Dec122014

Weekend Update – December 14, 2014

Weekend Update

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

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

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

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

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

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

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

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

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

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

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

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

Great time to increase the Strategic Petroleum reserve, anyone?

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

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

“How high will it go?”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: Caterpillar, EMC Corporation, McDonalds, Verizon

Momentum: Seadrill, YUM Brands

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

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

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.

Oct102014

Weekend Update – October 12, 2014

Weekend Update

As The Federal Reserve’s policy of “Quantitative Easing” comes to an end the next phase considered should perhaps be one of instituting some form of “Quantitative Muzzling.”

Given comments contained in this past week’s FOMC statement had recognized global economic concerns, perhaps the Federal Reserve should consider expanding its dual mandate and reaching across the ocean to affix, adjust and tighten the right remedy.

As most of us learned sometime in childhood, words have consequences. However, we tend not to mind when the consequences are positive for us or when what we all know is left unsaid and ignored.

In each of the past two weeks words from the European Central Bank’s President Mario Draghi have had adverse impacts on global markets. While no one is overtly suggesting that ECB President’s should be seen and not heard, undoubtedly at least one person is thinking that, having applied a sloppy test of correlation to the market’s moves and Draghi’s words.

Such sloppy tests may have at least as much validity as the much discussed “key reversal” seen as trading closed on Wednesday and said to presage a bullish turnaround to the downtrend.

How did that work out for most people?

This week Draghi told us what everyone knows to be the truth, but what no one wants to hear. He simply said that there can be no growth in the European economies without economic reform.

That’s not different from what he said the previous week, as he pointed out that political solutions were necessary to deal with economic woes.

We also all know if it we have to rely on politicians to do the right thing, or make the difficult decisions, we’re not going to fare terribly well, hence the sell-offs. Why the Europeans can’t simply kick things down the road and then forget about it is a question that needs to be asked.

Compare the response to Draghi’s comments to the absolutely effusive response to this past week’s FOMC statement that simply said nothing and ignored answering the question that everyone wanted to ignore.

Despite everyone knowing what Draghi has been saying to be true, having had the same scolding take place in the U.S. just two years ago, no one with an investment portfolio wants to hear of such a thing, especially when it’s followed up with downgrades of Finland’s and France’s credit ratings.

Add to the mix the International Monetary Fund’s cut to its global growth forecast and you have spoken volumes to an already wary US market that was now eagerly eying any breach of the 200 day S&P 500 moving average (dma), as that had taken the place of the “key reversal” in the hearts and minds of technicians and foisted upon investors as being the gateway to what awaits.

Unfortunately, the message being sent with that technical indicator is a bearish one. While it has been breached on numerous occasions in the past 5 years, the most pronounced and prolonged stay below the 200 dma came in the latter half of 2011, a period when triple digit daily moves were commonplace and volatility was more than double the now nearly 2 year high level.

I miss those days.

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

When I first started thinking about a theme for this week’s article I decided to focus on stocks that had already undergone their own personal 10% correction.

That list grew substantially by the time the week came to its close following a brief FOMC induced rally mid-week and that thesis was abandoned.

As trading in the coming week opens at a DJIA level lower than where it began the year, there’s not much reason to start the week with any sense of confidence.

While the S&P 500 is only 5.2% below its recent high, putting it on par with numerous “mini-corrections” over the past two years, you don’t have to do a quantitative assessment to know that this decline feels differently from the others, as volatility is at a two year high point. The sudden appearance of triple digit moves have now gone from the mundane 100 point variety and have added 200 and 300 point ones into the arsenal.

For me, this week may be a little different. Heading into the week I have less cash reserves than I would like and less confidence than I would ordinarily need to dwindle it down further.

While it appears as if there are so many values to be had I would prefer to see some sign of stability before committing resources in my usual buy/write manner. Instead, I may be more likely to add new positions through the sale of out of the money puts, unless there is a dividend involved.

Additionally, while individual stocks may have compelling reasons to consider their purchases, this week I’m less focused on those specific reasons rather than the nature of their recent price declines and the ability to capitalize on the heightened option premiums associated with their recent volatility.

One of the benefits of this rising volatility environment is that option premiums grow as does the uncertainty. The sale of puts and anticipation of the need to rollover those puts in the event of further price erosion may be better suited to an environment of continuing price declines, rather than utilizing a traditional buy/write strategy.

Furthermore, as the premiums become more and more attractive, I find myself more inclined to attempt to rollover positions that might otherwise be assigned, as the accumulation of premiums can offer significant downside protection and reduces the need to find alternative investment candidates.

If you’re looking for a sector that is screaming “correction” you really don’t have to look beyond the Energy Sector. Hearing so many analysts calling for continued
decline in oil prices may be reason enough to begin considering adding positions.

Over the years I’ve lost track of how many times I’ve owned Halliburton (HAL), but other than during the 2008-2009 market crash, the time of the Deepwater Horizon disaster and during the tumultuous market of 2011, there haven’t been such precipitous declines in its price, as it has just plunged below its own 200 dma.

Although Halliburton doesn’t report earnings until the following week, next week’s premiums are reflective of the volatility anticipated. For anyone considering this position through a buy/write one factor to keep in mind is that it will be imperative to rollover the contract if expiration looks likely. That is the case because earnings are reported on the following Monday morning before trading opens so there won’t be a chance to create a hedging position unless done the previous week.

I have been waiting for an opportunity to repurchase shares of Anadarko Petroleum (APC) ever since a bankruptcy judge approved a pollution related settlement, that was part of its years earlier purchase of Kerr-McGee. Like Halliburton, it is now trading below its 200 dma, but it doesn’t report earnings until a week after Halliburton. However, it also offers exceptionally high option premiums as the perceived risk remains heightened in anticipation of further sector weakness.

Owing to its drops the final two days of the previous week, Dow Chemical (DOW) is now also trading below its 200 dma. It, too, is demonstrating an option premium that is substantially higher than has been the case recently, although the risk appears to be considered less than that seen for both Halliburton and Anadarko. With the exception of having received an “outperform” rating those past two days, Dow Chemical appears to have just been caught up in the market’s downturn.

Fastenal (FAST) has traded below its 200 dma since its last earnings report in July 2014 and was not helped by its latest report this past Friday. That was the case despite generally good revenues, but with softer margins that were expected to continue. Unlike the preceding stocks the option premiums are not expanded in reflection of heightened risk. In the event that this position is initiated with a put sale that is likely to be assigned, I would consider taking possession of shares rather than rolling over the puts, as shares go ex-dividend during the November 2014 option cycle.

For a stock whose price hasn’t done very much, eBay (EBAY) has been getting lots and lots of attention and perhaps it is that attention which has prompted it to finally decide to do what so many have suggested, by releasing plans to spin off its PayPal unit. eBay reports earnings this week and is always a prospect to exhibit a sizeable move. It is currently trading below the point that consider the mid-point of the price range that I like to see when considering a new position. As with some other potential earnings trades, it is a candidate for out of the money put sales before earnings or for those more cautious the sale of puts after earnings in the event of a large price drop upon earnings having been released.

Intel (INTC) reports earnings this week after having already been brutalized this past week along with the rest of the chip sector. Most recently I discussed some hesitancy regarding a position in Intel because it had two price gaps higher in the past few months. However, thanks to the past week it has now erased one of those price gaps that represented additional risk. As with Fastenal there is an upcoming ex-dividend date that may be a consideration in any potential trade.

Following YUM Brands’ (YUM) earnings report last week, many over-reacted during after hours trading and shares quickly recovered to end the following day higher, perhaps buoyed by the enthusiasm following the FOMC Statement. Shares did trend lower the rest of the week, but fared much better than the overall market. This coming week YUM Brands is ex-dividend and based upon its option premium is a veritable sea of calm, although it too is demonstrating growth in premiums as risk is generally heightened.

Finally, Best Buy (BBY) is one of those stocks that has seen its own personal correction, having fallen nearly 13% since the market high just 3 weeks ago. With so much attention having been placed on European concerns it’s hard to think of too many stocks that are so well shielded from some of those perceived risks. Although it doesn’t report earnings for more than a month, this is a position that I would like to maintain for an extended period of time, particularly with its currently bloated option premiums, heading into earnings, which I believe will reflect an improving discretionary spending environment, to Best Buy’s benefit.

Unless of course the muzzle falls off, in which case all bets are off for this week.

Traditional Stocks: Anadarko Petroleum, Dow Chemical, Fastenal, Halliburton

Momentum: Best Buy

Double Dip Dividend: YUM Brands (10/15)

Premiums Enhanced by Earnings: eBay (10/15 AM), Intel (10/14 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.

Oct42014

Weekend Update – October 5, 2014

Weekend Update

This week’s markets didn’t respond so positively when Mario Draghi, the head of the European Central Bank failed to deliver on what many had been expecting for quite some time.

The financial markets wanted to hear Draghi follow through on his previous market moving rhetoric with an ECB version of Quantitative Easing, but it didn’t happen. After two years of waiting for some meaningful follow through to his assertion that “we will do whatever it takes” Draghi’s appearance as simply an empty suit becomes increasingly apparent and increasingly worrisome.

On a positive note, as befitting European styling, that suit is exquisitely tailored, but still hasn’t shown that it can stand up to pressure.

It also wasn’t the first time our expectations were dashed and no one was particularly pleased to hear Draghi place blame for the state of the various economies in the European Union at the feet of its politicians as John Chambers, the head of Standard and Poor’s Sovereign Debt Committee did some years earlier when lowering the debt rating of the United States.

Placing the blame on politicians also sends a message that the remedy must also come from politicians and that is something that tends to only occur at the precipice.

While the Biblical text referring to a young child leading a pack of wild animals is a forward looking assessment of an optimistic future, believing that an empty suit can lead a pack of self-interested politicians is an optimism perhaps less realistic than the original passage.

At least that’s what the markets believed.

Befitting the previous week’s volatility that was marked by triple digit moves in alternating fashion, Draghi’s induced 238 point decline was offset by Friday’s 208 point gain following the encouraging Employment Situation Report. Whereas the previous week’s DJIA saw a net decline of only 166 points on absolute daily moves of 810 points, this past week was more subdued. The DJIA lost only 103 points while the absolute daily changes were 519 points.

The end result of Friday’s advance was to return volatility to where it had ended last week, which was a disappointment, as you would like to see volatility rise if there has been a net decline in the broader market. Still, if you’re selling options, that level is better than it was two weeks ago.

While Friday’s gain was encouraging it is a little less so when realizing that such memorable gains are very often found during market downtrends. There is at least very little doubt that the market behavior during the past two weeks represents some qualitative difference in its behavior and an isolated move higher may not be very reflective of any developing trend, but rather reactive to a different developing trend.

As with Draghi, falling for the rhetoric of such a positive response to the Employment Situation Report, may lead to some disappointment.

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

Many of the positions being considered this week are recently highlighted positions made more appealing following recent price pullbacks rather than on any company specific factors. Of course, when looking at stocks whose price has recently fallen at some point the question regarding value versus “value trap” has to be entertained.

With some increase in volatility, despite the rollback this week, I’ve taken opportunity to rollover existing positions to forward weeks when expanded option contracts have been available. As those premiums have increased a bit being able to do so helps to reduce the risk of having so many positions expire concurrently and being all exposed to a short term and sudden price decline.

Just imagine how different the outcome for the week may have been if Thursday’s and Friday’s results were reversed if you were relying on the ability to rollover positions or have them assigned.

However, with the start of earnings season this week there’s reason to be a little more attentive when selecting positions and their contract expiration dates as earnings may play a role in the premiums. While certainly making those premiums more enticing it also increases the risk of ownership at a time when the relative market risk may outweigh the reward.

One stock not reporting earnings this week, but still having an enriched option premium is The Gap (GPS). It opens the week for trading on its ex-dividend date and later in the week is expected to announce its monthly same store sales, being one of the few remaining companies to do so. Those results are inexplicably confusing month to month and shares tend to make strong price movements, frequently in alternating directions from month to month. For that uncertainty comes a very attractive option premium for shares that despite that event driven volatility tend to trade in a fairly well defined range over the longer term.

When it comes to their fashion offerings you may be ambivalent, but when it comes to that kind of price movement and predictability, what’s not to like?

If you’re waiting for a traditional correction, one that requires a 10% pullback, look no farther than Mosaic (MOS). While it had been valiantly struggling to surpass the $50 level on its long road to recovery from the shock of the break-up of the potash cartel, it has now fallen about 13% in 5 weeks. Most recently Mosaic announced a cutback in phosphate production and lowered its guidance and when a market is already on edge it doesn’t need successive blows like those offered by Mosaic as it approaches its 52 week low.

Can shares offer further disappointment when it reports earnings at the end of this month? Perhaps, but for those with a longer term outlook, at this level shares may be repeating the opportunity they offered upon hitting their lows on the cartel’s dissolution for serial purchase and assignment, while offering a premium enhanced by uncertainty.

Seagate Technology (STX) is also officially in that correctio
n camp, having dropped 10% in that same 5 week period. It has done so in the absence of any meaningful news other than perhaps the weight of its own share price, with its decline having come directly from its 52 week high point.

For a company that has become fairly staid, Pfizer (PFE) has been moving about quite a bit lately. Whether in the news for having sought a tax inversion opportunity or other acquisitions, it is clearly a company that is in need of some sort of catalyst. That continuing kind of movement back and forth has been pronounced very recently and should begin making its option premium increasingly enticing. With shares seemingly seeking a $30 home, regardless of which side it is currently on and an always attractive dividend, Pfizer may start getting more and more interesting, particularly in an otherwise labile market.

Dow Chemical (DOW) is one of those stocks that used to be a main stay of my investing. It’s price climb from the $40 to $50 range made it less so, but with the realization that the $50 level may be the new normal, especially with activist investor pressure, it is again on the radar screen, That’s especially true after this week’s price drop. I had been targeting the $52.50 level having been most recently assigned at $53.50, but now it appears to be gift priced. Unfortunately, it may be a perfect example of that age old dilemma regarding value, having already greatly under-performed the market since its recent high the “value trap” part may have already been played out.

While MasterCard (MA) is ex-dividend this week, it is certainly not one to chase in order to capture its dividend. With a payout ratio far below its competitors it would seem that an increase might be warranted. However, what makes MasterCard attractive is that it has seemingly found a trading range and is now situated at about the mid-point of that range. While there is some recent tumult in the world of payments and with some continuing uncertainty regarding its presence in Russia, MasterCard continues to be worth consideration, particularly as it too has significantly under-performed the S&P 500 in the past two weeks.

Equal in its under-performance to MasterCard during that period has been Texas Instruments (TXN). I’ve been eager to add some technology sector positions for a while and haven’t done so as often as necessary to develop some better diversification. Along with Intel (INTC) which I considered last week, as well, Texas Instruments is back to a price level that has my attention. Like Intel, it reports earnings soon and also goes ex-dividend during the October 2014 option cycle. Unlike Intel, however, Texas Instruments doesn’t have a couple of gap ups in price over the past three months that may represent some additional earnings related risk.

When it comes to under-performance it is possible that Coach (COH) may soon qualify as being synonymous with that designation. Not too surprisingly its past performance in the past two weeks, while below that of the S&P 500 may be more directly tied to an improved price performance seen in its competitor for investor interest, Michael Kors (KORS). However, Coach seems to have established support at its current level and may offer a similar opportunity for serial purchase and assignment as had been previously offered by Mosaic shares.

Finally, with the exception of YUM Brands (YUM) all of the other stocks highlighted this week have under-performed the S&P 500 since hitting its recent high on September 18, 2014. YUM Brands reports earnings this week and is often very volatile when it does so. This time, hover, the options market doesn’t seem to be expecting a very large move, only about 4.5%. Neither is there an opportunity to achieve a 1% ROI through the sale of a put option at a strike outside of the range implied. However, YUM Brands is one of those stocks, that if I had sold puts upon, I wouldn’t mind owning if there was a likelihood of assignment.

So often YUM Brands share price is held hostage to food safety issues in China and so often it successfully is able to  see its share price regain sudden losses. That, however, hasn’t been the case thus far since it’s summertime loss. There are probably little expectations for an upside surprise upon release of earnings and as such there may be some limited downside, perhaps explaining the option market’s subdued pricing.

If facing assignment of puts being sold with an upcoming ex-dividend date the following week, I would be inclined to accept assignment and proceed from the point of ownership rather than trying to continue avoiding ownership of shares. However, with the slightest indication of political unrest spreading from Hong Kong to the Chinese mainland that may be a decision destined for regret, just like the purchase of an ill-fitting and overly priced suit.

Traditional Stocks: Dow Chemical, Pfizer, Texas Instruments, The Gap

Momentum: Coach, Mosaic, Seagate Technology

Double Dip Dividend:  MasterCard (10/7)

Premiums Enhanced by Earnings: YUM Brands (10/7 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.

Aug302014

Weekend Update – August 31, 2014

Weekend Update

You really can’t blame the markets for wanting to remain ignorant of what is going on around it.

When you’re having a party that just doesn’t seem to want to end the last thing you want to do is answer that unexpected knock on the door, especially when you can see a flashing red and blue light projected onto your walls.

The recent pattern has been a rational one in that any bad news has been treated as bad news. The market has demonstrated a great deal of nervousness surrounding uncertainty, particularly of a geo-political nature and there has been no shortage of that kind of news lately.

On the other hand, the market has thrived during a summer time environment that has been devoid of any news. Over the past four weeks that market has had its climb higher interrupted briefly only by occasional rumors of geo-political conflict.

Given the market’s reaction to such news which seemingly is accelerating from different corners of the world, the solution is fairly simple. But it was only this week that the obvious solution was put into action. Like any young child who wants only to do what he wants to do, the strategy is to hear only what you want to hear and ignore the rest.

Had the events of this week occurred earlier in the summer we might have been looking at another of the mini-corrections we’ve seen over the past two years and perhaps more. The additive impact of learning of Russian soldiers crossing the Ukraine border, Great Britain’s decision to elevate their Terror Alert level to “Severe” and President Obama’s comment that the United States did not yet have a strategy to  deal with ISIS, would have put a pause to any buying spree.

Instead, this week we heard none of those warnings and simply marched higher to even more new record closes, even ignoring the traditional warning to not go into a weekend of uncertainty with net long positions.

To compound the flagrant flaunting the market closed at another new high as we entered into a long holiday weekend. As we return to trading after its celebration the incentive to continue ignoring the world and environment around us can only be reinforced when learning that this past month was the best performing month of August in more than 10 years.

Marking the fourth consecutive week moving higher, the July worries of spiking volatility and a declining market are ancient history, occurring back in the days when we actually cared and actually listened.

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

Bank of America (BAC) may be a good example of ignoring news, although it could also be an example of  the relief that accompanies the baring of news. The finality of its recent $17 billion settlement stemming from its role in the financial crisis was a spur to the financial sector.

Shares go ex-dividend this week and represent the first distribution of its newly raised dividend. While still nothing worthy of chasing and despite the recent climb higher, the elimination of such significant uncertainty can see shares trading increasingly on fundamentals and increasingly becoming less of a speculative purchase as its beta has plunged in the past year.

With thoughts of conflict related risk continuing to be on my mind there’s reason to consider positions that may have some relative immunity to those risks. This week, however, the reward for selling options is unusually low. Not only is the extraordinarily depressed volatility so adversely impacting those premiums, but there are only four days of time value during this trade shortened week. Looking to use something other than a weekly option doesn’t offer much in the way of relief from the low volatility, so I’m not terribly enthusiastic about spending down cash reserves this coming week, particularly at market highs.

Still, there can always be an opportunity in the making. With the exceptions of the first and last selections for this week, like last week I’m drawn to positions that have under-performed the S&P 500 during the summer’s advance.

^SPX ChartThere was a time that Altria (MO) was one of my favorite stocks. Not one of my favorite companies, just one of my favorite stocks, thanks to drawing on the logic of the expression “hate the sin and not the sinner.”

Back in the old days, before it spun off Philip Morris (PM) it was one of those “triple threat” stocks. It offered a great dividend, great option premiums and the opportunity for share gains, as well. Even better, it did so with relatively little risk.

These days it’s not a very exciting stock, although it still offers a great dividend, but not a terribly compelling option premium, especially as the ex-dividend date approaches. However, during a time when geo-political events may take center stage, there may be some added safety in a company that is rarely associated with the word “safe,” other than in a negative context.

Colgate Palmolive (CL) isn’t a terribly exciting stock, but in the face of unwanted excitement, who needs to add to that fiery mix? Last week I added shares of Kellogg (K), another boring kind of position, but both represent some flight to safety. 

Trailing the S&P 500 by 8% during the summer, shares of Colgate Palmolive could reasonably be expected to have an additional degree of safety afforded from that recent decline and that adds to its appeal at a time when risk may be otherwise be an equal opportunity destroyer of assets.

YUM Brands (YUM) and Las Vegas Sands (LVS) both have much of their fortunes tied up in China and both have come down quite a bit during the summer.

YUM Brands has shown some stability of late and I would be happy to see it trading in the doldrums for a while, as that’s the best way to accumulate option premiums. WHile doing bu
siness is always a risk in China, there is, at least, little concern for exposure to other worldwide risks and YUM may have now weathered its latest food safety challenge.

Las Vegas Sands, on the other hand, may not yet have seen the bottom to the concerns related to the vibrancy of gaming in Macao. However, the concerns now seem to be overdo and expectations seem to have been sufficiently lowered, setting the stage for upside surprises, as has been the situation in the past. As with concerns regarding decreased business at YUM due to economic downturns, once you get the taste for fast food or gambling, it’s hard to cut down on their addictive hold.

T-Mobile (TMUS), despite the high profile it maintains, thanks to the efforts of its CEO, John Legere, has somehow still managed to trail the S&P500 during the summer. This past week’s comments by parent Deutsche Telecom (DTEGY) seemed to imply that they would be happy to sell their interests for a $35 price on shares. They may be willing to take even less if a potential suitor would also take possession of John Legere, no questions asked.

I think that in the longer term the T-Mobile story will not end well, as there is reason to question the sustainability of its strategy to attract customers and its limited spectrum. It needs a partner with both cash and spectrum. However, since I don;t particularly look at the longer term picture when looking for weekly selections, I’m interested in replacing the shares that were assigned this past week, as its premium is very attractive.

Whole Foods (WFM) is another position that I had assigned this past week, while I still sit on a much more expensive lot. On the slightest pullback in price, or even stability in share price, I would consider a re-purchase of shares, as it appears Whole FOods is finding considerable support at its current level and has digested a year’s worth of bad news.

In an environment that has witnessed significant erosion in option premiums, Whole Foods has recently started moving in the opposite direction. Its option premiums have seen an increase in price, probably reflecting broader belief that shares are under-valued and ready to move higher. Although I’ve been adding shares in an attempt to offset paper losses from that more expensive lot, I believe that any new positions are warranted on their own at this level and would even consider rolling over positions that are likely to be assigned in order to accumulate these enriched premiums.

I currently have no technology sector holdings and have been anxious to add some. With distrust of “new technology” and “old technology” having appreciated so much in the past few months, it has been difficult to find suitable candidates.

Both SanDisk (SNDK) and QualComm (QCOM) have failed to match the performance recently of the S&P 500 and may be worthy of some consideration, although they both may have some more downside risk potential during a period of market uncertainty.

Among challenges that QualComm may face is that it is not collecting payment for its products. That is just another of the myriad of problems that may confront those doing business in China, as QualComm, and others, such as Microsoft (MSFT), may not be receiving sufficient licensing fee payments due to under-reporting of device sales.

In addition, it may also be facing a challenge to its supremacy in providing the chips that connect devices to cellular networks worldwide as Intel (INTC) and others may be poised to add to their market share at QualComm’s expense.

For those believing that the bad news has now been factored into QualComm’s share price, having resulted in nearly a 7% loss as compared to the S&P 500 performance, there may be opportunity to establish a position at this point, although continued adverse news could test support some 6% lower.

SanDisk certainly didn’t inspire much confidence this week as a number of executives and directors sold a portion of their positions.

I don’t have any particular bias as to the meaning of such sales. SanDisk’s price trajectory over the past year certainly leaves significant downside risk, however, the management of this company has consistently steered it against a torrent of  pessimistic waves, as it has survived commoditization of its core products. The risk of share ownership is mitigated by its option premium, that has resisted some of the general declines seen elsewhere, perhaps reflective of the perceived risk.

Finally, Coach (COH) has recently been in my doghouse, despite the fact that it has been a very reliable friend over the course of the past two years. But human nature being what it is, it’s hard to escape the question “what have you done for me lately?”

That’s the case because my most recent lot of Coach was purchased after earnings when it fell sharply and then surprised me by continuing to do so in a significant manner afterward, as well. Unlike with some other earnings related drops over the past two years this most recent one has had an extended recovery period, but I think that it is finally getting started.

The timing may be helped a little bit with shares going ex-dividend this week. That dividend is presumably safe, as management has committed toward maintaining it, although some have questioned how long Coach can continue to do so.

I choose not to listen to those fears.

Traditional Stocks: Altria, Colgate Palmolive, QualComm, Whole Foods, YUM Brands

Momentum:  Las Vegas Sands, SanDisk, T-Mobile

Double Dip Dividend: Bank of America (9/3), Coach (9/5)

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.

Jul192014

Weekend Update – July 20, 2014

Weekend Update

While I don’t necessarily believe that space aliens will descend upon us with laser rays blazing, there’s reason to increasingly believe that possibility as we learn more and more about the existence of conditions elsewhere in the universe that may be compatible with sustaining life.

Still, even with that knowledge, I don’t let it control my life and quite frankly will probably never do anything that in any way is impacted by the thought of an encounter with an alien.

The principle reason for not elevating the alarm level is that there is no point in history to serve as an example. The pattern of life on earth has been so far devoid of such occurrences, as best we know. Right now, that’s good enough for me.

However, I just don’t completely discount the possibility, because I believe that it’s of a very low probability. Besides, the vaporization process would be so swift that there would be no time for remorse or regrets. At least that’s what I expect.

By the same token I don’t expect a complete meltdown in the market, even though I know it has and can, likely occur again. Despite its probability of occurrence and my belief of that probability, I’m not really prepared for one if it were to occur, even with the extraordinarily low cost of portfolio protection. The chances of a complete meltdown, as we know, is probably more likely to occur in the near term than the prospect of laser waving aliens in our lifetimes.

For all practical purposes one is a real probability and the other isn’t, yet they aren’t necessarily placed into different risk categories at the moment.

This week’s events, however, served as a reminder that the unexpected should always be expected. With the nice rebound on Friday from Thursday’s news of the tragic downing of the civilian Malaysian airplane, the lesson may be lost, however.

One thing that we seem to have forgotten how to do in the past 5 years is to expect the unexpected. Instead our expectations have been fueled by the relentless climb higher and a feeling of invincibility. To a large degree that feeling has been justified as every attempt to fight back against the gains has been stymied in quick and due course.

I probably wasn’t alone in having that invincible feeling way back in 2007. The vaporization process was fairly swift then, as well.

Even when faced with challenges that in the past would have sent markets tumbling, such as international conflict, we haven’t seen the application of age old adages such as “do not stay long going into a weekend of uncertainty.” This Friday’s market rebound was another example in a long string of uncertainty being expected to not lead to the unexpected.

In essence with the certainty of an ever climbing market having become the new reality there’s been very little reason to exercise caution, or at least to be prepared to act in a cautious manner in the expectation that perhaps the unexpected will occur.

Our minds are wired to like and identify patterns. That’s certainly the strategic basis for stock trading for many. Predictability brings a degree of comfort, but too much comfort brings complacency. The prevailing pattern simply argues against the unexpected, so we have discounted its probability and to a large degree its possibility.

While we may be correct in discounting complete market meltdowns, as their occurrence is still relatively uncommon, that complacency has us discounting intermediate sized moves that can easily come from the unexpected. The world is an increasingly complex and inter-connected place and as seen in the past week there needn’t be advanced warning signs for any of an infinite number of unexpected events to occur.

We did get lucky this past week, but we probably expected the luck to continue if the unexpected did strike. What would really be unexpected would be to draw a lesson from our fragility standing near market highs.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. With many companies reporting earnings this coming week a companion article, “Taking a Gamble with Earnings,” explores some additional potential trades.

As Thursday’s trading was coming to its close at the lows of the session more and more stocks were beginning to return to what seemed to be more reasonable trading levels.

The problem, of course, is dealing with the unexpected and trying to predict what comes next when there are really no data points to characterize what we’ve seen. Someday when we look back at these events and the market impact we may see a pattern, but at the moment the question will be “which pattern?” Is it one that’s simply a blip and short-lived as the event itself is self-limiting or is the pattern consistent with the beginning stages of what is to become an ongoing and escalating series of events that serve to erode confidence and place continuing strains on the market?

In other words, did we just witness a typical over-reaction and subsequent rebound or are we ready to witness a correction?

I think its the former, but it opens the possibility of additional incidents and escalation of hostilities in a part of the world that is far more meaningful to the world’s economies than unheralded internecine conflicts occurring in so many other places.

Interestingly, with that kind of backdrop, this week, while we begin to sort out what the short term holds, “Momentum” kind of stocks, particularly those with little to no international exposure in the hotbed areas, may be more conservative choices than the more Traditional selections.

While I like British Petroleum (BP), General Electric (GE) and Deere (DE) this week, predominantly due to their recent price drops, there is certainly reason to be wary of their exposure to parts of the world in conflict.

British Petroleum certainly has known interests in Russia and could be at unique risk, however, I believe that we will be seeing a lesser chest thumping Russia in the n
ear term as there is some reason to believe that existing sanctions and perhaps expanded ones are beginning to get attention at the highest levels. Above all, pragmatism would dictate not injuring the source of hard currency.

I’ve been waiting a while to re-purchase shares of British Petroleum and certainly welcome any opportunity, even if still at a price higher than my last entry. With earnings scheduled to be reported July 29, 2014 and a healthy dividend sometime during the August 2014 option cycle there may be opportunities over the coming weeks with these shares to generate ongoing income.

General Electric reported its earnings this past Friday and also announced the impending IPO of its consumer finance business. The market was unimpressed on both counts.

I haven’t owned shares of General Electric with the frequency that it deserved. With a generous and increasing dividend, price stability, low beta and decent option premiums, it certainly has had the appeal for ownership, perhaps even using longer term option contracts to better  lock in some of those dividends. While it has significant international exposure the recent price weakness makes entry a little less risky, but even with the quality and size of General Electric unexpected bumpy rides can be possible when uncontrollable events create investor fear.

Deere is simply finally down to the price level that in the past was my upper range for purchase. With Caterpillar (CAT) reporting earnings later this week and trading near its 52 week high, there is room on the downside, as well as some trickle down to Deere shares. However, with Joy Global’s (JOY) recent performance, my anticipation is that Caterpillar’s Chinese related revenues will be enough to satisfy traders and offer some protection to Deere, as well.

On the Momentum side of the equation this week are Best Buy (BBY), Las Vegas Sands (LVS) and YUM Brands (YUM).

While Las Vegas Sands and YUM Brands certainly have international exposure, at the moment if you had to choose where to place your overseas bets, China may be relatively insulated from the unexpected elsewhere in the world.

Both companies are coming off weak earnings reports and the markets reacted accordingly. Both, however, have been very resilient to declines and finding substantive support levels in the past. With some shares of Las Vegas Sands recently assigned at current levels I would look for opportunity to re-purchase them. It’s volatility offers generous option premiums and the availability of expanded weekly options makes it easier to consider rollover opportunities in the event of unexpected price drops in order to wait out any price rebound, which has been the expected pattern.

YUM Brands is, like Deere, finally approaching the upper range of where I have purchased shares in the past. While I would like to see them even lower, I think that due to its dependence on the Chinese economy and market it may be a relative out-performer in the event of internationally induced market weakness.

Best Buy, unlike YUM Brands and Las Vegas Sands, has recently been on an upward price trajectory. I liked it much better when it was trading in the $26 range, but I believe it still has further upside potential in its slow climb back after unexpectedly bad earnings news 6 months ago. It too has an attractive option premium and a dividend and despite its recent price climb higher has come down nearly 5% in the past two weeks.

I have never purchased shares of Pandora (P) before, but love its product. At the moment I don’t particularly have any great desire to own shares, but Pandora does report earnings this week and is notable for its 10.8% implied price move. In the meantime a 1% ROI can be achieved at a strike price that is 16.4% below the current price. Those are the kind of characteristics that I like to see when considering what may otherwise be a risk laden trade.

Pandora has certainly shown itself capable of making very large earnings related moves and it is also certainly in the cross hairs of other and bigger players, such as Apple (AAPL) and Google (GOOG). However, even a scathing critic, TheStreet’s Rocco Pendola, has recently commented that its crushing defeat at the hands of those behemoths is not guaranteed.

Expected, maybe, but not guaranteed.

Facebook (FB) is also reporting earnings this coming week and in the two years that it has done so has predominantly surprised to the upside as it has quickly lived up to its vow to monetize its mobile strategy.

With an implied price move of 7.6% the strike level necessary to generate a 1% ROI through the sale of puts is 8.7% below Friday’s closing price. While shares can certainly make a move much larger than what is expected by the option market, in the event of an adverse move Facebook has some qualities that makes it an easier put option position to manage in the effort to avoid assignment.

It trades expanded weekly options and it does so with liquidity and volume, thereby having relatively narrow bid and ask spreads, even for deep in the money options.

Sooner or later, though, the expectation must be that earnings expectations won’t be met. I wouldn’t discount that possibility, although I think the options market may have done so a bit, so in this case I would be more inclined to consider the sale of puts after earnings, if share price drops on a disappointing report.

Finally, Apple reports earnings this week. It doesn’t really fulfill the criteria that I used when considering the sale of puts prior to earnings, in that it doesn’t appear that a 1% ROI can be achieved at a strike level outside of the range defined by the option market when calculating the “implied move.”

It’s probably useless trying to speculate on sales numbers or guidance. Based on its usual earnings related responses in the past, you would be justified in believing that the market had not expected  the news. However, this quarter the implied move is on the small side, at only 4.5%, suggesting that not much in the way of a surprise is expected next week.

With the current option pricing, the sale of Apple puts doesn’t meet my criteria, but I would again be interested in considering either the sale of puts after earnings, if the market’s response is negative or the outright purchase of shares and sale of calls, in anticipation of an ex-dividend date coming up in early August.

Sometimes it’s just
easier dealing with the expected.

Traditional Stocks:  British Petroleum, Deere, General Electric

Momentum: Best Buy, Las Vegas Sands, YUM Brands

Double Dip Dividend: none

Premiums Enhanced by Earnings: Apple (7/22 PM), Facebook (7/23 PM), Pandora (P)

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.