recent high level, there’s not too much reason to be looking for risk.

As volatility rises concurrent with the market dropping, the option premiums themselves should show evidence of the perceived increased risk and can once again make even the most staid of stocks start looking appealing.

With my personal cash reserves at lower levels than I would like, I’m not eager to make many new purchases this week, despite what appear to be some relative bargains.

While the market was broadly weak I was fortunate in having a few positions assigned and may be anxious to re-purchase those very same positions at any sign of weakness or even if they stay near their Friday closing prices.

Those stocks were British Petroleum (BP), T-Mobile (TMUS) and Walgreen (WAG). Although they’re not included in this week’s listing, they may be among the first potential purchases that I look toward completing and may be satisfied being an onlooker for the rest of the week.

Among other stocks that may warrant some interest are those that have under-performed the S&P 500 since the beginning of the summer, a completely arbitrary measure that I have been using for the past few weeks, particularly during the phase of the market’s continuing climb.

^SPX Chart General Electric (GE) is
one of those staid stocks whose option premiums of late have been extraordinarily low. It goes ex-dividend this week and is starting to look a little bit more inviting. Having now spun off some of its financial assets and made preparations to sell its appliances divisions to my old bosses at Electrolux (ELUXY), General Electric is slowly refocusing itself and while not having looked as a stellar performer, it has greatly out-paced the S&P 500 since the bottom of the financial crisis in 2009. In hindsight it is a position that I’ve owned far too infrequently over those years.

Dow Chemical (DOW) and DuPont (DD) have both lagged the S&P 500 over the past two months, much of it having come in the past week. Those drops have brought shares back to levels that I would entertain share re-purchases.

The option premium pricing may indicate some greater risk in Dow Chemical, however both companies have some activists interests that may help to somewhat offset any longer term pressures.

I’ve been waiting for Verizon (VZ) shares to drop for a while and while it has done so in the past week, it’s still not down to the $47.50 level that I my eyes on. However, its current level may offer sufficient attraction to re-enter a position in advance of its upcoming, and increased dividend.

Without a doubt the mobile telephone sector has been an active one of late and I suspect that T-Mobile’s very aggressive strategy to acquire customers will soon show up in everyone’s bottom line and not in the way most would like. However, with strong price support at $45, a combination of option premiums and dividends could help ownership of Verizon shares offset those pressures while awaiting assignment of shares.

While Intel (INTC) hasn’t followed the pattern of the preceding selections and has performed well since the beginning of summer, it did give back enough ground in the past week to return to a level that interests me. On the downside is the credible assertion that perhaps shares of Intel have accelerated too much in the past few months and can be an easy target for any profit taking. WHile that may certainly be true, by all appearances the once moribund Intel has new life and I suspect will be reflected in earnings, should the goal of short term ownership turn into something longer.

As with Verizon, and hopefully General Electric, as its option premiums could still stand to improve, the combination of a strong dividend yield and option premiums can be helpful in waiting out any unexpectedly large and sudden price declines.

Given the mediocrity of performance by eBay (EBAY) over the past couple of years, it may be hard for anyone to find much relevance in the company, except for that potential jewel, PayPal. I purchased more shares last week and did expect that there might be some downside pressure if Apple announced a new payment system, as had been widely expected. Moving higher into the upcoming Apple event shares did go strikingly lower once details of “Apple Pay” became known. The use, however, of an expanded weekly option provided a rich premium related to the uncertainty surrounding the Apple event and time to dig out of any hole.

The bounce back came sooner than expected as some rumors regarding Google’s (GOOG) interest in eBay made their rounds. Whether valid or not, there’s not too much question that the pressure to consider a spin off of the PayPal unit is ramping up and may, in fact, be seen as necessary by eBay if it perceives any erosion on PayPal’s value as a result of a successful Apple Pay launch. In such a case, it’s far better to spin off that asset while it is still in its ascendancy, rather than to await some evidence of erosion. That is known as the “take the money and run” strategy and may serve eBay’s interests well, despite earlier assertions that PayPal functioned best and provided greatest value as an eBay subsidiary division.

While Visa (V) has announced its alignment with Apple, MasterCard (MA) always seems to be somewhat left out or at least not in a proactive position in the changing payments landscape. Yet even while it has ceded much of the debit card arena to Visa, it continues to be a very steady performer trading in a reasonably narrow range and offering an equally reasonable premium for the risk of owning shares. While selling those options also gives up the potential for upside share appreciation, that upside potential has been limited since the stock split. Much in the way as with eBay, the consideration of a covered option trade may be warranted and a means to generate returns from a position that has little net movement.

Las Vegas Sands (LVS) is the lone momentum stock for the week and it has a dividend this week that warrants some consideration. Having been brutalized in the last few weeks as the gaming sector, particularly those with interests in Macao have seen significant price erosion it appears to be developing some support in the $62.50 level. While I wish I knew that with certainty, what I do know with some degree of confidence is that when Las Vegas Sands does find that level of support it has consistently been a very good covered options position.

Finally, I jumped the gun with one of this week’s selections, having purchased shares of Cypress Semiconductor (CY) on Friday afternoon. I particularly like this company for non-investing reasons because it has been a fertile breeding ground for innovation in an number of different areas. However, by the same token, the same broad thinking that allows it to serve as an incubator also has its CEO spend too much time in the spotlight on policy related issues, when all I really want is for its share price to grow and to return to profitability.

In this case I was eager to purchase shares again in anticipation of its upcoming dividend early in the October 2014 option cycle. However, I also wouldn’t mind early assignment, having sold a deep in the money option. EIther way, the prospects of a satisfactory return look good, as even if not assigned early, there is a potential ROI of 2.5% even if shares fall nearly 5% from the purchase price.

The one caveat, if you find such things to be relevant, is that earnings will be released just two days before the end of the October cycle so there may be reason to consider rolling this forward at that point that the November 2014 options are available for sale.

Of course, all relevancy is in the eye of the
beholder and sometimes it is nice to not have any weighty issues to consider. After this coming week we may find ourselves wishing for those mindless days glued to “Access Hollywood” rather than the stock ticker.

Traditional Stocks: Cypress Semiconductor, Dow Chemical, DuPont, eBay, Intel, MasterCard, Verizon

Momentum: none

Double Dip Dividend: General Electric (9/18), Las Vegas Sands (9/18)

Premiums Enhanced by Earnings: none

Jun282014

Weekend Update – June 29, 2014

TheAcsManWeekend Update

There wasn’t much going on last week, but for what there was, you can be certain that there was a role played by some branch of government.

By no means I am a libertarian and I certainly understand the need for a beneficent government to protect those things that we hold dear, from assets to zoning, but this past week government seemed to be the singular driver of news during a week that was otherwise devoid of news.

For starters, we received yet another revision to the first quarter GDP, indicating a 2.9% decrease. That’s not the sort of growth that engenders much confidence in the economy, but it’s also the sort of report that doesn’t engender much confidence in the reporter.

Certainly for a market that is said to discount the future, learning that what you believed to have been true was patently false has to also shake confidence, particularly when you begin to wonder whether your own government’s reporting of economic data is any better than that from the nation we so readily disparage for the veracity of its reporting – China.

With the economic calendar so important each week, this coming week’s early Employment Situation Report, which has been fairly inconsequential for the past 6 months, may prove otherwise if either it offers data consistent with the abysmal GDP statistic or is qualified by large downward revisions of previous months.

But with objective data reporting out of the way, the early part of the week was focused on Supreme Court rulings that were scheduled to be released as the current session comes to its end. The decision regarding the novel technology behind the Aereo product that delivers broadcast transmission to any internet enabled device was ruled unconstitutional and any company with local broadcasting interests soared on the decision. Essentially, the Supreme Court said that an antennae that is leased and captures broadcasts is illegal, while an antennae that is purchased and captures broadcast television is not.

Then the Internal Revenue Service came into focus as it ruled favorably on Iron Mountain’s (IRM) request to convert to a REIT, which was especially surprising since it had tentatively given an adverse opinion last year. The result was a surge in share price confounding those who believed that the price already fully discounted the opinion. This ruling could open the way for others to consider separating that portion of their business that generates revenues in corporate owned facilities into a REIT and enjoy those tax benefits.

Then there was the matter of the refiners that awoke Thursday morning to the shocking news that the US Department of Commerce was going to allow essentially unrefined oil to be exported, even without a license, thereby likely reducing margins at the refiners. That sector saw some brutalized victims and some clear victors from the decision.

Then there was the case of Verizon (VZ) that had a contract in Germany canceled for fears that the NSA could use the devices as an easy conduit for surreptitiously gathering intelligence.

Finally, Barclays (BCS) drew attention from local government as the New York State Attorney General’s office filed suit against Barclays claiming “fraud and deceit” in the manner their dark pool trading was executed. Of course, when there’s one cockroach you can be certain that there are more to be found, so the financial sector becomes more widely suspect as Barclays is scrutinized.

But to be clear, I was certainly on the side of government when Janet Yellen, just the previous week gave reason to believe that interest rates would remain low, thereby suggesting that equities would be a more advantageous investment vehicle than bonds. Unfortunately, as soon as this past week started, that news was old and long forgotten, as the message had no carry over to this week’s trading.

While some of last week’s events were scheduled, others came as a surprise in more than their content. Hopefully this week will be one when the hand of government will remain invisible and allow the market to trade on something that hasn’t been seen in a long while – fundamentals.

However, now isn’t the time to hold one’s breath and it’s not necessarily likely that next week’s beginning of another earnings season will be the time to do so, either.

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

Holly Frontier (HFC) was one of those brutalized refiners whose shares plummeted upon the news that certain unrefined products could now be exported. The share drop has brought Holly Frontier to the lower end of the range in which it had been trading and in which I currently own shares. I’ve done so on five occasions this year and have watched shares go up and down in alternating quantum stages during that time. While I believe the reaction to the news may have been overdone and would like to add shares, as Holly Frontier has an appealing option premium, regular dividend and routinely pays a special dividend, as well, I would likely await to see some stability in its price as the week opens before making the decision.

I’ve been waiting a while to re-purchase shares of DuPont (DD) and after its surprise announcement of a lower earnings forecast on reduced seed sales that time may have arrived. At one time DuPont was a very frequent holding, but it’s been nearly two years since that last purchase. Since that time DuPont has started offering weekly options and much more recently expanded weekly options, greatly increasing its appeal. Like many other stocks that I consider for purchase, DuPont has that nice troika of option premium, dividend and price stability that can serve to minimize some market tremors.

Another major decliner this week was Dollar General (DG), which plunged upon news that its CEO was planning to retire sometime in 2015. Presumably, the rational for that plunge was that the company was therefore, less likely to be involved in a buyout or merger with Family Dollar Stores (FDO) as has been rumored, in the near term.

That doesn’t really seem to make very much sense to me. If the union of those two companies makes sense, as many believe that it does for both companies, it’s not terribly likely that a company would giv
e up on the idea and simply go on hiatus. They would most certainly get the process moving at an appropriate time, while ensuring that CEO succession was closely aligned with the objectives defined by the board, which will continue to be chaired by its current CEO who has indicated he would stay on during the transition period.

I actually purchased some shares in the final couple of hours on Friday in the belief that I could get a quick assignment while shares recovered and anticipated doing another purchase this coming week.

Instead, shares stumbled while trading in a wide range in the final hour and I eventually rolled over shares. However, I think that the reaction was very much not only an over-reaction, but also the wrong reaction to what was really benign news. That leaves me in a position to consider further adding shares this week.

Verizon seems to be paying a price for the US government’s alleged spying on German Prime Minister Angela Merkel and is reportedly losing government contracts in Germany to Deutsche Telecom (DT) over concerns that Verizon cell phones may be eminently capable of doing the NSA’s bidding overseas. A late day recovery restored shares above $49, but I would be anxious to purchase shares if approaching that level again, mindful of its ex-dividend date the following week.

The potential dividend payers for the week are Bristol Myers Squibb (BMY), Medtronic (MDT) and Sysco (SYY).

Bristol Myers is a frequent holding and I currently own two lots, having saved one from assignment specifically because I wanted to retain the dividend this week. It has traded in a range recently as some good news about a drug used in the treatment of melanoma has lifted shares from the low end of that range that I believe may carry shares back toward the $52 range if the overall market doesn’t fade.

Medtronic has been much in the news lately due to its proposed $43 billion buyout of Covidien (COV), an Ireland based company. While inversions are increasingly in our lexicon these days, this merger makes sense on more than just a tax basis.

Trading near its yearly highs isn’t generally a place I want to be when opening a position, but I don’t foresee any near term threat to Medtronic’s share price and it does offer a decent dividend, made more appealing if shares are assigned relatively quickly.

Sysco is just one of those companies that is everywhere you probably don’t always want to be. It’s non-flashy, utilitarian and below the radar, yet it is fairly indispensable and reliable in terms of what if offers to a broad range of customers. Shares have only recently begun trading weekly and expanded weekly options and while offering a nice dividend and option premium, also offers some opportunity for share appreciation, as well.

Finally, Whole Foods (WFM) also goes ex-dividend on July 1, but purchasing for the purposes of capturing the paltry dividend may be as bad of an idea as it has been for me to have purchased shares in the past. I currently own shares and have watched them tumble as the company faced increasing competition, bad weather and significant expansion efforts. In addition, an occasional comment too many and too controversial by one of its co-CEOs does nothing to help it recover its former glory.

Whole Foods is one of those rare companies that has previously recovered its lost glory, although it did take nearly 7 years to return to its 2005 price peak. I don’t really have the kind of patience, but the extent of the climb isn’t as steep as in the past.

I think that it’s bad news is behind it and it has shown some stability at its current price. While I often like to purchase shares after a price drop, especially if I already own shares, I haven’t found the reason to do so with Whole Foods while watching its value erode.

Unless there’s a report coming from government agencies next week citing health hazards of organic food, I’m finally ready to add to my Whole Food holdings and may as well take that puny dividend for my troubles.

Traditional Stocks: DuPont, Holly Frontier, Verizon, Whole Foods

Momentum: Dollar General

Double Dip Dividend: Bristol Myers Squibb (7/1), Medtronic (7/1), Sysco (7/1)

Premiums Enhanced by Earnings: none

Mar162014

Weekend Update – March 16, 2014

TheAcsManWeekend Update

Most of us have, at one time or another believed that we were carrying the weight of the world on our shoulders. The reality will always be that unless we are the President of the United States with a decision to be made regarding pressing that red button, those feelings are somewhat exaggerated and unlikely to be borne out in fact.

It’s probably not an exaggeration, however, to suggest that in the past week the burden of the world weighed down heavily on the U.S. stock markets.

Slowing growth and questionable economic statistics from China and an unfolding crisis in Crimea were the culprits identified this week that sapped the momentum out of our markets. The complete list of “reasons” for last week’s performance was compiled by Josh Brown, but ultimately it all came down to our shoulders. Perhaps like a regressive tax the individual investor may feel an exaggerated impact as well when the market behaves badly and may also take longer to recover from the heavy load of losses.

In addition to the global issues then there were also issues of regulation, seeing the SEC and FTC weigh in on Herbalife (HLF), dueling words of umbrage from billionaires over eBay (EBAY) and litigation from the New York State Attorney General’s Office over General Motor’s (GM) role in potentially avoidable vehicular deaths.

What there wasn’t was anything positive or optimistic to be said during the week, other than sooner or later Spring will arrive. For the first time since the last real attempt at a correction nearly two years ago the market closed lower in each trading session of the past week.

While the weekend may change my opinion, as additional news may be forthcoming as Russian war games on Ukraine’s borders play themselves out and a Crimean referendum is held, I find myself optimistic for the coming week.

I usually try to find ten potential trades for each coming week. Last week I struggled to find just nine. This week my preliminary list was nearly twenty and I had a difficult time narrowing down to ten stocks.

That hasn’t happened in a while.

Certainly, as has been discussed in previous weeks following a downward moving market, the challenge is discerning between value and value traps. In that regard this past week is no different, but for inspiration, I look to the option seller’s best friend.

That would be volatility. It creates the kind of premiums that can make me salivate and it is the lack of volatility that makes me wonder whether anyone really cares anymore about the need for stock markets to react appropriately to fundamental factors, as opposed to simply moving higher under all circumstances.

Since late 2011 we’ve been used to seeing historically low levels of volatility with occasional spikes representing market downturns. For those following along you know that there haven’t been many of those downturns in the past 20 months, although we did just recently quickly recover from an equally quick 7% loss. Those downturns saw spikes in volatility.

Suddenly there has been a lot of discussion about increasing volatility and for those that get excited about technical analysis, much is made of the significance of Volatility Index breaking above the 200 Day Moving Average.

What you don’t hear, however, are the video playbacks of all of the times the Volatility Index has surpassed that 200 Day Moving Average and it did not lead to a market breakdown, as suggested by many.

Instead, a quick look at the past year seems to indicate an alternating current of spikes in volatility between larger spikes and smaller ones. Simply put, I think we’re experiencing a regularly scheduled smaller spike in volatility.

I could be wrong, but that’s what hedging is all about.

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).

As with last week, despite the uncertainty that may usher in the coming week I see some possibilities even with some higher beta positions, on a selective basis.

While I’ve been trying to emphasize dividend paying positions for the past three months, the only potential such trades that had any appeal for me this week fell into the higher beta category.

While Best Buy (BBY) is probably immune to any direct impact from an overseas crisis, it has had no difficulty in creating its own and has certainly created a crisis of faith before regaining some respectability under new leadership. But for those that have held shares that all seems so long ago after some disappointing earnings reports. Hit especially hard this most recent earnings season, Best Buy has two months left to acquit itself and another two weeks to have their cash registers ring loudly to offset any weather related disappointments. In the meantime shares do go ex-dividend this week and have been trading in a narrow range of late. In the absence of any news it may be expected to keep doing so long enough to capture a dividend and perhaps a premium or two.

Las Vegas Sands (LVS) also goes ex-dividend this week and is also a higher beta stock. While I have traded this stock w
ith some frequency, it’s been a while since doing so as it resists going much lower. While it is at a relative low to its recent high after a 7% decline, it has still had a fairly uninterrupted trajectory. Like Best Buy, there’s not too much reason to suspect that events in Crimea will serve as a direct contagion, the higher beta may be its own heavy weight in the event of a market decline, but like cockroaches, gambling will survive even nuclear holocaust, as may Sheldon Adelson, the Chairman. It may also survive some weakness in China, as there’s no better place to bury your misery than in their Maxao casinos.

It’s usually a fallacy in the making when you use logic to convince yourself of the rationale to buy a stock. That includes the belief that if you liked a stock at one price it must certainly be even more likeable at a lower price. Yet that’s where I find myself with General Electric (GE), whose shares were just assigned from me a week ago and now find themselves priced below that earlier strike price. However, in the case of General Electric, unless there are some horrific surprises around the corner or a complete market meltdown, it’s hard to imagine that it could be classified as being a value trap at this new lower price. Down 4% in the past week and 10% YTD, if the market is heading lower, GE will have been ahead of the curve. While it’s option premium doesn’t reflect much in the way of volatility it does represent a reasonable means to surpass the performance of a flat market.

While retail has been a place that money has gone to die of late, you get a feeling that things may be reversing, at least in the minds of analysts when even Coach (COH), a literal punching leather bag for all, receives an upgrade. While my shares of Coach were assigned this week, as were my shares of Kohls (KSS), I’m ready to repurchase both in their current range, as the long fall down deserves at least a short climb higher.

Coach has shown itself to be able to faithfully defend the $46 level despite so many assaults over the past two years. That ability to consistently bounce back has made it a great covered option position, whether through outright purchase or the sale of puts.

Kohls represents exactly what I like in my stocks. That is a non-descript existence and just happily going along its way without making too much fuss, other than an occasional earnings related outburst. Dependable is far more important than being flashy and as a stock and as a company, Kohls hugs that middle lane reliably, but still provides a competitive premium thanks to those occasional outbursts.

If the thesis that retail is ready for a comeback has more of a basis than just as reflected in share price, but also reflects pent up spending from a harsh winter, MasterCard (MA) is a prime beneficiary. While already somewhat protected from the ravages of weather by virtue of being able to spend your money with just a simple mouse click, there are just some things that need to be done in the real world. Trading well below its pre-split price until recently I had not owned shares in years. Now more readily purchased in scale, I look forward to the opportunity to purchase and re-purchase these shares with some degree of regularity, WHile its dividend is paltry, there is certainly room for growth to rise to the levels of Visa (V) and Discover Financial Services (DFS). However, notwithstanding any potential bump in share price along with a dividend hike, the option premiums can make the wait worthwhile.

In a week of no industry specific news, following a flurry of changes in industry dynamics initiated by T-Mobile (TMUS), Verizon (VZ) fell 3% bringing it down to a level from which it has found significant strength. While General Electric may face some potential liability with events in Crimea or a deteriorating economy in China, I don’t see quite the same liability for Verizon. Instead, whatever burdens it has to carry will come from an increasingly competitive landscape as it and AT&T (T) are continually pushed by T-Mobile and perhaps Sprint (S). In the meantime, while trading in a range and finding support at $46, there’s always the additional lure of a 4.5% dividend.

While Verizon isn’t terribly exciting it meets its match in Intel (INTC). However, the excitement that comes from growth isn’t absolutely necessary to generate predictable profits. Intel is especially well suited when it’s share price is very close to a strike level. If volatility continues to rise the opportunity to purchase Intel expands as the price range at which it may be purchased increases, while still offering an attractive option premium which can be further enhanced by an attractive dividend.

While it was only a matter of time until retail would begin to dig its way out from under the piles of snow, no sector has brutalized me more this past year than the one that requires digging. Freeport McMoRan (FCX) is among that group that hasn’t been terribly kind to me, despite my belief that it would be the “stock of the year” for 2013.

With copper itself being brutalized this past week, despite gold’s relative strength, Freeport McMoRan has itself had the weight of the market’s response to the less than robust Chinese economy to shoulder. But the one thing that you can always count on is that data from China can easily correct reality and that explains the seemingly recurrent see-saw ride that we have been on in those sectors that are tied to their data. The true plunge in copper prices, if sustained, will not be good news for Freeport McMoRan, whose generous dividend payout could conceivably be jeopardized.

On the other hand, shares are now at a level that has repeatedly created substantial returns for those willing to test the waters.

Finally, not many companies, especially those with a newly appointed CEO had as bad a week as General Motors. You might think that having paid its first dividend in years this past Friday there would be reasons to rejoice, but finding yourself at the top of the headlines related to customer deaths isn’t an enviable place, nor one conducive to a thriving share price. When the Attorney General of any state piles on that doesn’t help.

However, with a chorus of those clamoring for General Motors to re-test the $30 level purely on a technical basis there may be reason enough to believe that won’t be the case. Having timed a purchase of shares as inopportunely as possible, I’d like nothing more than to see that position restored to some respect.

As with the recent news that the FTC will b
e investigating allegations that Herbalife was engaged in a Ponzi scheme, the bad news for General Motors, while coming as an acute event, will take a long while to play out, regardless of the merits of the cases or the human tragedies caught up in what is now a story of fines, punishment andperhaps even acquittal.

Traditional Stocks: Coach, General Electric, General Motors, Intel, Kohls, MasterCard, Verizon

Momentum Stocks: Freeport McMoRan

Double Dip Dividend: Best Buy (ex-div 3/18), Las Vegas Sands (ex-div 3/18)

Premiums Enhanced by Earnings: none