Weekend Update – June 30, 2013

The hard part about looking for new positions this week is that memories are still fresh of barely a week ago when we got a glimpse of where prices could be.

When it comes to short term memory the part that specializes in stock prices is still functioning and it doesn’t allow me to forget that the concept of lower does still exist.

The salivating that I recall doing a week ago was not related to the maladies that accompany my short term memory deficits. Instead it was due to the significantly lower share prices.

For the briefest of moments the market was down about 6% from its May 2013 high, but just as quickly those bargains disappeared.

I continue to beat a dead horse, that is that the behavior of our current market is eerily reminiscent of 2012. Certainly we saw the same kind of quick recovery from a quick, but relatively small drop last year.

What would be much more eerie is if following the recovery the market replicated the one meaningful correction for that year which came fresh off the hooves of the recovery.

I promise to make no more horse references.

Although, there is always that possibility that we are seeing a market reminiscent of 1982, except that a similar stimulus as seen in 1982 is either lacking or has neigh been identified yet. In that case the market just keeps going higher.

I listened to a trader today or was foaming at the mouth stating how our markets can only go higher from here. He based his opinion on “multiples” saying that our current market multiple is well below the 25 times we saw back when Soviet missiles were being pointed at us.

I’ll bet you that he misses “The Gipper,” but I’ll also bet that he didn’t consider the possibility that perhaps the 25 multiple was the irrational one and that perhaps our current market multiple is appropriate, maybe even over-valued.

But even if I continue to harbor thoughts of a lower moving market, there’s always got to be some life to be found. Maybe it’s just an involuntary twitch, but it doesn’t take much to raise hope.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend or Momentum categories. With earnings season set to begin July 8, 0213, there are only a handful of laggards reporting this coming week, none of which appear risk worthy (see details).

I wrote an article last week, Wintel for the Win, focusing on Intel (INTC) and Microsoft (MSFT). This week I’m again in a position to add more shares of Intel, as my most recent lots were assigned last week. Despite its price having gone up during the past week, I think that there is still more upside potential and even in a declining market it will continue to out-perform. While I rarely like to repurchase at higher prices, this is one position that warrants a little bit of chasing.

While Intel is finally positioning itself to make a move into mobile and tablets and ready to vanquish an entire new list of competitors, Texas Instruments (TXN) is a consistent performer. My only hesitancy would be related to earnings, which are scheduled to be announced on the first day of the August 2013 cycle. Texas Instruments has a habit of making large downward moves on earnings, as the market always seems to be disappointed. With the return of the availability of weekly options I may be more inclined to consider that route, although I may also consider the August options in order to capitalize somewhat on premiums enhanced by earnings anticipation.

Already owning shares of Pfizer (PFE) and Merck (MRK), I don’t often own more than one pharmaceutical company at a time. However, this week both Eli Lilly (LLY) and Abbott Labs (ABT) may join the portfolio. Their recent charts are similar, having shown some weakness, particularly in the case of Lilly. While Abbott carries some additional risk during the July 2013 option cycle because it will report earnings, it also will go ex-dividend during the cycle. However, Lilly’s larger share drop makes it more appealing to me if only considering a single purchase, although I might also consider selling an August 2013 option even though weekly contracts are available.

I always seem to find myself somewhat apologetic when considering a purchase of shares like Phillip Morris (PM). I learned to segregate business from personal considerations a long time ago, but I still have occasional qualms. But it is the continued ability of people to disregard that which is harmful that allows companies like Phillip Morris and Lorillard (LO), which I also currently own, to be the cockroaches of the market. They will survive any kind of calamity. It’s recent under-performance makes it an attractive addition to a portfolio, particularly if the market loses some ground, thereby encouraging all of those nervous smokers to sadly rekindle their habits.

The last time I purchased Walgreens (WAG) was one of the very few times in the past year or two that I didn’t immediately sell a call to cover the shares. Then, as now, shares took, what I believed to be an unwarranted large drop following the release of earnings, which I believed offered an opportunity to capture both capital gains and option premiums during a short course of share ownership. It looks as if that kind of opportunity has replicated itself after the most recent earnings release.

Among the sectors that took a little bit of a beating last week were the financials. The opportunity that I had been looking for to re-purchase shares of JP Morgan Chase (JPM) disappeared quickly and did so before I was ready to commit additional cash reserves stored up just for the occasion. While shares have recovered they are still below their recent highs. If JP Morgan was not going ex-dividend this trade shortened week, I don’t believe that I would be considering purchasing shares. However, it may offer an excellent opportunity to take advantage of some option pricing discrepancies.

I rarely use anecdotal experience as a reason to consider purchasing shares, but an upcoming ex-dividend date on Darden Restaurants (DRI) has me taking another look. I was recently in a “Seasons 52” restaurant, which was packed on a Saturday evening. I was surprised when I learned that it was owned by Darden. It was no Red Lobster. It was subsequently packed again on a Sunday evening. WHile clearly a small portion of Darden’s chains the volume of cars in their parking lots near my home is always impressive. While my channel check isn’t terribly scientific it’s recent share drop following earnings gives me reason to believe that much of the excess has already been removed from shares and that the downside risk is minimized enough for an entry at this level.

While I did consider purchasing shares of Conoco Phillips (COP) last week, I didn’t make that purchase. Instead, this week I’ve turned my attention back to its more volatile namesake, Phillips 66 (PSX) which it had spun off just a bit more than a year ago. It has been a stellar performer in that time, despite having fallen nearly 15% since its March high and 10% since the market’s own high. It fulfills my need to find those companies that have fared more poorly than the overall market but that have a demonstrated ability to withstand some short term adverse price movements.

Finally, I haven’t recommended the highly volatile silver ETN products for quite a while, even though I continue to trade them for my personal accounts. However, with the sustained movement of silver downward, I think it is time for the cycle to reverse, much as it had done earlier this year. The divergence between the performance of the two leveraged funds, ProShares UltraShort Silver ETN (ZSL) and the ProShares Ultra Silver ETN (AGQ) are as great as I have seen in recent years. I don’t think that divergence is sustainable an would consider either the sale of puts on AGQ or outright purchase of the shares and the sale of calls, but only for the very adventurous.

Traditional Stocks: Abbott Labs, Eli Lilly, Intel, Mosaic, Phillip Morris, Texas Instruments, Walgreens

Momentum Stocks: Phillips 66, ProShares UltraSilver ETN

Double Dip Dividend: Darden Restaurants (ex-div 7/8), JP Morgan (ex-div 7/2)

Premiums Enhanced by Earnings: none

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

 

Weekend Update – April 14, 2013

Increasingly modern science is helping to bring great clarity to an understanding of the very essence of our universe’s existence. Yet there remain some questions that will likely forever escape our ability to comprehend.

Some questions, such as the perennial “what is the meaning of life?” do not have a “Higgs-Boson” to provide a unifying hypothesis and can simultaneously provide contentment as well as contention.

I prefer to ask a very basic question that rarely has an answer. “What were they thinking?” Sometimes I ask a variant of that question – “What was I thinking?” Lately I’ve been asking the latter quite a bit.

What perplexes me, though, is how such two groups of smart people can convincingly commit themselves to opposite sides of an investment or so convincingly change their allegiances. I suppose that same observation can be applied toward the issue of nations going to war and then pursuing peace. The reasons aren’t always clear, yet the convictions are rock solid.

In this case, it’s one of my long time favorites and most recently under-performing stocks, Microsoft (MSFT) that is at the center of my attention. It happens to report earnings this coming week and any significant price changes ahead of earnings reflect conviction and large bets to back up that conviction.

For many, Microsoft has been an under-performer for a decade. I don’t look at it quite like that because of its option premiums and dividends while trading in a reasonably narrow price range. Lately, however, I haven’t been selling options as regularly as I had over nearly a decade of nearly continual share ownership. That’s because that price range had significantly narrowed and was well below my cost.

But this week really got my attention as shares skyrocketed, at least by Microsoft’s standards, about 6% over 2 days and surpassed $30. You may remember that $30 level, because that was just a bit above the level that many “smart” people finally publicly declared their love of the shares, just in tome to get in before a pronounced course reversal.

That was over a year ago. The price course higher was slow and under the radar. It’s rise, just as what happens to a frog in a pot of water that is slowly heated to the boiling point, went totally unrecognized by those that get paid for the opinions. The subsequent retreat, however was faster, but not of epic proportion.

But it was different this week. On no real news earlier in the week, shares surged. I don’t really recall the last time Microsoft had that kind of move higher without very positive news to propel it. I would assume, given it is a Dow Jones Index stock that it took the money of many smart people to make it rise as high and as quickly as it had done. I guess there was conviction behind the buying ahead of earnings. What else could account for the very high profile movement?

Then, just as quickly, actually even more quickly, the “smartest guys in the room” at Goldman Sachs (GS) downgraded Microsoft from “Neutral” to “Sell,” causing shares to fall 5% at time that the overall market was reaching for yet another new high. To be fair, Goldman Sachs tempered its conviction, having started at “Neutral” and not regressing downward to its “Conviction Sell” category.

Yet the market reacted with great conviction while I sat and asked the age old questions, happily having sold $29 calls earlier in the monthly cycle, finally getting back in that game as shares once again started a slow, below the radar ascent.

The reversals of late are frequent and very often without obvious catalyst, such as may be seen with shares of Baidu (BIDU) and Whole Foods (WFM). Then again, there weren’t necessarily catalysts to send them downward, either.

Sometimes reversing direction may take on a personal nature, as I’ve been bearish for more than a month and reluctant to commit to new positions while building cash and using longer term option contracts, where possible as often as possible. There does come a point when you begin to wonder what carries the greater cost. Missing out on further advances or chasing those advances. Although we don’t experience annual 20-30% gains very often, they do happen and they do have to start someplace. Maybe 10% over the first three months of the year is that place.

What’s missing though, is the conviction. My certainty of a correction was greater that is my current uncertainty. Having been wrong thus far shouldn’t be part of the equation, but it is hard to ignore.

For my personal trades I continue to be inclined to consider the increased safety of longer term monthly contracts, as I continue to expect some market correction, but I’m getting tired of waiting and missing out on some short term opportunities. Whatever convictions I may have or be evolving toward, I want to hedge those convictions.

In other words, I either have no convictions or am very flexible on them.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories, as earnings season gets into high gear this coming week (see details).

Walgreen (WAG) is one of those stocks that I regret having sold covered call options upon. It was also one of those rare instances in the past year that I waited to sell the options because I believed that shares would recover quickly from a precipitous drop. What i didn’t realize was just how great the recovery would be. Lately, the recoveries seem to be less quick and less robust, as the market appears to be more wary of mis-steps, even while in the midst of general enthusiasm. Despite impressive gains for the year, well ahead of the Health Care Index SPDR (XLV), Walgreen continues to be well poised to navigate through any health care model.

EMC Corp (EMC) in recent years has been defined by its wildly successful spin-off, VMWare (VMW). Following VMWare’s most recent disappointing guidance EMC has been defined by that guidance. I currently own shares and have also had other share lots assigned in the past few months. EMC reports earnings during the first week of the May 2013 option cycle, but appears to have developed support in the $23 level. I may consider adding shares or selling puts in advance of earnings, even though I am over-invested in the Technology sector and it has been under-performing.

McGraw Hill (MHP) continues its share rehabilitation after being put in the crosshairs of those that blame its actions for the past fiscal crisis. Whether it can successfully implement the famed “I was just doing my job” defense or not, it is still well below its previous trading levels.

Now that my cardiac rehabilitation has been completed, I don’t think I’ll ever need to don a pair of sneakers again. Fortunately, Footlocker (FL) can draw upon a population that isn’t very much like me and also sees fashion in pieces of rubber and cloth that are assembled far away by those that couldn’t qualify to work at FoxConn. It goes ex-dividend this week and although there is not a terribly large advantage to selling the option and attempting to also secure the dividend, it may be a good opportunity in a week that the general market is not showing large gains

As Chesapeake Energy (CHK) re-approached the $20 level that was my signal to purchase shares again after having owned numerous lots over the course of 2012. With much of the drama gone and the well deserved condemnation of telegraphing their need to sell assets at levels approaching distressed pricing, I think shares will actually even offer long term prospects, not just as a conduit for generating option premium income.

Joy Global (JOY) is one of those stocks that is very responsive to rumors concerning the Chinese economy, As much as Caterpillar (CAT) is increasingly levered to Chinese growth, Joy Global is much more so and has correspondingly larger moves upon news. Although I own Caterpillar and Deere (DE) at the moment, and those heavy movers are a little out of favor, with Joy Global near its yearly low and with earnings still a few weeks away, I may be tempted to pick up shares and capitalize on its always high option premium.

As the financial sector has been alternating between ups and downs in response to hypothetical stress tests and real stresses, none has been more responsive than Bank of America (BAC). After JP Morgan (JPM) and Wells Fargo (WFC) reported earnings on Friday, April 12, 2013, it will be Bank of America’s turn next week. Having owned shares several times already this year, its shares have shown great resilience during that period. Although current option pricing doesn’t seem to be expecting a significant drop after earnings are released, it certainly is possible. However, the resilience provides me some reason to believe that even with a drop it won’t take an undue length of time to see shares ultimately assigned. The presence of extended weekly options on Bank of America also offers an expansion of strategies and premium price points.

Finally, Align Technology (ALGN) is just an incredible profit center for dentists that use the product. Speaking as a one time practicing dentist, basically an idiot can perform an increasingly wide range of orthodontic services utilizing the technology. It is one of the first stocks that I started following in order to validate the “PEE” thesis. Shares are very capable of large earnings related moves, but most recently the put premiums have become a little less welcoming, However, anything less than a 10% drop in share price can still result in a 1.3% ROI for the week. If you don’t mind the fact that its shares have dropped by 30% in the past in the aftermath of earnings that can be a good risk-reward offering, at least for some.

Traditional Stocks: EMC, McGraw Hill, Walgreen

Momentum Stocks: Chesapeake Energy, Joy Global

Double Dip Dividend: Footlocker (ex-div 4/17)

Premiums Enhanced by Earnings: Align Technology (4/18 PM), Bank of America (4/17 AM), Microsoft (4/18 PM)

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

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.

 

Weekend Update – March 24, 2013

Common sense tells us that at some point there has to be some retracement following an impressive climb higher. My common sense has never been very good, so I’m beginning to question the pessimism that overtook me about 4 weeks ago.

Maybe the new version of a market plunge is simply staying at or near the same level for a few days. After all, who doesn’t believe that if you’re not moving ahead that you’re falling behind? It is all about momentum and growth. Besides, if history can be re-written by the victors, why not the rules that are based on historical observations?

During the previous 4 weeks I’ve made very few of the trades that I would have ordinarily made, constantly expecting either the sky to fall down or the floor to disappear from underneath. Of the trades, most have fallen in line with the belief that what others consider a timeless bit of advice. Investing in quality companies with reliably safe dividends may be timeless, but it can also be boring. Of course, adding in the income from selling options and it’s less so, but perhaps more importantly better positioned to cushion any potential drops in an overall market.

That makes sense to me, so there must be something flawed in the reasoning, although it did work in 2007-2009 and certainly worked in 1999-2000. I can safely say that without resorting to a re-writing of history.

Among the areas that I would like to consider adding this week are healthcare, industrials and financial sectors, having started doing so last week with Caterpillar (CAT) and Morgan Stanley (MS).

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend or “PEE” categories, with no selections in the “Momentum” category, befitting common sense. (see details). Additionally, there is a greater emphasis on stocks that offer monthly contracts only, eschewing the usual preference for the relatively higher ROI of weekly options for the guarantee of premiums for a longer period in order to ride out any turbulence.

Deere (DE) has been unnecessarily caught in the headlights recently, as it frequently trades in parallel to other heavy machinery giants, despite Deere not having the same kind of global economic exposure. The fact that it goes ex-dividend this week and always offers a reasonable premium, even when volatility is low, makes it a good selection, especially at its current price, which is down about 8% in a time that the S&P 500 has been up 3%. That seems a bit incongruous.

State Street Bank (STT) also goes ex-dividend this week. At a time when banks with global interests are at risk due to European Union and Euro related issues, State Street is probably the lowest profile of all of our “too big to fail” banks that play with the “big boys” overseas. Despite a marked climb, particularly from mid-January, it has shown resistance to potentially damaging international events.

While State Street Bank looks appealing, I have wanted to pick up shares of JP Morgan (JPM) for the past couple of weeks as it and its one time invincible CEO and Chairman, have come under increasing scrutiny and attack. Although it doesn’t pay a dividend this week, if purchased and call options are not assigned, it does offer a better dividend to holders than State Street and will do so on April 3, 2013. Better yet, Jamie Dimon will be there to oversee the dividend as both CEO and Chairman, as the Board of Directors re-affirmed his dual role late Friday afternoon, to which shares showed no response.

If you’re looking for a poster child to represent the stock market top of 2007, then look no further than Blackstone (BX). It was even hotter than Boston Chicken of a generation earlier, and it, too, quickly left a bad after taste. Suddenly, Blackstone no longer seems irrelevant and its name is being heard more frequently as buyouts, mergers and acquisitions are returning to the marketplace, perhaps just in time for another top.

Back in the days when I had to deal with managed care health companies, I wasn’t particularly fond of them, perhaps because I was wrong in the early 1980s when I thought they would disappear as quickly as they arrived. As it turns out, it was only the managed care company on whose advisory board I served that left the American landscape for greener pastures in The Philippines. Humana, one of the early managed care companies at that time was predominantly in the business of providing health care. These days it’s divested itself of that side of the social contract and now markets and offers insurance products.

Humana (HUM) is a low volatility stock as reflected in its “beta” of 0.85 and is trading close to its two year low. The fear with Humana, as with other health care with a large Medicare population is that new reimbursement rates, which are expected to be released on April 1, 2013 will be substantially lower. Shares have already fallen more almost 20% in the past 6 weeks at a time when insurers, on the other side of the equation, have fared well.

UnitedHealth Care (UNH) is the big gorilla in the healthcare room. It has really lagged the S&P 500 ever since being add to the DJIA. However, if your objective is to find stocks upon which you can generate revenue from dividends and the sale of option premiums, you really don’t need much in the way of share performance. In fact, it may be antithetical to what you really want. UnitedHealth Group, though, doesn’t have the same degree of exposure to Medicare fees, as does Humana.

While the insurers and the health care providers battle it out between themselves and the government, there’s another component to healthcare that comes into focus for me this week. The suppliers were in the news this week as Cardinal Health (CAH) reportedly has lost its contract with Walgreens (WAG). Cardinal Health and Baxter (BAX) do not do anything terribly exciting, they just do somethings that are absolutely necessary for the provision of healthcare, both in formal settings and at home. Although also subject to Medicare reimbursement rates and certainly susceptible to pricing pressure from its partners, they are consistently reliable companies and satisfy my need to look for low beta positions. Besides their option premiums, Cardinal Health also goes ex-dividend this week.

Then again, what’s healthcare without pharmaceuticals? Merck (MRK) is another of those companies whose shares I’ve wanted to buy over the past few weeks. It’s now come down from its recent Vytorin related high and may round out purchases in the sector.

With the safe and boring out of the way, there are still a few laggard companies that have yet to report their quarterly earnings before the cycle starts all over again on April 8th. Of those, one caught my attention.

Why anyone goes into a GameStop (GME) store is beyond me. Yet, if you travel around the country you will still see the occasional Blockbuster store, as well. Yet, somehow GameStop shares tend not to suffer terribly when earnings are released, although it is very capable of making large moves at any other time. The current proposition is whether the sale of puts to derive a 2.8% ROI in the event of less than a 12% decline in share price is worthwhile.

Now that’s a challenging game and you don’t even have to leave home to play it.

Traditional Stocks: Baxter, Blackstone, JP Morgan, UnitedHealth Group

Momentum Stocks: none

Double Dip Dividend: Cardinal Health (3/27), Deere (3/26), Humana (3/26), State Street Bank (3/27)

Premiums Enhanced by Earnings: GameStop (3/28 AM)

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

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.