Weekend Update – December 18, 2016

 

A long time ago there was a reasonably popular song by a group that itself was reasonably popular  at a time when Disco was dying, Punk Rock had out-grown its shock factor and Heavy Metal and long hair bands were taking root.
 
In that vacuum anything could have become reasonably popular and so it was that everyone was humming the tune of the song that cried out for the need for a new drug.
 
I always wondered why the lyrics didn’t include the requirement for a drug that won’t quit, as that’s the ultimate problem for anyone seeking to be taken to a better place through the modern miracle of chemistry.
 
At some point we develop a kind of tolerance to stimuli, to feelings and even to drugs. That’s why we always keep searching for something new. What was once good, or at least good enough, just quits on us.
 
Even when we may not fall prey to the human desire for more, bigger and better, we at least want to get the same kick at a bare minimum and we can’t possibly tolerate a drug or an emotion that quits on us.
 
This past week we came to a point when the FOMC sort of quit. It really didn’t take us any place new, even as it did finally take some action.
 
  
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Weekend Update – December 11, 2016

There are so many ways to look at most things.

Take a runaway train, for example.

The very idea of a “runaway train” probably evokes some thoughts of a disaster about to happen.

Following this past week’s 3.1% gain in the S&P 500, adding to the nearly 4.3% gain since the election result that most everyone thought to be improbable, the market may be taking on some characteristics of a runaway train.

But I don’t really think too much about the inevitable crash that ensues when the train does leave the tracks.

As every physics fan knows, the real challenge behind a runaway train is getting all of that momentum under control.

I don’t think about that, either, though.

What I do think about is trying to understand how to look at momentum.

Momentum, of course, is simply the product of the object’s mass and its velocity.

Mass, of course is nothing more than the force exerted by that object divided by its acceleration.

Acceleration, of course is nothing more than the derivative of an object’s velocity.

So, I like to look at momentum as an expression of the product of an object’s force and its velocity, while at the same time dividing by rate of change in that velocity.

In other words, depending upon how you look at things makes all the difference in the world.


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Weekend Update – March 6, 2016

Depending upon what kind of outlook you have in life, the word “limbo” can conjure up two very different pictures.

For some it can represent a theologically defined place of temporary internment for those sinners for whom redemption was still possible. 

In simple terms it may be thought of as a place between the punishing heat and torment of hell below and the divineness and comfort of heaven above.

Others may just see an image reminding them of a fun filled Caribbean night watching a limber individual dancing underneath and maybe dangerously close to a flaming bar that just keeps getting set lower and lower.

Both definitions of “limbo” require some significant balancing to get it just right.

For example, you don’t get entrance into the theologically defined “Limbo” if the preponderance of your sins are so grievous that you can’t find yourself having died in “the friendship of God.” Instead of hanging around and waiting for redemption, you get a one way ticket straight to the bottom floor.

It may take a certain balance of the quantity and quality of both the good and the bad acts that one has committed during their mortal period to determine whether they can ever have a chance to move forward and upward to approach the pearly gates of heaven.

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Weekend Update – November 17, 2013

Things aren’t always as they seem.

As I listened to Janet Yellen face her Senate inquisitors as the hearing process began for her nomination as our next Federal Reserve Chairman, the inquisitors themselves were reserved. In fact they were completely unrecognizable as they demonstrated behavior that could be described as courteous, demur and respectful. They didn’t act like the partisan megalomaniacs they usually are when the cameras are rolling and sound bites are beckoning.

That can’t last. Genteel or not, we all know that the reality is very different. At some point the true colors bleed through and reality has to take precedence.

Closing my eyes I thought it was Woody Allen’s sister answering softball economic questions. Opening my eyes I thought I was having a flashback to a curiously popular situational comedy from the 1990s, “Suddenly Susan,” co-starring a Janet Yellen look-alike, known as “Nana.” No one could possibly sling arrows at Nana.

These days we seem to go back and forth between trying to decide whether good news is bad news and bad news is good news. Little seems to be interpreted in a consistent fashion or as it really is and as a result reactions aren’t very predictable.

Without much in the way of meaningful news during the course of the week it was easy to draw a conclusion that the genteel hearings and their content was associated with the market’s move to the upside. In this case the news was that the economy wasn’t yet ready to stand on its own without Treasury infusions and that was good for the markets. Bad news, or what would normally be considered bad news was still being considered as good news until some arbitrary point that it is decided that things should return to being as they really seem, or perhaps the other way around..

While there’s no reason to believe that Janet Yellen will do anything other than to follow the accommodative actions of the Federal Reserve led by Ben Bernanke, political appointments and nominations have a long history of holding surprises and didn’t always result in the kind of comfortable predictability envisioned. As it would turn out even Woody Allen wasn’t always what he had seemed to be.

Certainly investing is like that and very little can be taken for granted. With two days left to go until the end of the just ended monthly option cycle and having a very large number of positions poised for assignment or rollover, I had learned the hard way in recent months that you can’t count on anything. In those recent cases it was the release of FOMC minutes two days before monthly expiration that precipitated market slides that snatched assignments away. Everything seemed to be just fine and then it wasn’t suddenly so.

As the markets continue to make new closing highs there is division over whether what we are seeing is real or can be sustained. I’m tired of having been wrong for so long and wonder where I would be had I not grown cash reserves over the past 6 months in the belief that the rising market wasn’t what it really seemed to be.

What gives me comfort is knowing that I would rather be wondering that than wondering why I didn’t have cash in hand to grab the goodies when reality finally came along.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

Sometimes the most appealing purchases are the very stocks that you already own or recently owned. Since I almost exclusively employ a covered option strategy I see lots of rotation of stocks in and out of my portfolio. That’s especially true at the end of a monthly option cycle, particularly if ending in a flourish of rising prices, as was the case this week.

Among shares assigned this past week were Dow Chemical (DOW), International Paper (IP), eBay (EBAY) and Seagate Technology (STX).

eBay just continues to be a model of price mediocrity. It seems stuck in a range but seems to hold out enough of a promise of breaking out of that range that its option premiums continue to be healthy. At a time when good premiums are increasingly difficult to attain because of historically low volatility, eBay has consistently been able to deliver a 1% ROI for its near the money weekly options. I don’t mind wallowing in its mediocrity, I just wonder why Carl Icahn hasn’t placed this one on his radar screen.

International Paper is well down from its recent highs and I’ve now owned and lost it to assignment three times in the past month. While that may seem an inefficient way to own a stock, it has also been a good example of how the sum of the parts can be greater than the whole when tallying the profits that can arise from punctuated ownership versus buy and hold. Having comfortably under-performed the broad market in 2013 it doesn’t appear to have froth built into its current price

Although Dow Chemical is getting near the high end of the range that I would like to own shares it continues to solidify its base at these levels. What gives me some comfort in considering adding shares at this level is that Dow Chemical has still under-performed the S&P 500 YTD and may be more likely to withstand any market downturn, especially when buoyed by dividends, option premiums and some patience, if required.

Unitedhealth Group (UNH) is in a good position as it’s on both sides of the health care equation. Besides being the single largest health care carrier in the United States, its purchase of Quality Software Services last year now sees the company charged with the responsibility of overhauling and repairing the beleague
red Affordable Care Act’s web site. That’s convenient, because it was also chosen to help set up the web site. It too, is below its recent highs and has been slowly working its way back to that level. Any good news regarding ACA, either programmatically or related to the enrollment process, should translate into good news for Unitedhealth

Seagate Technology simply goes up and down. That’s a perfect recipe for a successful covered option holding. It’s moves, in both directions, can however, be disconcerting and is best suited for the speculative portion of a portfolio. While not too far below its high thanks to a 2% drop on Friday, it does have reasonable support levels and the more conservative approach may be through the sale of out of the money put options.

While I always feel a little glow whenever I’m able to repurchase shares after assignment at a lower price, sometimes it can feel right even at a higher price. That’s the case with Microsoft (MSFT). Unlike many late to the party who had for years disparaged Microsoft, I enjoyed it trading with the same mediocrity as eBay. But even better than eBay, Microsoft offered an increasingly attractive dividend. Shares go ex-dividend this week and I’d like to consider adding shares after a moth’s absence and having missed some of the run higher. With all of the talk of Alan Mullally taking over the reins, there is bound to be some let down in price when the news is finally announced, but I think the near term price future for shares is relatively secure and I look forward to having Microsoft serve as a portfolio annuity drawing on its dividends and option premiums.

I’m always a little reluctant to recommend a possible trade in Cliffs Natural Resources (CLF). Actually, not always, only since the trades that still have me sitting on much more expensive shares purchased just prior to the dividend cut. Although in the interim I’ve made trades to offset those paper losses, thanks to attractive option premiums reflecting the risk, I believe that the recent sustained increase in this sector is for real and will continue. Despite that, I still wavered about considering the trade again this week, but the dividend pushed me over. Although a fraction of what it had been earlier in the year it still has some allure and increasing iron ore prices may be just the boost needed for a dividend boost which would likely result in a significant rise in shares. I’m not counting on it quite yet, but think that may be a possibility in time for the February 2014 dividend.

While earnings season is winding down there are some potentially interesting trades to consider for those with a little bit of a daring aspect to their investing.

Not too long ago Best Buy (BBY) was derided as simply being Amazon’s (AMZN) showroom and was cited as heralding the death of “brick and mortar.” But, things really aren’t always as they seem, as Best Buy has certainly implemented strategic shifts and has seen its share price surge from its lows under previous management. As with most earnings related trades that I consider undertaking, I’m most likely if earnings are preceded by shares declining in price. Selling puts into price weakness adds to the premium while some of the steam of an earnings related decline may be dissipated by the selling before the actual release.

salesforce.com (CRM) has been a consistent money maker for investors and is at new highs. It is also a company that many like to refer to as a house of cards, yet another way of saying that “things aren’t always as they seem.” As earnings are announced this week there is certainly plenty of room for a fall, even in the face of good news. With a nearly 9% implied volatility, a 1.1% ROI can be attained if less than a 10% price drop occurs, based on Friday’s closing prices through the sale of out of the money put contracts.

Then of course, there’s JC Penney (JCP). What can possibly be added to its story, other than the intrigue that accompanies it relating to the smart money names having taken large positions of late. While the presence of “smart money” isn’t a guarantee of success, it does get people’s attention and JC Penney shares have fared well in the past week in advance of earnings. The real caveat is that the presence of smart money may not be what it seems. With an implied move of 11% the sale of put options has the potential to deliver an ROI of 1.3% even if shares fall nearly 17%.

Finally, even as a one time New York City resident, I don’t fully understand the relationship between its residents and the family that controls Cablevision (CVC), never having used their services. As an occasional share holder, however, I do understand the nature of the feelings that many shareholders have against the Dolan family and the feelings that the publicly traded company has served as a personal fiefdom and that share holders have often been thrown onto the moat in an opportunity to suck assets out for personal gain.

I may be understating some of those feelings, but I harbor none of those, personally. In fact, I learned long ago, thanks to the predominantly short term ownership afforded through the use of covered options, that it should never be personal. It should be about making profits. Cablevision goes ex-dividend this week and is well off of its recent highs. Dividends, option premiums and some upside potential are enough to make even the most hardened of investors get over any personal grudges.

Traditional Stocks: Dow Chemical, eBay, International Paper, Unitedhealth Group

Momentum Stocks: Seagate Technology

Double Dip Dividend: Cablevision (ex-div 11/20), Cliffs Natural (ex-div 11/20), Microsoft (ex-div 11/19)

Premiums Enhanced by Earnings: Best Buy (11/19 AM), salesforce.com (11/18 PM), JC Penney (11/20 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 – October 20, 2013

With the S&P 500 having reached an all time high this past week you could certainly draw the conclusion that a government shutdown is a good thing and flirting with default is a constructive strategy. At a reported cost of only $24 Billion associated with closure and nothing more than a symbolic “Fitch slap” credit watch issued, perhaps we should look forward to the next potential round in just a few months.

For me, this past week marked the slowest week of opening new positions that I can recall since the 2009 market bottom. Although history suggests that the eleventh hour is a charm, the zeal of some more newly elected officials was reminiscent of a theological premise that believes in order to save it you must first destroy the world. That kind of uncertainty is the kind in which you get your affairs in order rather than embarking on lots of new and exciting initiatives.

With manufactured uncertainty temporarily removed the market can focus on earnings and other things that most of us believe are somewhat important.

One thing that will be certain is that wherever possible the next earnings season will attempt to lay some blame for any disappointments upon the government shutdown. This past week it certainly didn’t take Stanley Black and Decker (SWK) and eBay (EBAY) very long to already take advantage of that excuse. Who knew that government purchasing agents were unable to use eBay for Blackhawk helicopter replacement parts during their unexpected furlough?

As with the previous earnings season the financial sector started off the reports in a promising way, although early in the season the results are mixed, with some significant surges and plunges. What is clear is that investors are paying particular attention to guidance.

One earnings report that caught my attention was from Pet Smart (PETM). My father always believed that no matter what the economic environment, people would always find the wherewithal to spend on the pets and their kids. Pet Smart’s disappointing earnings focused on a “challenged consumer” and lower customer traffic. That can’t be a good sign. If pets are going wanting what does that portend for the rest of us?

Yet, on the other hand, Align Technology (ALGN) discussed last week, was a different story. Certainly representing discretionary spending and not benefiting from any provisions in the Affordable Care Act, their orthodontic appliances see no barriers from the economy ahead, as they reported great earnings and guidance.

Also clouding the picture, perhaps both literally and figuratively, is the positive guidance provided by Peabody Energy (BTU). For a nation that has been said to “move on coal,” that has to be a signal of something positive going forward.

This week, with lots of cash from assignments of October 2013 option contracts, I’m anxious to get back to business as usual, but still have a bit of wariness. However, despite the appearances of a reluctant consumer, I’m encouraged by recent activity in the speculative portion of my portfoli0, enough so to consider adding to those positions, even at market highs.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

The news from Peabody Energy in addition to some recent price stabilization in Walter Energy (WLT), Cliffs Natural Resources (CLF) and Freeport McMoRan (FCX) have me in a hopeful mood after long having suffered with positions in all three.

A year ago at this time I believed that Freeport McMoRan would be among the best performers in 2013, but subsequent to that it has only recently started on its recovery from the price plunge it sustained when announcing plans to acquire Plains Exploration and Production, as it planned to expand its asset base to include oil and natural gas. While the long term vision may be someday vindicated, 2013 has not been a stellar year. But, like some others this week, there has been a steady strengthening in its price, despite significantly lower gold, oil and copper prices, year to date. While its dividend has made holding shares marginally tolerable through the year, I think it is now ready to start a sustained climb and it offers appealing call premiums to create income or provide downside protection. Earnings are reported this week, but the option market is not expecting a very large move.

Another company slowly climbing higher, but still with a great distance to travel is Walter Energy . In addition to suffering through a proxy fight this year and significant challenges to management, declining coal prices and a slashed dividend, I believe that it is also poised to continue climb higher. I recently tested the waters and added shares along with selling in the money calls. Those were just assigned, but I think that I’m ready to dip deeper.

Sticking to the same theme, Cliffs Natural Resources goes hand in hand with Walter Energy, at least in its price behavior and disappointments. I
t too has slashed its dividend and its CEO has retired. Like Walter Energy, I recently started adding shares and had them assigned this week. Cliffs reports earnings this week and unlike Freeport McMoRan, the option market is expecting a larger price move.

While I rarely do more than glance at charts, in the case of Cliffs Natural Resources the 5 Year price chart may suggest a long term pattern that has shares at the beginning of a sustained climb higher.

As with many positions that are preparing to report earnings, I typically consider potential entry through the sale of put options.

Also reporting earnings this week is Cree (CREE). Thanks to legislation its LED light bulbs have become ubiquitous in home improvement stores and homes. It has the features of companies that make potentially alluring earnings trades. In this case, this always volatile moving company can sustain up to a 14% price decline and still return a 1% ROI for the week. The only real consideration is that it is capable of making that decline a reality, so if selling puts you do have to be prepared to take ownership.

While already having reported earnings and falling into the “disappointing” category, Fastenal (FAST), which I look at as being an economic barometer kind of company has already started regaining its price decline. It will be ex-dividend this week offering an additional reason to consider its purchase, even though I already own lower priced shares and rarely buy additional lots at higher prices. However, with W.W. Grainger (GWW) recently reporting positive earnings I’m encouraged that Fastenal will follow, but in the meantime the dividend and option premium make it easier to wait.

Also going ex-dividend this week is Williams-Sonoma (WSM). I considered its purchase last week, but it fell victim to a week of my inaction. While perhaps at risk to suffer from decreased spending at some higher end stores it has already fallen about 11% from its recent high point. However, since it reports earnings just prior to the expiration of the November 2013 option cycle, I might consider utilizing a December 2013 covered call sale.

The Gap (GPS) isn’t at risk of losing too many high end customers, it has just been losing customers, at least on the basis of its most recent monthly report. It is one of those retailers that still reports monthly comparison figures. That’s just one more bullet that needs to be dodged in addition to potential surprises during earnings season. Shares went precipitously lower with its most recent retail report and caught me along with it. It is near a price support level and represents an opportunity to either purchase additional shares to attempt to offset paper losses of an earlier lot or to establish an initial covered position.

While eBay may not sell used Blackhawk helicopter parts it somehow found a way to link its coming fortunes to the government shutdown. Suffering a significant price drop following earnings and guidance shares were once again in a channel of great familiarity. Having traded reliably in the $50-$52.50 range the sight of it falling was well received. However, late in the trading session on Friday someone else must have seen the same appeal as shares suddenly jumped $1.65 in about 20 minutes. That takes away some of the appeal. What takes away more of the appeal was the explanation by CEO Donahoe that spurred the surge, when he explained that he and his CFO did not mean to sound so dour about holiday prospects, it’s just that they both had colds.

On the other hand UnitedHealth Group (UNH) is a company that may be able to justifiably point its finger at the Federal government when it reports earnings again in January 2014. Already suffering a nearly 10% drop in the past week related to 2014 guidance, UnitedHealth is a major player in the options available on the Affordable Health Care Act exchanges. While perhaps not being able to blame the shutdown for any revenue related woes, disappointing enrollment statistics may be in the making. The additional price drop on Friday, following the large drop on Thursday may be related to enrollment challenges rather than projections of lower Medicare funding in the coming year. However, nearing a price support and following such a large price drop provides a combination that makes ownership appealing. Perhaps eBay employees should consider signing up en masse in the event they are all prone to colds that effect their ability to perform. In enough numbers that may be helpful to UnitedHealth Group’s 2014 revenues.

Of course, while the market seemed to rejoice at what could only be construed as the return to health of the eBay executives, Groupon (GRPN) is another example of a stock whose price has returned to more lofty levels following surgical removal of its CEO. It is one of a handful of stocks that I sold last year taking a capital loss and swore that I would never buy again. Now down about 15% from its recent high, which itself was up approximately 500% from its not too distant low, Groupon is a different company in leadership, product and prospects. While still a risky position

Finally, a name that everyone seems to disparage these days is Coach (COH). While there is certainly sufficient reason to believe that retailers, even the higher end retailers are being challenged, Coach is beginning to be perceived as taking a back seat to retailer Michael Kors (KORS). SHares have certainly been volatile, especially at earnings and Coach reports earnings this week. Having owned shares a number of times in the past year, my preference is to sell puts in advance of earnings in anticipation of a large drop. Currently, the option market is implying nearly a 9% move. A 1% ROI for the week can be obtained through such a sale if the price drop is less than 12%.

Traditional Stocks: eBay, The Gap, United Health Group

Momentum Stocks: Groupon, Walter Energy

Double Dip Dividend: Fastenal (ex-div 10/23), Williams Sonoma (ex-div 10/23)

Premiums Enhanced by Earnings: Coach (10/22 AM), Freeport McMoRan (10/22), Cree (10/22 PM), Cliffs Natural Resources (10/24 PM)

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

Weekend Update – September 15, 2013

Month after month of seeing market gains finally came to an end in August. The streak had started in November 2012 and for those who are prone to remember oddities, we even had a string of 20 consecutive gaining Tuesdays during that span.

Of course we also eclipsed the 2007 Dow Jones and S&P 500 highs and subsequently did so on repeated occasions, all while “Chicken Littles” like me kept waiting for the correction that never came.

The small head fake correction that began near the end of May was barely a blip and was quickly erased as more new highs were established, but the trading patterns of August seemed to indicate that perhaps the rally was getting tired and the market not only began sputtering, but also lost ground as Syrian related tensions were in the air.

Anxious to see a modest correction so that I would finally have something constructive to do with the cash I had been raising, I wasn’t terribly happy with what would come in September, with the first seven trading days having seen gains.

Not only did they make gains, but there were three consecutive triple digit gains. Adding insult to injury was the root cause of those triple digit gains.

While avoiding the use of military force, at least in the near term, is somewhat comforting, the very idea that a Russian proposed plan could avert military action against Syria was about as implausible as anything that occurred in the 20th or 21st centuries, with the possible exception of the Russian President speaking directly to American citizens through an op-ed piece in the New York TImes (NYT).

Russian peace plan? Can those words even possibly all be in a single paragraph?

But with fear centered around uncertainty regarding military action against Syria temporarily tabled, the market ignored August and also ignored the historical nature of Septembers past. By Friday morning, just seconds after the opening bell, all of August’s losses had been recovered.

Somehow, I am neurologically incapable of saying “Thank you, Vladimir.”

Instead, the increasingly nervous part of me wonders what there is that awaits that will continue to send markets higher? Are there unseen catalysts or are there now more opportunities for disappointment, particularly if Russian efforts, inspired by an off the cuff remark by Secretary of State Kerry, prove to be inadequate?

I’ve been asking questions in a similar vein for months now, but the answer has always been in the affirmative, even if the catalysts weren’t always apparent.

Of course, now there’s also the question of the market’s reaction to the expected announcement of the nomination of Lawrence Summers as the next Federal Reserve Chairman. The rumor that such an announcement would come today was denied, but that should come as no surprise, as President Obama had his heart set on doing so by attaching a banner to a Tomahawk missile.

If Syria fails to deliver a market correction and neither fear of the “Taper” nor the nomination of Summers can do so, at least we will have Congress back and fully engaged so that a new round of budget crises can at least allow the market to bounce up and down, which is far more healthy for someone relying on a covered option strategy. If that happens, I can hold my head up high and point to a momentary drop lower and sat “See? That correction.”

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

I’ve only opened a limited number of new positions in the last few weeks and don’t anticipate seeing that pattern change this week, unless there is a substantive near term correction to last week’s price increases. Those increases, for example, are the reason why I have no Double Dip Dividend selections this coming week, as the risk of experiencing some price pullbacks outweighs the benefits of garnering option premiums and dividends. As it is, instead of the usual number of potential selections, this week’s list contains only 5 names.

Certainly a controversial place to begin looking in the new week is Apple (AAPL). I purchased shares last week following the large drop on Wednesday when disappointment began to settle in for varied reasons. The small recovery that I was expecting never really came, but instead of being disappointed by the inability to quickly close my position, I think that there is simply continued opportunity to pick up additional shares. However, as opposed to the rare instance of having purchased shares and not immediately having sold calls, I do plan to do so this time around if adding shares.

Apple, while not necessarily making significant changes to its product line is making significant changes to the way it conducts its business. From a trade-in program, to less expensive models, to not taking pre-orders on the upcoming iPhone 5S, to dividends and buybacks, they are shaking up their daily approach to existence on all fronts. From my vantage point the short term emphasis is that “cash is king” and that share price matters. I especially like Tim Cook’s philosophy that market share isn’t as important as having enough money to be in control of one’s destiny. The recent product announcements should see to it that the cash keeps pouring in and helps to secure that destiny.

Continuing with the controversial theme is Cliffs Natural Resources (CLF). I had written about the possibility of adding shares recently, but did not do so. Instead, I continued selling calls on a lower priced lot of shares to try and continue to offset substantial paper lo
sses from older lots. That’s a slow process but I think at this current level the process can be speeded up by adding more shares. Highly levered to economic news from China does add to the risk of ownership, but Cliffs has been demonstrating some price stability at this level.

I may as well add to the controversy with Phillip Morris (PM). Whatever your opinions are about ownership of a company that directly results in countless premature deaths, it’s hard to overlook their move to increase the dividend and the reasonably narrow range in which shares trade. Combine those attributes with an appealing option premium and you have a combination that’s hard to resist and doesn’t even require nicotine to keep you hooked.

They say that there’s no such thing as bad publicity, although JP Morgan (JPM) may disagree. However, if you want to see the poster child for resilience you don’t have to look much further than this company. After an avalanche of bad news, having inherited the burden from Goldman Sachs (GS), JP Morgan has somehow been able to keep its share price respectably positioned. This week it announced plans to commit nearly $6 Billion toward legal defenses and compliance. In addition to an option premium that provides some comfort, shares will be ex-dividend during the October 2013 option cycle so I may consider using a longer term option sale and would actually welcome early assignment.

Finally, while earnings season is set to begin again in just a few weeks, Oracle (ORCL) is a laggard and reports this week. With the upcoming report the company will have had six months to make some changes, whether substantive or purely optical, to create a more positively received report. Following two successive negative reports that were not well received by the market, I think that its inconceivable that Larry Ellison would allow his name to be badly tarnished again by anything other than his own words and actions. No doubt that he is unhappy with share performance since that first disappointment.

While I usually like to consider earnings related trades on the basis of selling deep out of the money puts, Oracle may work equally well as an outright purchase and sale of calls. In the event of another price meltdown I would not go out of my way to greet Ellison if you see him in Lanai, although I don’t believe the police department was included with the sale of the island.

Traditional Stocks: JP Morgan Chase, Phillip Morris

Momentum Stocks: Apple, Cliffs Natural Resources

Double Dip Dividend: none

Premiums Enhanced by Earnings: Oracle (9/11 PM)

Remember, these are just guidelines for the coming week. The above selections may be 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 over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

Disclosure: I am long AAPL, CLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may initiate positions, add shares or sell puts in AAPL, CLF, JPM, ORCL and PM

Weekend Update – August 25, 2013

You’re only as good as your earnings. Having stopped making an honest living a little on the early side, I still need to make money, or otherwise my wife would insist that I do something other than watch a moving stock ticker all day.

Since there’s far too much competition on the highway exit near our home and my penmanship has deteriorated due to excessive keyboard use, I’ve come to realize that stock derived earnings, predominantly from the sale of options and accrual of dividends, are the only thing keeping me from joining those less fortunate.

I’m under no delusions. I am only as good as my earnings, just as Bob Greifeld, CEO of NASDAQ (NDAQ) should be under no delusions, as he is only as good as his response to the most recent NASDAQ failing.

On that count, I may have the advantage, although he may have better hygiene and a wardrobe that includes a clean hoodie.

There was a time that we thought of stocks in very much the same earnings centric way. If earnings were good the stock was good. There was a time that we didn’t dwell quite as much on the macro-economic data and we certainly didn’t spend time thinking about Europe or China.

However, after this most recent earnings season, which will come to an end a few days before the next season is kicked off on October 8, 2013, maybe it’s a good thing that it’s only during the otherwise slow summer months when other news is sparse, that we focus on earnings.

If you’ve been paying attention, this hasn’t been a particularly encouraging month, especially as far as retail sales go, which are about as good a reflection of discretionary spending as you can find. Beyond that, listening to guidance can make shivers run down one’s spine as less than rosy earnings pictures are being painted for the future. The very future that our markets are supposed to be discounting.

As it is the S&P 500 is now about 0.3% below the earlier all time high that was hit on May 21, 2013. That in turn gave way to a rapid 5.7% fall and equally rapid 8.6% recovery to new highs. By all historical measures that post-May 21st drop was small as compared to the gains since November 2012 and we are right back to that level.

Perhaps once summer is over and our elected officials return to Washington, DC, not only would they have an opportunity to see me at a highway exit, but they may also get back to doing the things that create the dysfunction that makes earnings less salient.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” selections this week (see details).

Most of the positions considered this week are themselves lower than they were at the low point following the May 21st peak and have underperformed the S&P 500 since that time. For the moment, as I contribute to cling to the idea that there will be some additional market weakness, my comfort level is increased by focusing on positions that don’t have as much to fall.

I’ve been anxious to buy either Cisco (CSCO) or Oracle (ORCL) ever since Cisco’s disappointing earnings report. During more vibrant markets a drop in the share price of an otherwise good company would stand out as a buying opportunity. However, recently there has been more competition among those companies suffering precipitous earnings related price drops. While striving to keep my cash reserves at sufficient levels to allow me to go on a wild spending spree, I’ve resisted opportunities in CIsco and Oracle. Both, however, are getting more and more appealing as their prices sink further.

Oracle will report its earnings right before the end of the September 2013 option cycle and I have a very hard time believing that it could be three disappointments in a row, especially after some high profile remarks by CEO Larry Ellison regarding leadership at Apple (AAPL) that could come back to haunt him, even if only in terms of comparative share performance.

A technology company that always intrigues me, if at the price point relative to its option contract strikes, is Cypress Semiconductor (CY). It’s products and technology are quietly everywhere. However, its CEO, T.J. Rodgers has become precisely the opposite, as he is increasingly appearing in the media and offering political and policy opinions that make you wonder whether he is getting detached from the business, as perhaps may be said of Ellison. In Cypress Semiconductor’s case I think the business is small and focused enough that it can withstand some diversions. It is one of the few positions that has outperformed the S&P 500 since May 21st.

Among companies reporting earnings this week is salesforce.com (CRM), which also has Larry Ellison connections. the most recent of which is a great example of how business and strategic needs may trump personal feelings. For those who would innocently suffer collateral damage otherwise, that is the way it should be, as two companies seek to have the sum of their parts create additional value. While I do own shares of salesforce.com, I would be inclined to consider the sale of puts as a means to add additional shares and achieve an earnings stream of 1% for the week while awaiting the market’s reaction to earnings. My only hesitancy is that the strike at which that return can be achieved as more close to the strike of the implied move downward than I would ordinarily like.

Having recently lost shares of Eli Lilly (LLY) to early assignment in order to capture its dividend, I’ve wanted to re-purchase shares. Along with Bristol Myers Squibb (BMY) that I have been wanting to add for a while, they both offer attractive option premiums and are both 5% below their May 21st prices, which I believe limits their short term risk, during a period that I prefer to be somewhat defensive. Additionally, Bristol Myers offers extended weekly options that can be used as part of a broader strategy to attempt and stagger option expiration dates and perhaps infusions of cash back into portfolios for new purchases.

Sinclair Broadcasting Group (SBGI) is a local television broadcasting powerhouse that just purchased the important Washington, DC ABC affiliate. But it is far more than a local presence, as it has quietly become the nation’s largest operator of television stations, barely 4 years after fears of bankruptcy. Of course its recent buying spree may put pressures on the bottom line, but for now it is coming off a nearly 8% earnings related price decline and goes ex-dividend this week. Both of those work for me.

JP Morgan (JPM) which is increasingly becoming the poster child for everything wrong with big banks, at least from the point of view of regulators and the Department of Justice, finally showed a little bit of price stability by mid-week. Although I don’t know how any initiatives directed toward JP Morgan will work out, I’m reasonably sure that talk of looking at Jamie Dimon as a potential Treasury Secretary won’t be rekindled anytime soon. At current price levels, however, I think shares warrant another look.

While I’m not a terribly big fan of controversy, I think it may be time to publicly proclaim support for Cliffs Natural Resources (CLF). Having suffered through ownership beginning prior to the dividend cut, it has been an uncomfortable experience, ameliorated a bit by occasional purchase of additional shares and sacrificing them for their option premiums. Beginning with a report approximately 6 weeks ago that China had purchased a massive amount of nickel in the London commodity market, Cliffs has been slowly showing strength that may suggest demand for iron ore is increasing. Held hostage to our perceptions of the health of the Chinese economy, which can vary wildly from day to day, Cliffs’ share price can be equally volatile, but I believe will be rewarding for the strong of stomach.

Finally, Abercrombie and Fitch (ANF) was widely criticized as no longer being “cool.” That suits me just fine, figuratively, but not literally, as I resist wearing anyone’s logo with compensation. However, after joining other teen retailers in receiving earnings related punishment, I sold puts on its shares and happily saw them expire. Long a favorite stock of mine on which to generate option premium income, I think it’s at a price level that may offer some stability even with a demographic customer base that may not offer the same stability. This has been a great company to practice serial covered call writing, as long as you have a parallel strategy during the week of earnings release. In this case, that leaves three months of evaluating opportunities and perhaps even receiving a dividend before the next quarterly challenge.

Traditional Stocks: Bristol Myers Squibb, Cisco, Cypress Semiconductor, Eli Lilly, JP Morgan, Oracle

Momentum Stocks: Cliffs Natural Resources

Double Dip Dividend: Abercrombie and Fitch (ex-div 8/29), Sinclair Broadcasting (ex-div 8/28)

Premiums Enhanced by Earnings: salesforce.com (8/29 PM)

Remember, these are just guidelines for the coming week. The above selections may be 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 over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

 

Weekend Update – August 11, 2013

I like to end each week taking a look at the upcoming week’s economic calendar just to have an idea of what kind of curveballs may come along. It’s a fairly low value added activity as once you know what is in store for the coming week the best you can do is guess about data releases and then further guess about market reactions.

Just like the professionals.

That’s an even less productive endeavor in August and this summer we don’t even have much in the way of extrinsic factors, such as a European banking crisis to keep us occupied in our guessing. In all, there have been very few catalysts and distractions of late, hearkening back to more simple times when basic rules actually ruled.

In the vacuum that is August you might believe that markets would be inclined to respond to good old fundamentals as histrionics takes a vacation. Traditionally, that would mean that earnings take center stage and that the reverse psychology kind of thinking that attempts to interpret good news as bad and bad news as good also takes a break.

Based upon this most recent earnings season it’s hard to say that the market has fully embraced traditional drivers, however. While analysts are mixed in their overall assessment of earnings and their quality, what is clear is that earnings don’t appear to be reflective of an improving economy, despite official economic data that may be suggesting that is our direction.

That, of course, might lead you to believe that discordant earnings would put price pressure on a market that has seemingly been defying gravity.

Other than a brief and shallow three day drop this week and a very quickly corrected drop in May, the market has been incredibly resistant to broadly interpreting earnings related news negatively, although individual stocks may bear the burden of disappointing earnings, especially after steep runs higher.

But who knows, maybe Friday’s sell off, which itself is counter to the typical Friday pattern of late is a return to rational thought processes.

Despite mounting pessimism in the wake of what was being treated as an unprecedented three days lower, the market was able to find catalysts, albeit of questionable veracity, on Thursday.

First, news of better than expected economic growth in China was just the thing to reverse course on the fourth day. For me, whose 2013 thesis was predicated on better than expected Chinese growth resulting from new political leadership’s need to placate an increasingly restive and entitled society, that kind of news was long overdue, but nowhere near enough to erase some punishing declines in the likes of Cliffs Natural Resources (CLF).

That catalyst lasted for all of an hour.

The real surprising catalyst at 11:56 AM was news that JC Penney (JCP) was on the verge of bringing legendary retail maven Allen Questrom back home at the urging of a newly vocal Bill Ackman. The market, which had gone negative and was sinking lower turned around coincident with that news. Bill Ackman helped to raise share price by being Bill Ackman.

Strange catalyst, but it is August, after all. In a world where sharks can fall out of the sky why couldn’t JC Penney exert its influence, especially as we’re told how volatile markets can be in a light volume environment? Of course that bump only lasted about a day as shares went down because Bill Ackman acted like Bill Ackman.The ensuing dysfunction evident on Friday and price reversal in shares was, perhaps coincidentally mirrored in the overall market, as there really was no other news to account for any movement of stature.

With earnings season nearly done and most high profile companies having reported, there’s very little ahead, just more light volume days. As a covered option investor if I could script a market my preference would actually be for precisely the kind of market we have recently been seeing. The lack of commitment in either direction or the meandering around a narrow range is absolutely ideal, especially utilizing short term contracts. That kind of market present throughout 2011 and for a large part of 2012 has largely been missing this year and sorely missed. Beyond that, a drop on Fridays makes bargains potentially available on Mondays when cash from assigned positions is available.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum, with no “PEE” selections this week. (see details).

For an extended period I’ve been attempting to select new positions that were soon to go ex-dividend as a means to increase income, offset lower option premiums and reduce risk, while waiting for a market decline that has never arrived.

This week, I’m more focused on the two selections that are going ex-dividend this coming week, but may have gotten away after large price rises on Thursday.

Both Cliffs Natural Resources and Microsoft (MSFT) were beneficiaries of Chinese related ne
ws. In Cliffs Natural’s case it was simply the perception that better economic news from China would translate into the need for iron ore. In Microsoft’s case is was the introduction of Microsoft Office 365 in China. Unfortunately, both stocks advanced mightily on the news, but any pullback prior to the ex-dividend dates would encourage me to add shares, even in highly volatile Cliffs, with which I have suffered since the dividend was slashed.

A bit more reliable in terms of dividend payments are Walgreens (WAG), Chevron (CVX) and Phillips 66 (PSX).

Although I do like Walgreens, I’ve only owned it infrequently. However, since beginning to offer weekly options I look more frequently to the possibility of adding shares. Despite being near its high, the prospect of a short term trade in a sector that has been middling over the past week, with a return amplified by a dividend payment, is appealing.

Despite being near the limit of the amount of exposure that I would ordinarily want in the Energy Sector, both Chevron and Phillips 66 offer good option premiums and dividends. The recent weakness in big oil makes me gravitate toward one of its members, Chevron, however, if forced to choose between just one to add to my portfolio, I prefer Phillips 66 due to its greater volatility and enhanced premiums. I currently own Phillips 66 shares but have them covered with September call contracts. In the event that I add shares I would likely elect weekly hedge contracts.

If there is some validity to the idea that the Chinese economy still has some life left in it, Joy Global (JOY), which is currently trading near the bottom of its range offers an opportunity to thrive along with the economy. Although the sector has been relatively battered compared to the overall market, option premiums and dividends have helped to close that gap and I believe that the sector is beginning to resemble a compressed spring. On a day when Deere (DE) received a downgrade and Caterpillar was unable to extend its gain from the previous day, Joy Global moved strongly higher on Friday in an otherwise weak market.

Oracle (ORCL) is one of the few remaining to have yet reported its earnings and there will be lots of anticipation and perhaps frayed nerves in advanced for next month’s report, which occurs the day prior to expiration of the September 2013 contract.

You probably don’t need the arrows in the graph above to know when those past two earnings reports occurred. Based Larry Ellison’s reaction and finger pointing the performance issues were unique to Oracle and one could reasonably expect that internal changes have been made and in place long enough to show their mark.

Fastenal (FAST) is just a great reflection of what is really going on in the economy, as it supplies all of those little things that go into big things. Without passing judgment on which direction the economy is heading, Fastenal has recently seemed to established a lower boundary on its trading range after having reported some disappointing earnings and guidance. Trading within a defined range makes it a very good candidate to consider for a covered option strategy

What’s a week without another concern about legal proceedings or an SEC investigation into the antics over at JP Morgan Chase (JPM)? While John Gotti may have been known as the “Teflon Don,” eventually after enough was thrown at him some things began to stick. I don’t know if the same fate will befall Jamie Dimon, but he has certainly had a well challenged Teflon shell. Certainly one never knows to what degree stock price will be adversely impacted, but I look at the most recent challenge as just an opportunity to purchase shares for short term ownership at a lower price than would have been available without any legal overhangs.

Morgan Stanley (MS), while trading near its multi-year high and said to have greater European exposure than other US banks, continues to move forward, periodically successfully testing its price support.

With any price weakness in JP Morgan or Morgan Stanley to open the week I would be inclined to add both, as I’ve been woefully under-invested in the Finance sector recently.

While retailers, especially teen retailers had a rough week last week, Footlocker (FL) has been a steady performer over the past year. A downgrade by Goldman Sachs (GS) on Friday was all the impetus I needed and actually purchased shares on Friday, jumping the gun a bit.

Using the lens of a covered option seller a narrow range can be far more rewarding than the typical swings seen among so many stocks that lead to evaporation of paper gains and too many instances of buying high and selling low. Some pricing pressure was placed on shares as its new CEO was rumored a potential candidate for the CEO at JC Penney. However, as that soap opera heats up, with the board re-affirming its support of their one time CEO and now interim CEO, I suspect that after still being in limbo over poaching Martha Stewart products, JC Penney will not likely further go where it’s unwelcome.

Finally, Mosaic (M
OS
) had a good week after having plunged the prior week, caught up in the news that the potash cartel was falling apart. Estimates that potash prices may fall by 25% caused an immediate price drop that offered opportunity as basically the fear generated was based on supposition and convenient disregard for existing contracts and the potential for more rationale explorations of self-interest that would best be found by keeping the cartel intact.

The price drop in Mosaic was reminiscent of that seen by McGraw Hill FInancial (MHFI) when it was announced that it was the target of government legal proceedings for its role in the housing crisis through its bond ratings. The drop was precipitous, but the climb back wonderfully steady.

I subsequently had Mosaic shares assigned in the past two weeks, but continue to hold far more expensively priced shares. I believe that the initial reaction was so over-blown that even with this past week’s move higher there is still more ahead, or at least some price stability, making covered options a good way to generate return and in my case help to whittle down paper losses on the older positions while awaiting some return to normalcy.

Traditional Stocks: Fastenal, Footlocker, JP Morgan, Morgan Stanley, Oracle

Momentum Stocks: Joy Global, Mosaic

Double Dip Dividend: Chevron (ex-div 8/15), Phillips 66 (ex-div 8/14), Walgreen (ex-div 8/16)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may be 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 over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

 

 

Weekend Update – July 21, 2013

This week may have marked the last time Ben Bernanke sits in front of far less accomplished inquisitors in fulfilling his part of the obligation to provide congressional testimony in accordance with law.

The Senate, which in general is a far more genteel and learned place was absolutely fawning over the Federal Reserve Chairman who is as good at playing close to the vest as anyone, whether its regarding divulging a time table for the feared “tapering” or an indication of whether he will be leaving his position.

If anything should convince Bernanke to sign up for another round it would be to see how long the two-faced good will last and perhaps give himself the opportunity to remind his detractors just how laudatory they had been. But I can easily understand his taking leave and enjoying the ticker tape, or perhaps the “taper tick” parade that is due him.

But in a week when Treasury Secretary Jack Lew and Bernanke had opportunities to move the markets with their appearances, neither said anything of interest, nor anything that could be mis-interpreted.

Instead, at the annual CNBC sponsored “Delivering Alpha Conference” the ability of individuals such as Jim Chanos and Nelson Peltz to move individual shares was evident. What is also evident is that based upon comparative performance thus far in 2013, there aren’t likely to be many ticker tape parades honoring hedge fund managers and certainly no one is going to honor an index.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. There are many potential earnings related trades this week beyond those listed in this article for those interested in that kind of trade. (see details).

A portion of this week’s selections reflect the recently wounded, but certainly not mortally, from recent disappointing earnings. While there may not be any victory tours coming anytime soon for some of them, it’s far too short sighted to not consider the recent bad news as a stepping stone for short term opportunism.

In terms of absolute dollars lost, it’s hard to imagine the destruction of market capitalization and personal wealth at the hands of Microsoft (MSFT), Intel (INTC) and eBay (EBAY). While no one is writing an epitaph for eBay, there are no shortage of obituary writers for Microsoft and Intel. However, although most all businesses will someday go that path, I don’t think that any of that triumvirate are going to do so anytime soon, although Microsoft’s nearly 11% drop on Friday was more than the option market anticipated. It was also more than an innocent cough and may not be good for Steve Ballmer’s health.

Since my timeframe is usually short, although I do currently have shares of Intel that will soon pass their one year anniversary, I don’t think their demise or even significantly more deterioration in share price will be anytime soon. All offer better value and appealing option premiums for the risk of a purchase. Additionally, both Intel and Microsoft have upcoming dividends during the August cycle that simply adds to the short term appeal. My eBay shares were assigned on Friday, but I have been an active buyer in the $50-52.50 range and welcomed its return to that neighborhood.

I currently own some shares of Apple (AAPL) and sold some $450 August 17, 2013 calls in anticipation of its upcoming earnings. While I normally prefer the weekly options, the particular shares had an entry of $445 and haven’t earned their keep yet from cumulative option premiums. The monthly option instead offered greater time protection from adverse price action, while still getting some premium and perhaps a dividend, as well. However, with earnings this week, the more adventurous may consider the sentiment being expressed in the options market that is implying a move of approximately 5% upon earnings. Even after Friday’s 1% drop following some recent strength, I found it a little surprising at how low the put premiums are compared to call options, indicating that perhaps there is some bullish sentiment in anticipation of earnings. I simply take that as a sign of the opposite and would expect further price deterioration.

I’m always looking to buy or add shares of Caterpillar (CAT). I just had some shares assigned in order to capture the dividend. After Chanos‘ skewering of the company and its rapid descent as a direct result, I was cheering for it to go down a bit further so that perhaps shares wouldn’t be assigned early. No such luck, even after such piercing comments as “they are tied to the wrong products, at the wrong time.” I’m not certain, but he may have borrowed that phrase from last year when applied to Hewlett Packard (HPQ). For me, the various theses surrounding dependence on China or the criticisms of leadership have meant very little, as Caterpillar has steadfastly traded in a well defined range and have consistently offered option premiums upon selling calls, as well as often providing an increasingly healthy dividend. To add a bit to the excitement, however, Caterpillar does report earnings this week, so some consideration may be given to the backdoor path to potential ownership through the sale of put options.

While Chanos approached his investment thesis from the short side, Nelson Peltz made his case for
Pepsico’s (PEP) purchase of Mondelez (MDLZ). My shares of Mondelez were assigned today thanks to a price run higher as Peltz spoke. I never speculate on the basis of takeover rumors and am not salivating at the prospect of receiving $35-$38 per share, as Peltz suggested would be an appropriate range for a, thus far, non-receptive Pepsico to pay for Mondelez ownership. Despite the general agreement that margins at Mondelez are low, even by industry standards, it has been trading ideally for call option writers and I would consider repurchasing shares just to take advantage of the option premiums.

Fastenal (FAST) is just one of those companies that goes about its business without much fanfare and it’s shares are still depressed after offering some reduced guidance and then subsequently reporting its earnings. It goes ex-dividend this week and offers a decent monthly option premium during this period of low volatility. Without signs of industrial slowdowns it is a good place to park assets while awaiting for some sanity to be restored to the markets.

Although I’ve never been accused of having fashion sense Abercrombie and Fitch (ANF) and Michael Kors (KORS) are frequently alluring positions, although always carrying downside risk even when earnings reports are not part of the equation. I have been waiting for Kors to return to the $60 level and it did show some sporadic weakness during the past week, but doggedly stayed above that price.

Abercrombie and Fitch is always a volatile position, but offers some rewarding premiums, as long as the volatility does strike and lead to a prolonged dip. It reports earnings on August 14, 2013 and may also provide some data from European sales and currency impacts prior to that. Kors also reports earnings during the AUgust cycle and ant potential purchases of either of these shares must be prepared for ownership into earnings if weekly call contracts sold on the positions are not assigned.

Finally, it’s hard to find a stock that has performed more poorly than Cliffs Natural Resources (CLF). Although no one has placed blame on its leadership, in fact, they have been lauded for expense controls during demand downturns, it didn’t go unnoticed that shares rallied when the CEO announced his upcoming retirement. It also didn’t go unnoticed that China, despite being in a relative downturn, purchased a large portion of the nickel, a necessary ingredient for steel, available on the London commodity market. For the adventurous, Cliffs reports earnings this week and seems to have found some more friendly confines at the $16 level. The option market expects a 9% move in either direction. A downward move of that amount or less could result in a 1% ROI for the week, if selling put options. I suspect the move will be higher.

Traditional Stocks: Caterpillar, eBay, Intel. Microsoft, Mondelez

Momentum Stocks: Abercrombie and Fitch, Michael Kors

Double Dip Dividend: Fastenal (ex-div 7/24 $0.25)

Premiums Enhanced by Earnings: Apple (7/23 PM), Cliffs Natural Resources (7/25 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.

Disclosure: I am long AAPL, FAST, CAT, CLF, INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

 

Weekend Update – March 31, 2013

It’s said that George Eastman, founder of Eastman Kodak (EKDKQ), was quite methodical as he approached the end of his life and was prepared to put his escape plan into action.

“My work here is done” may be a very logical way to approach any kind of transition, although it doesn’t have to be taken to the extreme that Eastman felt was appropriate under his circumstances. Be prepared, but don’t be crazy.

I’ve been transitioning a portfolio for almost a month in anticipation of the market taking a break and perhaps giving back some of its gains; maybe even a lot of its gains.

Doing so has made me much less fun to be around, but circumstances do change and being prepared for plausible scenarios means having exit strategies and surviving to see them do as planned until it’s time to exit the exit strategy. Once my work is done I can’t wait to get back to work.

I for one was glad to see the first quarter of 2013 come to an end. Fortunately, as a covered option seller, my remaining life span may not be sufficient to see another opening yearly quarter such as this past one, as the last such period was in 1987.

You may or may not remember how that year ended, but let’s just say that a single day 500 point drop back then was a lot more meaningful than it would be today.

I wasn’t prepared back then, in fact, that was the last time I used a margin account. I may end up being wrong this time around, but in watching markets for a number of years, both as a casual observer and as an active participant it’s reasonably clear that the good times don’t just keep rolling.

Selling covered calls is a great strategy when applied methodically, but it does meet its match in markets that just do nothing other than going higher. Hopefully April will usher in some greater variety in outcomes, as the past few weeks, despite having established records in both the Dow Jones and S&P 500 have been showing some signs of tentative behavior.

Part of being a less fun person has meant initiating fewer new positions each week. The first step to creating an environment that wouldn’t entice me to spend money on new positions was to cut off the funding just like you might with any addict. Luckily, most stock traders won’t resort to petty crime and pawning the belongings of loved ones to feed the habit, although that margin account can be very appealing and the answer to an easy fix.

I cut off my flow of funds by moving from weekly to extended weekly or monthly options. Longer contracts means less weekly contracts available to be assigned and less opportunity for new weekly cash to be available to “feed the beast.”.

Unfortunately, I also curtailed my cash flow by some unseemly timing in the purchase of new positions this past quarter, such as Petrobras (PBR) and Cliffs Natural Resources (CLF) that are sitting awaiting opportunities to have call contracts written against them.

The next part of the transition was focusing on reliable dividend paying stocks. The kind your grandfather would feel comfortable owning. Last week, all new positions went ex-dividend last week or this coming week. They’re not very exciting to own, but dividends, especially when their ensuing share price reduction is partially offset by option premiums are especially welcome.

Keeping more cash in reserve, moving away from “Momentum” positions, longer contracts and seeking near term dividends is the exit strategy and my transition is nearly complete.

Now comes the waiting and the period of self-doubt, which includes wondering when it’s time to abandon a thesis. In the meantime, increasing cash reserves doesn’t mean a total prohibition against finding potential new opportunities. After all, being prepared doesn’t have to take you to extremes. Once you’ve reached a crazy state of preparedness it’s hard to turn around to see the light.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend or Momentum categories, with no selections in the “PEE” category, as earnings season begins anew on April 8, 2013 (see details). Additionally, as in previous weeks there is a greater emphasis on stocks that offer monthly contracts only, eschewing the usual preference for the relatively higher ROI of weekly options for the guarantee of premiums for a longer period in order to ride out any turbulence.

Some of this week’s selections are stocks that I already own but may consider adding to existing positions. One such stock is Deere (DE) which left me somewhat exasperated this past Thursday, the final day of a holiday shortened trading week.

At almost precisely noon shares of Deere dropped by about $1.40 in about 8 minutes, taking it from the realm of stocks poised for assignment. The plunge happened while the market was stable and most other heavy machinery and equipment makers were actually going higher. There was no news to account for the sudden and sustained drop. Neither in real time nor hours after.

Caterpillar (CAT) is one of the stocks that has an ignominious reputation during this record setting quarter. It was among the worst performers of the quarter and was routinely tagged as a laggard on those days that the broad market performed well. I recently purchased shares having waited all quarter for them
to reach the price point that was very kind to me in 2012. It accompanied Deere for a small portion of the former’s inexplicable retreat but recovered sufficiently to avoid being tagged yet again.

Bristol Myers Squibb (BMY) and Medtronic (MDT) fit into two ongoing themes. Looking for near term dividend paying shares and belonging to the broadly defined healthcare sector. While healthcare has been the leading sector for the trailing year, I think there are still short term opportunities, even with a specter of a declining market. While both Bristol Myers and Medtronic have had significant advances lately, the combination of dividend and premium continue to make it appealing.

MetLife (MET), also a recent holding, fits into my broad definition of “healthcare” if you stretch that definition to an extreme. Part of my positive outlook for its shares is related to what I believe will be growth in its home insurance business. Of course, I rarely think in terms of fundamentals and certainly don’t have a long term perspective on its shares, but it is well positioned to maintain price stability even in a stock market of reduced stability.

Wells Fargo (WFC) and JP Morgan (JPM) are two very different banks. JP Morgan goes ex-dividend this week and has been beleaguered with domestic attacks from elected officials and international attacks as Cyprus may or may not add risk to global banks, such as JP Morgan.

On the other hand, Wells Fargo is as pure of a domestic play as you can find at a size that still makes it “too big to fail.” With news of improving real estate sales all over the country the Wells Fargo money machine is poised to re-create the glory days that so abruptly ended 5 years ago.

I’ve been looking for an excuse to purchase Lowes (LOW) for the past few weeks and have watched its price show some mild erosion during that time

Dow Chemical (DOW) has been one of my favorite stocks for a long time. I purchased additional shares last week to capture its dividend and after looking at its performance over the past 10 months feel guilty thinking that it’s a “boring” stock.

In fact, it’s been absolutely the poster child for what makes a covered call strategy a successful one. While its stock price has virtually remained unchanged since May 2012, the active cycle of buying shares, selling calls, assignment, buy shares, etc.. has resulted in a nearly 40% ROI.

Finally, Western Refining (WNR) is a company whose shares I briefly owned recently at a much lower price. It was one that got away during the uni-directional market of the first quarter. Its price has come down a bit and I think may now be at its “new normal” making it perhaps an antidote to Petrobras in a sector that has some catching up to do.

Traditional Stocks: Caterpillar, Deere, Dow Chemical, JP Morgan, Lowes, MetLife, Wells Fargo

Momentum Stocks: Western Refining

Double Dip Dividend: Bristol Myers (ex-div 4/3), JP Morgan (ex-div 4/3), Medtronic (ex-div 4/3)

Premiums Enhanced by Earnings: none

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.

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.