Weekend Update – February 14, 2016

It’s not only campaigns that are going negative.

After having watched the latest in political debates on both sides of the aisle, the negative finally coming to the surface should no longer come as a surprise.

Maybe the real surprise should have been just how long the professional politicians on both sides were able to keep that negativity mostly bottled up.

There’s certainly nothing illegal about engaging in a negative political campaign and we have heard time and time again that politicians pursue that unsavory strategy because it works.

It’s also a strategy that’s not unique to the United States. The last unicorn was apparently spotted in Canada and ex-Prime Minister of Great Britain, Tony Blair, was frequently called “Tony Bliar.”

Maybe the fact that such an approach works is why central banks around the world are increasingly giving some thought to going negative.

Negative interest rates are now all the rage after the Bank of Japan had already gone in that direction a few weeks ago.

This week there was at least some suggestion that particular strategy wasn’t entirely off the table in the United States as some are beginning to question just what arrows the Federal Reserve has left in its quiver in the event of an economic slowdown.

Janet Yellen, during her two day mandated session in front of Congressional committees this week said that she didn’t even know whether the Federal Reserve had the legal authority to implement negative interest rates in the United States, but that didn’t stop the worries over what such a scenario would mean with regard to the economy that drove it there.

While oil continued to be the major stock market mover for 2016, this week had some diversification as precious metals began to soar and interest rates continued to plunge.

Who would have predicted this just a couple of months ago when the FOMC saw it fit to begin a slow increase in interest rates?

But just as the week was looking as if it would create a February 2016 that would have us pining for the good old days of January 2016, oil rebounded and Jamie Dimon came to the rescue with a $26 million expression of confidence in the banking system.

Even in the economy of Djibouti, $26 million isn’t that big of a deal, but when Dimon elected to purchase shares in the open market for only the 3rd time in his tenure at JP Morgan Chase, it may have been the first vote of confidence in anything in 2016.

Fortunately, we have a holiday shortened trading week ahead to help us digest the gains seen on Friday that left the S&P 500 only 0.9% lower on the week.

While we’ve had a recent run of strong week ending trading sessions, there hasn’t been much in the way of staying power. Maybe a long weekend will help.

What the day off will also do is to give us a chance to actually try to understand the significance of negative interest rates even as the market seemed concerned just a couple of days earlier that a March 2016 interest rate hike wasn’t off the table.

Last week’s reactions by the market to interest rates was akin to being both afraid of the dark and the light as the market understandably went back and forth in spasms of fear and relief.

Going negative usually reflects some sort of fear and a concern that more conventional approaches aren’t going to deliver the hoped for results.

It may also reflect some desperation as there comes a perception that there is nothing really to lose.

I can understand a Presidential candidate using a profanity during a public appearance and I can even understand one Presidential candidate referring to another as “a jerk.”

That kind of negativity I get, but I’m having a really hard time understanding the concept of negative interest rates.

While I understand relative negative rates during periods of high inflation, the very idea that paying to keep your money in the bank would become similar to paying someone to store your cache of gold bars is confusing to me.

Why would you do that? Why would I want to pay money to a bank just so they could make even more money by putting my money to use?

I know that it’s not quite that simple, but I would be happy if I could get a bank to lend money to me at a negative interest rate, but somehow I don’t envision the APR on credit cards reflecting that kind of environment anytime soon.

Now, if you really wanted to spur consumer spending, that may be just the way to do it. Why not apply a monthly negative interest rate to a credit card balance and the longer you keep the balance open the more likely it will disappear as the negative interest accumulates and works down your debt.

The money you don’t spend on your monthly payments could easily then be used to spur even more consumer spending.

If that isn’t a win – win, then I just don’t know what would be.

I suppose I understand the theory behind how negative interest rates may prompt banks, such as Dimon’s JP Morgan Chase (JPM) to put deposits to work by increasing their lending activity, but I wonder how the lending risk is managed as thoughts of recession are coming to the surface.

As I recall, it wasn’t that long ago that poor management of lending risk put us all at risk.

The coming week will have the release of some FOMC meeting minutes and we may get to see whether there was even the slightest consideration given to going negative.

It’s not too likely that will have come up, but as we may now be witnessing, it is possible that the FOMC’s crystal ball is no better than those owned by the least informed of us.

What was clear, however, as the market began to sink back to a “bad news is good news” kind of mentality is that negative rates weren’t the kind of bad news that anyone could embrace.

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

Among many stocks that fared well on Friday as the market found a reason to mount some rebound from the onslaught earlier in the week was Best Buy (BBY).

Best Buy’s performance was especially impressive as it opened the d

ay 6% lower following a downgrade, they ended the day more than 1% higher.

I generally don’t want to add positions after a sharp climb higher, but as Best Buy is set to report earnings during the first week of the March 2016 option cycle, I am willing to consider the sale of puts in the week prior to those earnings, as the recent volatility has its rewards reflected in the available premiums.

If faced with assignment the premiums are enhanced due to earnings and there may be good opportunity to roll the short put position over, although if doing so, some thought has to be given to the upcoming ex-dividend date likely sometime before the beginning of the April 2016 option cycle.

If faced with assignment of shares just prior to that ex-dividend date, I’d be inclined to accept that assignment in order to have both the chance to sell calls and to possibly collect the dividend, as well.

While its options are less liquid than those of Best Buy, I would consider doing the same with Weyerhauser (WY), although earnings don’t have to be contended with until the May 2016 option cycle.

With an upcoming merger expected to close sometime in the first or second quarters of 2016, Weyerhauser has badly trailed the S&P 500 since the announcement was made 3 months ago.

That is despite the belief by many that the proposed merger with Plum Creek Timber (PCL) represents a good strategic fit and offers immediate financial synergy.

At this point, I just like the low price, the relatively high option premium and the potential to take ownership of shares in order to also try and collect the generous dividend just a few weeks away.

Due to the lesser liquidity of the options, there can also be some consideration to simply doing a buy/write and perhaps selecting an out of the money strike price with an expiration after the ex-dividend date.

Sinclair Broadcasting (SBGI) is another that hasn’t fared terribly well in the past few months and has also under-performed the S&P 500 of late.

It is a stock that I often purchase right before an ex-dividend date, as long as its price is reasonable by its historical standards.

For me, that reasonable price is around $29. It failed to break through resistance at $33 and has fallen about 18% in February, bringing the price to where I like to consider entry.

Share price hasn’t been helped by a recent downgrade on earnings warnings and the announced buyout of The Tennis Channel.

In the meantime, Sinclair Broadcasting remains the most potent play in local television in the nation and is increasingly diversifying its assets.

With earnings and an ex-dividend date both due early in the March 2016 option cycle and with only monthly options available, this is a position that I would consider selling longer term and out of the money contracts upon, such as the $30 June 2016 contract.

Sinclair Broadcasting’s stock price history suggests that it tends not to stay depressed for more than a couple of months after having approached a near term low. Hopefully, it’s current level is that near term low, but by using a June 2016 option expiration there may be sufficient time to ride out any further decline.

Following an even stronger gain than the S&P 500’s 1.9% advance to close the week, General Electric (GE) is now almost even with the S&P 500 for 2016.

That’s not a great selling point.

General Electric seems to have just successfully tested an important support level, but that risk does remain, particularly if the overall market takes another leg down.

In that case, there may be some significant risk, as there could be another 15% downside in an effort to find some support.

Thus far, the moves in 2016 have been fairly violent, both lower and higher, with an overall net downward bias. There isn’t too much reason to believe that pattern will soon reverse itself and for that reason option premiums, such as for General Electric are higher than they have been for quite some time.

While numerous stocks can make a case that their current prices represent an attractive entry level, General Electric can certainly pick up the pieces even if there is further downside.

The worst case scenario in the event of further price declines is that the General Electric position becomes a longer term one while you collect a nice dividend and maybe some additional option premiums along the way.

T-Mobile (TMUS) reports earnings this week.

I’m struck by two things as that event approaches.

The first is what seems to be an even increasing number of T-Mobile television ads and the increasing financial burden that must be accruing as it continues to seek and woo subscribers away from its competitors.

The second comes from the option market.

I generally look at the “implied move” predicted by the option market when a company is about to report earnings. For most companies, the option premiums near the strike price are very similar for both puts and calls, particularly if the current price is very close to the strike price. However, in the case of T-Mobile, there is considerable bias on the call side.

The implied move is about 8.1%, but about 5.4% of that is from the very high call premium. The clear message is that the option market expects T-Mobile to move higher next week. It’s unusual to see that much of a declaration of faith as is being demonstrated at the moment.

When I see something like that, the oppositional side of me even thinks about buying puts if I didn’t mind the almost all or none proposition involved with that kind of a trade.

However, rational though pushes that oppositional piece of me to the side and while I generally like the idea of selling puts ahead of earnings, in this case, there may be good reason to consider the purchase of shares and the sale of calls, perhaps even deep in the money calls, depending upon the balance of risk and reward that one can tolerate.

Finally, if you’ve been following the news, you know that it wasn’t a particularly good week to have been a cruise line or perhaps to have been a cruise line passenger. While there may be lots of great things about being a passenger, it seems that we hear more and more about how either a virus or the rough seas will take its toll.

With an upcoming ex-dividend date this week and a severe price descent, Carnival (CCL) is finally looking attractive to me again after nearly 18 months of not having owned shares.

With earnings early in the April 2016 cycle th

ere are a number of different approaches in the coming week to the shares.

One approach may simply be the purchase of shares and the concomitant sale of in the money February 2016 call options, which are the equivalent of a weekly option, as expiration is this Friday. In such as case, whether using the at the money or in the money strike, the intent is to at least generate option premium and perhaps the dividend, as well, while having the position exercised.

Alternatively, a larger premium can be exacted by selling a March 2016 out of the money option and more predictably ensuring the capture of the premium. With earnings coming early in the April 2016 option cycle, the more daring investor can also consider the use of even longer dated out of the money options in the hopes of getting an more substantive share gains in addition to the dividend and an earnings enhanced option premium.

I’m more inclined to go for the full journey on this one and extend my stay even if there may be some bumpiness ahead. 

Traditional Stocks: General Electric, Sinclair Broadcasting, Weyerhauser

Momentum Stocks: Best Buy

Double-Dip Dividend: Carnival (2/17 $0.30)

Premiums Enhanced by Earnings: T-Mobile (2/17 AM)

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

Weekend Update – May 19, 2013

Shades of 1999.

I’m not certain that I understand the chorus of those claiming that our current market reminds them of 1999.

Mind you, I’m as cautious, maybe much more so than the next guy and have been awaiting some kind of a correction for more than 2 months now, but I just don’t see the resemblance.

Much has also been made of the fact that the S&P 500 is now some 12% above its 200 Day Moving Average, which in the past has been an untenable position, other than back when sock puppets were ruling the markets. Back then that metric was breached for years.

Back in 1999 and the years preceding it, the catalyst was known as the “dot com boom” or “dot com bubble” or the “dot com bust,” depending on what point you entered. The catalyst was clear, perhaps best exemplified by the ubiquitous sock puppet and the short lived PSINet Stadium, back then home to the world Champion Baltimore Ravens. The Ravens survived, perhaps even thrived since then, while PSINet was a casualty of the excesses of the era. When it was all said and done you could stuff PSINet’s assets into a sock.

During the height of that era the catalyst was thought to be in endless supply. But in the current market, what is the catalyst? Most would agree that if anything could be identified it would likely be the Federal Reserve’s policy of Quantitative Easing.

But as last week’s rumor of its upcoming end and then an article suggesting that the Federal Reserve already has an exit plan, the catalyst is clearly not thought to be unending. Unless the economy is much worse than we all believe it to be the fuel will be depleted sooner rather than later.

Now if you’re really trying to find a year comparable to this one, look no further than 1995, when the market ended the year 34% higher and never even had anything more than a 2% correction.

If llke me, and you’re selling covered options; let’s hope not.

For me, this Friday marked the end of the May 2013 option cycle. As I had been cautious since the end of February and transitioned into more monthly option contract sales, I am faced with a large number of assignments. Considering that the market has essentially been following a straight line higher having so many assignments isn’t the best of all worlds.

While I now find myself with lots of available cash the prevailing feeling that I have is that there is a need to protect those assets more than before in anticipation of some kind of correction, or at least an opportunity to discover some temporary bargains.

This week I have more than the usual number of potential new positions, however, I’m unlikely to commit wholeheartedly to their purchase, as I would like to maintain about a 40% cash position by the end of next week. I’m also more likely to continue looking at monthly option sales rather than the weekly contracts.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or the “PEE” category (see details). Additionally, although the height of earnings season has passed there may still be some more opportunity to sell well out of the money puts prior to earnings on some reasonably high profile names..

There’s no doubt that the tone for the week was changed by the down to earth utterances of David Tepper, founder of the Appaloosa Hedge Fund. He has a long term enviable record and when he speaks, which isn’t often, people do take notice. Apparently markets do, as well.

However, among the things that he mentioned was that he had lightened up on his position in Apple (AAPL). It didn’t take long for others to chime in and Apple shares fell substantially even when the market was going higher. Although I was waiting for Apple to get back into the $410-420 range, the rebound in share price following news of reduced positions by high profile investors is a good sign and I believe warrants consideration toward the purchase of new shares.

I recently purchased shares of Sunoco Logistics (SXL) in order to capture its generous and reliable dividend. My shares were assigned this past Friday, but I’m willing to repurchase, even at a higher price and even with a monthly option contract to tie me down. In the oil services business it is a lesser known entity and trades with low volume, however, it will share in sector strength, just in a much more low profile manner.

Pfizer (PFE) is another stock that was recently purchased in order to capture it’s dividend and premium and was also assigned this past week. However, it is among the “defensive” stocks that I think would fare relatively well regardless of near term market direction. Like many others that do offer weekly options, my inclination is to consider the selling monthly contracts for the time being.

While healthcare has certainly already had its time in the sun in 2013 and Bristol Myers Squibb (BMY) has had its share of that glory, after some recent tumult in its price and most recently its next day reversal of a strong move the previous day, I find the option premium appealing. However, as opposed to Pfizer, which I’m more inclined to consider a monthly option, Bristol Myers has too much downside potential for me to want to commit for longer periods.

Although I already own shares of Petrobras (PBR) and am not a big fan of adding additional shares after such a strong climb hig
her off of its rapidly achieved lows, Petrobras recently and quietly had quite an achievement. WHile everyone was talking about Apple’s $17 Billion bond offering that had about $50 Billion in bids, Petrobras just closed an $11 Billion offering with more than $40 Billion in bids.

Caterpillar (CAT), which I also currently own, is a perennial member of my portfolio. To a very large degree it has been recently held hostage to rumors of contraction and slowing in the Chinese economy. It has, however, shown great resiliency at the current price level and has been an excellent vehicle upon which to sell call options.

As shown in the table above, I’ve owned shares of Caterpillar on 11 separate occasions in less than a year. While the price has barely moved in that period, the net result of the in and out trades, as a result of share assignments has been a gain in excess of 35%.

The more ambiguity and equivocation there is in understanding the direction of the Chinese economy the better it has been to own Caterpillar as it just bounces around in a fairly well defined price range, making it an ideal situation for covered call strategies.

Continuing the theme of shares that I currently own, but am considering adding more shares, is British Petroleum (BP). With much of its Deepwater Horizon liabilities either behind it or well defined, shares appear to have a floor. However, in the past year, that has already been the case, as my experience with British Petroleum ownership has paralleled that of Caterpillar in both the number of separate times owning shares and in return – only better.

Of course, better than either Caterpillar or British Petroleum has been Chesapeake Energy (CHK). I’ve owned it 18 times in a year. It too has had much of its liability removed as Aubrey McClendon has left the scene and it is already well known that Chesapeake will be selling assets under a degree of duress. With its turnaround on Thursday and dip below $20, I am ready to add even more shares.

I’ve probably not owned Conoco Phillips (COP) as much as I would have imagined over the past year probably As a result of owning British Petroleum and Chesapeake Energy so often. Shares do go ex-dividend this week which always adds to the appeal, particularly when I’m in a defensive mode.

Salesforce.com (CRM) was a recommendation last week. I did make that purchase and subsequently had shares assigned. This week it reports earnings and as many of the earnings related trades that I prefer, it offers what I believe to be a good option premium even in the event of a large downward move. In this case a 1% return for the week may be achieved if share price doesn’t exceed 8%

Sears Holdings (SHLD) always seems like a ghost town when I enter one of its stores, although perhaps a moment of introspection would indicate that I drive shoppers away. I’m aware of other story lines revolving around Sears and its real estate holdings, but tend not to think in terms of what has been playing out a s a very, very long term potential. Instead, I like Sears as a hopefully quick earnings trade.

In a week that saw beautiful price action from Macys (M), Kohls (KSS) and others, perhaps even Sears can pull out good numbers and even provide some positive guidance. However, what appeals to me is a put sale approximately 8% below Friday’s close that could offer a 4% ROI for the month or shorter.

Another retailer, The Gap (GPS), has certainly been an example of the ability to arise from the ashes and how a brand can be revitalized. Along with it, so too can its share price. The Gap reports earnings this week and has already had an impressive price run. As opposed to most other earnings related trades, I’m not looking for a significant downward move and the market isn’t expecting such a move either. Based on some of the strong retail earnings announced this past week I think The Gap may be an outright purchase, but I would be more likely to look at a weekly option sale and hope for quick assignment of shares.

TIVO (TIVO) is one of those technologies that I’ve never adopted. Maybe that’s because I never leave the house and the television is always on and I rarely see a need to change the station. But here, too, I believe TIVO offers a good short term opportunity even if shares go down as much as 20% following Monday’s earnings release. In the event that shares go appreciably higher, it is the ideal kind of earnings trade, in that coming during the first day of a monthly option contract, it could likely be quickly closed out and the money then used for another investment vehicle.

Om the other hand, Dunkin Brands (DNKN) is definitely one of those technologies that I’ve adopted, especially when having lived in New England. Fast forward 20 years and they are now everywhere in the Mid-Atlantic and spreading across the country as their new offerings also spread waists around the country. Going ex-dividend this coming week and offering a nice monthly option premium, I may bite at more than a jelly donut. However, it is trading at the upper end of its recent price range, like all too many other stocks.

Finally, Carnival (CCL) hasn’t exactly been the recipient of much good news lately. Although it’s up from its recent woes and lows. It does report earnings at the end of the June 2013 option cycle, but it also goes ex-dividend in the first week of the cycle, in addition to a offering a reasonable option premium

Traditional Stocks: Bristol Myers, Caterpillar, Pfizer, Sunoco Logistics

Momentum Stocks: Apple, Chesapeake Energy, Petrobras

Double Dip Dividend: Carnival Line (ex-div 5/22), Conoco Phillips (ex-div 5/22), Dunkin Brands (ex-div 5/23)

Premiums Enhanced by Earnings: Salesforce.com (5/23 PM), Sears Holdings (5/23 AM), The Gap (5/23 PM), TIVO (5/20 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

 

 
 
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