Weekend Update – April 3, 2016

 I used to love comic books, but I was definitely never in the market for comic books based on great literature, unless a book report was due.

Normally engaged in less high brow reading pursuits, I knew enough to focus on key phrases found in the great works of literature. Those often held the theme and offered insight without having to commit to reading from cover to cover.

Unfortunately, sometimes those phrases from different comic books tended to coalesce and my graded book reports were often characterized by large red question marks.

Lyrics to a song may have no relationship to famous snippets from great works of literature, but this week reminded me of the “Talking Heads” always poignant question that one may find oneself asking:

“Well… How did I get here?”

It was really a week with no real direction, but it was the “Same As It Ever Was” and a perfect ending to the first quarter of 2016, which was truly a tale of two very different markets halves with much ado signifying nothing.

Despite there not being anything really different having occurred from one half of that quarter to the next half your head would have irreparably rolled had you succumbed to the temptation to cut loose, sell and run following the first 6 weeks.

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Weekend Update – September 13, 2015

For those of a certain age, you may or may not recall that Marvin Gaye’s popular song “What’s Going On?” was fairly controversial and raised many questions about the behavior of American society both inside and outside of our borders during a time that great upheaval was underway.

The Groucho Marx character Rufus T. Firefly said “Why a four-year-old child could understand this report. Run out and find me a four-year-old child, I can’t make head or tail of it.”

While I could never answer that seminal question seeking an explanation for everything going on, I do know that the more outlandish Groucho’s film name, the funnier the film. However, that kind of knowledge has proven itself to be of little meaningful value, despite its incredibly high predictive value.

That may be the same situation when considering the market’s performance following the initiation of interest rate hikes. Despite knowing that the market eventually responds to that in a very positive manner by moving higher, traders haven’t been rushing to position themselves to take advantage of what’s widely expected to be an upcoming interest rate increase.

In hindsight it may be easy to understand some of the confusion experienced 40 years ago as the feeling that we were moving away from some of our ideals and fundamental guiding principles was becoming increasingly pervasive.

I don’t think Groucho’s pretense of understanding would have fooled anyone equally befuddled in that era and no 4 year old child, devoid of bias or subjectivity, could have really understood the nature of the societal transformation that was at hand.

Following the past week’s stealth rally it’s certainly no more clear as to what’s going on and while many are eager to explain what is going on, even a 4 year old knows that it’s best to not even make the attempt, lest you look, sound or read like a babbling idiot.

It’s becoming difficult to recall what our investing ideals and fundamentals used to be. Other than “buy low and sell high,” it’s not clear what we believe in anymore, nor who or what is really in charge of market momentum.

Just as Marvin Gaye’s song recognized change inside and outside of our borders, our own markets have increasingly been influenced by what’s going on outside of those borders.

If you have any idea of what is really going on outside of our borders, especially in China, you may be that 4 year old child that can explain it all to the rest of us.

The shock of the decline in Shanghai has certainly had an influence on us, but once the FOMC finally raises rates, which may come early as this week, we may all come to a very important realization.

That realization may be that what’s really going on is that the United States economy is the best in the world in relative terms and is continuing to improve in absolute terms.

That will be something to sing about.

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

With relatively little interest in wanting to dip too deeply into cash reserves, which themselves are stretched thinner than I would like, I’m more inclined to give some consideration to positions going ex-dividend in the very near future.

Recent past weeks have provided lots of those opportunities, but for me, this week isn’t as welcoming.

The two that have my attention, General Electric (NYSE:GE) and Las Vegas Sands (NYSE:LVS) couldn’t be more different, other than perhaps in the length of tenure of their Chairmen/CEOs.

I currently own shares in both companies and had shares of General Electric assigned this past week.

While most of the week’s attention directed toward General Electric is related to the European Union’s approval of its bid to buy Alstom SA (EPA:ALO), General Electric has rekindled my interest in its shares solely because of its decline along with the rest of the market.

While it has mirrored the performance of the S&P 500 since its high point in July, I would be happy to see it do nothing more than to continue to mirror that performance, as the combination of its dividend and recently volatility enhanced option premium makes it a better than usual candidate for reward relative to risk.

While I also don’t particularly like to re
purchase recently assigned shares at a higher price, that most recent purchase may very well have been at an unrealistically low price relative to the potential to accumulate dividends, premiums and still see capital appreciation of shares.

Las Vegas Sands, on the other hand, is caught in all of the uncertainty surrounding China and the ability of Chinese citizens to part with their dwindling discretionary cash. With highly significant exposure to Macau, Las Vegas Sands has seen its share price bounce fairly violently over the past few months and has certainly reflected the fact that we have no real clue as to what’s going on in China.

As expected, along with that risk, especially in a market with its own increasing uncertainty is an attractive option premium. Since Las Vegas Sands ex-dividend date is on a Friday and it does offer expanded weekly options, there are a number of potential buy/write combinations that can seek to take advantage of the option premium, with or without also capturing the dividend.

The least risk adverse investor might consider the sale of a deep in the money weekly call option with the objective of simply generating an option premium in exchange for 4 days of stock ownership. At Friday’s closing prices that would have been buying shares at $46.88 and selling a weekly $45.50 call option for $1.82. With a $0.65 dividend, shares would very likely be assigned early if Thursday’s closing price was higher than $46.15.

If assigned early, that 4 day venture would yield a return of 0.9%.

However, if shares are not assigned early, the return is 2.3%, if shares are assigned at closing.

Alternatively, a $45.50 September 25, 2015 contract could be sold with the hope that shares are assigned early. In that case the return would be 1.3% for the 4 days of risk.

In keeping with Las Vegas Sand’s main product line, it’s a gamble, no matter which path you may elect to take, but even a 4 year old child knows that some risks are better than others.

Coca Cola (NYSE:KO) was ex-dividend this past week and it’s not sold in Whole Foods (NASDAQ:WFM), which is expected to go ex-dividend at the end of the month.

There’s nothing terribly exciting about an investment in Coca Cola, but if looking for some relative safety during a period of market turmoil, Coca Cola has been just that, paralleling the behavior of General Electric since that market top.

As also with General Electric, its dividend yield is more than 50% higher than for the S&P 500 and its option premium is also reflecting greater market volatility.

Following an 8% decline I would consider looking at longer term options to try and lock in the greater premium, as well as having an opportunity to wait out some chance for a price rebound.

Whole Foods, on the other hand, has just been an unmitigated disaster. As bad as the S&P 500 has performed in the past 2 months, you can triple that loss if looking to describe Whole Foods’ plight.

What makes their performance even more disappointing is that after two years of blaming winter weather and assuming the costs of significant national expansion, it had looked as if Whole Foods had turned the corner and was about to reap the benefits of that expansion.

What wasn’t anticipated was that it would have to start sharing the market that it created and having to sacrifice its rich margins in an industry characterized by razor thin margins.

However, I think that Whole Foods will now be in for another extended period of seeing its share price going nowhere fast. While that might be a reason to avoid the shares for most, that can be just the ideal situation for accumulating income as option premiums very often reflect the volatility that such companies show upon earnings, rather than the treading water they do in the interim.

That was precisely the kind of share price character describing eBay (NASDAQ:EBAY) for years. Even when stuck in a trading range the premiums still reflected its proclivity to surprise investors a few times each year. Unless purchasing shares at a near term top, adding them anywhere near or below the mid-point of the trading range was a very good way to enhance reward while minimizing risk specific to that stock.

While 2015 hasn’t been very kind to Seagate Technology (NASDAQ:STX), compared to so many others since mid-July, it has been a veritable super-star, having gained 3%, including its dividend.

Over the past week, however, Seagate lagged the market during a week when the performance of the technology sector was mixed.

Seagate is a stock that I like to consider for its ability to generate option related income through the sale of puts as it approaches a support level. Having just recovered from testing the $46.50 level, I would consider the sale of
puts and would try to roll those over and over if necessary, until that point that shares are ready to go ex-dividend.

That won’t be for another 2 months, so in the event of an adverse price move there should be sufficient time for some chance of recovery and the ability to close out the position.

In the event that it does become necessary to keep rolling over the put premiums heading into earnings, I would select an expiration a week before the ex-dividend date, taking advantage of either an increased premium that will be available due to earnings or trading down to a lower strike price.

Then, if necessary, assignment can be taken before the ex-dividend date and consideration given to selling calls on the new long position.

Adobe (NASDAQ:ADBE) reports earnings this week and while it offers only monthly option contracts, with earnings coming during the final week of that monthly contract, there is a chance to consider the sale of put options that are effectively the equivalent of a weekly.

Adobe option contracts don’t offer the wide range of strike levels as do many other stocks, so there are some limitations if considering an earnings related trade. The option market is implying a move of approximately 6.7%.

However, a nearly 1% ROI may be achieved if shares fall less than 8.4% next week. Having just fallen that amount in the past 3 weeks I often like that kind of prelude to the sale of puts. More weakness in advance of earnings would be even better.

Finally, good times caught up with LuLuLemon Athletica (NASDAQ:LULU) as it reported earnings. Having gone virtually unchallenged in its price ascent that began near the end of 2014, it took a really large step in returning to those price levels.

While its earnings were in line with expectations, its guidance stretched those expectations for coming quarters thin. If LuLuLemon has learned anything over the past two years is that no one likes things to be stretched too thin.

The last time such a thing happened it took a long time for shares to recover and there was lots of internal turmoil, as well. While its founder is no longer there to discourage investors, the lack of near term growth may be an apt replacement for his poorly chosen words, thoughts and opinions.

However, one thing that LuLuLemon has been good for in the past, when faced with a quantum leap sharply declining stock price is serving as an income production vehicle through the sale of puts options.

I think that opportunity has returned as shares do tend to go through a period of some relative stability after such sharp declines. During those periods, however, the option premiums, befitting the decline and continued uncertainty remain fairly high.

Even though earnings are now behind LuLuLemon, the option market is still implying a price move of % next week. At the same time, the sale of a weekly put option % below Friday’s closing price could still yield a % ROI and offer opportunity to roll over the position in the event that assignment may become likely.

Traditional Stock: Coca Cola, Whole Foods

Momentum Stock: LuLuLemon Athletica, Seagate Technology

Double-Dip Dividend: General Electric (9/17 $0.23), Las Vegas Sands (9/18 $0.65)

Premiums Enhanced by Earnings: Adobe (9/17 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.

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Weekend Update – April 5, 2015

It was a little odd having the Employment Situation Report released on a day that stock markets were closed yet bond markets and equity futures were trading on an abbreviated schedule.

It reminds me of the frustrations that I sometimes experience when being unable to react to news that moves a stock’s price after the market has closed on the Friday of option expiration. The option holder has the advantage of being able to exercise or not until nearly 90 minutes after the market has closed while as the seller of an option I can do nothing to respond to the news.

In trading circles that is something referred to as “a case of the blue calls.”

Not that I would know, but I would imagine that’s something like being in the old Times Square, before Mayor Rudy Giuliani cleaned it up and chased all of the adult entertainment away. Those glass walls between the patrons pumping quarters into the booth and the paid entertainment must have been frustrating for those watching events unfold but being incapable of taking appropriate action. That’s especially the case if knowing that a more genteel, moneyed and privileged clientele was in the back room and had less restricted access.

Or so I’ve heard. I believe that there was an expression describing that situation, as well.

While analysts are going to be spending time trying to find something good to say about the data released, the number of new jobs created was the smallest in more than a year and included downward revisions of the past 2 months. In fact, the 126,000 new jobs created in March was about half of what the consensus had been expecting. The 69,000 jobs downward revisions makes you wonder whether the decidedly negative reaction to what was perceived as a heating up jobs market previously was warranted.

The smaller than expected job creation number caused an immediate and large decline in interest rates and a meaningful decline in stock futures, although on very light volume.

Still, there was a net increase in jobs, and there is no specter of unmanageable and unruly lines queuing up as in scenes from 75 years ago. Yet we will begin trading on Monday on the far end of a 3 day vacuum having been unable to respond to the immediate reactions to Friday morning’s news.

After a few days to mull it over we may learn whether the disappointing employment news is ultimately interpreted as being good or bad for the stock market and more specifically for the likelihood of interest rates being increased sooner rather than later.

After all, lately that seems to be all that markets have cared about and the speculation has gone back and forth as the data has done the same.

As far as the Treasury market is concerned their bet is on lower interest rates after the Employment Situation Report was released and they’re said to be smarter than the average investor.

When rates go
back up just as quickly, as they have volleyed back and forth over the past few weeks, we can remind ourselves that the back and forth of rates simply reflects how smart those bond traders really are.

One might think that any further decline in rates would be good for stocks particularly as an alternative to bonds, unless it is interpreted as being bad news that the tepid economic expansion was actually beginning a deceleration phase.

Couple that thought with the worry that the upcoming earnings season is going to highlight currency woes more than costs savings from lower energy and you do have the makings of continued uncertainty about where the next catalyst to move stocks higher will be coming from.

Normally, I like uncertainty, but unfortunately, the uncertainty that we’ve seen over the past few weeks as markets have regularly alternated between triple digit gains and losses hasn’t really moved volatility as much as it would seem to have been logical. That’s because most days have actually traded with great certainty, showing little variance from where the day’s trading started and then giving way to an all new kind of certainty the very next day.

We’ll see how that certainty shows itself on Monday.

It’s anyone’s guess.

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

Whole Foods (NASDAQ:WFM) is one of many stocks that I currently own that are not earning their keep because they’re too far below their purchase price to warrant writing calls and generating premium income. While shares do go ex-dividend this week, the dividend is too small to justify chasing or to make a trade simply in the hopes of capturing that dividend.

However, I’ve been happy to see some of the share gains seen after earnings in February get digested, notwithstanding this past Thursday’ strong gain. The slow and methodical retracement of those gains is providing an opportunity to add shares of Whole Foods again with the goal of using new shares to help offset some of the losses on the non-performing lot, as was done 5 times in 2014.

However, following the previous share increase after earnings those shares just seemed too expensive to use as an offset to paper losses. However, now they appear to be more reasonably priced and ready to stabilize at that lower level.

Having add my General Motors (NYSE:GM) shares assigned last month I’ve wanted to repurchase shares since then. At the time the entry of an activist into the picture was unexpected and poor timing for me, but I’m glad to see shares come down from that activist induced high.

Through several bouts of share ownership during the Mary Barra era I’ve continued to be amazed at how well share price has persever
ed against a barrage of bad news. The toll on share price has generally been small and short lived, while being able to roll over option contracts helped to increase yield while awaiting assignment.

Shares offer attractive premiums, an increasingly attractive dividend and the watchful eyes of activists. That can be a good combination particularly since earnings are still a month away, giving some opportunity to collect those premiums before contending with the challenge of currency.

Bed Bath and Beyond (NASDAQ:BBBY) reports earnings this week and used to be one of those traditionally being among the last of S&P 500 members to report earnings. Now it’s either still among the last or possibly among the first, as earnings seasons now just tend to flow one into the next.

While Bed bath and Beyond isn’t likely to suffer much due to the strengthening dollar, in fact it may benefit from increased buying power, it may report some detriment from the west coast port disruptions.

Bed Bath and Beyond is no stranger to large moves when announcing its earnings, but this time the options market is implying a move of 6.5%. A 1% ROI may be possible by selling put options as much as 7.1% below the week’s closing price. That’s not as large of a cushion as I would prefer seeing, but if selling puts and faced with the possibility of assignment, I wouldn’t mind taking ownership of shares rather than attempting to roll the put options over.

Being booted from the DJIA isn’t necessarily a bad thing, just as being added isn’t always a good thing as far as stock prices go.

Few have done as well as Alcoa (NYSE:AA), which despite a nearly 50% decline since reaching it’s peak post-DJIA share price is still about 65% higher and has well out-performed the S&P 500 and the DJIA.

Alcoa, which reports earnings this week, and while perhaps no longer considered to be the kick-off to a new earnings season still remains the first to get much attention.

Shares have been in a considerable decline for the past 2 months after having recovered from most of the decline that preceded the market’s decline in early December 2014. The subsequent recovery in share price at that time was in lock step with the S&P 500 from mid-December to mid-January when earnings intervened.

Unlike most earnings related trades that I consider, for this one I’m not looking at the sale of puts, but rather a buy/write and am further considering the use of a slightly out of the money option, rather than an in the money strike price, in the belief that there’s reason to suspect both on a technical basis and a fundamental basis that there is room to move higher.

While it’s too soon to tell how its continuing performance will be, AT&T (NYSE:T) has joined Alcoa as an ex-member of the DJIA. During the two week period of its exile, shares have out-performed the S&P 500, just as its replacement has t
railed.

While 2 weeks doesn’t make for a trend, as AT&T shares are ex-dividend this week, I think there may be enough past history with other ex-members in the immediate period of their expulsion to create a tiny additional increment of confidence. WHile that confidence doesn’t necessarily extend to believing that shares will move higher in the very near term, it does make me feel better about the prospects of it continuing to out-perform the broader market.

With it’s very generous dividend the option premium isn’t very large, but at the very least will offset some of the decline in price that will occur as the dividend is taken into account. With much of the competitive hoopla and pressure now in the past and with less of a concern about currency fluctuations, this may be a good time to consider a position as shares may be a bit more immune to some of the pressures that may face many other multi-national companies as earnings are soon to be released.

Finally, being added to the DJIA isn’t necessarily a golden ticket, either, as some more recently added members may attest.

In exchange for AT&T’s departure Apple (NASDAQ:AAPL) was added and has since trailed the narrow index as excitement mounts over the prospects for its latest product entry.

I’m not as excited about that as I am about the prospects of Apple announcing a dividend increase most likely concurrent with its next earnings release in 3 weeks. Between now and then I think there are going to be many opportunities for Tim Cook and others to increasingly whip up excitement and demand for a product that has a fairly low bar being set.

In the meantime Apple continues to offer an attractive option premium and can easily be considered as either a buy/write or put sale, as there is considerable liquidity on either side of the options aisle.

Traditional Stocks: Apple, General Motors

Momentum Stocks: none

Double Dip Dividend: AT&T (4/8), Whole Foods (4/8 $0.13)

Premiums Enhanced by Earnings: Alcoa (4/8 PM), Bed Bath and Beyond (4/8 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.

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Weekend Update – January 11, 2015

Somewhere buried deep in my basement is a 40 year old copy of the medical school textbook “Rapid Interpretation of EKG’s.”

After a recent bout wearing a Holter Monitor that picked up 3000 “premature ventricular contractions” I wasn’t the slightest bit interested in finding and dusting off that copy to refresh my memory, not having had any interest nearly 40 years ago, either.

All I really cared about was what the clinical consequence of those premature depolarizations of the heart’s ventricle meant for me and any dreams I still harbored of climbing Mount Everest.

Somewhere in the abscesses of my mind I actually did recall the circumstances in which they could be significant and also recalled that I never aspired to climb Mount Everest.

But it doesn’t take too much to identify a premature ventricular contraction, even if the closest you ever got to medical school was taking a class on Chaucer in junior college.

Most people can recognize simple patterns and symmetry. Our mind is actually finally attuned to seeing breaks in patterns and assessing even subtle asymmetries, even while we may not be aware. So often when looking askance at something that just seems to be “funny looking,” but you can’t quite put your finger on what it is that bothers you, it turns out to be that lack of symmetry and the lack of something appearing where you expect it to appear.

So it’s probably not too difficult to identify where this (non-life threatening) premature ventricular contraction (PVC) is occurring.

While stock charts don’t necessarily have the same kind of patterns and predictability of an EKG, patterns aren’t that unheard of and there has certainly been a pattern seen over the past two years as so many have waited for the classic 10% correction.

 

What they have instead seen is a kind of periodicity that has brought about a “mini-correction,” on the order of 5%, every two months or so.

The quick 5% decline seen in mid-December was right on schedule after having had the same in mid-October, although the latter one almost reached that 10% level on an intra-day basis.

But earlier this week we experienced something unusual. There seemed to be a Premature Market Contraction (NYSE:PMC), occurring well before the next scheduled mini-correction.

You may have noticed it earlier this week.

The question that may abound, especially following Friday’s return to the sharp market declines seen earlier in the week is just how clinically important those declines, coming so soon and in such magnitude, are in the near term.

In situations that impact upon the heart’s rhythm, there may be any number of management approaches, including medication, implantation of pacemakers and lifestyle changes.

The market’s sudden deviation from its recently normal rhythm may lend itself to similar management alternatives.

With earnings season beginning once again this week it may certainly serve to jump start the market’s continuing climb higher. That may especially be the case if we begin to see some tangible evidence that decreasing energy prices have already begun trickling down into the consumer sector. While better than expected earnings could provide the stimulus to move higher, rosy guidance, also related to a continuing benefit from decreased energy costs could be the real boost looking forward.

Of course, in a nervous market, that kind of good news could also have a paradoxical effect as too much of a good thing may be just the kind of data that the FOMC is looking for before deciding to finally increase interest rates.

By the same token, sometimes it may be a good thing to avoid some other stimulants, such as hyper-caffeinated momentum stocks that may be particularly at risk when the framework supporting them may be suspect.

This week, having seen 5 successive days of triple digit moves, particularly given the context of outsized higher moves tending to occur in bear market environments, and having witnessed two recent “V-Shaped” corrections in close proximity, I’d say that it may be time to re-assess risk exposure and take it easier on your heart.

Or at least on my heart.

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

Dividends may be just the medication that’s needed to help get through a period of uncertainty and the coming week offers many of those opportunities, although even within the week’s upcoming dividend stocks there may be some heightened uncertainty.

Those ex-dividend stocks that I’m considering this week are AbbVie (NYSE:ABBV), Caterpillar (NYSE:CAT), Freeport McMoRan (NYSE:FCX), Whole Foods (NASDAQ:WFM) and YUM Brands (NYSE:YUM).

AbbVie is one of those stocks that has been in the news more recently than may have been envisioned when it was spun off from its parent, Abbott Labs (NYSE:ABT), both of which are ex-dividend this week.

AbbVie has been most notably in the news for having offered an alternative to Gilead’s (NASDAQ:GILD) product for the treatment of Hepatitis C. Regardless of the relative merits of one product over another, the endorsement of AbbVie’s product, due to its lower cost caused some short term consternation among Gilead shareholders.

AbbVie is now trading off from its recent highs, offers attractive option premiums and a nice dividend. That combination, despite its upward trajectory over the past 3 months, makes it worth some consideration, especially if your portfolio is sensitized to the whims of commodities.

Caterpillar is finally moving in the direction that Jim Chanos very publicly pronounced it would, some 18 months ago. There isn’t too much question that its core health is adversely impacted as economic expansion and infrastructure projects slow, as it approaches a 20% decline in the past 2 months.

That decline takes us just a little bit above the level at which I last owned shares and its upcoming dividend this week may provide the impetus to open a position. I suppose that if one’s time frame has no limitation any thesis may find itself playing out, for Chanos‘ sake, but for a short time frame trade the combination of premium and dividend at a price that hasn’t been seen in about a year seems compelling.

It has now been precisely a year since the last time I purchased shares of YUM Brands and it is right where I last left it. Too bad, because one of the hallmarks of an ideal stock for a covered option position is no net movement but still traveling over a wide price range.

YUM Brands fits that to a tee, as it is continually the recipient of investor jitteriness over the slowing Chinese economy and food safety scares that take its stock on some regular roller coaster rides.

I’m often drawn to YUM Brands in advance of its ex-dividend date and this week is no different, It combines a nice premium, competitive dividend and plenty of excitement. While I could sometimes do without the excitement, I think my heart and, certainly the option premiums, thrive on the various inputs that create that excitement, but at the end of the day seem to have no lasting impact.

Whole Foods also
goes ex-dividend this week and while its dividend isn’t exactly the kind that’s worthy of being chased, shares seem to be comfortable at the new level reached after the most recent earnings. That level, though, simply represents a level from which shares plummeted after a succession of disappointing earnings that coincided with the height of the company’s national expansion and the polar vortex of 2014.

I think that shares will continue to climb heading back to the level to which they were before dropping to the current level more than a year ago.

For that reason, while I usually like using near the money or in the money weekly options when trying to capture the dividend, I’m considering an out of the money February 2015 monthly option in consideration of Whole Foods’ February 11th earnings announcement date.

I don’t usually follow interest rates or 10 Year Treasury notes very carefully, other than to be aware that concerns about interest rate hikes have occupied many for the entirety of Janet Yellen’s tenure as the Chairman of the Federal Reserve.

With the 10 Year Treasury now sitting below 2%, that has recently served as a signal for the stock market to begin a climb higher. Beyond that, however, declining interest rates have also taken shares of MetLife (NYSE:MET) temporarily lower, as it can thrive relatively more in an elevated interest rate environment.

When that environment will be upon us is certainly a topic of great discussion, but with continuing jobs growth, as evidenced by this past week’s Employment Situation Report and prospects of increased consumer spending made possible by their energy dividend, I think MetLife stock has a bright future. 

Also faring relatively poorly in a decreasing rate environment has been AIG (NYSE:AIG) and it too, along with MetLife, is poised to move higher along with interest rates.

Once a very frequent holding, I’ve not owned shares since the departure of Robert ben Mosche, whom I believe deserves considerable respect for his role in steering AIG in the years after the financial meltdown.

In the meantime, I look at AIG, in an increasing rate environment as easily being able to surpass its 52 week high and would consider covering only a portion of any holding in an effort to also benefit from share price advances.

Fastenal (NASDAQ:FAST) isn’t a very exciting company, but it is one that I really like owning, especially at its current price. Like so many others that I like, it trades in a relatively narrow range but often has paroxysms of movement when earnings are announced, or during the occasional “earnings warnings” announcement.

It announces earnings this week and could easily see some decline, although it does have a habit of warning of such disappointing
numbers a few weeks before earnings.

Having only monthly options available, but with this being the final week of the January 2015 option cycle, one could effectively sell a weekly option or sell a weekly put rather than executing a buy/write.

However, with an upcoming dividend early in the February 2015 cycle I would be inclined to consider a purchase of shares and sale of the February calls and then buckle up for the possible ride, which is made easier knowing that Fastenal can supply you with the buckles and any other tools, supplies or gadgets you may need to contribute to national economic growth, as Fastenal is a good reflection on all kinds of construction activity.

Bank of America (NYSE:BAC) also reports earnings this week and I unexpectedly found myself in ownership of shares last week, being unable to resist the purchase in the face of what seemed to be an unwarranted period of weakness in the financial sector and specifically among large banks.

Just as unexpectedly was the decline it took in Friday’s trading that caused me to rollover shares that i thought had been destined for assignment, as my preference would have been for that assignment and the possibility of selling puts in advance of earnings.

Now, with shares back at the same price that I liked it just last week, its premiums are enhanced this week due to earnings. In this case, if considering adding to the position I would likely do so by selling puts. However, unlike many other situations where I would prefer not to take assignment and would seek to avoid doing so by rolling over the puts, I wouldn’t mind taking assignment and then turning around to sell calls on a long position.

Finally, while it may make some sense to stay away from momentum kind of stocks, Freeport McMoRan, which goes ex-dividend this week may fall into the category of being paradoxically just the thing for what may be ailing a portfolio.

Just as stimulants can sometimes have such paradoxical effects, such as in the management of attention deficit hyperactivity disorder, a stock that has interests in both besieged metals, such as copper and gold, in addition to energy exploration may be just the thing at a time when weakness in both of those areas has occurred simultaneously and has now become well established.

Freeport McMoRan will actually report earnings the week after next and that will present its own additional risk going forward, but I think that the news will not be quite as bad as many may expect, particularly as there is some good news associated with declining energy prices, as they represent the greatest costs associated with mining efforts.

I’ve suffered through some much more expensive lots of Freeport McMoRan for the past 2 years and have almost always owned shares over the past 10 years, even during that brief period of time in which the dividend was suspended.

As surely as commodity prices are known to be cyclical in nature at some point Freeport will be on the right end of climbs in the price of its underlying resources. If both energy and metals can turn higher as concurrently as they turned lower these shares should perform exceptionally well.

After all, they’ve already shown that they can perform exceptionally poorly and sometimes its just an issue of a simple point of inflection to go from one extreme to the next.

Traditional Stocks: AIG, MetLife

Momentum Stocks: none

Double Dip Dividend: AbbVie (1/13), Caterpillar (1/15), Freeport McMoRan (1/13), Whole Foods !/14), YUM Brands (1/14)

Premiums Enhanced by Earnings: Bank of America (1/15 AM), Fastenal (1/15 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.

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Copyright 2015 TheAcsMan

Weekend Update – December 21, 2014

What a week.

There were enough events to form the basis for a remake of the Billy Joel song “We Didn’t Start the Fire.”

The range of those events this past was stunning.

Oil prices stabilizing, The Colbert Show finalizing; North Korean cyber-attack, Cuban Revolution roll back; Ruble in freefall, speculators facing margin call; FOMC removing “considerable time,” markets having a memorable climb.

Russia didn’t start the fire, but they could have flamed it.

Deep down, maybe not so deep down, there are many who wouldn’t feel too badly if its President, Vladimir Putin, began to start reeling from the precipitous decline in oil prices, as many also believe as does Eddy Elfenbein, of “Crossing Wall Street” who recently tweeted:

The problem is that it can be a precarious balance for the Russian President between the need to support his ego and the need to avoid cutting off one’s own nose while spiting an adversary.

While Putin pointed a finger at “external forces” for causing Russia’s current problems stemming from economic sanctions and plunging energy and commodity prices, thus far, ego is winning out and the initial responses by the Bank of Russia. Additionally, comments from Putin indicate a constructive and rational approach to the serious issues they face having to deal with the economic burdens of their campaigns in Ukraine and Crimea, the ensuing sanctions and the one – two punch of sliding energy and metals prices.

Compare this week’s response to the economic crisis of 1998, as many are attempting to draw parallels. However, in 1998 there was no coherent national strategy and the branches of Russian government were splintered.

No one, at least not yet, is going to defy a decree from Putin as was done with those from Yeltsin nearly a generation ago when he had no influence, much less control over Parliament and unions.

While the initial response by the Bank of Russia, increasing the key lending rate by 65% is a far cry from the strategies employed by our own past Federal Reserve Chairmen and which came to be known as the Greenspan and Bernanke puts, you can’t spell “Putin” without “put” an the “Putin Put” while a far cry from being a deliberate action to sustain our stock markets did just that last week.

Putin offered, what sounded like a sober assessment of the challenges facing Russia and a time frame for the nation to come out from under what will be pronounced recession. Coming after the middle of the night surprise rate hike that saw the Ruble plunge and international markets showing signs of panic, his words had a calming effect that steadied currency and stock markets.

Somehow, the urge to create chaos as p
art of a transfer of pain has been resisted, perhaps in the spirit of the holiday season. Who would have guessed that the plate of blinis and vodka left out overnight by the dumbwaiter would have been put to good use and may yet help to rescue this December and deliver a Santa Clause Rally, yet?

No wonder Putin has been named “Russia’s Man of the Year” for the 15th consecutive year by the Interfax news agency. It’s hard to believe that some wanted to credit Janet Yellen for this week’s rally, just for doing her part to create her own named put by apparently delaying the interest rate hikes we’ve come to expect and dread.

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

I know that if anyone chose to designate me as being “systemically important,” I would feel honored, but after that glow had worn off I would start wondering what the added burden of that honor was going to be.

That’s what MetLife (NYSE:MET) is facing as it has 30 days to respond to its designation as being a systemically important financial institution, which carries with it significantly increased regulatory oversight.

I can see why they might want to resist the designation, especially when it knows that better and more profitable days are ahead, as interest rates rises are actually going to be more likely as employment and GDP continue to increase, buoyed by low energy prices. Most would agree that with increased regulation comes decreased profit.

MetLife, like most every other stock had inexplicably been taken lower as the energy sector held the stock market hostage. Also, like most other stocks, it had a substantial recovery this week to end the week a little higher than I would like to consider entering into a position. However, on any further drop back toward $52.50 it appears to again be a good candidate for a covered call strategy.

It’s only appropriate that during the holiday season thoughts turn to food. Dunkin Brands (NASDAQ:DNKN) and Coca Cola (NYSE:KO) may stand in sharp contrast to Whole Foods (NASDAQ:WFM), but they may all have a place in a portfolio, but for different reasons.

Dunking Brands just reported earnings and shares plunged toward its 52 week lows. In doing so it reminded me of the plight of Whole Foods earlier in the year.

While a horrible winter was part of Whole Foods’ successive disappointing quarterly earnings reports, so too was their national expansion effort. That effort began to deliver some rewards after the most recent earnings report, but in the interim there were many questioning whether Whole Foods was being marginalized by growing competition.

Instead, after its most recent earnings report shares gapped up higher to the point at which they had gapped down earlier in the year, as shares now appear to be solidifying at a new higher baseline.

I don’t ordinarily think about a longer term position when adding shares, but if adding to my existing Whole Foods position, I may consider selling February 2015 call options that would encompass both the upcoming earnings report and a dividend, while also seeking some modest capital gains from the underlying shares.

Where Dunkin Donuts reminds me of Whole Foods is in its national expansion efforts and in also having now returned successive disappointing earnings while investing for the future. Just as I believe that will be a strategy with long term benefits for Whole Foods, I think Dunkin Brands will also turn their earnings story around as the expansion efforts near their conclusion.

Coca Cola represents an entirely different story as the clock is ticking away on its hope to withstand activist efforts. Those efforts appear as if they will have an initial primary focus on a CEO change.

While it may not be appropriate to group Coca Cola with Dunkin Brands and Whole Foods, certainly not on the basis of nutritional value, that actually highlights part of its problem. Like Russia, so tied to energy and mining, Coca Cola is tied to beverages and has little to no diversification in its portfolio. At the moment a large part of its product portfolio is out of favor, as evidenced by my wife, who when shopping for Thanksgiving guests said “we don’t need soda. No one drinks soda, anymore.”

That may be an exaggeration and while the long term may not be as bright for Coca Cola as some of its better diversified rivals, in the short term there is opportunity as pressure for change will mount. In the interim there will always be the option premiums and the dividends to fall back upon.

I had shares of eBay (NASDAQ:EBAY) assigned this past week and that left me without any shares for the coming week. That’s an uncommon position for me to be in, as eBay has been a favorite stock for years as it has traded in a fairly well defined range.

That range was disrupted, in a good way, by the entrance of Carl Icahn and then by the announcement of its plans to spin off its profitable PayPal unit, while it still has value.

My most recent lot assigned was the highest priced lot that I had ever owned and was also held for a significantly longer time period than others. Ordinarily I like to learn from my mistakes and wouldn’t consider buying shares again at this level, but I think that eBay will continue moving higher, hopefully slowly, until it is ready to spin off its PayPal division.

The more slowly it moves, occasionally punctuated by price drops or spikes, the better it serves as part of a covered options strategy and in that regard it has been exemplary.

While eBay doesn’t offer a dividend, and has had very little share appreciation, it has been a very reliable stock for use in a covered option strategy and should continuing being so, until the point of the spin-off.

If last week demonstrated anything, it was that the market is now able to decouple itself from oil prices, whereas in previous weeks almost all sectors were held hostage to energy. This week, by the middle of the week the market didn’t turn around and follow oil lower, as futures prices started dropping. By the same token when oil moved nicely higher to close the week, the market essentially yawned.

Energy sector stocks were a different story and as is frequently the case their recovery preceded the recovery in crude prices. Despite some nice gains last week there may be room for some more. Halliburton (NYSE:HAL) is well off from its highs, with that decline preceding the plunge felt within the sector. While its proposed buyout of Baker Hughes (NYSE:BHI) helped send it 10% higher that surge was short lived, as its descent started with details of the penalty Halliburton would pay if the deal was not completed.

While there has to be some regulatory concern the challenge of low prices and decreased drilling and exploration probably reinforces for Halliburton the wisdom of combining with Baker Hughes.

During its period of energy price uncertainty, coupled with the uncertainty of the buy out, Halliburton is offering some very enticing option premiums, both as part of a covered call trade or the sale of puts.

In addition to some stability in energy prices, there’s probably no greater gift that Putin himself could receive than higher prices for gold and copper. Just as Russia has been hit by the double hardship of reliance on energy and metals it has become clear that there isn’t too much of an economy as we may know it, but rather an energy and mining business that simply subsidizes everything else.

Freeport McMoRan (NYSE:FCX) can probably empathize with Russia’s predicament, as the purchase of Plains Exploration and Production was intended to protect it from the cycles endured by copper and gold.

Funny how that worked out, unless you are a current shareholder and have been waiting for the acquisition strategy to bear some fruit.

While it hasn’t done that, gold may be approaching a bottom and with it some of Freeport’s troubles may get diminished. At its current level and the lure of a continuing dividend and option premiums it is getting to look appealing, although it still carries the risks of a world not valuing or needing its products for some time to come.

However, when the perceived value returns and the demand returns, the results can be explosive for Freeport’s shares to the upside, just as it has dragged it much lower in a shirt period of time.

Finally, I’ll never be accused of leading a lifestyle that would lend itself to documentation through the use of a GoPro (NASDAQ:GPRO) product, but its prospects do have my heart racing more than usual this week.

I generally stay away from IPO stocks for at least 6 months, so as to get an idea of how it may trade, especially when earnings are part of the equation. Pragmatically, another issue is the potential impact of lock-up expiration dates, as well.

GoPro, in its short history as a publicly traded company has already had a storied life, including its key underwriter allowing some shares that were transferred into a charitable trust to be disposed of prior to the lock-up expiration date. Additionally, a secondary offering has already occurred at a price well above this past week’s closing price and also represented a fairly large sale by insiders.

Will the products and the lifestyle brand that GoPro would like to develop may be exciting, so far its management of insider shares hasn’t been the kind that inspires confidence, as shares are now about 42% below their high and 25% below their secondary issue pricing.

What could be worse?

Perhaps this week’s lock-up expiration on December 23, 2014.

The option market is treating the upcoming lock-up expiration as if it was an earnings event and there is a nearly 9% implied move for the week in anticipation. For those accustomed to thrill seeking there’s still no harm in using a safety harness and you can decide what strike puts on the sale of puts provides the best combination of excitement and safety.

I tend to prefer a strike price outside of the range identified by the option market that can offer at least a 1% ROI. That could mean accepting up to a 12.8% decline in price in return for the lessened thrill, but that’s thrill enough for me for one week.

Happy Holidays.

 

Traditional Stocks: Coca Cola, Dunkin Brand Group, eBay, MetLife, Whole Foods

Momentum: Freeport McMoRan, GoPro, Halliburton

Double Dip Dividend: none

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.

Click here for reuse options!
Copyright 2014 TheAcsMan