Weekend Update – June 28, 2015

To call the stock market of this past week “a dog” probably isn’t being fair to dogs.

Most everyone loves dogs, or at least can agree that others may be able to see some positive attributes in the species. It’s hard, however, to have similar equanimity, even begrudgingly so, toward the markets this week.

What started off strongly on Monday and somehow wasn’t completely disavowed the following day, devolved unnecessarily on Wednesday and without any strong reason for doing so.

In fact, it was a week of very little economic news. We were instead focused on societal news that likely made little to no impression on the markets as a whole, although one sector did stand out.

That sector was health care, as the Supreme Court’s decision on the Affordable Care Act was a re-affirmation of a key component of the legislation and delayed any need to come up with an alternative, while still allowing Presidential contenders to criticize it heading into election season.

That’s a win – win.

It also keeps the number of uninsured at their lowest levels ever and puts more money in the pockets of hospitals and insurers, alike.

That’s another win – win.

While those two are usually on the opposite sides of most health care related arguments investors definitely agreed that the Affordable Care Act was and will continue to be additive to their bottom lines.

There is no health care flag, however.

The “Rainbow Flag” got a big thumbs up last week as the Supreme Court re-affirmed the right to dignity and the universal right to have access to divorce courts. The Court’s decision and its impact on businesses and the economy was a topic of speculation that was designed to fill air time and empty columns in the business section, as it came on a quiet day to end the week.

The Confederate Flag, of course, got a big thumbs down, after 150 years of quiet and thoughtful deliberation over its merits and what it represented. The decision by major retailers to stop sales of items with the Confederate flag on them can only mean that their demand wasn’t very significant and those items will probably be sent overseas, just as is done with the tee shirts of the losing Super Bowl team, so we can expect to see lots of photos of strangely attired impoverished third world children in the future.

And that leaves Greece, the EU, the IMF and the World Bank. For those most part, those aren’t part of our societal concerns, but they do concern markets.

Just not too much this past week.

The European Union was very forward thinking in the design of its flag. Rather than being concrete and having the 12 stars represent its member nations, those stars are said to represent characteristics of those member states. In other words Greece could leave the EU and the flag remains unchanged. Although the symbolism of the stars being arranged in a circle to represent “unity” may have to come under some scrutiny.

The growing realization is that would likely not be the same for the EU itself, as an exit by Greece would ultimately be “de minimis.” Either way, we should get some more information this week, as IMF chief Christine Legarde’s June 30th line in the sand regarding Greece’s repayment is quickly approaching.

It may be too late for a proposed “Plan B” for Greece to prevent default, as the European Union is now in its 86th trimester.

Still, despite a week of little news, somehow it was another week of pronounced moves in both directions that ultimately managed to travel very little from home.

New and existing home sales data suggested a strengthening in that important sector and the revised GDP indicated that the first quarter wasn’t as much of a dog as we all had come to believe. But there really wasn’t enough additional corroborating data to make anyone jump to the conclusion that core inflation was now exceeding the same objective that Janet Yellen had just stated weren’t being met.

So any concerns about improving economic news shouldn’t have led anyone to begin expressing their fears of increased interest rates by selling their stocks.

But it did.

Wednesday’s sell-off followed the news that the revised 2015 first quarter GDP was only down by 0.2% and not the previously revised 0.7%.

That makes it seem as if nerves and expectations for a long overdue correction or even a long overdue mini-correction are ruling over common sense and rational thought.

As usual, the week’s poten

tial stock selections are classified as being in Traditional, Double-Dip Dividend, Momentum or “PEE” categories.

The coming week is a holiday shortened one and will have the Employment Situation Report coming on Thursday, potentially adding to interest rate nervousness if numbers continue to be strong.

After Micron Technology’s (NASDAQ:MU) earnings disappointment last week it may be understandable why a broad brush was used within the technology sector to drive prices considerably lower on Friday. However, it wasn’t Micron Technology that introduced the weakness. The past two weeks haven’t been particularly kind to the sector.

At a time that I’m under-invested in technology and otherwise very reluctant to commit new funds, the sector has a disproportionate share of my attention in competition for whatever little I’m willing to let go.

With Oracle (NYSE:ORCL) having also recently reported disappointing earnings and Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT) and Seagate Technology (NASDAQ:STX) reporting in the next 3 weeks, it may be an interesting period.

While Micron Technology brought up concerns about PC sales, they are more dependent upon those than some others that have found salvation in laptops, tablets and mobile devices.

What was generally missing from Micron’s report, however, was placing the blame for lower revenues on currency exchange, unlike as was just done by Oracle. Micron focused squarely on decreasing product demand and pricing pressure.

That lack of adverse impact from currency exchange is a theme that I’m expecting as the upcoming earnings season begins. Whereas the previous earnings reports provided dour guidance on expectations of USD/Euro parity, the Dollar’s relative weakness in the most recent quarter may provide some upside surprises.

With share prices in Microsoft and Intel having dropped, this may be a good time to add positions in both, as they could both be significant beneficiaries of an improvement in currency exchange, as both await any bump coming from the introduction of Windows 10. I haven’t owned shares of Microsoft for a while and have been looking for a new entry point. At the same time, I do own shares of Intel and have been looking for an opportunity to average down and ultimately leave the position, or at least underwrite some of the paper losses with premiums on contracts written on an additional lot of shares.

While Seagate Technology doesn’t report its earnings until July 15th, following its weakness over the last 7 weeks, I’m considering the sale of puts in the weeks in advance of earnings. Those premiums are elevated and will become even more so during the actual week of earnings. In the event of an adverse price move, there might be a need to rollover the puts to try and avoid or delay assignment. However, at some point in the August 2015 option cycle the shares will be ex-dividend, so a shift in strategy, pivoting to share ownership maybe called for if still short the put options.

While Oracle and Cisco (NASDAQ:CSCO) don’t report earnings for a while, both have upcoming ex-dividend dates that add to their appeal. In the case of Oracle, it’s ex-dividend date is on Monday of the following week, which opens the possibility of ceding the dividend to early assignment in exchange for getting two weeks of premium and the opportunity to recycle proceeds from an assignment into another income producing position.

Also going ex-dividend on the Monday of the following week is The Gap (NYSE:GPS). It is one of my favorite stocks, even though it rarely seems to be doing anything right these days.

Part of its allure is that it continues to provide monthly sales data and the uncertainty with those report releases consistently creates option premium opportunities usually seen only quarterly for most stocks as they prepare to release earnings.

As long as The Gap continues to trade in a range, as it has done for quite some time, there is opportunity by holding shares and serially selling calls, while collecting dividends, as the company attempts to figure out what it wants to be, as it closes stores, yet announces plans to take over the Times Square Toys ‘R Us location, for those NYC tourists that just have to jet a pair of khakis to remember their trip.

Finally, American Express (NYSE:AXP) goes ex-dividend this week. It has been extremely range bound ever since the initial shock of losing its co-branding relationship with Costco (NASDAQ:COST) in 2016.

My wife informed me this morning that after about 30 years of near exclusive use of American Express, she has replaced it with another credit card. While that’s not related to the Costco news, it is something that American Express will likely be experiencing more and more in the coming months. That may, of course, explain the spate of mailings I’ve recently received to entice continuing loyalty.

While that comes at a cost, that’s still tomorrow’s problem and the market has likely discounted the costs of the partnership dissolution, as well as the lost revenues.

I like the price range and I like the option premium and dividend opportunities for as long as they may persist, but my loyalty to shares may only go for a week at a time.

Traditional Stocks: Intel, Microsoft

Momentum Stocks: Seagate Technology

Double-Dip Dividend: American Express (6/30), Cisco (7/1), Oracle (7/6), The Gap (7/6)

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 21, 2015

No matter how old you are, people love getting gifts.

That may even be the case when you end up paying for them yourself.

Sometimes, that’s the real surprise.

Last year, for example, I received a surprise birthday gift when hitting one of those round numbers. It was a trip to my favorite city, New Orleans, and I was further surprised by friends and family that had assembled there and then individually popped up at totally unexpected times and places.

The real surprise was when I received the hotel bill and then subsequently the other bills. While I’ll be forever remembering the moment a tap on my shoulder at a busy restaurant announced, “Sir, your drinks are here,” only to turn around and see one of my sons unexpectedly turn up holding a platter of shots. Priceless, but as long as we’re talking about price, I think that I would have chosen less costly libations had I known what was to be in store for me.

In hindsight, though, it was a great gift, but I paid the price as many expect will be the case after years of the Federal Reserve injecting liquidity into the system and keeping interest rates at historic lows, much as is now occurring throughout Europe and the world.

Following the FOMC Statement release this past week was Janet Yellen’s press conference and as one person said to me, hers was the “best tightrope walking” he’d ever seen.

Janet Yellenda, has a nice ring to it and she certainly did a great job of staying on course while questions came at her trying their best to throw her off message. Many of those questions were posed to see her lose her tight cling to the carefully nuanced words that served to tantalize, while hinting of what was ahead.

Instead of seeing the gift for what it was, they wanted to know when the bill would be coming due and maybe who was going to end up holding the bag when the celebrations were all over.

Of course, there are those really sick people for whom the gift would be seeing someone else fail or fall off that tightrope wire, but Yellen was better than any gust of wind that could come her way.

For those that had so recently come to expect that perhaps the FOMC would raise interest rates with this past week’s statement release, the market made it clear that they considered the delay as a real gift, even if the celebration and enjoyment lasted just for a day or so.

Sooner or later, there’s also a price that needs to be paid.

That gift, withholding the interest rate increase that just a couple of weeks ago seemed as if it might come this past week, not only was being delayed, but perhaps being delayed all the way to September. As if that gift wasn’t enough, there was a suggestion that any rate increase wasn’t necessarily going to be part of a planned series of regular rate increases, as had been the practice during the Greenspan era.

Could it get any better? At least that was how most heard her words as she delicately balanced them against one another, saying only those things that could be construed by willing ears as “Laissez les bons temps rouler,” as they like to say in New Orleans.

On Thursday, the day after the FOMC Statement release and press conference, it didn’t seem that it could get any better, as the market celebrated what could only be interpreted as a gift for stock investors.

Still, the reality is that while we are winding down a monetary policy era that has likely been to the benefit of our stock markets, the rest of the world is now beginning on that path and may offer stiff winds for us as the bill gets tallied.

The gales coming from Europe were evident this past week as the market was also reacting to the tightrope walk that Greece was doing as it vacillated between being reasonable and unrealistic.

Telling its IMF and ECB safety nets that there were better safety nets out there, while forgetting that neither Russia nor China has ever saved anyone without exacting a price that makes simple interest paid to the IMF and ECB look absolutely charitable, our own markets swayed along with those cross currents of uncertainty.

There may be lots of those cross currents ahead, so that balancing skill may come in very handy while waiting for earnings season to begin again in July and offering the possibility of getting grounded in fundamental reality.

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

Last week marked the second consecutive week in which I didn’t open any new positions, something that would have been unimaginable to me at any point during the past 7 or more years. This coming week I can see more of the same, as there’s very little compelling news ahead to make we want to let go of the cash in my hand. As the bill may be ready to come due soon, I’d like to be ready with that cash on hand to balance the cha

llenge of uncertainty.

Of course, as is usually the case, once the reality of the bill finally settles in, most of the time that represents an opportunity to again start moving forward.

For now, unless there is some further compelling reason to come from upcoming GDP, Retail Sales, Employment Situation and JOLTS reports to believe that the economy is heating up sufficiently to warrant a rate increase in July, the next catalyst may very well come from earnings.

This past week Oracle (NYSE:ORCL) reported earnings. It is among a very small handful of significant companies that report late in the cycle. In fact, their report was almost 3 months following the close of the quarter upon which they reported. While many of those reported soon after earnings season started, less than 2 weeks after the close of that quarter, the expectation for currency related revenue declines was so high at that time, that those companies didn’t see stock prices harshly punished for the dollar’s strength.

Now? Not so much.

Most, in fact, took the previous earnings report opportunity to provide decreased forward guidance as the expectation was that we were headed for US Dollar and Euro parity.

Nearly 3 months later that projection hasn’t become reality, as the US dollar has weakened significantly since March 31, 2015 and that can be expected to show up in the next quarter’s earnings reports. Unfortunately for Oracle share holders, had the company reported in April, there’s a chance that they would have gotten the same free pass as did others at that time.

Sinclair Broadcasting (NASDAQ:SBGI) and Comcast (NASDAQ:CMCSA) are both firmly in the control of their founding families and are on different ends of the spectrum when it comes to their approach to bringing content into the home.

The family nature of Comcast was highlighted this past Friday with the passing of its founder, Ralph Roberts, at age 95. My mother used to say, “they should never go younger,” and while I was never a fan of their product and service, the man was an outlier in many good ways.

With Comcast having recently been extricated from a potential buyout of another cable company, it’s also finding that there are opportunities outside of people’s television sets and streaming devices, as its ownership of Universal Studios makes it the beneficiary of some blockbuster movie releases.

On the downside, it is near its 52 week high as it gets ready to go ex-dividend the week after next. That gives some reason for pause, although neither Greece nor currency headwinds should be an issue, although rising interest rates can be particularly hurtful for a capital intensive company.

However, I especially like Monday ex-dividend dates and like the idea of being assigned early on those positions, as you can get an additional week of premium in exchange for giving up the dividend and holding the stock position for a shorter period of time than planned, while having the opportunity to re-invest the assignment proceeds into another position. With the availability of expanded weekly options on Comcast there are a number of different expiration dates that can be used in an effort to capture additional time premium or try to find the right balance between premium, dividend and time.

Sinclair Broadcasting is in the terrestrial business and just keeps getting larger and larger. It’s not particularly an exciting stock, but does trade with a fairly large price range without any particularly moving news.

It is now at a price that is still above its range mid-point, but that however, has been a reliable launching pad for new positions. With only monthly options available the time commitment is longer as the July 2015 cycle begins this coming week. With earnings coming during the August 2015 cycle any short term price decline necessitating a rollover may look to bypass additional earnings risk and go to a September 2015 expiration, which would also include an upcoming dividend.

Philip Morris (NYSE:PM) and Blackberry (NASDAQ:BBRY) can both elicit some emotional responses, but for very different reasons. Both have upcoming events this week that can offer some opportunity.

Philip Morris is ex-dividend this week and that dividend is very attractive. The company recently stopped its aggressive buyback program as it was feeling the pain of currency exchange and did so, ostensibly, in favor of the dividend. With a history of annual dividend increases coming for the third quarter of each year, there is some question as to wh

ether that will be possible this year, as cash flow is decreased from both currency and declining sales.

Earnings are scheduled to be reported on the day prior to the end of the July 2015 monthly cycle, so in the event that shares haven’t been assigned prior to that, I would consider attempting to rollover any expiring option to a date that may give sufficient time to recover from any price decline.

Blackberry reports earnings this week and is sitting precariously near its yearly lows. The options market is implying an 8% price move when earnings are released on Tuesday morning.

Blackberry usually has released earnings on Friday mornings over the past few years and I’ve generally overlooked it because my preference is to sell a weekly put on most earnings related trades. I further prefer those that report early in the week, so as to have time for some price recovery if at risk for assignment, particularly as some price recovery could ease the ability to rollover the position to delay or avoid assignment.

With a Tuesday morning report and the chance of achieving a 1% ROI at a strike just outside the range implied by the options market, the interest in a short put position is rekindled. However, the greatest likelihood is that I would be more inclined to consider a put sale after earnings, if the price declines, as the premium can really get further enhanced as the price challenges that 52 week low.

I currently own shares of Dow Chemical (NYSE:DOW) and am at risk of having those shares assigned in order to capture the dividend. With those contracts expiring on July 2, 2015 and the ex-dividend date of Friday, June 26th, the $0.42 dividend would require a price of at least $53.92 for the $53.50 options to be assigned early. If that looks like a possibility as trading nears it close on Thursday, I may consider rolling over the option position in order to secure the dividend.

However, with any price decline in shares, particularly if coming early in the week, I would consider adding additional shares and again consider selling call options for the following, holiday shortened week, or even for the week afterward.

Dow Chemical has recently been trading well off its lows that were fueled by decreasing oil prices. CEO Andrew Liveris, who has come under fire on his own for allegedly using his position to finance his lifestyle, did an excellent job in convincing investors that Dow Chemical was a beneficiary of decreasing oil prices, rather than a victim, as it was being treated early in 2015, prior to his going on the offensive.

I think that even if oil prices head moderately higher in the near term, Andrew Liveris would be able to convince people that was also to the benefit of Dow Chemical, just as I expect he’ll be able to convince internal Dow Chemical “watch dogs” that his personal actions were entirely appropriate.

Finally, I had Bank of America (NYSE:BAC) shares assigned this past week, but following weakness among financials on Friday, as well as following the week’s peak in interest rates, shares declined.

That decline, although still leaving shares near a 6 month high, does provide another entry point opportunity. While its shares may continue to be pressured if the bond market bids interest rates lower, the bond market knows exactly where interest rates are going to be headed and financials should be following along.

While the premiums aren’t spectacular, I would look at a potential purchase of shares with an eye toward a longer term holding trying to capitalize on share gains supplemented by option premiums while awaiting the reality of rate increases to come.

Traditional Stocks: Sinclair Broadcasting

Momentum Stocks: Bank of America

Double-Dip Dividend: Comcast (6/29), Dow Chemical (6/26), Philip Morris (6/23)

Premiums Enhanced by Earnings: Blackberry (6/23 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.

Weekend Update – June 14, 2015

The investing community is either really old or thinks it’s really well versed in history.

The prospects of interest rates going higher must be evoking memories of the Jimmy Carter era when personal experiences may have been pretty painful if on the wrong side of a prime interest rate of 21.5%.

I’d be afraid, too, of reliving the prospects of having to take out a 20% loan on my Chevrolet Vega.

The interest rate isn’t what would bother me, though. That Vega still evokes nightmares.

If not old enough to have had those personal experiences, then investors must be great students of history and simply fear the era’s repeat.

Unfortunately, neither group seems to readily recall the experiences of the intervening years when hints of inflation appearing over the horizon were addressed by a responsive Federal Reserve and not the Federal Reserve presided over by the last Chairman to have come from a corporate background.

It’s unfortunate only because the stock market has been held hostage, despite having reached new highs recently, by fears of a return to a long bygone era, which was also characterized by a passive Federal Reserve Chairman who opposed raising interest rates as a fiscal tool and while inflation was rapidly growing, believed that it would self-correct. 

G. William Miller was certainly correct on that latter belief as rates did self-correct once reaching that 21.5% level, although they lasted longer than did most people’s Vegas, while Miller’s length of tenure as Chairman of the Federal Reserve did not.

Passivity and benign neglect weren’t the best ways to approach an economy then and probably not a very good way to do so now.

This past week seemingly provided more of the confirmatory data the FOMC has been waiting upon to make the long signaled move that has also been long feared. Following the previous week’s Employment Situation Report and this past week’s JOLTS report and Retail Sales report, every indication is now pointing to an economy that is heating up.

Not as much as the crankcase of my Vega that caused so many engine blocks to crack, but enough to get the FOMC to act in a way that the interest rate dovish Miller would not.

Still, the various bits of information coming in during the week caused major moves in both stock and bond markets, although the cumulative impact was negligible, even while the details were attention getting.

 

While Janet Yellen has been referred to as a “dove,” when compared to Miller, she is a ravenous hawk who only needs a clear signal of when to swoop. While the FOMC will meet this week it’s not too likely that there will be any policy changes announced, although sometimes it’s all about the wording used to describe the committee’s thoughts.

As recently as 2 weeks ago many were thinking that rate hikes might not come until 2016. However, now the prevailing chatter is that September 2015 is the target date for action.

However with the July 2015 meeting coming at the very end of the month and the opportunity to peruse another month’s worth of data what would be easier than making that decision then, particularly coming in-between June and September scheduled press conferences?

That would take most by surprise, but at least it gets this ordeal over.

Like so many things in life, the anticipation can be the real ordeal as the reality pales in comparison. Somehow, though, that’s not a lesson that’s readily learned.

Unless the upcoming earnings season will have some very nice upside surprises due to a continuing strengthening of the US Dollar that never arrived, there doesn’t appear to be any catalyst on the horizon to prompt the stock market to test its highs. That is unless we finally get a chance to remove the yoke of fear.

Real students of history will know that the fear of those interest rate hikes, especially in the early stages of an overtly improving economy, is unwarranted.

After a week of not opening a single new position I’d love to see some clarity that can only come from FOMC decisiveness. It may well be a long hot summer ahead, but it’s time to embrace the heating up of the economy for what it is and celebrate its arrival and put the ghost of G. William to rest.

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

While markets were gyrating wildly this past week and news regarding Greece, the IMF and ECB kept going back and forth, I found myself shaking my head as the biggest story of the week seemed to be the upcoming CEO change at Twitter (TWTR). 

Although I am short puts and have a real interest in seeing shares rise, I sat wondering why a company that was so small, employed so few people and contributed so little to the economy, could possibly receive so much attention for a really inconsequential story.

Beyond that, the company could go away tomorrow and its 300 million monthly active users wouldn’t be facing a gap very long others in Silicon Valley could step in to fill that gap in a heartbeat and do so without all of the dysfunction characterizing the company.

One thing that strikes me is that with the change the Board of Directors will continue to have 3 past CEOs. A friend of mine was once Chairman of an academic department that had 4 past Chairman still active on the faculty. He said it was absolutely intolerable and he couldn’t act with

out continuing second guessing and sniping.

Among the characteristics of some selections this week is strong and unequivocal leadership. Right or wrong, it helps to be decisive.

It also helps to offer a dividend, as that’s another recurring theme for me, of late.

General Electric (GE) has been led by the same individual for nearly 15 years. While it may not be helpful to his legacy to compare General Electric’s stock performance relative to the S&P 500 under his tenure to that of his predecessor, no one can accuse GE of standing still and being indecisive.

The one thing that I continually bemoan is that I haven’t owned shares of GE as often as I should have over the past few years. Despite it’s relative under-performance over the years, other than 2015 YTD, it has been a very reliable covered call position. Its fairly narrow trading range, reasonable premium and its safe and excellent dividend are a great combination if not looking for dizzying growth and the risk that attends such growth.

Shares are ex-dividend this week and that may be the motivator I need to consider committing some funds at a time when I’m not terribly excited about doing so.

Although Larry Ellison has stepped back from some of his responsibilities at Oracle (ORCL), there’s not too much doubt that he is in charge. Who other than such a powerful leader could convince two other powerful business leaders to be in a CEO sharing arrangement?

Oracle reports earnings this week and is expected to go ex-dividend during the July 2015 option cycle. The options market is predicting only a 3.9% price move over the course of the coming week. 

There isn’t an appealing premium available for selling puts outside of the price range predicted by the options market, but Oracle is a company that I wouldn’t mind owning, rather than simply taking advantage of it to generate earnings volatility induced premiums. It’ like GE, is a company that I haven’t owned frequently enough over the years, as it has also been a very good covered call position, even while frequently trailing the S&P 500 over recent years.

Cypress Semiconductor (CY) is another company with a strong leader, who also happens to be a visionary. It’s stock price surged upon news that it was going to acquire Integrated Silicon Solution (ISSI), but over the past week has been on somewhat of a rollercoaster ride as the buyout went from Cypress Semiconductor missing a self-designated deadline to obtain regulatory approval, to then arranging financing and culminating in ISSI announcing that it had accepted the Cypress offer.

Or so it seemed.

That rollercoaster ride is likely to continue next week as the coveted buyout target has just recommended accepting an offer from a Chinese private equity consortium just a day after announcing it had accepted Cypress’ offer.

A special meeting of ISSI stockholders has now been called for June 19, 2015. With a close eye on that meeting and its outcome, I would consider waiting until then to make a decision of Cypress Semiconductor shares, that will go ex-dividend the following week.

While it’s clear that the market valued the combination of the two companies, the disappointment may now be factored in, although perhaps not fully. Cypress Semiconductor is a company that I’ve long admired, particularly as it has acted as an technology incubator and have liked as a covered option trade, although at a lower price. 

American Express (AXP) has also been led by a strong CEO for nearly 15 years. Of late, he may have been subject to some criticism for the opacity related to the company’s relationship with Costco (COST), as their co-branding credit card agreement will be ending in 2016 and surprisingly represented a large share of American Express’ profits. However, for much of the earlier years American Express was a good investment vehicle and offered a differentiated and profitable product.

Since that announcement and once the surprise was digested, American Express has traded in a narrow range following a precipitous drop in shares that discounted the earnings hit that was still to be a year away.

That steadiness in share price with the overhang of uncertainty, has made shares another good covered call and they, too, will be ex-dividend during the July 2015 option cycle.

International Paper (IP) may stand as the exception to the previous stocks. It has a new CEO and won’t be offering a dividend until the August or September 2015 cycle.

In fact, its recently retired CEO was once on a CNNMoney list of the 5 most over-paid CEOs.

What it does have is a recent 10% decline in share price that has finally brought it back to the neighborhood in which I wouldn’t mind considering shares. Like GE and Oracle, in hindsight, I wish I had owned shares more frequently over the years, not because of its share out-performance, as that certainly figured into the poor value received from its past CEO, but rather from that steady combination of option premiums and dividends along with a reasonably steady share price. 

Finally, although the sector isn’t very large, there hasn’t been a shortage of activity going in within the small universe of telecommunications companies and cable and satellite providers, of late.  

Verizon (VZ) has been making its own news with a proposed buyout of AOL (AOL), which is a relatively small one when compared to the other deals being made or proposed.

While matching the performance of the S&P 500 YTD, it is lagging well behind in the past month, but in doing so, it is also becoming more attractive, as it returns to the $47 neighborhood. It also will be going ex-dividend in the July 2015 option cycle and always has a reasonable option premium relative to the manageable risk that it generally offers.

At a time when there is ongoing market certainty there is a certain amount o

f comfort that comes from dividends and that comfort makes decisions easier to make.

 

Traditional Stocks: American Express, Cypress Semiconductor, International Paper, Verizon

Momentum Stocks: none

Double-Dip Dividend: General Electric (6/18)

Premiums Enhanced by Earnings:  Oracle (6/17 PM)

 

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

 

 

Weekend Update – June 7, 2015

 

In statistics, there is a concept of “degrees of freedom.”

It is the number of independent ways by which a dynamic system can move, without violating any constraint imposed upon it.

For example, if you know that you have a dollar in change distributed between your 2 pockets and one of those pockets has $0.75 in it, there aren’t too many possibilities for what the other pocket will contain. That’s an example of a single degree of freedom. However, as soon as you throw a third pocket into the mix there are an additional 25 permutations possible, as a second degree of freedom opens up lots of possibilities.

Poor Janet Yellen. So few possibilities and so many constraints tying her up.

Since US interest rates can’t go much lower, she doesn’t have too much choice in their direction. She has no choice but to raise rates.

Eventually.

Her only freedom is in the timing of action. If you’re married to data, as is now being professed, she has to balance the opinion of a well regarded economist with the latest employment data release and the prospects of upwardly revised GDP statistics.

Her degrees of freedom situation got a little muddled this past week as Christine Lagarde, who is the Managing Director of the International Monetary Fund, urged her to stay in line with the European Central Bank and keep interest rates low. At the same time the Employment Situation Report, released on Friday morning came in with job growth stronger than expected.

As the popular song once asked “should I stay or should I go?” is the kind of decision facing Janet Yellen right now and regardless of her decision, it’s going to be second guessed to death and much more likely to receive blame than credit for whatever near term or longer term outcomes there may be.

Doing nothing may be the safest decision, although this week the US bond market made its feelings known as rates moved in the only direction that makes sense.

That’s because suddenly the data has shifted the discussion back to the potential for the announcement of an interest rate increase as early as June 17th, the date of the next FOMC Statement release. That’s happened within days of the discussion having been about whether that increase would even occur in 2015.

With competing pressures of being out of synchrony with the direction of rates in the rest of the world and the reality of an economy that now may actually be growing at a stronger rate than had been believed, inaction would seem to be the obvious path to take.

Being tied up makes it easier to fail to act, but I’m betting that if any one can break free of the duct tape constraints that seek to bind her, it will be Janet Yellen.

The expression became long ago hackneyed, but while we all await a decision of interest rates, I suspect that Janet Yellen will break out of the box. As Bernanke before her, she will put her own twist on our narrow and limited expectations, leaving Christine Lagarde to realize that being late to the game is not a good reason to heed advice.

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

Intel (NASDAQ:INTC) had a really terrible week last week as the news that everyone had come to expect regarding its intentions with Altera (NASDAQ:ALTR) became confirmed.

The funny part, although not if you’re an Intel shareholder, is that when rumors first surfaced earlier in the year, the initial response was positive for Intel’s share price.

Not so much, though, as rumors became news and suddenly every one started questioning intel’s strategy with the acquisition.

As weak as the overall market was this past week, it was well ahead of Intel, which lost nearly 8%. That drop in price has made the shares once again appealing, as its CEO, Brian Krzanich, shouldn’t strike anyone as being frivolous, particularly as it comes to operations, having previously served as Intel’s COO. I would guess that Krzanich can sense a strategic fit better than most at a company where he has spent nearly 33 years of his life.

With Chuck Robbins set to start soon as the new CEO at Cisco (NASDAQ:CSCO), more executive level changes were announced this past week, as shares also well under-performed the S&P 500 for the week.

Although nowhere as severe as Intel’s weekly decline, the drop in Cisco’s shares bring them closer to an appealing price once again, as its
ex-dividend data nears in a few weeks.

While shares are still a little higher priced than I might like to initiate a position, its recent weakness hasn’t had very much basis. Robbins’ new team, even though comprised of many Cisco insiders, is likely to hit the ground running with strategic initiatives and will probably be more focused on near term victories, than was outgoing CEO John Chambers.

I think that creates short term opportunities even as Robbins may pull out varied accounting tricks in the waning days of June in order to make the next quarter’s earnings pale in comparison to the subsequent quarter, thereby creating a positive early image of his leadership.

Altria (NYSE:MO) and Merck (NYSE:MRK) are both ex-dividend this week and both offer a very attractive dividend. While one seeks to improve people’s lives through better chemistry, the other takes a different path.

Tobacco companies faced some challenges last week as the market didn’t react well to news of a $15 billion Canadian court penalty. Nor did it react well to news that a lawsuit regarding package labeling against the FDA was being dropped. A nearly 6% drop for the week is enough evidence of market displeasure.

Those drops helped to bring shares near some support levels just in time for the dividend and surprisingly good option premiums. While I don’t take any particular delight in the products or in the consequences of their use, there has never been a very good time to bet against their continued ability to withstand challenges.

That ability to withstand challenges is one of the signs of a great company and Merck falls into that category, as well.

Most often, companies like Altria and Merck, that have better than average dividend yields and whose dividend is about the size of a strike price unit or larger, in this case $0.50, are difficult to double dip in an effort to have some of the share price reduction brought about by going ex-dividend get subsidized by the option premium. However, with pharmaceutical companies being in play of late, the option premiums are higher than they have been for quite some time, even during an ex-dividend week.

Merck is rarely a candidate for a double dip dividend trade, but may be so this coming week, having also concluded a very weak past few trading days that highlighted a number of drug study trial results.

Finally, Williams Company (NYSE:WMB) is also ex-dividend this week having fallen sharply following the very positive reception it received after announcing the planned purchase of the remainder of its pipeline business, Williams Partners (NYSE:WPZ).

With a nearly 10% decline in the past month since that announcement, as with both Altria and Merck, it offers a better than average dividend yield and a dividend that is greater than its strike price units. However, it too, is now offering an option premium that allows for double dipping that is so often now possible or feasible.

However, as with Altria, the recent decline seems to have been over-exaggerated and rather than selling an in the money call in an attempt to double dip on dividend and premium, I think that i may be inclined to forgo some of that double dipping in exchange for capital gains on the underlying shares by using out of the money options.

Either way, it’s an exercise in greed, but I like having the increased degree of freedom to do so.

Traditional Stocks: Cisco, Intel

Momentum Stocks: none

Double-Dip Dividend: Altria (6/11), Williams Company (6/10), Merck (6/11)

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.