Oct182014

Weekend Update – October 19, 2014

Weekend Update

 After Friday’s nearly 300 point move higher, it’s absolutely inconceivable that anyone can have a clear idea of what comes next.

Even during the climbs higher over the past two years no one really had a clue of what the next day would bring, but there was an entirely different “gestalt” about the market than we have now.

During that earlier time the sum of its parts seemed somewhat irrelevant as the market as a whole was just greater than those parts and had a momentum that was impervious to the usual challenges and patterns.

The most obvious of those challenges that hadn’t come to a fruition was the obligatory periodic 10% correction. Instead, while we really didn’t know what was coming next, at least we had a clear idea of what was not coming next.

Can you say the same today?

After a month of the kind of daily moves that we really haven’t seen since the latter half of 2011, their alternating basis can only keep people off guard.

People generally fall into two categories on days when the market spikes as it did on Friday, particularly after a torrent of plunges. They either see that as evidence that we’ve turned the corner or that it’s just another trap to lure you in so that your money can wither away while feeding the beast.

For some, those optimists among us, they will have identified a capitulation as having occurred this week. They believe that kind of blow off selling marks the beginning of a return to a climb higher.

For the pessimists among us, they see that most every out-sized market one day gain has occurred during an overall downtrend.

While I remain confused about what the next week will bring, I’m not too confused about what my course of action is likely to be.

I don’t agree with the optimists that we’ve seen a capitulation. Those tend to be marked by a frenzy of selling. It’s not just a 400 point decline, it’s the rapid acceleration of the losses that shows no evidence of letting up that is usually the hallmark. The following day is also usually marked by selling during the open and then cautious buying that becomes a flood of bargain hunters.

So capitulation? Probably not, but the market very well still could have found a near term bottom this week as that 400 point loss did evaporate. That near bottom did bring us to about a 9% overall decline in the S&P 500 over the past 4 weeks, so perhaps you might hear the optimists asking “can a brother get some slack on 1%?” in the hopes that we can all move on and return to the carefree ways of 2012 and 2013.

On the other hand, those pessimists do have data on their side. You don’t need very fancy kinds of analysis to show that those 200, 300 and higher point moves over history have only served to suck money out of people’s pockets under false pretenses.

Over the past four weeks with the possible exception of the advances higher in the latter half of this past week, every strong advance led to disappointment. Every time it looked as if there was value to be had it was another value trap, as a whole.

My course of action last week was one that still has me in shock.

I didn’t execute a single new position trade last week, after having only added 2 new positions the previous week.

I’d better get used to that shock, because I don’t expect to add many, if any, new positions this week, unless there’s some reason to believe that a period, even if very short, of stability will step in.

Perhaps continuing good earnings news will be the catalyst for the market to take a breather from its recent mindless journeys to the depths and to the heights. Good news form the financial sector, some good indications from industrials and some good news from the technology companies that really matter could be a wonderful prelude to improved retail earnings.

Or maybe none of that will matter and we’ll again focus on things like moving averages, support levels, mixed messages from Federal Reserve Governors and news of continuing economic dysfunction in the European Union, all while watching the smartest guys in the room, the bond traders have their own gyrations as interest rates on 10 Year Treasury notes resemble a yo-yo, having had an enormous 10% spread in the past week.

Most of all, I want to focus on not being duped and trying to put uncovered positions to work. That means continuing to try and resist what appear to be screaming bargains, even after Friday’s march higher and higher.

But, we’re only human and can only resist for so long.

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

As I look at prices, even after some runs higher on Friday, what’s not to like? That still doesn’t mean, however, that you have to end up committing to anything.

What makes the temptation even stronger, despite a big drop in volatility on Friday, are the option premiums that can now be had when selling. The challenge, however, is finding the option buyer, as call volume is diminished, probably reflecting a paucity of belief that there will be sudden price jumps in underlying shares.

Part of the strategy accommodation that may be made if grappling with paper losses following the past four weeks is to now consider using out of the money strike prices that will still return the same ROI on the premium portion, but also potentially add some meaningful capital gains on the shares.

As with last week, I’m not terribly interested in the back story behind the week’s selections, but more in the recent price history, with particular attention to those that may have been overly and inappropriately punished.

MetLife (MET) is one of those among so many, that l have been waiting to repurchase. With the recent interest rate gyrations that actually brought the 10 Year rate below 2% there may be some rational to the price drop seen in MetLife, but with the 10% increase in rates some life was breathed back into floundering shares.

eBay (EBAY) is still a company that is always on my radar screen. Whether that will continue to be the case after the PayPal spin-off may be questionable, but for now, at its new low, low price, having taken a little bit of a beating from its just posted earnings, it really is beginning to feel irresistible.

Among sectors getting my attention this week is Healthcare. Following the drop in Merck (MRK), Baxter International (BAX) and the continued weakness of Walgreen (WAG).

With a 10% drop in shares of Merck in the past week, taking it to an 8 month low in the absence of any meaningful news one has to wonder when will the craziness end? Now in
its own personal correction phase it wouldn’t be entirely an ill-conceived idea to believe that shares have either no reason to continue under-performing the market. With an attractive dividend and option premiums reflecting that downward spiral, Merck is one position that could warrant resisting the need to resist.

Baxter International is also in its own personal correction, although its time frame as been a month for that 10% decline. Despite having just released earnings and offering improved guidance shares continued to flail even as most everything else was showing some recovery. While there may be some logical explanation my interest in entertaining it may be subsumed by an interest in picking up shares.

Walgreen continues to be mired down at a price level to which it plunged after calling off any potential tax inversion plans. Being stuck in that trading range, however, has helped Walgreen to outperform the S&P 500 since it hit its highs last month. For it to continue trading in that range might be the kind of comfort that could provide some smiles even while everything else around is crumbling, particularly if the upcoming dividend is captured, as well.

Marathon Oil (MRO) is just another of those really hard hit energy stocks that has to cause some head shaking as it is in a personal correction and then some, even after 2 days of strength. The list need not end with Marathon Oil if considering adding energy sector positions, as there is no shortage of viable candidates. FOr me, Marathon Oil is one position that I’ve longed to return to my portfolio, but do understand that there may continue to be some downward pricing pressure in oil, before the inevitable bounce higher.

FInally, how can you not at least consider taking sides in the great Apple (AAPL) saga? Whether there will be a gold mine ahead as the new products hit the stores or deep disappointment, its earnings report this week is not likely to reflect anything other than great phone sales and lagging sales in most, if not all other product lines.

The option market, however, isn’t expecting too much action, with an implied price movement of only 4.4% next week. With barely a 1% premium at a strike level right at the lower edge defined by the implied move there isn’t really any enhancement in its premiums, especially as there is a general increase in volatility buoying most option premiums.

However, the sale of puts at the lower level strike may offer the opportunity to enter a position, particularly in front of the upcoming dividend at a better price than has been seen in over 2 months, or may simply offer a decent one week return.

Traditional Stocks: Baxter International, eBay, Marathon Oil, Merck, MetLife, Walgreen

Momentum: none

Double Dip Dividend: none

Premiums Enhanced by Earnings: Apple (10/20 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.

Sep132014

Weekend Update – September 14, 2014

Weekend 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 ChartGeneral 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

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.

Aug92014

Weekend Update – August 10, 2014

Weekend Update

Back in 2007 there was a sign that most mere mortals failed to recognize or understand as they stood in the path of peril.

A messenger delivered such a sign some seven years earlier, as well, and did so again last month.

The messenger was old, perhaps as old as the universe itself and his words and actions did foretell of the dangers that awaited, yet they were not appreciated as such, not even by the messenger, who may also have served as the executioner.

The proposed acquisitions of Chris-Craft and Dow Jones, in 2000 and 2007, respectively, were among the signs of market tops preceding terrible plunges that each saw the sacrifice of a generation of investors, some of whom are still said to be hiding as they await some sign of safety to begin investing once again.

The re-appearance of the messenger should give them some pause before considering a return to the action.

However, in a strange kind of way the “all safe” sign may have been delivered this week, as Rupert Murdoch, whose timing with his large previous acquisitions has been exquisite in its accuracy for coinciding with market tops has now sent a counter sign.

Barely a month ago, for those believing in the power of Murdoch, it was ominous that he would have proposed a buy out of Time Warner (TWX), but this week that offer was revoked, perhaps offering a respite to investors fearing another plunge from what may be destined to be a market top.

While many are speculating as to the reason for Murdoch’s change of heart, could it be that he has come to the realization that his offering price was just too high and that history, which has a habit of repeating itself, was poised to do so again?

Probably not, as once you get the taste, it’s all about the hunt and it shouldn’t come as a surprise if Murdoch either regroups, as the world appreciates that Time Warner’s share value is far less without Murdoch’s pursuit or as he seeks a new target.

As far as the revocation of the offer being a counter sign, this past week didn’t seem to receive it as such, as market weakness from last week continued amidst a barrage of international events.

But Murdoch wasn’t alone this week in perhaps having some remorse. Sprint (S), which never really made an overt bid for T-Mobile (TMUS), did however, overtly withdraw itself from that fray, just as T-Mobile was thumbing its nose at the French telecommunications company, Illiad’s (ILD) bid.

Walgreen (WAG) may have had a double dose of remorse this week as it announced that it would buy the remainder of a British drug store chain but would not be considering doing a tax inversion. They may have first regretted the speculation that they would be doing so as they undoubtedly received considerable political pressure to not move its headquarters. Seeing its shares plunge on that news may have been additional cause for remorse.

While Murdoch may have significant personal wealth tied to the fortunes of his company and may have a very vested interest in those shares prospering, that may not always be the case, as for some, it may be very easy to spend “other people’s money” in pursuit of the target and be immune to feelings of remorse.

But it’s a different story when it’s your own money in question. “Investor’s Remorse” can have applicability in both the micro and macro sense. We have all made a stock purchase that we’ve come to regret. However, in the larger sense, the remorse that may have been felt in 2000 and 2007 as Murdoch flexed his muscles was related to the agony of having remained fully invested in the belief that the market could only go higher.

When we see the potential signs of an apocalypse, such as increasing buyout offers and increasing numbers of initial public offerings while the market is hitting new highs, one has to wonder whether remorse will be the inevitable outcome. An Italian recession and the German stock exchange in correction may add to concerns.

Philosophically, my preference has long been to miss an upward climb to some degree by virtue of not being fully invested, rather than to be fully engaged during a market decline.

A drop of 10% seems like a lot, but it will seem even more when you realize that you must gain 11% just to once again reach your baseline. Having been that route I believe it’s much easier to drop 10% than it is to gain 11%. Just ask anyone who now own stocks that may have suddenly found themselves officially in “correction territory.”

As I get older I have less and less time and less appetite for remorse. I would assume that Rupert Murdoch feels the same, but he may also have a sense of immunity coupled with the secret for immortality, neither of which I enjoy.

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

This week’s selections include a number of recent targets and perhaps sources of remorse that may now find themselves better suited for those spending their own money, rather than that of other people.

Time Warner shareholders have been on a rollercoaster ride over the past three weeks as they saw a plunge on the same order as an initial surge in that time span. They may be experiencing some remorse for their leadership not being willing to consider Murdoch’s overture. The revocation of the offer, beautifully timed to dampen the good news of Time Warner’s earnings perhaps helped to limit any upside gains from earnings and adding to the feeling that Murdoch was the key to attaining “fair value,” even if that fair value may now no longer represent a premium to the initial bid.

However, with shares now back to their pre-offer level, which admittedly was at the then high for the year, the option premiums are quite high, reflecting the potential for more action. The challenge is knowing in which direction.

In the case of T-Mobile, it was a whirlwind week seeing an offer from abroad which wasn’t taken very seriously by anyone and then seeing the presumptive acquirer drop out of the game.

It’s hard to say who if anyone would have had any remorse, certainly not its out front CEO, John Legere, but no doubt shareholders experienced some, as shares plummeted in the belief that suitors were dropping like flies.

While Legere talks a boisterous game and did all he could to close the door to any future with Sprint, the reality is that T-Mobile needs both spectrum and cash and Legere needs a “sugar daddy” and one with lots of patience and tolerance.

For anyone willing to get in bed with T-Mobile, the good news is that they can have John Legere. The bad news is that they get John Legere.

But for a short term trade, suddenly T-Mobile is in correction territory and as long as there may still be prospects of capital appreciation, the option premiums are very enticing.

Walgreen shares fell nearly 15% on news that it wasn’t going to do a tax inversion, which seems far more than appropriate, as shares had their major ascent about 6 months ago long before most had ever heard of tax inversion.

I’ve been waiting for a while for Walgreen shares to return to the $60 level and the current reason hardly seems like one that would keep shares trading at that low level. Some recovery over the past two days doesn’t dampen the attraction to its shares.

Target (TGT) certainly should have experienced some remorse over the manner in which its data security practices were managed. In Target’s case, they put an additional price tag on that remorse that reversed the recent climb in shares, but was just really part of the obligatory dumping of all bad news into a single quarter to honor the ascension of a new CEO.

I’ve owned Target shares for a while waiting for it to recover from its security breach related price drop. Uncharacteristically, I haven’t added to my holdings as I usually do when prices drop because I haven’t had the level of confidence that I usually want before doing so. Now, however, I’m ready to take that plunge and don’t believe that there will be reason for further personal remorse. WIth an upcoming dividend, I don’t mind waiting for it to share in an anticipated pick up in the retail sector.

I’ve certainly had remorse over my ownership of shares in Whole Foods (WFM). While its co-CEOs are certainly visionaries, they have been facing increasing competition, are engaged in an aggressive national expansion and have one CEO that tends to make inopportune comments reflecting personal beliefs that frequently impact the stock price.

To his credit John Mackey has expressed some regrets over his choice of words in the past, but recently there has been little to inspire confidence. A recent, albeit small, price climb was attributed to a rumor of an activist position. While I have no idea of whether there’s any validity to that, Whole Foods does represent the kind of asset that may be appealing to an activist, in that it has a well regarded product, significantly depressed share price and leadership that may have lost touch with what is really important.

Mondelez (MDLZ) may or may not have any reason to feel remorse over adding activist investor Nelson Peltz onto its Board of Directors and to his decision to stop seeking a merger deal with Pepsi (PEP). Investors, however, may have some remorse as shares suddenly find themselves in correction over the past month.

That price drop brings Mondelez shares back into consideration for rotation into my portfolio, especially if looking for classically “defensive” positions in advance of an anticipated market decline. With an almost competitive dividend, a decent option premium and the possibility of some price bounce back the shares look attractive once again.

DuPont (DD) and Eli Lilly (LLY) are both ex-dividend this week and there’s rarely reason to feel remorse when a dividend can make you feel so much better, especially when well in excess of the average for S&P 500 stocks. Lilly’s recent fall in the past two weeks and DuPont’s two month’s decline offer some incentive to consider adding shares at this time and adding option premiums to the income mix while waiting for the market to return to an upward bias.

Cree (CREE) reports earnings this week and is always an exciting ride for a lucky or unlucky investor. It is a stock that either creates glee or remorse.

My most recent lot of shares came from eventually taking assignment of shares following the sale of puts after the previous earnings report, thinking that they couldn’t possibly go down any further in a significant manner. I don’t have any remorse, as I’ve been able to generate option premium revenue on having rolled the puts over and then having sold calls subsequent to assignment. I may, however, have some remorse after this coming week’s earnings.

The option market is once again looking for a significant earnings related move next week. For the trader willing to risk remorse a 1% weekly ROI may be achieved at a strike level 12% below the current price. For those less tolerant of risk, if shares do drop significantly after earnings, some consideration can be given to selling out of the money puts and being prepared to manage the position, as may become necessary.

Finally, how can you talk about remorse and not mention Halliburton (HAL)? From drilling disasters to adventures in Iraq Halliburton really hasn’t needed to be remorseful, because somehow it always found a way to prosper and move beyond the “disaster du jour.”

In hindsight, it seems so perfectly appropriate that for a period in time its CEO was future Vice President Dick Cheney, who didn’t even express any remorse for having shot a good friend in the face.

That’s the kind of leadership that we need in a company being considered for its worthiness of our personal assets, because we are capable of remorse and are pained by the prospects of engaging in it.

With some recent price weakness, as being experienced in the energy sector, now appears to be a good time to take advantage of Halliburton’s price retreat and save the remorse for others.

Traditional Stocks: Halliburton, Mondelez, Target, Time Warner, Walgreen, Whole Foods

Momentum: T-Mobile

Double Dip Dividend: DuPont (8/13), Eli Lilly (8/13)

Premiums Enhanced by Earnings: Cree (8/12 PM)

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

Aug302013

Weekend Update – September 1, 2013

Weekend Update

Behind every “old wives’ tale” there has to be a kernel of truth. That’s part of the basis for it being handed down from one generation to the next.

While I don’t necessarily believe that the souls of dead children reside in toads or frogs, who knows? The Pets.com sock puppet was real enough for people to believe in it for a while. No one got hurt holding onto that belief.

The old saw “Sell in May and go away,” has its origins in a simpler time. Back when The Catskills were the Hamptons and international crises didn’t occur in regular doses. There wasn’t much reason to leave your money in the stock market and watch its value predictably erode under the hot summer sun back in the old days.

Lately, some of those old wives’ tales have lost their luster, but the Summer of 2013 has been pretty much like the old days. With only a bare minimum of economic news and that part of the world that could impact upon our stock market taking a summer break, it has been an idyllic kind of season. In fact, with the market essentially flat from Memorial Day to Labor Day it was an ideal time to sell covered options.

So you would think that Syria could have at least waited just another week until the official end to the summer season, before releasing chemical weapons on its own citizens and crossing that “red line,” that apparently has meaning other than when sunburn begins and ends.

Or does it?

On Monday, Secretary of State John Kerry made it clear where the United States believed that blame lay. He used a kind of passion and emotion that was completely absent during his own Presidential campaign. Had he found that tone back in 2004 he might be among that small cadre of “President Emeritus” members today. On Friday he did more of the same and sought to remove uncertainty from the equation.

Strangely, while Kerry’s initial words and intent earlier in the week seemed to have been very clear, the market, which so often snaps to judgment and had been in abeyance awaiting his delayed presentation, didn’t know what to do for nearly 15 minutes. In fact, there was a slightly positive reaction at first and then someone realized the potentially market adverse meaning of armed intervention.

Finally, someone came to the realization that any form of warfare may not be a market positive. Although selling only lasted a single day, attempts to rally the markets subsequently all faded into the close as a variant on another old saying – “don’t stay long going into the weekend,” seemed to be at play.

That’s especially true during a long weekend and then even more true if it’s a long weekend filled with uncertainty. As it becomes less clear what our response will be, paradoxically that uncertainty has led to some calm. But at some point you can be assured that there will be a chorus of those questioning President Obama’s judgment and subsequent actions and wondering “what would Steve Jobs have done.”

John Kerry helped to somewhat answer that question on Friday afternoon and the market ultimately settled on interpreting the message as being calming, even though the message implied forceful action. What was clear in watching the tape is that algorithms were not in agreement over the meaning of the word “heinous.”

With the market having largely gone higher for the past 20 months the old saying seeking to protect against uncertainty during market closures has been largely ignored during that time.

But now with uncertainty back in the air and the summer season having come to its expected end, it is back to business as usual.

That means that fundamentals, such as the way in which earnings have ruled the market this past summer take a back seat to “events du jour” and the avalanche of economic reports whose relevance is often measured in nano-seconds and readily supplanted by the next bit of information to have its embargo lifted.

This coming week is one of great uncertainty. I made fewer than the usual number of trades last week and if i was the kind that would be prone to expressing regret over some of them, I would do so. I expect to be even more cautious this week, unless there is meaningful clarity introduced into the equation. While wishing for business as usual, that may not be enough for it to become reality.

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

While I currently own more expensive shares of Caterpillar (CAT), I almost always feel as if it’s a good time to add shares. Caterpillar has become everyone’s favorite stock to disparage, reaching its peak with famed short seller Jim Chanos’ presentation at the “Delivering Alpha Conference” a few weeks ago. as long as it continues trading in a $80-$90 range it is a wonderful stock for a covered call writing strategy and it has reliably stayed in that range.

Joy Global (JOY) reported its earnings last week and beat analysts estimates and reaffirmed its 2014 guidance. Nonetheless it was brutalized in the aftermath. Although already owning shares I took the opportunity to sell weekly put options in the belief that the reaction was well overdone.

If the reports of an improving Chinese economy are to be believed, and that may be a real test of faith, then Joy Global stands to do well. Like Caterpillar, it has traded in a reasonably narrow range and is especially attractive in the $48-53 neighborhood.

eBay (EBAY) is simply on sale, closing the week just below the $50 level. With no news to detract from its share price and having traded very well in the $50 -53 range, it’s hard to justify why it fell along with other stocks in the uncertainty that attended the concerns over Syria. It’s certainly hard to draw a straight line from Syria related fears to diminished earnings at eBay.

By the recent measure that I have been using, that is the comparison to the S&P 500 performance since May 21, 2013, the market top that preceded a small post-Ben Bernanke induced correction, eBay has well underperformed the index and may be relatively immune from short term market pressure.

Baxter International (BAX) is one of those stocks that I like to own and am sad to see get assigned away from me. Every job has its negative side and while most of the time I’m happy seeing shares assigned, sometimes when it takes too long for them to return to a reasonable price, I get forlorn. In this case, timing is very serendipitous, because Baxter has fallen in price and goes ex-dividend this week.

Coach (COH) also goes ex-dividend this week and that increases its appeal. At a time when retail has been sending very mixed messages, and at a time when Coach’s position at the luxury end is being questioned as Michael Kors (KORS) is everyone’s new darling, COach is yet another example of a stock that trades very well in a specific range and has been very well suited to covered option portfolios.

In general, I’ve picked the wrong year to be bullish on metals and some of my patience is beginning to wear thin, but I’ve been seeing signs of some stability recently, although once again, the risk of putting too much faith into a Chinese recovery may carry a steep price. BHP Billiton (BHP) is the behemoth that all others bow to and may soon receive the same kind of fear and respect from the potash industry, as it is a prime reason the cartel has lost some of its integrity. BHP Billiton also goes ex-dividend this week and is now about 6% below its recent price spurt higher.

Seagate Technology (STX) isn’t necessarily for the faint of heart. but it is down nearly 20% from its recent high, at a time when there is re-affirmation that the personal computer won’t be disappearing anytime soon. While many of the stocks on my radar screen this week have demonstrated strength within trading ranges, Seagate can’t necessarily lay claim to the same ability and you do have to be mindful of paroxysms of movement which could take shares down to the $32 level.

While Seagate Technology may offer the thrills that some people need and the reward that some people want, Walgreen (WAG) may be a happy compromise. A low beta stock with an option premium that is rewarding enough for most. Although Walgreen has only slightly under-performed the S&P 500 since May 21st, I think it’s a good choice now, given potential immunity from the specific extrinsic issues at hand, particularly if you are under-invested in the healthcare sector.

Another area in which I’m under-invested is in the Finance sector. While it hasn’t under-performed the S&P 500 recently, Bank of New York Mellon (BK) is still about 7% lower in the past 5 weeks and offers a little less of a thrill in ownership than some of my other favorites, JP Morgan Chase (JPM) and Morgan Stanley (MS). Sometimes, it’s alright giving up on the thrills, particularly in return for a competitive option premium and the ability to sleep a bit sounder at night.

Finally, with the excitement about Steve Ballmer finally leaving Microsoft (MSFT) after what seems like an eternity of such calls, the share price has simply returned to a more inviting re-entry levels. In fact, when Ballmer announced his decision to leave the CEO position in 12 months, I did something that I rarely do. I bought back my call options at a loss and then sold shares at the enhanced share price. Occasionally you see a shares appreciation outstrip the appreciation in the in the money premium and opportunities are created to take advantage of the excitement not being reflected in future price expectations.

At the post-Ballmer excitement stage there is still reason to consider share ownership, including the anticipation of another dividend increase and option premiums while awaiting assignment of shares

Traditional Stocks: Bank of New York Mellon, Caterpillar, eBay, Microsoft, Walgreen

Momentum Stocks: Joy Global, Seagate Technology

Double Dip Dividend: Baxter International (ex-div 9/4), BHP Billiton (ex-div 9/4), Coach (ex-div 9/5)

Premiums Enhanced by Earnings: none

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

Aug92013

Weekend Update – August 11, 2013

Weekend Update

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

Just like the professionals.

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

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

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

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

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

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

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

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

That catalyst lasted for all of an hour.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Momentum Stocks: Joy Global, Mosaic

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

Premiums Enhanced by Earnings: none

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