Weekend Update – June 29, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That doesn’t really seem to make very much sense to me. If the union of those two companies makes sense, as many believe that it does for both companies, it’s not terribly likely that a company would giv

e up on the idea and simply go on hiatus. They would most certainly get the process moving at an appropriate time, while ensuring that CEO succession was closely aligned with the objectives defined by the board, which will continue to be chaired by its current CEO who has indicated he would stay on during the transition period.

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

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

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

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

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

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

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

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

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

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

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

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

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

Momentum: Dollar General

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

Premiums Enhanced by Earnings: none

 

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.

 

 

Weekend Update – June 22, 2014

There’s an old expression that advises that it’s generally a bad idea to fight the Federal Reserve.

They have pretty powerful tools even when there’s some concern that the quiver is beginning to empty.

Janet Yellen, its Chairman, may give every indication of being a dove, but my guess is that when on the canvass and feeling threatened, she would be a formidable foe to anything that creates a threat.

Right now, the most immediate threat that can be recognized is that of a rising interest rate environment, although there are still those that worry about deflation, as well. But at least most everyone is agreed that interest rates have more than just mere relevance.

I don’t think Yellen was using the old “Rope-a-dope” strategy to ultimately beat inflation, because sooner or later we all know that it is the end result of a whirring economy and if that is the goal then there has to be some acceptance of inflation’s return.

So when Janet Yellen, during her press conference that followed the release of the most recent FOMC statement suggested that inflationary signals didn’t threaten low interest rates that could only be construed as a green light to buy stocks and that’s exactly what happened as more new highs were the ultimate outcome.

The current market reminds me a little of the glitchy computer software that allows you to build roller-coasters of your dreams that only go higher.

At some point even a zealous non-engineer can realize that something is missing from the formula that creates the real excitement. The climb higher is only the anticipation and can never be realized without the drops.

Stocks, I suppose, are a little different. The real excitement comes during the climb higher, but only as long as you get off of the ride before the actual drop.

Maybe that’s one of the reasons I like a covered option strategy. On days like this past Friday, which was the conclusion of the June 2014 option cycle, I was forced off of many rides, as lots of assignments were my fate.

It was exciting going up and I can get back on. There’s always another ride coming along and maybe even one that will come at a discount on the ride down.

On the meantime, I don’t know if I want to be on the ride whenever the dove bears her teeth and puts on the brakes. As much as we like Janet Yellen’s actions that help to support the market’s continued trajectory it may be a prelude to the same characteristic that would lead to tough medicine when needed, but before we are ready to accept it.

Either way, it’s probably a good idea to stay on the same side as the Federal Reserve, taking and throwing the same punches, in the knowledge that they’re aligned with investors. Even if that alignment is unintentional it signals favoring investing over saving. That in turn belies a mindset that reduces the role of a defensive posture, so there may be some sporadic punches taken in the name of advancing the offense.

I have a lot more money this week after last week’s assignments and while still concerned about approaching that point at which a drop seems sooner rather than later, for now it seems as if the Federal Reserve just keeps adding more and more track to make the ride up more giddy and the ride down more of a “white knuckle” experience.

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

As Apple (AAPL) gets ready to begin trading its third week following the 7 to 1 split, what is clear is that for those expecting a quick profit once the shares became priced in a more egalitarian fashion it has been two weeks of disappointments. in that time Apple shares dropped 1.7% while the S&P 500 climbed 1.1%.

As I suggested at the time of the split announcement that may have been timed with earnings to help deflect closer scrutiny of results, Apple would become a better trading vehicle as it settled into that phase of its corporate identity that no longer scoffed at dividends, buybacks and stock splits.

While the speculation regarding new products and innovations will continue and there will undoubtedly be occasional elation and occasional disappointment, Apple shares will be less likely to reflect fervor that enhances risk and reward. For me, that makes it a much more logical covered option trade than at anytime over the past 30 months.

Kohls (KSS) is to me an ideal kind of stock. It just muddles along and has some occasional earnings surprises that propel shares higher or lower only to see it somehow return to more familiar territory. It has an attractive dividend and has relatively recently started trading expanded options that are available at many strike levels.

It neither stands out at the upper nor lower ends of the consumer spectrum and sees little reason to bring too much attention for itself as it is very comfortable being in the middle. That kind of comfort also brings a lot of comfort when considering its use as part of a covered option strategy.

While I already have some shares of Kohls that are hoped to be assigned away or rolled over this coming week, at the current price I think it’s time to add additional shares and perhaps make use of some of the expanded option opportunities.

Lowes (LOW) is another stock that just seems to do its job, as long as its job is not to stay for prolonged times at elevated or depressed levels. While that may describe the worst rollercoaster ever designed, it is a perfectly good design for a stock used in a covered option strategy.

I had shares assigned this past week and would consider adding them again despite a small increase in its price in that time. It is currently trading at about the mid-point of the price range that h

as worked very nicely over the past year if using such a strategy.

While the Federal Reserve may be easing some defenses as it continues to ignore some inflationary pressures I’ve been looking increasingly to a more defensive position over the past years in seeking dividends, where possible.

This week’s potential purchases reflect the difficulty in re-allocating funds when prices are at or near their highs. Both Dow Chemical (DOW) and Deere (DE) are ex-dividend this week, but are also near those one year highs. Both favorites over the past few years, while having owned shares of Dow Chemical recently, I haven’t owned Deere in almost a year, while awaiting it to give back some gains.

Inevitably, that should be the case for both Dow Chemical and Deere, but as long as the Federal Reserve keeps adding that track I’m not certain I can see a specific reason why the drop should come at this particular time for either of those stocks. While the share prices are higher than I would like they both continue to have those characteristics that made them frequent trades for me in past years and always in consideration from one week to the next.

I haven’t owned EMC Corp (EMC) as frequently as Dow Chemical or Deere, but it too goes ex-dividend this week and it, too, is one that I’ve been waiting upon to shed some of its gains. While its dividend isn’t as attractive as some others, shares would fill a void for me as I’m currently under-invested in the technology sector. That itself may not be a good reason to add shares, but EMC has been a steady and reliable performer, although I would prefer to be out of the position, if purchased, prior to earnings during the early part of the August 2014 option cycle, as it is frequently moved by its more volatile progeny, VMWare (VMW).

AS earnings season now winds down in preparation for the next one that begins in just two weeks I’m somewhat less inclined to engage in risk, despite the recent recovery of many momentum stocks.

Apollo Education (APOL) has been beleaguered for a while, along with others in the for-profit education business. Having Bill Ackman place you in his cross-hairs isn’t necessarily good for your share’s health, either.

While the option market is anticipating an 11.1% move in share price upon earnings announcement in either direction, the sale of put contracts at a strike level 14.9% below Friday’s closing price could still deliver a weekly 1% ROI, if not assigned.

I like that kind of gap between what the market is expecting and the risk level where I may be able to achieve my desired ROI. One negative factor, however, which limits the ability to respond to an adverse price movement that might make unwanted assignment possible, is the lack of expanded option availability. I like to have those available in the event that a rollover of the put contracts is necessary, in order to avoid assignment, while then awaiting a bounce back in share price.

Micron Technology (MU) also reports earnings this week and a look at its chart makes you believe that it may be ready for a rest.

While the option market is anticipating only a 7.5% move in price, the 1% ROI threshold may be able to be achieved if shares drop less than 9.3%. The availability of expanded weekly options makes this a bit more attractive than the Apollo trade, however, I tend to prefer those earnings related trades in which shares are already trading with a negative bias, such as Apollo.

A few days ago, Josh Brown asked on Twitter if anyone could find a worse looking chart in the S&P 500 than Coach (COH), he would be impressed. Well, Bed Bath and Beyond (BBBY) reports earnings this week and its chart isn’t the most beautiful of sights to behold.

As opposed to Micron Technology and Apollo Group, there isn’t the same kind of gap between the implied price move and the strike level that gives me a sense of security if selling puts. However, Bed Bath and Beyond is a stock that I wouldn’t mind owning if faced with the prospect of assignment of those puts, although I would still consider the possibility of rolling over puts, as expanded weekly options are available.

Finally, Sinclair Broadcasting (SBGI) was a stock that I kept a close eye on this past week. As the nation’s largest independent broadcaster it potential had something to lose as it awaited a decision by the Supreme Court on whether the Aereo device would be allowed to continue its re-broadcasts of programs coming over what are considered public airwaves.

I was watching closely not because I had any great interest in the legal basis for any decision, but rather because I had shares of SInclair and had sold options that were expiring this Friday. Mid-week came word that a decision might come as early as Thursday or Friday and that sent shares moving in alternating directions. Added to that was news that one of the founding family Vice-Presidents sold all of his shares earlier in the week was enough to prompt me to close the positions, pare down the profit and look for another roller coaster car.

By the time the market closed on Friday the decision had yet to be released, but selling again got the better of the shares and Sinclair lost its past month of gains.

The decision to do anything will essentially be binary. If the decision favors Aereo I would be very interested in re-purchasing shares of Sinclair Broadcasting. If the decision favors the traditional broadcasters then I’d anticipate a rebound in share price and would look elsewhere for opportunities.

For now, the Federal Reserve is giving us all of the opportunities we need and I’m certainly not going to become a fighter at this stage in my life.

Traditional Stocks: Apple, Kohls, Lowes, Sinclair Broadcasting

Momentum: none

Double Dip Dividend: Deere (6/26), Dow Chemical (6/26), EMC Corp (6/27)

Premiums Enhanced by Earnings: Apollo Education Group (6/25 AM), Bed Bath and Beyond (6/25 PM), Micron Technology (6/23 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.

Weekend Update – June 15, 2014

It’s hard to believe that there was ever a period of a few hundred years with relative peace and little military expansion.

It’s not too hard to believe that almost 2000 years have passed, but given that the Pax Romana was followed by the Middle Ages we may want to re-think the idyllic and beneficial nature of peace.

The “Pax Romana” sounds so quaint in an era when even a week without new conflict seems like a gift from the heavens, but the markets need some kind of conflict, physical or otherwise, to keep it functioning in a rationale manner. Otherwise it gets left to its own self and that could have consequences.

This past week was one in which there was no real scheduled news and very little was expected to be happening to shake markets. It was a week when I thought the real challenge would be balancing new market highs achieved in very tentative fashion with the vacuum that can generate largely uncatalyzed moves.

In that vacuum too much quietude can lead to lots of introspection, and over-analysis, not to mention those voices that start telling you what you really should be doing. In that vacuum it’s not too unusual to see over-exaggerated responses to otherwise benign factors.

Who knew that the vacuum could be so easily magnify the results of a primary election in a small congressional district?

For some reason that was the conventional wisdom explaining the first of two triple digit losses mid-week, despite little rationale reason to believe that the political landscape could get any less accommodating. Why in the world a roadblock toward achieving immigration reform could jeopardize stock health is a difficult thesis to weave, but that was the story and everyone stuck to it, while ignoring the fact that the World Bank had cut its forecasts for global growth.

However, the following day there really was something to be concerned about and that was the disruption of a week’s worth of world peace as news came of a mostly unknown army beginning to conquer Iraq and marching toward its capital with Patton-like speed.

Its name “ISIS,” an acronym for “The Islamic State in Iraq and Syria” is an unfortunate situation for Isis Pharmaceuticals (ISIS). It reminds me a bit of the early 1980s and the one time popular diet suppressant, AYDS. Hopeful Isis Pharmaceuticals will respond better than the decision to rename a product as “Diet Ayds.”

But with tensions rising as this past week came to its close the market once again did the unexpected, just as it had done through much of 2011, 2012 and 2013.

If the lessons of the Crimean and Ukraine crises have taught us anything it’s that Friday crises tend to be good for whatever it is that’s ailing the markets.

Going into a weekend of uncertainty the market again failed to sell off and abide by the age old wisdom of not staying long going into a weekend of uncertainty.

Lately, it seems that the market thrives most when peace, whether that of political compromise necessary for a budgetary agreement or that of a cease fire, is itself at risk. With all of the recent talk about complacency, while the Volatility Index may reflect the level of past complacent behavior, the decision to ignore the unknown that may come from a marauding army marching into a nation’s capital is a true measure.

While we all want peace in every aspect of our lives there is a sense of “schadenfreude” that may exist when realizing that it is ongoing tension that may serve to keep markets thriving rather than focusing upon itself and realizing that sometimes heights are untenable.

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

In  addition to the certainty of conflict that seems to occur on a very predictable basis, so too is there certainty lately that General Motors (GM) will be in the news and not for a good reason. With even more recalls announced last week there really hasn’t been much good news for quite a while, but as we saw last week, that didn’t seem to have any impact on sales.

To its credit despite all of the adverse news General Motors has defended the $35 level very nicely, as long as you’ve had a little bit of faith and patience while others either took profits or panicked.

Following a little bit of weakness and demonstrating that shares can absorb incredible amounts of bad news, General Motors offers some good opportunities for use in a covered option strategy, as it offers an attractive dividend that results from its frequent price gyrations. With it’s equally attractive dividend it is easier to be patient while watching shares move up and down. The availability of expanded weekly options adds considerable latitude in how shares are managed while awaiting those price movements.

With the recent revision to GDP there may not be much reason to be optimistic about near term economic growth. However with continuing and steady growth in employment and perhaps bolstered by news from one time leader Intel (INTC), of increasing fortunes, I again took to my proxy for economic growth, Fastenal (FAST). 

I already own shares that may be assigned this coming week, but would not be adverse to rolling them over as they approach the purchase price after some recent weakness. I would also consider either replacing those shares, if assigned, or even adding additional shares and would further consider using some longer term options, such as the July or August 2014 contracts. The latter also adds the possibility of capturing a dividend payment.

Nike (NKE) isn’t a company that I’ve owned very often, although it is one that I look at each week when thinking of possible replacements for assigned shares. Unfortunately, this week I didn’t have any assignments and that makes me a little more guarded about adding new positions and eroding my cash position. However, it’s hard to formulate a thesis whereby Nike is disproportionately damaged by any breach of peace in the world. I also look at shares of Nike as currently being on sale after some recent losses. 

Lowes (LOW) on the other hand, is a company that I’ve owned with some frequency, as recently as a week ago. It, too, is on sale after last week’s market movements and without any real reason for its price drop.

Lowes fits the profile of companies that have been especially kind to me, in that it tends to move within a defined range, deals with an easily understandable product and happens to offer reasonable option premiums and a fair dividend.

While there’s nothing terribly exciting about the company that sits in the shadow of a larger competitor and isn’t too likely to gain from future growth nor suffer from growth disappointments, there is something exciting about booking profits at a tolerable level of risk.

With some recent concerns about its future in the Russian marketplace having been put at ease, MasterCard (MA) has rebounded from its recent lows. It is among those stocks that has seen me hoping for a drop in value and did so a bit over the past week. My comfort level with purchasing new shares is in the $76 range and it is currently just below that level, inviting some consideration. However, I may be inclined to sell puts on shares as my preference is a lower entry price. If doing so and the shares dropped below the strike I would assess whether to attempt to rollover the puts in an effort to get an even lower entry price or whether to accept assignment and position myself to sell calls and perhaps collect the trivial dividend early next month.

The week’s two potential dividend plays are very much at extremes of the spectrum. General Electric (GE) is fairly staid, moves in small doses, while Las Vegas Sands (LVS) is quite the opposite.

General Electric is a company that I don’t own often enough and am never quite certain why that is the case. It too tends to trade in a definable range, is not terribly volatile, offers a reasonable option premium and an excellent dividend. All of that sounds compelling to me, with perhaps this being the week, as the dividend serves as a lure.

Las Vegas Sands, which I purchased last week and may lose to early assignment, is still at the lower end of its recent trading range, despite the good showing last week. While I don’t particularly like chasing stocks that have risen, regardless of how much higher they may still need to go to get to recent highs, here too, the dividend may be a potent lure. While the premium is always attractive, I think that the near term lower boundary on the trading range may have been defined at about $72.

Finally, everyone who loves dysfunction would certainly be attracted to Darden Restaurants (DRI).

Not too long ago its CEO, Clarence Otis, was hailed as a genius and in touch with the casual dining needs of the nation. Now, he is castigated as caring only about his own fate and selling Darden’s assets at ridiculously low valuation in an effort to fend off activists.

Whatever.

I rarely want to consider an earnings related trade unless there are weekly and preferably expanded weekly contracts available and then usually consider the sale of puts. Sadly, in Darden’s case there are only monthly contracts, but this happens to be the final week of the monthly cycle, so in a perfectly executed strategy this could be a weekly trade.

However, despite that, I look at a potential share purchase of Darden and looking at a longer term commitment, with consideration of selling July 2014 calls in the hope of also capturing its very healthy dividend.

Dysfunction can sometimes play the same role as conflict. Sure, normalcy is far easier to deal with, but as with peace, where’s the excitement in that?

 

Traditional Stocks: Fastenal, Lowes, MasterCard, Nike

Momentum:  General Motors

Double Dip Dividend:  General Electric (6/19), Las Vegas Sands (6/18)

Premiums Enhanced by Earnings: Darden Restaurants (6/20)

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.

Weekend Update – June 8, 2014

This was a week with some potentially market rattling news.

Whenever the market is sitting at new highs, especially when having done so in a series of tentative moves and on low volume the risk may be heightened for a reversal of fortunes.

For definitional purposes, I would call that “exciting.”

Among the potential stumbling blocks to further market records were the much awaited announcement by Mario Draghi, the President of the European Central Bank, regarding interest rates, followed the next day by the monthly Employment Situation Report.

However, both were expected to be devoid of surprise and weren’t widely expected to move the markets unless some true surprise was announced.

True to expectations neither event contained any surprises.

In contra-distinction, I would call that boring and would generally expect ambivalence in response. Yet despite fully expecting the outcomes the market added nearly 100 points on each of those days, turning those yawns of boredom into gains and giving meaning to the age old saying that “no news is good news.”

The ECB’s reduction of its key lending rate was taken in stride and was a non-event, yet for some reason the market closed with just shy of a triple digit gain having suddenly turned around from an early morning loss. That early loss seemed more in line with another age old saying that has us selling on the news.

As the gain picked up some steam there was an obligatory need to find a reason and it was simple, as David Tepper, hedge fund manager and founder of Appaloosa Management, who had recently moved markets both up and down, was reported by CNBC’s Kate Kelly, via CNBC’s Twitter publicity machine to have said that his market concerns had “alleviated.”

That revelation soon found its way into what now passes for mainstream media and was reported as “David Tepper Isn’t Nervous Anymore.”

click to enlarge)

It’s always nice to know what’s going on and what causes market moves. Of course, what was conveniently missing here was the time line, as the turnaround started at 10:18 AM and the initial Kelley Tweet didn’t appear until an hour later, at which point 50% of the gain in the S&P had already been realized.

By the time the CNBC publicity machine Tweet was posted and the Business Insider article appeared about 90% of the gain had already been realized.

But we can still give Tepper the credit. After all, it doesn’t really matter other than for the creation of image.

Friday was a little more straightforward. Completely expected non-farm payroll numbers and the market opened with a gap higher and just stayed there throughout the day. There was no need to look for search high and low for an explanation and make it fit the events.

The spin surrounding the employment statistics was that as a nation we were now back to pre-recession employment numbers, as if that itself would be received as meaningful or even good news.

The message seems to be that the market doesn’t need a catalyst to go higher. It just needs to ensure that there’s no deterrent. The status quo is just fine.

Boredom is the new black bottom line for portfolios.

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

While boring may be good for your health and your portfolio Cree (CREE) the maker of LED light bulbs has been anything but boring since becoming a publicly traded company and is, nonetheless, high on my list for consideration this week.

That’s because Cree may be settling into senescence of late. After a disastrous response to its most recent earnings report it has settled into a downright boring trading pattern and its own measure of volatility is no longer one that should send a sane investor heading in a different direction.

While the recent trading pattern has been in a tight range, memories of days past that included numerous sharp rises and declines help to keep option premiums at attractive levels. In the past I’ve both owned shares and sold calls, as well as sold put contracts. Most recently, after some rollovers following an adverse price move, I accepted assignment and again own shares. This time around I may again elect the put sale route with the hope of being able to rollover contracts if assignment is likely.

Las Vegas Sands (LVS), on the other hand, may not be settling into senescence. Although its Chairman is getting on in years, he hasn’t let that dim his level of enthusiasm for life or diminish Las Vegas Sands’ impact on gaming worldwide.

While Caesers (CZR) cast a little pall on the sector on Friday with word of a notice of default from some bond holders, it was already a challenging week for casinos and Las Vegas Sands hasn’t been immune to the selling pressure.

Down about 15% from its March 2014 high I have been waiting for an entry point. Like Cree, I may prefer to do that with the sale of put options, although I may be more inclined to accept assignment, rather than rolling over, as shares go ex-dividend the following week.

One last bit of excitement may come from LuLuLemon Athletica (LULU) which reports earnings this week. Since I already own shares at a price far higher than it currently

sits, despite Friday’s 4% move higher and also am short puts, I’m considering the put sale route again this coming week.

Always a candidate for an explosive price movement on earnings and forward guidance, the options market is implying a 10.3% movement in price upon the event, which would suggest a lower price range of $40. However, a 1% weekly ROI may be able to be attained at a strike price as low as $38.50, which would represent a 13.8% price decline.

Could that large of a drop happen? With LuLuLemon? Absolutely. Just look at June 2013 or December 2013 earnings.

On the other hand, there is Lorillard (LO). The tobacco industry is generally a fairly boring one when litigation isn’t part of the equation. Lately the excitement level has gone a bit higher with the introduction of “e-cigarettes” of which Lorillard is said to be a leader.

But the real excitement revolves around the market’s response to the potential buyout of Lorillard, the tangled web of ownership and the potentially internecine relationships both between the various involved companies and with their own customers.

While there is always risk associated with jumping on board in anticipation of a buyout or merger, there’s little reason to believe that some kind of alliance won’t be realized, as there haven’t been any signs of protest or contention from any of the parties and there appears to also be a buy-in from British American Tobacco (BTI), which owns a substantial piece of the proposed acquiring company, Reynolds American (RAI). In addition to an attractive premium that was generally the case prior to buyout speculation, the longer the process is drawn out the more likely one is to also benefit from a very attractive dividend, as well.

The Gap (GPS) is an anachronism, as it remains one of the few retailers to still provide monthly comparable sales statistics.

In hindsight, it seems that I’ve been caught too often in the crossfire between those reports and the market’s reaction to those reports. I’ve also been trading in The Gap long enough to see that those reports vary wildly from month to month as does the subsequent reaction.

This past Friday was one such report and unusually, the comparable sales statistics were flat, as was the response. My existing shares were subsequently assigned. However, with any weakness in price, particularly returning shares to the $41 level, I would be an eager buyer, but would always try to be mindful of the recurring monthly event that makes the option premiums appear very attractive, but that bring along additional risk.

Finally, I’ve been lately focusing more on dividend payments, as option premiums increasingly reflect the low volatility environment. The combination of dividends and option premiums can address the challenge of low expectations for sudden price movements, particularly among “Traditional” or low beta stocks in an already low volatility market environment.

This week both Coca Cola (KO) and Merck (MRK) are ex-dividend. Neither are frequent targets for past purchase, although I have owned Merck twice in the past year and Coca Cola has been in one of my children’s accounts for more than a decade.

While there are some more adventurous and less boring potential positions to be considered this week, the boring DJIA components have a certain comfort level that may be just right at this point of the market’s climb.

One contrast to that boring approach to the accumulation of dividends is Newmont Mining (NEM) which is also ex-dividend this week. While suggestions that its dividend may be imperiled have slowed down, it is certainly tied to the price of gold, which has been imperiled on its own of late.

Already owning two more expensively lots of Newmont Mining and long suffering while awaiting some rebound in price, I’m finally ready to add shares in anticipation of an opportunity to realize some capital gains in addition to option premiums and dividends.

At that point I would then be happy to settle into boring mode.

 

Traditional Stocks: Lorillard, The Gap

Momentum: Cree, Las Vegas Sands

Double Dip Dividend: Coca Cola (6/12), Merck (6/12), Newmont Mining (6/10)

Premiums Enhanced by Earnings: LuLuLemon Athletica (6/12 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.