Weekend Update – December 21, 2014

What a week.

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

The range of those events this past was stunning.

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

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

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

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

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

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

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

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

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

Somehow, the urge to create chaos as p

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What could be worse?

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

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

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

Happy Holidays.

 

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

Momentum: Freeport McMoRan, GoPro, Halliburton

Double Dip Dividend: none

Premiums Enhanced by Earnings: none

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