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Weekend Update – September 13, 2015

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

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

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

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

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

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

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

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

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

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

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

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

That will be something to sing about.

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

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

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

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

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

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

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

While I also don’t particularly like to re

purchase recently assigned shares at a higher price, that most recent purchase may very well have been at an unrealistically low price relative to the potential to accumulate dividends, premiums and still see capital appreciation of shares.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Seagate is a stock that I like to consider for its ability to generate option related income through the sale of puts as it approaches a support level. Having just recovered from testing the $46.50 level, I would consider the sale of

puts and would try to roll those over and over if necessary, until that point that shares are ready to go ex-dividend.

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stock: Coca Cola, Whole Foods

Momentum Stock: LuLuLemon Athletica, Seagate Technology

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

Premiums Enhanced by Earnings: Adobe (9/17 PM)

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

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Weekend Update – August 2, 2015

Like many people I know who have seen the coming attractions for “Vacation,” I’m anxious to see the film having laughed out loud on the two occasions that I saw the coming attractions.

That’s one of the benefits of diminishing short term memory and ever lower standards for what I find entertaining.

My wife and I usually rotate over who gets to select the next movie we see, although it usually works out to a 3 to 1 ratio in her favor. We tend to like different genres. But on this one, we’re both in agreement.

I’m under no illusions that the upcoming “vacation” being taken by the Federal Reserve and its members will have anywhere near the hijinks that the scripted “Vacation” will likely have.

For a short while the usually very visible and very eager to share their opinion members of that august institution will not garner too much attention and the stock market will be left to its own devices to try and interpret the meaning of incoming economic data in a vacuum.

The greatest likelihood is that the Federal Reserve Governors and the members of the FOMC will also be busily evaluating the economic data that will continue to accrue during the remainder of the summer, even as they have a much abridged speaking schedule in August.

I count only 3 scheduled appearances for August, which means less opportunity to go off script or less opportunity to speak one’s own mind, regardless of how that mind may lack influence where it really matters.

That then translates into less opportunity to move markets through casual comments, observations or expressions of personal opinion, even when that opinion may carry little to no weight.

While FOMC members may be taking a vacation from their public appearances for a short while, they’ll be able to give some thought to the most recent economic data which isn’t painting a picture of an economy that is expanding to the point of worry or perhaps not even to the point of justifying action.

The GDP data reported this week came in below estimates and further there was no indication of wage growth. For an FOMC that continually stresses that it will be “data driven” one has to wonder where the justification would arise to consider an interest rate increase even as early as September.

This coming week’s Employment Situation Report could alter the landscape as could the upcoming earnings reports from retailers that will begin in about 2 weeks.

With less attention being paid to when an interest rate hike may or may not occur, perhaps more attention will be paid to the details that would trigger such an increase and interpret those details on their surface, such that good news is greeted as good news and bad news as bad. That would mean a greater consideration of fundamental criteria rather than interpretation of the first or second order changes that those fundamentals might trigger.

Meanwhile, the market continues to be very deceiving.

While the S&P 500 is only about 1.5% below its all time high and the DJIA is about 3.5% below its high, it’s hard to overlook the fact that 40% of the latter’s component companies are in bear market correction.

That seems to be such an incongruous condition and the failure to break out beyond resistance levels after successfully testing support could be pointing to a developing dynamic of higher lows, but lower highs. That’s something that technicians believe may be a precursor to a breakout, but of indeterminate direction.

A lot of good that is.

The fact remains that the market has been extremely unpredictable from week to week, exhibiting something resembling a 5 steps forward and almost 5 steps backward kind of pattern throughout 2015.

With this past week being one that moved higher and bringing markets closer to its resistance level, the coming week could be an interesting one if China remains under control and fundamentals coming from earnings and economic data paint a picture of good news.

Given my low volume of trading over the past few weeks I feel that I’ve been on an extended, but unplanned vacation. Unfortunately, there are no funny tales to recount and the weeks past feel like weeks lost.

Although I’ve never really understood those who complained about having “too much quality family time” and welcomed heading back to work, I think I now have a greater appreciation for their misery.

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

PEE” categories.

Last week I purchased shares of Texas Instruments (NASDAQ:TXN) with dividend capture in mind. However, on the day before the ex-dividend date shares surged beyond my strike price and I decided to roll those options over in a hope that I could either retain the dividend and get some additional premium, or, in the event of early assignment, simply retain the additional premium.

This week, despite semi-conductors still being embattled, I’m interested in adding shares of Intel (NASDAQ:INTC), also going ex-dividend during the week.

While patiently awaiting the opportunity to sell new calls on a much more expensive existing position, I’m very aware that Intel is one of those DJIA components in correction mode. However, I don’t believe Intel will be additionally price challenged unless caught in a downward spiraling market. While I’d love to see some rebound in price for my existing shares, I’d be more than satisfied with a quick turnaround of a new lot of shares and capture of dividend and option premium.

MetLife (NYSE:MET) is also ex-dividend this week. It, too, may be in the process of developing higher lows and lower highs, which may serve as an alert.

With interest rates under pressure in the latter half of the week, MetLife followed suit lower, with both peaking mid-week. Any consideration of adding shares of MetLife for a short term holding should probably be done in the context of the expectation for interest rates climbing. If you believe that interest rates are still headed lower, the prospect of dividend capture and option premium may not offset the risk associated with the share price being pulled toward its support level.

MetLife shares are currently a little higher priced than I would like, but with a couple of days of trading prior to the ex-dividend date, I would be more enticed to consider a dividend capture trade and the use of an extended weekly option if there is price weakness early in the week.

I haven’t owned shares of Capital One Financial (NYSE:COF) in a number of years, although it’s always on my watch list. I almost included it in last week’s selection list following it’s impressive earnings related plunge of about 13%, but decided to wait to see if it could show any attempt to stem the tide.

In a sector that has generally had positive earnings this past quarter the news that Capital One was setting aside 60% more for credit losses came as a stunner, as its profitability ratio also fell.

Some price stability came creeping back last week, however, although still leaving shares well off their highs from less than 2 weeks ago. Even after some price recovery, Capital One Financial joins along with those DJIA stocks that are in correction mode and may offer some opportunity after being oversold.

Despite still owning a much too expensive lot of shares of Abercrombie and Fitch (NYSE:ANF), I’m always attracted to its shares, even when I know that they are likely not to be good for me.

There’s something perverse about that facet of human nature that finds attraction with what most know is bound to be a train wreck, but it can be so hard to resist the obvious warning signals.

While having that expensive lot of shares the recent weakness in Abercrombie and Fitch shares that have taken it below the tight range within which it had been trading makes me want to consider adding shares for the fourth time in 2015.

The option premiums are generally attractive, befitting its penchant for large moves and there is nearly 4 weeks to go until it reports earnings, so there may be some time to manage a position in the event of an adverse price movement.

I might consider the sale of puts with Abercrombie, rather than a buy/write. The one caveat about doing so and it also pertains to being short calls, is that if the ensuing share price is sharply deviating from the strike price when looking to execute a rollover, the liquidity may be problematic and the bid-ask spreads may be overly large and detrimental to someone who feels pressure to make a trade.

Finally, for those that have real intestinal fortitude, both Green Mountain Keurig (NASDAQ:GMCR) and Herbalife (NYSE:HLF) have been in the cross hairs of well known activists and both report earnings this week.

The Green Mountain Keurig saga is a long one and began some years ago when questions arose regarding its accounting practices and issues of inventory. Thrown later into the equation were questions regarding the sale of stock by its founder who had also served as CEO and Chairman until he was fired.

What Green Mountain has shown is that second acts are possible, as it has, very possibly through a lifeline offered by Coca Cola (NYSE:KO), emerged from a seeming spiral into oblivion.

Somewhat ominously, at its recent earnings report and conference, Coca Cola made no mention of its investment in Green Mountain, which has seen its share price fall by more than 50% in the past 9 months. It has been down that path before, having fallen by about 65% just 4 years ago in 2 month period.

Are there third and fourth acts?

The options market is implying a price move of about 10.7%. Meanwhile, one can potentially obtain a 1% ROI for the week if selling a put contract at a strike as much as 14% below this past Friday’s close.

In light of how this current earnings season has punished those disappointing with their earnings, even that fairly large cushion between the implied move and the strike that could deliver a 1% ROI still leads to some discomfort. However, I would very much consider the sale of puts after the earnings report if shares do plunge.

Herbalife has had its own ongoing and long saga, as well, that may be coming toward some sort of a resolution as the FTC probe is nearly 18 months old and follows allegations of illegality made nearly 3 years ago.

Following a fall to below $30 just 6 months ago, a series of court victories by Herbalife have helped to see it realize its own second act, as shares have jumped by 65% since that time.

The options market is implying a share price move of about 16%.

Considering that any day could bring great peril to Herbalife shareholders in the event of an adverse FTC decision, that implied move isn’t unduly exaggerated, as more than business results are in play at any given moment.

However, if that intestinal fortitude does exist, especially if also venturing a trade on Green Mountain, a 1% ROI may possibly be obtained by selling puts at a strike nearly 29% below Friday’s closing price.

Now that’s a cushion, but it may be a necessary one.

If the news is doubly bad, combining disappointing earnings and the coincidental release of an FTC ruling the same week that Bill Ackman would immensely enjoy, I might recommend a vacation, if you can still afford one.

Traditional Stocks: Capital One Finance

Momentum Stocks: Abercrombie and Fitch

Double-Dip Dividend: Intel (8/5), MetLife (8/5)

Premiums Enhanced by Earnings: Green Mountain Keurig (8/5 PM), Herbalife (8/5 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.

Visits: 17

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Weekend Update – February 15, 2015

You would think that when the market sets record closing highs on the S&P 500 that there would be lots of fireworks after the fact and maybe lots of excited anticipation before the fact.

But that really hasn’t been the case since 2007.

The “whoop whoop” sounds you may have heard coming from the floor of the NYSE had nothing to do with pitched fervor, but rather with traditional noise making at 3:33 PM on the Friday before a 3 day holiday.

The whooping noise was also in sharp contrast to the relative calm of the past week and it may have been that calm, or maybe the absence of anxiety, that allowed the market to add another 2% and set those record highs.

After a while you do get tired of always living on the edge and behaving in a hyper-caffeinated way in response to even the most benign of events.

Even back in 2007 as we were closing in on what we now realize was the high point for that year, there were so many records being set, seemingly day in and out, that it began to feel more like an entitlement rather than something special.

You whoop about something special. You don’t whoop about entitlements. There was no whooping on Friday at 4 PM. instead, it was a calm, matter of fact reaction to something we had never seen before. New highs are met with yawns and new heights aren’t as dizzying as they used to be, especially if you don’t look down.

When your senses get dulled it’s sometimes hard to see what’s going on around you, but there’s a difference between maintaining a sense of calm and having your senses dulled to the dangers of collateralized debt obligations or other evils of the era.

This calmness was good.

As opposed to those who refer to pullbacks from highs as being healthy, this calm character of this climb to a new high was what health is really all about. I feel good when my portfolio outperforms the market during a down week, but the end result is still a loss. When I really feel great is when out-performing during an up week.

Both may feel good, but only one is good in absolute terms. From my perspective, the only healthy market is one that is moving higher, but not doing so recklessly.

This week, was a continuation of a month that has characterized by calm events and an appropriate measure of acceptance of those events while moving to greater heights in a methodical way

While it may be good to not see some kind of unbridled buying fervor break out when records are reached, it does make you wonder why the same self control can’t be put on when things momentarily appear dire, as there have certainly been pl

enty of near vertical declines in the past few months that just a little calmness of mind could have avoided.

Coming from the most recent decline that ended in January 2015, the move higher has presented a circuitous path toward Friday’s new high close.

Instead of the straight line higher or the “V-shaped” recoveries that so many refer to, and that have characterized upward reversals in the past few months, this most recent reversal has been a stagger stepped one.

Rather than coming as a burst of unbridled excitement, the market has been taking the time to enjoy and digest the ride higher.

The climb was odd though when you consider that oil prices had been moving strongly higher, retail sales were disappointing, interest rates were climbing and currency troubles were plaguing US company profits. All these were happening as gold, long a proxy for the investor anxiety was gyrating with large moves.

But perhaps it was a sense of serenity and calm from overseas that offset those worrying events. Greece and the European Union appeared to be closer to an agreement on debt concerns and another Ukraine peace accord seemed likely.

The stock market simply decided that nothing could possibly happen to derail either of those potential agreements.

So there’s calmness, dulled senses and burying your head in the sand.

This week the calmness may have been secondary to some denial, but given the result, I’m all for denial, as long as it can keep reality away just a little longer.

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

What surprises me most, particularly considering a portfolio that doesn’t often hold very many DJIA positions, is that this week there are 5 DJIA members that may have reason for garnering attention.

It has been a bit more than two years since I last owned American Express (NYSE:AXP). Up until 2015, if you had looked at its performance in the time since I last owned it and happened to have also been in a vacuum at the time, it looked as if it had a pretty impressive ride.

That impression would have been upset if the vacuum was disrupted and you began to compare its performance to the S&P 500 and especially if comparing it to its rivals.

That ride got considerably more bumpy this past week as it will be losing a major co-branding partner, Costco (NASDAQ:COST) in 2016. While the possibility of that partnership coming to an end had been well known, the market’s reaction suggests that either it was ignored or calmness doesn’t reside when mediocre rewards programs are threatened with extinction.

But a 10% plunge seems drastic. The co-branding effort allowed American Express to dip its toes into the credit card business and deal with normal folks who don’t always pay their credit card charges in full, but do pay interest charges. Given the Costco shopper demographic that seemed like a nice middle ground for risk and reward that will be difficult to replace. However, American Express shares are now on sale, having reached 16 month lows and the excitement injects some life into its option premiums.

Intel (NASDAQ:INTC) recovered some of its losses since my last purchase, but not enough to make it within easy striking distance of an assignment.

While it was a great performer in 2014 it has badly trailed the S&P 500 in 2015. While it may be subject to currency crosswinds, nothing fundamental has changed in its story to warrant its most recent decline, particularly as “old tech” has had its respect restored.

While its option premium is not overly exciting enough to consider using out of the money options, there is enough reason to believe that there is some additional potential for price recovery left in its shares to consider not covering all new shares.

Coca Cola (NYSE:KO) continues to be derided and maybe for good reason as it needs something to both change its image of being out of touch with contemporary tastes and some diversification of its product lines.

The former isn’t likely to happen overnight, nor is any revenue related calamity expected to strike with suddeness, at least not before its next dividend, which is expected in the next few weeks. In the meantime, as with Intel, there may be some reason to believe that some price recovery may be part of the equation when deciding to sell calls on the position.

In the cases of DJIA components Johnson and Johnson (NYSE:JNJ) and General Electric (NYSE:GE) their upcoming ex-dividend dates this week add to their interest.

Johnson and Johnson, when reporting earnings last month was one of the first to remind us of the darkness associated with a strong US dollar and its shares are still lower, having trailed the S&P 500 by nearly 8% since earnings release on January 20th. Most of that decline, however, has come since the market began its turnaround once February started.

Uncharacteristically, Johnson and Johnson’s option premium has become attractive, even in
a week that has a significant dividend event. As with its fellow DJIA members, Intel and Coca Cola, I would consider some possibility of trying to also capitalize on share appreciation to complement the option premium and the dividend.

General Electric is the least appealing of the DJIA components considered this week as its option premium is fairly small as it goes ex-dividend. However, General Electric is a stock that I repeatedly can’t understand why I haven’t owned with much greater regularity.

It has traded in a fairly predictable range, has offered an excellent and growing dividend and reasonable option premiums for an extended period of time. That’s a great combination when considering a covered option strategy.

Add Kellogg (NYSE:K) to the list of companies bemoaning the impact of a strong dollar on their earnings and future prospects for profits. Down nearly 5% on its earnings and a more impressive 9.6% in the past 3 weeks it also has to deal with falling cereal sales, which likely played a role in analyst downgrades this week. While currencies continually fluctuate and at some point will shift to Kellogg’s benefit, those sagging sales adjusted for currency effect, is a cause for concern, but not right away.

As with American Express that price decline brings shares to a more reasonable price point, well below where I last owned shares less 2 months ago. With an upcoming dividend in the March 2015 option cycle and only offering monthly options, I would consider selling March options bypassing what remains of the February contract in anticipation of some price recovery.

Facebook (NASDAQ:FB) has been uncharacteristically quiet since it reported earnings last month, as investor attention has shifted to Twitter (NYSE:TWTR).

Its share price has been virtually unchanged over the past 3 months but its option premiums have remained very attractive and continue to be so, even as it may have recently fallen off investor’s radar screens despite having avoided mis-steps that characterize so many young companies with great growth.

While I generally consider the sale of puts in advance of earnings and frequently would prefer not to take assignment of shares, Facebook is an exception to that preference. While I would consider entering a position through the sale of puts if shares move adversely the market for its options is liquid enough to likely allow put rollovers, or if taking assignment create an easy path for selling calls on the position.

Finally, I don’t really begin to make believe that I understand the dynamics of oil prices, nor understand the impact of prices on the various industries that either get their revenue by being some part of the process from ground to tank or that see a large part of their costs related to energy pricing. I certainly don’t understand “crack spreads” and find myself more likely to giggle than to ask an informed question or add an insight when the topic arises.

United Continental Holdings (NYSE:UAL) is one of those that certainly has a large portion of its costs tied up in fuel prices. While hedging of fuel can

certainly be a factor in generating profits, it can also be a tool to generate losses, as they have learned.

With about $1 billion in hedging related losses expected in 2015 United shares are down nearly 10% since having reported earnings. That’s only fair as its price trajectory higher over the previous months was closely aligned with the perception that falling jet fuel prices would be a boon for airlines, without real regard to the individual liabilities held in futures contracts.

As with energy companies over the past few months the great uncertainty created by rapidly moving prices created greatly enhanced option premiums. With oil prices having significant gains this week but still a chorus of those calling for $30 oil, it’s anyone’s guess where the next stop may be. However, any period of stability or only mildly higher fuel prices may still accrue benefit to those airlines that had been hedged at far higher levels, such as United.

While we think about an “energy sector,” there’s no doubt that its comprised of a broad range of companies that fit in somewhere along that continuum from discovery to delivery. It’s probably reasonable to believe that not all portions of the sector experience the same level of response to price changes of crude oil.

Western Refining (NYSE:WNR) is ex-dividend this week and reports earnings the following week. It’s in a portion of the energy sector that doesn’t suffer the same as those in the business of drilling when crude oil prices are plunging, as evidenced by the refiner’s performance relative to the S&P 500 in 2015.

If previous earnings reports from many others in the sector are to act as a guide, although there have been some exceptions, any disappointing earnings are already anticipated and Western Refining’s report will be well received.

For that reason, I might consider, as with Kellogg, bypassing the February 2015 option contract and considering a sale of the March 2015 contract, which also provides nearly a month for share price to recover in the event of a move lower upon earnings.

Traditional Stocks: American Express, Coca Cola, Intel, Kellogg

Momentum Stocks: Facebook, United Continental Holdings

Double Dip Dividend: General Electric (2/19), Johnson and Johnson (2/20), Western Refining (2/18)

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.

Visits: 20

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Weekend Update – February 1, 2015

At first glance there’s not too much to celebrate so far, as the first month of 2015 is now sealed and inscribed in the annals of history.

It was another January that disappointed those who still believe in or talk about the magical “January Effect.”

I can’t deny it, but I was one of those who was hoping for a return to that predictable seasonal advance to start the new year. To come to a realization that it may not be true isn’t very different from other terribly sad rites of passage usually encountered in childhood, but you never want to give up hoping and wishing.

It was certainly a disappointment for all of those thinking that the market highs set at the end of December 2014 would keep moving higher, buoyed by a consumer led spending spree fueled by all of that money not being spent on oil and gas.

At least that was the theory that seemed to be perfectly logical at the time and still does, but so far is neither being borne out in reality nor in company guidance being offered in what is, thus far, a disappointing earnings season.

Who in their right mind would have predicted that people are actually saving some of that money and using it to pay down debt?

That’s not the sort of thing that sustains a party.

What started a little more than a month ago with a strongly revised upward projection for 2015 GDP came to an end with Friday’s release of fourth quarter 2014 GDP that was lower than expected and, at least in part validated the less than stellar Retail Sales statistics from a few weeks ago that many very quick to impugn at the time.

When the week was all said and done neither an FOMC Statement release nor the latest GDP data could rescue this January. Despite a 200 point gain heading into the end of the week in advance of the GDP data, and despite a momentary recovery from another 200 point loss heading into the close of trading for the week fueled by an inexplicable surge in oil prices, the market fell 2.7% for the week. In doing so it just added to the theme of a January that breaks the hearts of little children and investors alike and now leaves markets about 5% below the highs from just a month ago.

Like many, I thought that the January party would get started in earnest along with the start of the earnings season. While not expecting to see much tangible benefit from reduced energy costs reflected in the past quarter, my expectation was that the good news would be contained in forward guidance or in upward revisions.

Silly, right? But if you used common sense and caution think of all of the great things you would have missed out on.

While waiting for earnings to bring the party back to life the big surprise was something that shouldn’t have been a surprise at all for all those who take an expansive view of things. I don’t get paid to be that broad minded, but there are many who do and somehow no one seemed to have taken into consideration what we all refer to as “currency crosswinds.”

Hearing earnings report after earnings report mention the downside to the strong dollar reminded me that it would have been good to have been warned about that sort of thing earlier, although did we really need to be told?

Every asset class is currently in flux. It’s not just stocks going through a period of heightened volatility. Witness the moves seen in Treasury rates, currencies, precious metals and oil and it’s pretty clear that at the moment there is no real safe haven, but there is lots of uncertainty.

A quick glance at the S&P 500’s behavior over the past month certainly shows that uncertainty as reflected in the number of days with gap openings higher and lower, as well as the significant intra-day reversals seen throughout the month.

 I happen to like volatility, but it was really a party back in 2011 when there was tremendous volatility but at the end of the day there was virtually no net change in markets. In fact, for the year the S&P 500 was unchanged.

If you’re selling options in doesn’t get much better than that, but 2015 is letting the party slip away as it’s having difficulty maintaining prices as volatility seeks to assert itself as we have repeatedly found the market testing itself with repeated 3-5% declines over the past 6 weeks.

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

If you were watching markets this past Friday afternoon what was turning out to really be a terrible day was mitigated by the performance of the highest priced stock in the DJIA which added nearly 60 points to the index. That notwithstanding, the losses were temporarily reversed, as has been the case so often in the past month, by an unexplained surge in oil prices late in the trading session.

When it appeared as if that surge in oil prices was not related to a fundamental change in the supply and demand dynamic the market reversed once again and compounded its losses, leaving only that single DJIA component to buck the day’s trend.

So far, however, as this earnings season has progressed, the energy sector has not fared poorly as a result of earnings releases, even as they may have floundered as oil prices themselves fell.

Sometimes lowered expectations can have merit and may be acting as a cushion for the kind of further share drops that could reasonably be expected as revenues begin to see the impact of lower prices.

That may change this coming week as Exxon Mobil (NYSE:XOM) reports its earnings before the week begins its trading. By virtue of its sheer size it can create ripples for Anadarko (NYSE:APC) which reports earnings that same day, but after the close of trading.

Anadarko is already well off of the lows it experienced a month ago. While I generally don’t like establishing any kind of position ahead of earnings if the price trajectory has been higher, I would consider doing so if Exxon Mobil sets the tone with disappointing numbers and Anadarko follows in the weakness before announcing its own earnings.

While the put premiums aren’t compelling given the implied move of about 5%, I wouldn’t mind taking ownership of shares if in risk of assignment due to having sold puts within the strike range defined by the option market. As with some other recent purchases in the energy sector, if taking ownership of shares and selling calls, I would consider using strike prices that would also stand to benefit from some share appreciation.

Although I may not be able to tell in a blinded taste test which was an Anadarko product and which was a Keurig Green Mountain Coffee (NASDAQ:GMCR) product, the latter does offer a more compelling reason to sell puts in advance of its earnings report this week.

Frequently a big mover after the event, there’s no doubt that under its new CEO significant credibility has been restored to the company. Its relationship with Coca Cola (NYSE:KO) has certainly been a big part of that credibility, just as a few years earlier its less substantive agreement with Starbucks (NASDAQ:SBUX) helped shares regain lost luster.

The option market is predicting a 9.3% price move next week and a 1.5% ROI can be attained at a strike price outside of that range, but if selling puts, it would be helpful to be prepared for a move much greater than the option market is predicting, as that has occurred many times over the past few years. That would mean being prepared to either rollover the put contracts or take assignment of shares in the event of a larger than expected adverse move.

While crowd sourcing may be a great thing, I’m always amused when reading some reviews found on Yelp (NYSE:YELP) for places that I know well, especially when I’m left wondering what I could have possibly repeatedly kept missing over the years. Perhaps my mistake was not maintaining my anonymity during repeated visits making it more difficult to truly enjoy a hideous experience.

Yet somehow the product and the service endures as it seeks to remove the unknown from experiences with local businesses. But it’s precisely that kind of unknown that makes Yelp a potentially interesting trade when earnings are ready to be announced.

The option market has implied a 12% price move in either direction and past earnings seasons have shown that those shares can easily move that much and more. For those willing to take the risk, which apparently is what is done whenever going to a new restaurant without availing yourself of Yelp reviews, a 1% ROI can be attained by selling weekly put contracts at a strike level 16% below Friday’s closing price.

While the market didn’t perform terribly well last week, technology was even worse, which has to bring International Business Machines (NYSE:IBM) to mind. As the worst performer in the DJIA over the past 2 years it already knows what it’s like to under-perform and it hasn’t flown beneath anyone’s critical radar in that time.

However, among big and old technology it actually out-performed them all last week and even beat the S&P 500. With more controversy certain for next week as details of the new compensation package of its beleaguered CEO were released after Friday’s close, in an attempt to fly beneath the radar, shares go ex-dividend.

While there may continue being questions regarding the relevance of IBM and how much of the company’s performance is now the result of financial engineering, that uncertainty is finally beginning to creep into the option premiums that can be commanded if seeking to sell calls or puts.

With shares trading at a 4 year low the combination of option premium, dividend and capital appreciation of shares is recapturing my attention after years of neglect. If CEO Ginny Rometty can return IBM shares to where they were just a year ago she will be deserving of every one of the very many additional pennies of compensation she will receive, but she had better do so quickly because lots of people will learn about the new compensation package as trading resumes on Monday.

Also going ex-dividend this week are 2 very different companies, Pfizer (NYSE:PFE) and Seagate Technology (NASDAQ:STX), that have little reason to be grouped together, otherwise.

After a recent 6% decline, Pfizer shares are now 6% below their 4 year high, but still above the level where I have purchased shares in the past.

The drug industry has heated up over the past few months with increasing consideration of mergers and buyouts, even as tax inversions are less likely to occur. Even those companies whose bottom lines can now only be driven by truly blockbuster drugs have heightened interest and heightened option premiums associated with their shares which are only likely to increase if overall volatility is able to maintain at increased levels, as well.

Following its recent price retreat, its upcoming dividend and improving option premiums, I’m willing to consider re-opening a position is Pfizer shares, even at its current level.

Seagate Technology, after a nearly 18% decline in the past month was one of those companies that reported a significant impact of currency in offering its guidance for the next quarter, while meeting expectations for the current quarter.

While I often like to sell puts in establishing a Seagate Technology position, with this week’s ex-dividend event, there is reason to consider doing so with the purchase of shares and the sale of calls, as the premium is rich and lots of bad news has already been digested.

I missed an opportunity to add eBay (NASDAQ:EBAY) shares a few weeks ago in advance of earnings, as eBay was one of the first to show some currency headwinds. However, as has been the case for nearly a year, the story hasn

‘t been the business it has been all about activists and the saga of its profitable PayPal unit.

After an initial move higher on announcement of a standstill agreement with Carl Icahn, the activist who pushed for the spin-off of PayPal, shares dropped over the succeeding days back to a level just below from where they had started the process and again in the price range that I like to consider adding shares.

From now until that time that the PayPal spin-off occurs or is purchased by another entity, that’s where the opportunity exists if using eBay as part of a covered call strategy, rather than on the prospects of the underlying business. However, after more than a month of not owning any shares of a company that has been an almost consistent presence in my portfolio, it’s time to bring it back in and hopefully continue serially trading it for as long as possible until the fate of PayPal is determined.

Finally, Yahoo (NASDAQ:YHOO) reported earnings this past week, but took a page out of eBay’s playbook from earlier in the year and used the occasion to announce significant news unrelated to earnings that served to move shares higher and more importantly deflected attention from the actual business.

With a proposed tax free spin off of its remaining shares of Alibaba (NYSE:BABA) many were happy enough to ignore the basic business or wonder what of value would be left in Yahoo after such a spin-off.

The continuing Yahoo – Alibaba umbilical cord works in reverse in this case as the child pumps life into the parent, although this past week as Alibaba reported earnings and was admonished by its real parent, the Chinese government, Yahoo suffered and saw its shares slide on the week.

The good news is that the downward pressure from Alibaba may go on hiatus, at least until the next lock-up expiration when more shares will hit the market than were sold at the IPO. However, until then, Yahoo option premiums are reflecting the uncertainty and offer enough liquidity for a nimble trader to respond to short term adverse movements, whether through a covered call position or through the sale of put options.

Traditional Stocks: eBay

Momentum Stocks: Yahoo

Double Dip Dividend: International Business Machines (2/5), Pfizer (2/4), Seagate Technology (2/5)

Premiums Enhanced by Earnings: Anadarko (APC 2/2 PM), Keurig Green Mountain (2/4 PM), Yelp (2/5 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.

Visits: 13

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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.

Visits: 15

Posted on

Weekend Update – October 26, 2014

It’s too bad that life doesn’t come with highly specific indicators that give us direction or at least warn us when our path isn’t the best available.

Parents are supposed to do that sort of thing, but in real life the rules are pretty simple. You don’t go swimming for 30 minutes after a meal, you don’t kill people and you don’t swallow your chewing gum.

The seven additional commandments are really just derivative of those critically important first three.

Knowing the difference between right and wrong gives one the ability to change direction when getting too close to what is known to be on the wrong side of what society finds acceptable. Most people get the concept and also apply it to their personal safety.

In stock investing it’s not that simple, although there are lots of rules and all kinds of advance warning signals that may or may not work, depending on whether you were giving or receiving the information. As opposed to adolescents who eventually become adults and lose the “it can never happen to me” mentality, investors often feel a sense of immunity from what may await just beyond that point that others would avoid.

It would have been really, really nice if there was some kind of warning system that both alerted us to an upcoming decline and especially the fact that it would be abruptly followed by a reversal.

Much has been said about the various kinds of recoveries that can be seen, but if this most recent bounce higher will in fact be the recovery to the nearly 9% drop on an intra-day basis, then it is certainly of the “V-shape” variety.

This week came word that by a very large margin the activity in personal 401(k) retirement accounts had been to move out of equities, after the declines, and into fixed income instruments, after those interest rates had seen a 15% increase.

What may really complicate things is that there really is no society to provide guidance and set the boundaries. There are short sellers who like to see movement in one direction and then there are the rest of us, although we can all change those roles at any moment in time that seems to suit us.

For those that depended on the “key reversal” of a few weeks ago as a sign to buy or dipping below the 200 day moving average as a sign to sell, the past few weeks have frustrating.

On the other hand, news of rampant selling in 401(k) accounts may offer precisely the kind of prognostic indicator that many have been looking for, as being a perfectly contrarian signal and indication that the time to buy had come once again.

But what caused the sudden change that created the “V shape?”

Technicians and chart watchers will point to the sudden reversal seen on October 15th in the early afternoon as the DJIA had fallen more than 400 points. However, that 260 point mid-day reversal was lost, almost in its entirety at the following morning’s opening bell.

However, we may also want to thank serendipity that IBM (IBM) and Coca Cola (KO) didn’t report their earnings last week, and that reports of a New York City Ebola patient didn’t surface until market and contagion fears had abated.

It wasn’t until the afternoon following that 400 point drop that St. Louis Federal Reserve Governor James Bullard suggested that the Federal Reserve should consider delaying its ending of Quantitative Easing.

If you were looking for a turning point, that was it.

Even those that are critical of the Federal Reserve for its QE policies have been happy to profit from those very same policies. The suggestion that QE might continue would be a definite reason to abandon fear and buy what appear to be bargain priced stocks, especially as the fixed income side’s sudden 15% increase in rates made bonds less of a bargain..

I was either flatfooted or disbelieving in the sudden climb higher, not having made any new purchases for the second consecutive week. I was almost ready to make some purchases last Thursday, following what Wednesday’s decline, but that was followed by a 120 point gap up the following morning. Instead of adding positions I remained content to watch fallen asset values recapture what had been lost, still in the belief that there was another shoe to drop while en-route perhaps to a “W-shape”

That other shoe may come on Wednesday as the FOMC releases its monthly statement. Lately, that has been a time when the FOMC has given a boost to markets. This time, however, as we continue so consumed by the nuances or changes in the wording contained in the statement, there could be some disappointment if it doesn’t give some indication that there will be a continuing injection of liquidity by the Federal Reserve into markets.

If Bullard was just giving a personal opinion rather than a glimpse into the majority of opinion by the voting members of the FOMC there may be some price to be paid.

While there will be many waiting for such a word confirming Bullard’s comments to come there also has to be a sizable faction that would wonder just how bad things are if the Federal Reserve can’t leave the stage as planned.

Welcome back to the days of is good news bad news.

As usual, the week’s potential stock selections ar

e classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories.

While the move higher this week was more than impressive, there’s still no denying that these large moves higher only happen in downturns. The question that will remain to be answered is whether the very rapid climb higher from recent lows will have any kind of sustainability.

For the coming week I expect another quiet one, at least personally. The markets may be anything but quiet, as they certainly haven’t been so for the past few weeks, but trying to guess where things may go is always a dicey prospect, just seemingly more so, right now.

Despite what may be continuing uncertainty I have increased interest in earnings related and momentum stocks in the coming week.

Among those is Joy Global (JOY) a stock whose fortunes are closely aligned with Chinese economic growth. Those prospects got somewhat of a boost as Caterpillar (CAT) delivered better than expected earnings during a week that was a cavalcade of good earnings, despite some high profile disappointments. While the S&P 500 advanced 4.1% for the week and Caterpillar rose 4.6%, Joy Global may just be warming up following only a 2.1% climb higher, but still trading well below its mean for the past year.

In that year it has generally done well in recovering from any downward moves in price and after two months in that kind of trajectory may be ready to finally make that recovery.

With “old technology” continuing to do well, EMC Corp (EMC) held up surprisingly well after its majority owned VMWare (VMW) fell sharply after its own earnings were announced. EMC typically announces its earnings the morning after VMWare announces and while showing some impact from VMWare’s disappointment, rapidly corrected itself after its own earnings were released.

EMC has simply been a very steady performer and stands to do well whether staying as an independent company, being bought out pr merged, or spinning off the large remainder of its stake in VMWare. Neither its dividend nor option premium is stunning, but there is a sense of comfort in its stability and future prospects.

Halliburton (HAL) has been trading wildly of late and is well below the cost of my most recent lot of shares. WHile the entire energy sector has fallen on some hard times of late, there’s little reason to believe that will continue, even if unusually warm weather continues. Halliburton, as have others, have been down this path before and generally investors do well with some patience.

That will be what I practice with my more expensive lot. However, at its current price and volatility, Halliburton, with its just announced dividend increase offers an exceptional option premium that is worthy of consideration, as long as patience isn’t in short supply.

Another stock having required more patience than usual has been Coach (COH). It reports earnings this week and as has been the case over the past 3 years it wouldn’t be unusual to see a large price move in shares.

The options market is expecting a 7% move in shares, although in the past the moves have been larger than that and very frequently to the downside. Lately, however, Coach seems to have stabilized as it has gotten a reorganization underway and as its competitor in the hearts and minds of investors, Michael Kors (KORS) has also fallen from its highs and stagnated.

The current lot of shares of Coach that I purchased were done so after it took a large earnings related decline and I didn’t believe that it would continue doing so. This time around, I’m likely to wait until earnings are announced and if shares suffer a decline I may be tempted to sell puts, with the objective of rolling over those puts into the future if assignment appears to be likely.

For those that like dabbling in excitement, both Facebook (FB) and Twitter (TWTR) announce their earnings this week.

< span style="font-size: medium;">I recently came off an 8 month odyssey that began with the sale of a Twitter put, another and another, but that ultimately saw assignment as shares dropped about $14. During that period of time, until shares were assigned, the ROI was just shy of 25%. I wouldn’t mind doing that again, despite the high degree of maintenance that was required in the process.

The options market’s pricing of weekly options is implying a price movement of about 13% next week. However, at current premiums, a drop of anywhere less than 18% could still deliver a weekly ROI of about 1.2%. I look at that as a good return relative to the risk undertaken, albeit being aware that another long ride may be in store. Since Twitter is, to a large degree, a black box filled with so many unknowns, especially regarding earnings and growth prospects, even that 18% level below could conceivably be breached.

Facebook seems to have long ago quieted its critics with regard to its strategy and ability to monetize mobile platforms. In the 2 years that it has been a publicly traded company Facebook has almost always beaten earnings estimates and it very much looks like a stock that wants to get to $100.

The option market is implying a much more sedate 7.5% in price movement upon earnings release and the decline cushion is only about 9.5% if one is seeking a 1% ROI.

Both Facebook and Twitter are potentially enticing plays this coming week and the opportunities may be available before and after earnings, particularly in the event of a subsequent share decline. If trying to decide between one or the other, my preference is Twitter, as it hasn’t had the same upside move, as Facebook has had and I generally prefer selling puts into price weakness rather than strength.

After some disappointing earnings Ford Motor (F) goes ex-dividend this week. Everyone from a recent Seeking Alpha reader who commented on his Ford covered call trade to just about every talking head on television is now touting Ford shares.

Normally, the latter would be a sign to turn around and head the other way. However, despite still being saddled with shares of a very beleaguered General Motors (GM), I do like the prospects of Ford going forward and after a respite of a few years it may be time to buy shares again. The dividend is appealing and more importantly, appears to be safe and the option premiums are enough to garner some interest as shares are just slightly above their yearly low.

Finally, I don’t know of anyone that has anything good to say about Abercrombie and FItch (ANF), regardless of what the perspective happens to be. It, along with some other teen retailers received some downgrades this past Friday and its shares plummeted.

I have lost count of how often that’s been the case with Abercrombie and FItch shares and I’ve come to expect them to rise and plunge on a very regular basis. If history is any guide Abercrombie and Fitch will be derided for being out of touch with consumers and then will surprise everyone with better than expected earnings and growth in one sector or another.

I’ve generally liked to jump on any Abercrombie post-plunge opportunity with the sale of puts and while I’d be inclined to roll those over in the event of likely assignment, I wouldn’t be adverse to taking possession of shares in advance of its earnings and ex-dividend date, which are usually nearly concurrent, with earnings scheduled for November 20t, 2014.

Traditional Stocks: EMC, Halliburton

Momentum: Abercrombie and Fitch, Joy Global

Double Dip Dividend: Ford (10/29)

Premiums Enhanced by Earnings: Coach (10/28 AM), Facebook (10/28 PM), Twitter (10/27 PM)

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

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Weekend Update – September 7, 2014

There was no shortage of news stories that could have prevented the market from setting yet another new closing high this week.

While much of the week was spent on discussing the tragic sequence of events leading to the death of Joan Rivers, markets still had a job to do, but may have been in no position to stop the momentum, regardless of the nature of more germane events.

Despite what everyone agrees to have been a disappointing Employment Situation Report, the market shrugged off that news and closed the week at another new record. They did so as many experts questioned the validity of the statistics rather than getting in the way of a market that was moving higher.

As the saying goes “you don’t step in front of a moving train.”

The previous day, with the announcement by ECB President Mario Draghi of further decreases in interest rates and more importantly the institution of what is being referred to as “Quantitative Easing Lite,” the market chose to ignore the same reasoning that many believed was behind our own market’s steady ascent and could, therefore, pose a threat to that continued ascent. 

Continue reading “Almost Nothing Can Stop a Runaway Train” on Seeking Alpha

 

 

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