Deal Me In

dealI don’t know what it is about 2017, but whatever it is, I want to be dealt in on it.

While a 1.3% increase YTD on the S&P 500 isn’t necessarily the kind of thing that legends are built upon, it’s far, far better than the first 10 days in 2016.

I don’t like to project very much, especially if that means counting and spending money that you don’t really have, but 2016 ended being up such a nice year when compared to the already good S&P p500 performance, that I am beginning to salivate about the prospects for 2017.

That’s probably not a really good idea.

What I especially like is that I’ve had a trade in each of the 6 trading days to date.

That’s a pattern that I would really love to continue.

Today’s early rollover of the Cliffs Natural Resources puts in the face of commodity strength is something that I hope to be doing a lot of, much as was the case with Marathon Oil in the latter half of 2016. Continue reading “Deal Me In”

Spending Money

spending-moneyI wasn’t really expecting to spend much money this week.

What I really wanted was to replicate last week and to do that for the remaining 51 weeks of 2017.

Back in the days when I did initiate lots of new positions, if you go all the way back to 2015, it always seemed as if money was burning a hole in my pockets or that maybe I believed that cash was only good to wipe one’s butt.

That’s pretty far from the truth, but that’s what it looked like and that’s what it felt like, even though I know myself pretty well.

So no one was more surprised than me, after having toiled hard to raise cash reserves for about a year and finally getting to a point that I felt was good enough to be prepared for whatever awaited, that within 30 minutes of the opening bell I had already opened 2 new positions.

I’m still of the mindset that I would like to see my existing positions get used on a much more frequent and regular basis through the sale of calls, but I just couldn’t resist this morning. Continue reading “Spending Money”

It Really Shouldn’t Come As a Surprise

supriseThere’s really no reason to be surprised, but I woke up this morning realizing that earnings season has to be starting soon.

As if it ever really ended.

What really makes things different this quarter is that Alcoa, even though it has now been out of the DJIA for a little while, is no longer the official/unofficial start to earnings season.

The official start of earnings season honors went to JP Morgan after Alcoa left the DJIA, but Alcoa still came first.

No more.

This week, earnings start for real on Friday morning, with JP Morgan getting things started and Alcoa doesn’t announce  until a full 11 days later.

It’s a whole new world order.

 tweetI was greeted this fine snowy Sunday morning with a very nice Tweet.

What was also very nice was not having to write an article in a rush to meet an unclear deadline in order to get potentially time sensitive material posted.

Or, for that matter, writing it at all.

My response to the Tweet was that 300 of those articles was enough and so I then did what was the only seemingly natural thing. Continue reading “It Really Shouldn’t Come As a Surprise”

Santa Steals Away Joy from Retailers

santaclausFollowing a pretty good day today, where we really did come close to the mystical 20,000 level of the DJIA,. there was a big surprise after the closing bell.

The surprise that came can give you just a little idea of how well anyone really knows what’s truly going on.

If you were following the market today, you may have noticed that national retailers were really strong.

In fact, I took the opportunity to sell some calls on a couple of lots of Macy’s shares that have been sitting around uncovered for the past week or so.

I like to at least consider selling calls, even if the strike price isn’t something to really make me salivate, as long as the shares are moving strongly at the time.

That described Macy’s, as it was more than $1 higher earlier in the trading session.

While I didn’t think about selling calls on Coach, Kohls, nor Abercrombie and Fitch, they too were all strongly higher during the day.

You may also remember that I sold calls on The Gap, yesterday.

Then a funny, well maybe not too funny thing happened after the close.

The bottom fell out as Macy’s and others reported the not so good Christmas sales news.

Sales stunk.

Not only did sales stink, but guidance was moved lower.

How could that be? Especially as the economy is supposedly heating up?

So we await tomorrow’s Employment Situation Report and will be left to wonder, if the news continues to be good, just where people are spending their money.

The obvious answer is that they’re doing it on Amazon or they’re just not spending it on old fashioned things like sweaters and place settings.

Maybe they’re spending it on streaming data plans. Continue reading “Santa Steals Away Joy from Retailers”

Let the Partying Begin

partyfavor What a way to start the new year.

Not even close to the way 2016 started, but then again, 2016 wasn’t all that bad.

Right?

For a little while it looked as if 2017 was going to start off with a major disappointment as the market decided to do something that it hadn’t done for a while.

In fact, it hasn’t really happened since we accepted the fact that we were getting someone very unexpected as our new President.

What happened today was that the stock market actually followed oil, again.

That was the story for most of 2016 and the story worked out pretty well, as long as you didn’t sell your oil losers in 2015, or repeatedly went back to the literal and figurative well in pursuit of the gains.

Even though there wasn’t too much evidence that the rise in oil prices was actually tied to increasing demand, the stock market just looked at a year of slowly, if not steadily increasing oil prices, as a good thing.

Who would have guessed? Continue reading “Let the Partying Begin”

Earnings Finally Matter

 
A couple of years ago I finally realized that I like earnings season.
Part of that realization was out of necessity as it seems that earnings season never ends, so it just can’t be avoided. Of the companies that I regularly follow, no sooner does LuLuLemon Athletica (LULU) report its earnings that Alcoa (AA)traditionally kicks off the next season just two weeks later.

The way I now look at things earnings season accounts for about 85% of the year, so it has become a case of just learning to live with it instead of fearing the potential for swings. The problem with a buy and hold approach is that the investor is often held hostage to the wild price swings that accompany earnings and can see paper profits quickly erased as the mountain has to be newly re-climbed.

One of the nice things about using a covered option strategy is that you can, to a degree, determine what your exposure to earnings risk or reward is through the use of varied expiration dates. For existing holdings that you believe may have difficulty withstanding an earnings report the use of a longer option contract can give you more downside protection due to the larger premium, as well as additional time for shares to recover, if indeed they fail to hold the line.

You can also use shorter term options in the hope of being assigned out of a position in advance of earnings.

Of course, there is the more adventurous route, akin to being a storm chaser. You can meet earnings head on and purposefully trade in a stock just for the earnings related move.

While there are many ways to do so, I prefer the sale of out of the money put options and use the “implied volatility” as my guide, along with my objective of a 1% ROI on an investment that is hoped to last only for the week. Where possible I try to find a strike price that is outside the range suggested by the implied volatility, yet still offers a 1% or greater ROI.

Generally, only stocks that ordinarily trade with a high degree of volatility will be candidates for such an earnings related trade and have exhibited very large earnings related moves in the past.

This coming week is going to be a busy one as far as high profile companies go that may fit the above criteria. Among the companies that I am considering this coming week are Apple (AAPL), Amazon (AMZN), Blackstone (BX), Chipotle Mexican Grill (CMG), Facebook (FB), Las Vegas Sands (LVS), MasterCard (MA), Phillips 66 (PSX), Seagate Technology (STX), VMware (VMW) and Yahoo! (YHOO).

One thing that really appeals to me about earnings season is that it’s a time that I don’t really think about macroeconomic nor microeconomic issues. I simply focus on the numbers and the past history of price movements in that particular stock, especially in the aftermath of previous earnings reports.

The ultimate question is distilled to a very simple core. Is there an indication that the potential reward is sufficient for the potential risk?

As a general rule my preference is to sell puts when there is already an indication of price weakness. I look at any decline in share price in advance of earnings to be similar to a down payment and the sentiment that evolves as shares are already moving lower is often to increase the premium that can be obtained for the sale of puts and may also allow the use of even lower strike prices while getting a relatively larger option premium. Following this past Friday’s (January 24, 2014) 300 point loss in the DJIA, that isn’t terribly difficult.

The caveat is that you must be either willing to own the shares if assigned or be willing to manage the options contract until some resolution is achieved. That could mean rolling the option contract forward and hopefully to a lower strike or accepting assignment and then selling calls until assignment of shares.

The table above may be used as a guide for determining which of selected companies may meet the risk-reward parameters that an individual sets.

However, there are also times when, despite what appear to be acceptable rewards I don’t make the trade prior to earnings, but rather look for companies on the radar screen that find their shares on the losing end after announcement and guidance. That is especially true for those positions that don’t meet criteria or only do so marginally.

In such cases, I consider the sale of puts after the initial plunges, as often the premium is enhanced as sentiment assumes the importance that uncertainty previously held in maintaining the premium level.

Just a few days ago it appeared that the market was going to solely focus on earnings and fundamentals, just like in the old days. The coming week, in addition to perhaps being more responsive to earnings than in the past years, is suddenly also subject to many other winds, including more fallout from China, Turkish monetary woes, Argentinian debt and worries regarding the FOMC response to the current snapshot of the economy.

As a result, earnings related trades may also be impacted by those macroeconomic factors and I would be inclined to stay away from “marginal” selections and be increasingly inclined to consider trades after earnings, especially if prices have taken a strong downward move in response.

 

Is Jeff Bezos Killing Capitalism?

(A version of this article appeared on TheStreet)

 

My guess is that if you asked people to describe the face of the individual most tied to the idea of destroying capitalism you would evoke images of Marx, Lenin or Castro, men of distinctive features and great bluster who made no secret of their disdain.

Ask me and I see a man who is softly spoken, clean shaved, spares the bluster, lacks distinct or memorable features, although possesses a distinctive laugh and has greatly benefited from the system he is destroying. I see Jeff Bezos as the anti-capitalist who is methodically destroying the foundations that allowed the United States to thrive.

First, let’s acknowledge that Amazon (AMZN) is an American success story. Financed by family funds and embracing technology as none had before, it survived an era that many did not and turned a concept into reality that has subsumed retailing, forcing retailers to create online shopping strategies.

Amazon will report its earnings on January 30, 2014. While I don’t invest with items such as P/E, in mind, I know enough that Amazon’s P/E of 1414 puts to rest the derisive comments about it being a non-profit. But I also know that no one believes in the axiom “we make it up in volume” more than Amazon, which had a 0.19% profit margin last year, compared to a sector average of 9.5%. Of 20 national retailers, only four had profit margins lower than Amazon; JC Penney, Sears Holdings, Best Buy and Aeropostale.

And that is precisely the problem. That is how Amazon is killing capitalism in its methodic march to eliminate competition, beginning with the already wounded. As the saying goes, “the market can stay irrational longer than you can stay solvent.” Bezos, though, isn’t being irrational, as demonstrated by competitors that are slowly melting into irrelevancy. With size comes power, in this case pricing power, which to a degree has been supported by an asymmetric application of sales tax collection requirements. In essence, indirect government support undermining existing capitalist structure in support of a venture evolving toward a monopolistic or market controlling position.

At a time when consumer discretionary spending doesn’t appear to be consistent with an expanding and improving economy price sensitivity remains an important motivator and Amazon maintains its advantage by aggressive pricing at the expense of margins. With over $70 billion in revenues it trails Wal-Mart, but exceeds the combined revenues of Sears, JC Penney and Kohls, while matching Target’s revenues. The latter two companies have scarce cushion in their profit and operating margins to withstand further erosion by an energized Amazon, ready to continue decreasing its margins, as it has done over the past 3 years.

AMZN Profit Margin (Quarterly) Chart
AMZN Profit Margin (Quarterly) data by YCharts

Don’t get me wrong. I am a capitalist through and through and believe that competition is what drives us forward, while other systems are left to the ash heaps of history along with the dodo. The same fate should befall businesses that simply can’t compete on the basis of that blend of price and quality that appeals to varying segments of the population.

Competing against Amazon, however, is somewhat like the Aztecs being faced with gunpowder propelled projectiles.

Admittedly, I shop Amazon and will probably continue doing so even as it increasingly loses the sales tax advantage it held over brick and mortar retailers. However, it is now that next phase, as that artificial pricing advantage disappears, that Amazon can only do one thing to maintain its position. It has to further reduce its profit margins.

While Bezos may not be acting irrationally, investors may be accused of doing so, particularly in light of margins. Most any other retailing CEO would have been shown the door with performance such as Amazon delivers. However, it’s share price that talks and you can’t argue with a P/E of 1414, except that it’s 1414. The realization that profits and return on equity are important concepts is currently suspended as there is implicit buy-in from investors that the strategy of driving the competition out of business is a sound one in anticipation of even greater share appreciation rewards. Clearly the vision of near monopolistic existence has its perceived reward.

While Amazon may not solely be to blame for the woes at JC Penney (JCP) and Sears (SHLD), it may not be entirely coincidental that JC Penney and Sears profit woes began in earnest at the time that Amazon’s own profit margins began decreasing in 2011. Amazon is undoubtedly a contributor not just to those growing losses, but also to the degradation of the shopping experience as so graphically illustrated in a recent series of articles by Rocco Pendola. When you can no longer compete on the basis of price and are unable to generate sales revenues and cash flows, the only recourse remaining is to cut costs.

Fewer employees, bare shelves and lack of facilities maintenance are the natural next stages. As predictable as the “Five Stages of Grief,” except there may be no end stage healthy resolution in sight.

While Bezos is on a path that endangers capitalism, his continued success may really jeopardize Amazon’s own shareholders whose fortunes are predicated on a model that history has shown can’t be sustained. Eventually, profits and not promises, are the engine that drive companies and their stocks. Sooner or later, cash flow is no substitute for profits.

If you want to see capitalism saved, the answer is a plummeting Amazon share price and subsequent investor pressure to increase profit margins, restoring balance to the retail sector and giving the likes of JC Penney and Sears the ability to dodge those projectiles.

Is Jeff Bezos Killing Capitalism

(A version of this article appeared on TheStreet)

 

My guess is that if you asked people to describe the face of the individual most tied to the idea of destroying capitalism you would evoke images of Marx, Lenin or Castro, men of distinctive features and great bluster who made no secret of their disdain.

Ask me and I see a man who is softly spoken, clean shaved, spares the bluster, lacks distinct or memorable features, although possesses a distinctive laugh and has greatly benefited from the system he is destroying. I see Jeff Bezos as the anti-capitalist who is methodically destroying the foundations that allowed the United States to thrive.

First, let’s acknowledge that Amazon (AMZN) is an American success story. Financed by family funds and embracing technology as none had before, it survived an era that many did not and turned a concept into reality that has subsumed retailing, forcing retailers to create online shopping strategies.

Amazon will report its earnings on January 30, 2014. While I don’t invest with items such as P/E, in mind, I know enough that Amazon’s P/E of 1414 puts to rest the derisive comments about it being a non-profit. But I also know that no one believes in the axiom “we make it up in volume” more than Amazon, which had a 0.19% profit margin last year, compared to a sector average of 9.5%. Of 20 national retailers, only four had profit margins lower than Amazon; JC Penney, Sears Holdings, Best Buy and Aeropostale.

And that is precisely the problem. That is how Amazon is killing capitalism in its methodic march to eliminate competition, beginning with the already wounded. As the saying goes, “the market can stay irrational longer than you can stay solvent.” Bezos, though, isn’t being irrational, as demonstrated by competitors that are slowly melting into irrelevancy. With size comes power, in this case pricing power, which to a degree has been supported by an asymmetric application of sales tax collection requirements. In essence, indirect government support undermining existing capitalist structure in support of a venture evolving toward a monopolistic or market controlling position.

At a time when consumer discretionary spending doesn’t appear to be consistent with an expanding and improving economy price sensitivity remains an important motivator and Amazon maintains its advantage by aggressive pricing at the expense of margins. With over $70 billion in revenues it trails Wal-Mart, but exceeds the combined revenues of Sears, JC Penney and Kohls, while matching Target’s revenues. The latter two companies have scarce cushion in their profit and operating margins to withstand further erosion by an energized Amazon, ready to continue decreasing its margins, as it has done over the past 3 years.

AMZN Profit Margin (Quarterly) Chart
AMZN Profit Margin (Quarterly) data by YCharts

Don’t get me wrong. I am a capitalist through and through and believe that competition is what drives us forward, while other systems are left to the ash heaps of history along with the dodo. The same fate should befall businesses that simply can’t compete on the basis of that blend of price and quality that appeals to varying segments of the population.

Competing against Amazon, however, is somewhat like the Aztecs being faced with gunpowder propelled projectiles.

Admittedly, I shop Amazon and will probably continue doing so even as it increasingly loses the sales tax advantage it held over brick and mortar retailers. However, it is now that next phase, as that artificial pricing advantage disappears, that Amazon can only do one thing to maintain its position. It has to further reduce its profit margins.

While Bezos may not be acting irrationally, investors may be accused of doing so, particularly in light of margins. Most any other retailing CEO would have been shown the door with performance such as Amazon delivers. However, it’s share price that talks and you can’t argue with a P/E of 1414, except that it’s 1414. The realization that profits and return on equity are important concepts is currently suspended as there is implicit buy-in from investors that the strategy of driving the competition out of business is a sound one in anticipation of even greater share appreciation rewards. Clearly the vision of near monopolistic existence has its perceived reward.

While Amazon may not solely be to blame for the woes at JC Penney (JCP) and Sears (SHLD), it may not be entirely coincidental that JC Penney and Sears profit woes began in earnest at the time that Amazon’s own profit margins began decreasing in 2011. Amazon is undoubtedly a contributor not just to those growing losses, but also to the degradation of the shopping experience as so graphically illustrated in a recent series of articles by Rocco Pendola. When you can no longer compete on the basis of price and are unable to generate sales revenues and cash flows, the only recourse remaining is to cut costs.

Fewer employees, bare shelves and lack of facilities maintenance are the natural next stages. As predictable as the “Five Stages of Grief,” except there may be no end stage healthy resolution in sight.

While Bezos is on a path that endangers capitalism, his continued success may really jeopardize Amazon’s own shareholders whose fortunes are predicated on a model that history has shown can’t be sustained. Eventually, profits and not promises, are the engine that drive companies and their stocks. Sooner or later, cash flow is no substitute for profits.

If you want to see capitalism saved, the answer is a plummeting Amazon share price and subsequent investor pressure to increase profit margins, restoring balance to the retail sector and giving the likes of JC Penney and Sears the ability to dodge those projectiles.

Taking Solace in an Earnings Challenged Coach

(A version of this article appeared in TheStreet)

It has been very easy to be disparaging of Coach (COH) these days.

In 2013, including dividends, an investment in Coach shares witnessed a 3.1% ROI, as compared to 29.6% for the S&P 500, exclusive of dividends.

Perhaps the root cause of the quantitative disappointment has been the near universal acknowledgement that Coach was no longer a very interesting place to shop, as Michael Kors (KORS) had displaced it in the hearts and more importantly, the literal and figurative pocketbooks of shoppers.

The first hint of trouble presented itself in August 2011 when shares plunged 6.5% after announcing earnings, following years of running higher, that took only a short rest in June 2010. While shares went bacl to their old ways of climbing higher under CEO and Chairman Lew Frankfort that climb came to a decided halt shortly after the Michael Kors IPO.

COH ChartIn 2013 Coach knew only large price moves following earnings reports, following the pattern that began in 2012. The difference, however, was that in 2013 all but one of those large price moves was higher, with -16.1%, +9.8%, -7.8% and -7.5% earnings related responses greeting increasingly wary and frustrated shareholders.

Coach reports its second quarter earnings on January 22, 2014 prior to the market’s open. The option market is implying a nearly 10% move upon that event, which comes on the heels of a 6.3% decline in shares in the past week.

For most, that may mean that this would be a good time to steer clear of Coach shares or even consider exiting existing psoitions, especially as the retail sector has been struggling to get consumers to part with their discretionary cash.

In the past year, while Coach has been a non-entity, I have owned it and sold calls on shares, or sold puts on eight occasions. Included in those trades were three sales of put options on the day prior to earnings and one purchase of shares and sale of calls on the day following disappointing earnings.

COH data by YCharts

During that time Coach has fulfilled two of my cardinal requirements in that it has been a model of mediocrity, but still has something to offer and will do more than simply make a pretense of maintaing a business model.

My goal with Coach, as with all positions upon which I use a covered option strategy is to make a small rate of return and in a short time frame. My ideal trade is one that returns a 1% profit in a week’s time and surpasses the performance of the S&P 500 during the time period of the trade.

During 2013, the cumulative return from the eight Coach trades was 25.4% and the average holding period was 28 days. The average trade had an ROI of 3.2%, which when adjusted for the average holding period was less than the 1% goal, consistent with the lower premiums obtained in a low volatiity period. However, during the same time periods for each trade, the results surpassed the S&P 500 performance for the same time periods by 18.5%.

Coach 2013 Performance - Option to Profit

While I don’t place too much credibility on annualizing performance, the annualized performace of Coach, utilizing the serial covered option strategy, with some trades timed to coincide with earnings was 41.5%, while the annualized S&P 500 return was 34.7%. A longer period of observation also yielded similar favorable results

In the case of potential trades seeking to reach those objectives when earnings are to be released, my preference is to see whether there is an option premium available for the sale of puts that is at the extreme end of the implied volatility range or beyond. For Coach, the implied volatility suggests expectations of a price move in the $47.50 to $57.50 range, based on Friday’s closing price of $52.56.

The $47 January 24, 2014 put premium satisfies the quest for a 1% return and is at a strike price slightly outside of the implied volatility range. Essentially, the risk-reward proposition is a 1% return in the event of anything less than a 10% drop in share price. Anything more than a 10% price drop creates additional possibilities to generate returns, but extends the period of the trade.

As always, the sale of puts should only be undertaken if you’re prepared to take ownsership of shares at the strike price specified. While I wouldn’t shy away from share ownership in the event of a larger than anticipated price drop, I would be inclined to consider rolling over the put sale into a new expiration date and ideally at a lower strike price, if possible, repeating that process until expiration finally arrives.

While not everyone appreciates leather, everyone can appreciate investment profits, even if they come at the expense of corporate losses and a fall from grace.

Abercrombie and Fitch Sets Itself Up for More Disappointment

disappointment

 

(A version of this article appears on TheStreet.com)

With low expectations shareholders of Abercrombie and Fitch (ANF) were rewarded during Thursday’s after hours trading as it was announced that the company experienced higher than expected sales for the fourth quarter to date.

Embattled CEO and Chairman Michael Jeffries needed a boost after calls for his resignation and having been the recent recipient of Herb Greenberg’s “Worst CEO of 2013 Award.” The 15% surge, if maintained into trading to end the week will leave shares only about 30% below their 52 week high.

Perhaps lost in the translation are the nuances contained in the report that sent shares soaring that may set Abercrombie and Fitch share holders up for more disappointment in the future. Manufactured good news has a way of doing that once reality hits and it is difficult to interpret today’s press release as anything other than a very favorable spin on a company and a personality much in need of spin.

For the period in question, which ended on January 4, 2014, the company actually reported decreased total sales, but found some solace in the fact that its direct to consumer sales were at its highest level of total sales than ever before. Of course, as the total pie shrinks a component may look comparatively better by simply not shrinking as much. The details of the direct to consumer activities was lacking. Its growth, was by all accounts, relative.

While sales were reported to be better than expected they represented a 4% decrease in the United States and a 10% decrease in international sales. Improved guidance was based on the nine week period ending before much of the east coast freeze that is reported to have stalled mall traffic. It’s unclear how nature’s elements will project forward as the first quarter becomes the object of focus. Additionally, reliance on”ongoing cost reduction efforts” is rarely a strategy for growth. Jeffries’ one year contract extension may require something more substantive than smoke and mirrors to further extend the engagement. Marketing the company as “We’re Not Sears” is not likely to provide a prolonged bounce, much as today’s press release may be suspect.

But I don’t really care about any of that, because Abercrombie and Fitch, for all of its dysfunction and sometimes embaarrassing behavior of its CEO, has been one of my favorite stocks since May 2012. During that period of time I’ve owned shares on 18 occasions.

Abercrombie and Fitch hasn’t been a holding for the faint of heart during that period, nor for anyone abiding by a buy and hold strategy.

As a punctuated buy and hold investor, my sales have been dictated by the call contracts I routinely sold on holdings, almost always utilizing in the money or very near the money strike levels.

Abercrombie and Fitch

Perhaps coincidentally the average cost of those shares has been $38.64, which was just slightly higher than the after hours trading peak after its more than $5 climb. During the period in question shares were initiated at $35.15 and soared as high as $55.23 almost a year to the date of that opening position. A perfect market timer could have sold shares at the peak ans achieved a 59% return with dividends.

Not only am I not a perfect market timer, but I’m also not very patient and would have had a hard time holding onto shares for a full year. Instead my shares were held for reasonably short periods of time, other than one lot currently open for 4 months. During that time the cumulative return has been 56% while the shares themselves have appreciated less than 11% from the date of first purchase.

With some of my shares set to expire on Friday January 10, 2014 amd some others the very next week, there is a chance that I will be left with no shares, thanks to a well timed press release.

However, I have no doubts that Abercrombie and Fitch will find a way to undo investor goodwill and will see its price come down. When it does, I will be there, once again, eager to pick up the wounded shares of of a company that would be embarrassed to have me as a customer.