Weekend Update – November 15, 2015

Back in March 2015, when writing the article “It’s As Clear As Mud,” there was no reason to suspect that there would be a reason for a Part 2.

After all, the handwriting seemed to be fairly clear at that time and the interest rate hawks seemed to be getting their footing while laying out the ground rules for an interest rate increase that had already been expected for months prior.

In fact, back in July 2015, I wrote another article inadvertently also entitled “It’s As Clear As Mud,” but in my defense the reason for the confusion back then had nothing to do with the FOMC or the domestic US economy, so it wasn’t really a Part 2.

It was simply a case of more confusion abounding, but for an entirely different reason.

Not that the FOMC hadn’t continued their policy of obfuscation.

But here we are, 8 months after the first article and the FOMC is back at the center of confusion that’s reigning over the market as messages are mixed, economic data is perplexing and the intent of the FOMC seems to be going counter to events on the ground.

While most understand that extraordinarily low interest rates have some appeal and can also be stimulatory, there’s also the recognition that prolonged low interest rates are a reflection of a moribund economy.

While individuals may someday arrive at a point in their lives that they’re not interested in or seeking personal growth, economies always have to be in pursuit of growth unless their populations are shrinking or aging along with the individual.

Like Japan.

Most would agree that when it comes to the economy, we don’t want to be like the Japan we’ve come to know over the past generation.

So despite the stock market being unable to decide whether an increase in interest rates would be a good thing for it, an unbiased view, one that doesn’t directly benefit from cheap money, might think that the early phase of interest rate increases would simply be a reflection of good news.

Growth is good, stagnation is not.

However, the FOMC has now long maintained that it will be data driven, but what may be becoming clear is that they maintain the right to move the needle when it comes to deciding where thresholds may be on the data they evaluate.

After years of regularly being disappointed by monthly employment gains below 200,000, October 2015’s Employment Situation Report gave us a number that was below 150,000. While that was surprising, the real surprise may have come a few weeks later when the FOMC indicated that 150,000 was a number sufficiently high to justify that rate increase.

The October 2015 Employment Situation report came at a time that traders had a brief period of mental clarity. They had been looking at negative economic news as something being bad and had been sending the market lower from mid-August until the morning of the release, when it sent the market into a tailspin for an hour or so.

Then began a very impressive month long rally that was based on nothing more than an expectation that the poor employment statistics would mean further delay in interest rate hikes.

But then the came more and more hawkish talk from Federal Reserve Governors, an ensuing outstanding Employment Situation Report and terrible guidance from national retailers.

With a year of low energy prices, more and more people going back to work and minimum wage increases you would have good reason to think that retailers would be rejoicing and in a position to apply that basic law of supply and demand on the wares they sale.

But the demand part of that equation isn’t showing up in the top line, yet the hawkish FOMC tone continues.

The much discussed 0.25% increase isn’t very much and should do absolutely nothing to stifle an economy. While I’d love to see us get over being held hostage by the fear of such an increase by finally getting that increase, it’s increasingly difficult to understand the FOMC, which seems itself to be held hostage by itself.

Difficulty in understanding the FOMC was par for the course during the tenure of Alan Greenspan, but during the plain talk eras of Ben Bernanke and Janet Yellen the words are more clear, it’s just that there seems to be so much indecisiveness.

That’s odd, as Janet Yellen and Stanley Fischer are really brilliant, but may be finding themselves faced with an economy that just makes little sense and isn’t necessarily following the rules of the road.

We may find out some more of the details next week as the FOMC minutes are released, but if they’re confused, what chance do any of the rest of us have?

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

Last week was just a miserable week. I was probably more active in adding new positions than I should have been and took little solace in having them out-perform the market for the week, as they were losers, too.

This week has more potentially bad news coming from retail, at a time when I really expected some positive news, at least with regard to forward guidance.

But with Abercrombie and Fitch (NYSE:ANF) having fallen about 12% last week after having picked up a little strength in the previous week, I’m ready to look at it again as it reports earnings this week.

I am sitting on a far more expensive lot of Abercrombie and Fitch, although if looking for a little of that solace, I can find some in having also owned it on 6 other occasions in 2015 and 21 other times in the past 3 years.

Despite that one lot that I’m not currently on speaking terms with, this has been a stock that I’ve longed loved to trade.

It has been range-bound for much of the past 8 months, although the next real support level is about 20% below Friday’s closing price.

With that in mind, the option market is implying about a 13.3% price move next week. A 1% ROI could potentially be obtained by selling puts nearly 22% below that close.

A stock that I like to trade, but don’t do often enough has just come off a very bad single day’s performance. GameStop (NYSE:GME) received a downgrade this past week and fell 16.5%

The downgrade was of some significance because it came from a firm that has had a reasonably good record on GameStop, since first downgrading it in 2008 and then upgrading in 2015.

GameStop has probably been written off for dead more than any stock that I can recall and has long been a favorite for those inclined to short stocks.

Meanwhile, the options market is implying a 5.5% move next week, even though earnings aren’t to be reported until Monday morning of the following week.

A 1% ROI could possibly be achieved by selling a put contract at a strike level 5.8% below Friday’s close, but if doing that and faced with possible assignment resulting in ownership of shares, you need to be nimble enough to roll over the put contracts to the following or some other week in order to add greater downside protection.

For the following week the implied move is 12.5%, but part of that is also additional time value. However, the option market clearly still expects some additional possibility of large moves.

If you’re a glutton for more excitement, salesforce.com (NYSE:CRM) reports earnings this week and is no stranger to large price movements with or without earnings at hand.

Depending upon your perspective, salesforce.com is either an incredible example of great ingenuity or a house of cards as its accounting practices have been questioned for more than a decade.

The basic belief is that salesforce.com’s practice of stock based compensation will continue to work well for everyone as long as that share price is healthy, but being paid partially in the stock of a company whose share price is declining may seem like receiving your paycheck back in the days of Hungarian hyper-inflation.

Let’s hope it doesn’t come to that this week, as shares already did fall 4.6% last week.

The share price of salesforce.com has held up well even as rumors of a buyout from Microsoft (NASDAQ:MSFT) have gone away. The option market is implying a share price move of 8.1% next week and a 1% ROI might possibly be obtained if selling puts at a strike level 9.4% below Friday’s close.

Microsoft itself is ex-dividend this week and is one of those handful of stocks that has helped to create the illusion of a healthy broader market.

That’s because Microsoft, a member of both the DJIA and the S&P 500 is up nearly 14% for the year and is one of those few well performing companies that has helped

to absorb much of the shock that’s being experienced by so many other index components that are in correction or bear territory.

In fact, coming off its market correction lows in August, Microsoft shares are some 30% higher and is only about 5% below its recent high.

While that could be interpreted by some as its shares being a prime candidate for a decline in order to catch up with a flailing market, sometimes in times of weakness it may just pay to go with the prevailing strength.

While I’d rather consider its share purchase after a price decline and before its ex-dividend date, Microsoft’s ability to withstand some of the market’s stresses adds to its appeal right now.

On the other hand, Intel’s (NASDAQ:INTC) 5.1% decline last week and its 6.5% decline from its recent ex-dividend date when some of my shares were assigned away from me early, makes it appealing.

Despite a large differential in comparative performance between Microsoft and Intel in 2015, they have actually tracked one another very well through the year if you exclude two spikes higher in Microsoft shares in the past year.

With that in mind, in a week that I like the idea of adding Microsoft for its dividend, I also like the idea of adding more Intel, just for the sake of adding Intel and capturing a reasonably generous option premium, in the hopes that it keeps up with Microsoft.

Finally, also going ex-dividend in the coming week are Dunkin Brands (NASDAQ:DNKN) and Johnson & Johnson (NYSE:JNJ).

The former probably sells something that can help you if you’ve over-indulged in the former for far too long of a time.

Dunkin Brands only has monthly dividends, but this being the final week of the monthly cycle, some consideration can be given to using it as a quick vehicle in an attempt to capture both premium and dividend, or perhaps a longer term commitment in an attempt to also secure some meaningful gain from the shares.

Those shares are actually nearly 30% lower in the past 4 months and are within easy reach of a 22 year low.

I’m currently undecided about whether to look at the short term play or a longer term, but I am also considering using a longer term contract, but rather than looking for share appreciation, perhaps using an in the money option in the hopes of being assigned shares early and then moving on to another potential target with the recycled cash.

Johnson & Johnson is not one of those companies that has helped to create the illusion of a healthy market. If you factor in dividends, Johnson & Johnson has essentially mirrored the DJIA.

Over the past 5 years, with a very notable exception of the last quarter, Johnson & Johnson has tended to trade well in the few weeks after having gone ex-dividend.

For that reason I may look at the possibility of selling calls dated for the following week, or perhaps even the week after Thanksgiving and also thinking about some capital gains on shares in addition to its generous dividend, but somewhat lower out of the money premium.’

While thinking about what to do in the coming week, I may find myself munching on some Dunkin Donuts. That tends to bring me clarity and happiness.

Maybe I could have some delivered to the FOMC for their next meeting.

It couldn’t hurt.

Traditional Stocks:Intel

Momentum Stocks: GameStop

Double-Dip Dividend: Dunkin Donuts (11/19 $0.26), Johnson & Johnson (11/20 $0.75). Microsoft (11/17 $0.36)

Premiums Enhanced by Earnings: Abercrombie and Fitch (11/20 AM), 11/18 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 – August 16, 2015

Most everyone understands the meaning of “a bull in a China shop.”

Even I, who always had problems with idiomatic expressions, could understand that the combination of bull and china wasn’t very good. You simply did not want a bull any where near fragile china, especially if it was precariously placed so that everyone could enjoy its sight.

At the very least you had to keep a close eye on the bull in an effort to avoid or minimize damage. Even better would be to keep it on a tight leash.

Now, it’s China that you have to keep an eye upon lest your bull gets damaged as China continues to tighten its leashes.

Lately China has become a threat to the bull that everyone’s been enjoying. The bull market itself has already been precariously positioned for a while and its tentativeness has been accentuated by some of the recent unpredicted and unpredictable actions by the Chinese government and the Peoples Bank of China (“PBOC”), which are essentially the same thing.

Just to confuse things a bit, in the midst of a series of 3 moves to devalue the Chinese Yuan, came an interruption by the PBOC in the currency markets to support the currency.

That sort of thing, trying to fight the tide of the currency market doesn’t typically work out as planned, but you can’t blame the PBOC for trying, given how the government’s actions in the stock markets have seemed to stop the hemorrhaging these past few weeks.

The theory at play may be that the tighter the leash the easier it is to control things when oxygen is no longer fueling natural existence.

While many suspect that China is looking to jump start its economy with a 10% currency devaluation, that is being denied, at least in terms of the size of the devaluation. What isn’t being denied is that the Chinese economy isn’t growing by the same leaps and bounds as it had been, if those leaps and bounds were real in the first place.

It should come as no surprise that China is using bully measures to try and bring things under control, because while they may be new at this game we call “capitalism,” the rulers understand the consequences of failure.

In the United States and Europe, we’re accustomed to cycles and the kinds of depths to which we get taken while awaiting the inevitable upward return.

Plus, we can “vote the bums out.”

In China, where personal and societal freedom has been traded for growing prosperity, what does the population have left if the prosperity disappears?

They can’t necessarily exercise their constitutional right to change their government representatives every two, four or 6 years as is often the cry after currency devaluation is felt by citizens as a their standard of living is reduced.

Of course the rulers remember the lesson of popular dissent and how their forefathers came to be in power, so this may be a government especially willing to pull out the stops, including a currency war.

While currency wars aren’t terribly common, when the bull is cornered it typically lashes out.

That’s usually not good for the bull, but now I’m left confused as to which side of the metaphor I’m working.

That may sum up where the new week is set to begin.

With markets successfully steering clear of violating support levels and having done so in a dramatic way mid-week and actually managing to not fritter away the effort, you would believe that there is reason for optimism.

However, despite revisions to previous month’s government Retail Sales Reports, the actual earnings reports coming from national retailers isn’t necessarily painting a picture of a spending consumer. That’s even as the JOLTS report indicates increasing job turnover, presumably leading to higher wages for more workers and more job openings for incoming workforce members.

The coming week has more retail sales reports and hopefully will give the market a fundamental reason to begin a test of resistance levels, while we await the next stutter step from China.

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

With all of the concern about what happens next in China, it seems odd to begin the week thinking about adding another position in Las Vegas Sands (NYSE:LVS).

I have 2 much more expensively priced share lots and have been awaiting an opportunity to add another. With all of the bad news focusing around gaming p

rospects in Macau, one of only two special administrative areas within China, Las Vegas Sands has seen its share price plummet and then go into regular paroxysms of pronounced movements higher and lower, as the news runs sweet and sour.

However, its current price now represents the downward paroxysm that has taken shares below the mid-point of a reasonably stable price channel over the past 8 months. That seems like a reasonable entry point.

While the trading range has been fairly well defined, which would seem to limit uncertainty, the option premium seems to respect the continuing uncertainty of doing business in Macau, during a period of time that market volatility is otherwise so low. Whereas uncertainty has been very much under-estimated for many stocks, especially as they were in the throes of earnings releases, Las Vegas Sands seems to be getting its fair due in terms of option pricing.

While i still own those more expensive shares and while the dividend has made it minimally more palatable, my hope for a new position, if added, would be to have it assigned before its next ex-dividend date at the end of the September option cycle.

On a positive note, Microsoft (NASDAQ:MSFT) may not have the same worries about China as do some other companies. I suppose that having so much of your intellectual property getting pirated within China makes you a little more resistant to the effects of currency devaluation.

So there’s always that.

Microsoft hopefully has some other good things going for it, as reviews for its new operating system, Windows 10, have been generally favorable. However, one has to remember that we often tend to be less picky about things when they’re free.

Microsoft is ex-dividend this week and one thing that isn’t free is a dividend. You know that when you look at your stock’s share price on its ex-dividend date. Although studies show long term out-performance by stocks offering dividends, that’s not very different from saying people who run marathons live longer.

Both may be true, but the underlying reason a company can afford to pay a dividend or the underlying reason that someone can run a marathon may be related to pre-existing financial health or physical health, respectively.

However, when the option premium tends to subsidize some of that decline in a stock’s share price, part of that dividend really may be free, thanks to the buyer of the option premium.

In this case, Microsoft is offering a relatively large option premium for a weekly at the money option helping to offset some of the obligatory price decline as shares go ex-dividend.

Also going ex-dividend this week are Cablevision (NYSE:CVC) and Dunkin Donuts (NASDAQ:DNKN). While watching television and eating donuts may not be the formula necessary to be able to run those marathons, there’s more to life than just good health.

A broad selection of television offerings, fast internet speed, hot coffee and a jelly donut can be its own kind of health.

You have to enjoy yourself, as well, and a combination of price appreciation, a satisfactory dividend and an option premium can create an enjoyable atmosphere.

Both companies offer only monthly option contracts, but this being the final week of the August 2015 cycle, there is a potential opportunity for them to effectively offer a weekly option during their ex-dividend week.

Cablevision is a company firmly in the grip of a single family and one that is perennially rumored to be for sale. Back in May, the last time I owned shares, not coincidentally just prior to its ex-dividend date, shares surged upon news of a foreign buyer for a privately owned cable company. That rumor took Cablevision along for a ride as well, especially since Cablevision indicated that it was now willing to sell itself.

While recent activity in the sector is focused on the changing landscape for product distribution and introducing the phrase “skinny bundle” into common parlance, Cablevision has fared better than the rest during recent sector weakness. In fact, after years of lagging behind, it has finally been an out-performer, at least as long as rumors and deep pockets or willing lenders are available.

When thinking about stocks that should have relatively little to be concerned about when China is considered, Dunkin Donuts comes to mind, but perhaps not for long. Earlier this year it announced plans for a major expansion in China, but it will hopefully shelve any thoughts of emulating its New England model.

I still am amazed after years of living and working in and around Boston how so many locations could exist so close to one another.

I don’t know whether it was Dunkin Donuts or its more upscale competitor that discovered that cannibalization doesn’t seem to extend to coffee purveyors, but there is still plenty of room around the rest of the nation for more and more of their outlets and maybe reason to slow down some overseas expansio

n.

While I would prefer a single week’s holding in order to capture the dividend, I would also consider the use of a longer term call option sale to try for capital appreciation of shares while other companies may have significant currency exchange concerns.

On that same day that it was revealed that activist Nelson Peltz took a large position in a food services company, DuPont (NYSE:DD) received an analyst upgrade and shares did something that they haven’t really done ever since Peltz was rebuffed when seeking a seat on the Board.

DuPont isn’t alone in seeming to be bargain priced, but it has actually accounted for 17% of the DJIA decline since coming off of its highs in the aftermath of Peltz being sent packing. So it has had more than its fair share of angst of late.

The option market doesn’t appear to expect any continued unduly large moves in share price and this is also a position that I would consider purchasing and using a longer term option in order to capitalize on share gains and a competitive dividend.

Finally salesforce.com (NYSE:CRM) reports earnings this week. Its share price has been the beneficiary of two successively well received earnings reports and rumors about a buyout from Microsoft.

In the nearly 4 months that have passed since those rumors the stock has given up very little of what was gained when the speculation began.

The option market is predicting up to 9.2% price movement, but as has been the case on a number of occasions this earnings season, the option market has been under-estimating some of the risk associated with earnings, particularly when they are disappointing.

While selling puts prior to earnings can be rewarding when shares either move higher or fall less than the implied move, I generally like to consider doing so when the stock is already showing some weakness heading into earnings.

salesforce.com hasn’t been doing that, although it is about 3% below its closing high for the year. What makes a put sale tempting is that a 1% ROI for the week may be obtained even if the shares fall 11%.

However, considering just how often the option market has missed the risk associated with earnings this quarter, salesforce.com is another in a series of earnings related put sales that I would only seriously consider after earnings and in the event of a precipitous fall in the market’s response.

While salesforce.com may have the expertise to know how to most efficiently utilize a herd of bulls to exact the greatest amount of damage its own recent rise carries significant risk in this market if there is the slightest disappointment in its earnings report and guidance. If that report does disappoint, there may still be reward to be found in selling put contracts as sellers pile on to depress the price, while helping to maintain a relatively high option premium even after the carnage.

Traditional Stocks: DuPont

Momentum Stocks: Las Vegas Sands

Double-Dip Dividend: Microsoft (8/18 $0.31), Cablevision (8/19 $0.15), DNKN (8/20 $0.26)

Premiums Enhanced by Earnings: salesforce.com (8/20 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 – May 31, 2015

The one thing that’s been pretty clear as this earnings season is winding down is that the market hasn’t been very tolerant unless the bad news was somehow wrapped in a currency exchange story.

It was an earnings season that saw essentially free passes given early on to those reporting decreased top line revenue and providing dour guidance, as long as the bad news was related to a strong US Dollar.

As earnings season progressed, however, it became clear that some companies that could have asked for that free pass were somehow much better able to tolerate the conditions that investors were willing to forgive. That had to raise questions in some minds as to whether there was a little too much leniency as the market’s P/E ratio was beginning to get a little bit ahead of where it historically may have been considered fully priced. Not punishing share price when earnings may warrant doing so can lead to those higher P/E ratios that so often seem to have had a hard time sustaining themselves at such heights.

On the other hand, plunges of 20% or more weren’t uncommon when the disappointment and the pessimistic future outlook couldn’t be easily rationalized away. Sometimes the punishment seemed to be trying to make up for some of those earlier leniences, although if that’s the case, it’s not a very fair resolution.

In other words, this earnings season has been one where bad news was good news, as long as there was a good reason for the bad news. If there was no good reason for the bad news, then the bad news was extra bad news.

This past Friday’s GDP report was bad news. It was the kind of news that would make it difficult to justify increasing interest rates anytime very soon. That. of course, would make it good news.

The market, though, interpreted that as bad news as the week came to its close, while the same news a month ago would have been likely greeted as good news.

Same news, but take your pick on its interpretation.

This past week was one that i couldn’t decide how to interpret anything that was unfolding. Listless pre-open futures trading during the week sometimes failed to portend what was awaiting and so eager to reverse course, at the sound of the opening bell. While I tend to trade less on holiday shortened weeks usually due to lower option premiums, this past week offered me nothing to feel positive about and more than a few reasons to continue to want to wish that i had more in my cash reserve pile.

As the new week is getting ready to start, it’s another with fairly little to excite. Like this past week, perhaps the biggest news will come on the final trading day, as the Employment Situation Report is released.

Another strong showing may only serve to confuse the picture being painted by GDP data, which is now suggesting increased shrinking of our economy.

A weak employment report might corroborate GDP data, but at this point it’s hard to say what the market reaction might be. Whether that would be perceived as good news or bad news is a matter of guesswork.

If the news, however, is really good, then it’s really anyone’s guess as to what would happen, as a decreasing GDP wouldn’t seem to be a logical consequence of strongly expanding employment.

While the FOMC says that it will be data driven and has worked to remove any reference to a relative timeframe, ultimately it’s not about the data, but rather how they chose to interpret it, especially if logic seems to be failing to tie the disparate pieces together.

While markets may change how they interpret the data from day to day, hopefully the FOMC will be a bit more consistent and methodical than the paper fortune teller process markets have been subjected to of late.

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

Kohls (NYSE:KSS) is one of those companies that didn’t have a currency exchange excuse that could be used at earnings time and its shares took a nearly 15% plunge. Best of all, if not having owned shares, in the subsequent 2 weeks its share price has barely moved. That lack of movement can either represent an opportunity that hasn’t disappeared or could be the building of a new support level and invitation to take advantage of that opportunity.

With an upcoming ex-dividend date on Monday of next week, any decision to exercise an option to grab the dividend would have to be made by the close of trading this week. With only monthly options being sold, that could be an attractive outcome if purchasing shares and selling in the money June 2015 calls.

The potential downside is that the dramatic drop in Kohls’ share price still hasn’t returned it to where it launched much higher a few months ago and where the next level of technical support may be. For that reason, while hoping for a quick early assignment and the opportunity to then redeploy the cash, there is also the specter of a longer term holding in the event that shares start migrating lower to its most recent support level.

Mosaic (NYSE:MOS) is ex-dividend this week and represents a company that had a similar plunge nearly 2 years ago, but still has shown no signs of recovery. In its case the price plunge wasn’t related to poor sales or reduced expectations, but rather to the collapse of artificial price supports as the potash cartel was beginning to fall apart.

Mosaic, however, has traded in a fairly narrow range since then and has been an opportune short term purchase when at or below the mid-point of that range.

Those shares are now at that mid-point and the dividend is an additional invitation to entry for me. With its ex-dividend day being Tuesday, it may also be an example of seeking early assignment by selling an in the money weekly call in the hopes of attaining a small, but very quick gain and then redeploying cash into a new position.

I recently had shares of Sinclair Broadcasting (NASDAQ:SBGI) assigned and tried to repurchase them last week in order to capture the dividend, but just couldn’t get the trade executed. However, even with the dividend now out of the picture, I am interested in adding the shares once again.

While so much attention has recently focused on cable and content providers, Sinclair Broadcasting is simply the largest television station operator in the United States. The tightly controlled family operation shows that there is still a future in doing nothing more than transmitting signals the old fashioned way.

While I usually prefer to start new positions with an eye toward a weekly option or during the final week of a monthly option, Sinclair Broadcasting is one of those companies that I don’t mind owning for a longer period of time and don’t get overly concerned if its shares test support levels. I would have preferred to have entered the position last week, but at $30/share I still see some opportunity, but would not chase this if it moved higher as the week begins.

With old tech no longer moribund, people are no longer embarrassed to admit that they own shares of Microsoft (NASDAQ:MSFT). Instead, so many seem to have re-discovered Microsoft before the rest of the world and no longer joke about or disparage its products or strategies. They simply forgot to tell the rest of the world that they were going to be so prescient, but fortunately, it’s never to late to do so.

Microsoft continues to have what has made it a great covered call trade for many years. It still offers an attractive premium and it offers dividend growth. Of course the risk is now greater as shares have appreciated so much over those years. But along with that risk comes an offset that may offer some support. In the belief that passivity or poorly conceived or integrated strategies are no longer the norm it is far easier to invest in shares with confidence, even as the 52 week high is within reach.

While new share heights provide risk there is also the feeling that Microsoft will be in a better position to proactively head into the future and react to marketplace challenges. Even the brief speculation about a buyout of salesforce.com (NYSE:CRM) helped to reinforce the notion that Microsoft may once again be “cool” and have its eyes on a logical strategy to evolve the company.

For the moment it seems as if some of the activist and boardroom drama at DuPont (NYSE:DD) may have subsided, although it’s not too likely that it has ended.

The near term question is whether activists give up their attempts at enhancing value and exit their positions with respectable profits or double down, perhaps with new strategic recommendations.

While the concern about Trian exiting its position may have been responsible for the steep price decline after the shareholder vote last month, it’s not entirely clear that the Trian stake was in any meaningful way responsible for DuPon’t share performance, as they like to credit themselves.

It’s apparently all a matter of interpretation.

In fact, from the time the Trian stake was first disclosed nearly 2 years ago, DuPont has only marginally out-performed the S&P 500. However, from the beginning of the market recovery in March 2009 up until the points that Trian’s stake was disclosed, DuPont’s share performance was more than 50% better than that of the S&P 500.

So while the market has clearly shown that they perceive Peltz’s position and strategy to be an important support for DuPont’s share price and they may have already discounted his exit, CEO Kullman’s strategic path may have easier going without activist distractions

Finally, following the release of some clinical trial results of its drug Opdivo in the treatment of lung cancer, shares of Bristol Myers Squibb (NYSE:BMY) fell nearly 7% on Friday. Those shares are still well above the level where they peaked following an earnings related move in October 2014, so there is still some concern that th

e decline last week may have more to go.

However, the results of those clinical trials actually had quite a few very positive bits of news, including significantly increased survival rates in a sizeable sub-population of patients and markedly lower side effects. On Friday, the market interpreted the results as being very disappointing, but after a few days that interpretation can end up becoming markedly different.

As we all know too well.

Traditional Stocks: Bristol Myers Squibb , DuPont, Microsoft, Sinclair Broadcasting

Momentum Stocks: none

Double-Dip Dividend: Kohls (6/8), Mosaic (6/2)

Premiums Enhanced by Earnings: none

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

Weekend Update – May 17, 2015

The nice thing about the stock and bond markets is that anything that happens can be rationalized.

That’s probably a good thing if your job includes the need to make plausible excuses, but unless you work in the finance industry or are an elected official, the chances are that particular set of skills isn’t in high demand.

However, when you hear a master in the art of spin ply his craft, it’s really a thing of beauty and you wonder why neither you nor anyone else seemed to see things so clearly in a prospective manner.

Sometimes rationalization is also referred to as self-deception. It is a defense mechanism and occasionally it becomes part of a personality disorder. Psychoanalysts are divided between a positive view of rationalization as a stepping-stone on the way to maturity and a more destructive view of it as divorcing feeling from thought and undermining powers of reason.

In other words, sometimes rationalization itself is good news and sometimes it’s bad news.

But when it comes to stock and bond markets any interpretation of events is acceptable as long as great efforts are taken to not overtly make anyone look like an idiot for either having made a decision to act or having made a decision to be passive.

That doesn’t preclude those on the receiving end of market rationalizations to wonder how they could have been so stupid as to have missed such an obvious connection and telegraphed market reaction.

That’s strange, because when coming to real life personal and professional events, being on the receiving end of rationalization can be fairly annoying. However, for some reason in the investing world it is entirely welcomed and embraced.

In hindsight, anything and everything that we’ve observed can be explained, although ironically, rationalization sometimes removes rational thought from the process.

The real challenge, or so it seems, in the market, is knowing when to believe that good news is good and when it is bad, just like you need to know what the real meaning of bad news is going to be.

Of course different constituencies may also interpret the very same bits of data very differently, as was the case this past week as bond and stock markets collided, as they so often do in competition for investor’s confidence.

We often find ourselves in a position when we wonder just how news will be received. Will it be received on its face value or will markets respond paradoxically?

This week any wonder came to an end as it became clear that we were back to a world of rationalizing bad news as actually being something good for us.

In this case it was all about how markets viewed the flow of earnings reports coming from national retailers and official government Retail Sales statistics.

In a nutshell, the news wasn’t good, but that was good for markets. At least it was good for stock markets. Bond markets are another story and that’s where there may be lots of need for some quick rationalizations, but perhaps not of the healthy variety.

In the case of stock markets the rationalization was that disappointing retail sales and diminished guidance painted a picture of decreased inflationary pressures. In turn, that would make it more difficult for an avowed data driven Federal Reserve to increase interest rates in response. So bad news was interpreted as good news.

If you owned stocks that’s a rationalization that seems perfectly healthy, at least until that point that the same process no longer seems to be applicable.

As the S&P 500 closed at another all time high to end the week this might be a good time to prepare thoughts about whether what happens next is because we hit resistance or whether it was because of technical support levels.

^TNX Chart

On the other hand, if you were among those thought to be a member of the smartest trading class, the bond traders, you do have to find a way to explain how in the face of no evidence you sent rates sharply higher twice over the past 2 weeks. Yet then presided over rates ending up exactly where they started after the ride came to its end.

The nice thing about that, though, is that the bond traders could just dust off the same rationalization they used for surging rates in mid-March 2015.

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

Cisco (NASDAQ:CSCO) has had a big two past weeks, not necessarily reflected in its share price, but in the news it delivered. The impending departure of John Chambers as CEO and the announcement of his successor, along with reporting earnings did nothing to move the stock despite better than expected revenues and profits. In fact, unlike so many others that reported adverse currency impacts, Cisco, which does approximately 40% of its revenues overseas was a comparative shining star in reporting its results.

However, unlike so many others that essentially received a free pass on currency issues, because it was expected and who further received a free pass on providing lowered guidance, Cisco’s lowered guidance was thought to muzzle shares.

However, as the expected Euro – USD parity is somehow failing to materialize, Cisco may be in a good position to over-deliver on its lowered expectations. In return for making that commitment to its shares with the chance of a longer term price move higher, Cisco offers a reasonable option premium and an attractive dividend.

Both reporting earnings this week, Best Buy (NYSE:BBY) and Hewlett Packard (NYSE:HPQ), have fortunes that are, to a small degree, related to one another.

In two weeks I will try to position myself next to the husband of the Hewlett Packard CEO at an alumni reunion group photo. By then it will be too late to get any earnings insights, not that it would be on my agenda, since I’m much more interested in the photo.

No one really knows how the market will finally react to the upcoming split of the company, which coincidentally will also be occurring this year at the previous employer of the Hewlett Packard CEO, Meg Whitman.

The options market isn’t anticipating a modest reaction to Hewlett Packard’s earnings, with an implied move of 5.2%. However, the option premiums for put sales outside the lower boundary of that range aren’t very appealing from a risk – reward perspective.

However, if the lower end of that boundary is breached after earnings are released and approach the 52 week lows, I would consider either buying shares or selling puts. If selling puts, however and faced with the prospects of rolling them over, I would be mindful of an upcoming ex-dividend event and would likely want to take ownership of shares in advance of that date.

I currently own shares of Best Buy and was hopeful that they would have been assigned last week so as to avoid them being faced with the potential challenge of earnings. Instead, I rolled those shares over to the June 2015 expiration, possibly putting it in line for a dividend and allowing some recovery time in the event of an earnings related price decline.

However, with an implied move of 6.6% and a history of some very large earnings moves in the past, the option premiums at and beyond the lower boundary of the range are somewhat more appealing than is the case with Hewlett Packard.

As with Hewlett Packard, however, I would consider waiting until after earnings and then consider the sale of puts in the event of a downward move. Additionally, because of an upcoming ex-dividend date in June, I would consider taking ownership of shares if puts are at risk of being exercised.

It’s pretty easy to rationalize why MetLife (NYSE:MET) is such an attractive stock based on where interest rates are expected to be going.

The only issue, as we’ve seen on more than one recent occasion is that there may be some disagreement over the timing of those interest rate hikes. Since MetLife responds to those interest rate movements, as you might expect from a company that may be added to the list of “systemically important financial institutions,” there can be some downside if bonds begin trading more in line with prevailing economic softness.

In the interim, while awaiting the inevitable, MetLife does offer a reasonable option premium, particularly as it has traded range-bound for the past 3 months.

A number of years ago the controlling family of Cablevision (NYSE:CVC) thought it had a perfectly rationalized explanation for why public shareholders would embrace the idea of taking the company private.

The shareholding public didn’t agree, but Cablevision hasn’t sulked or let the world pass it by as the world of cable providers is in constant flux. Although a relatively small company it seems to get embroiled in its share of controversy, always keeping the company name in the headlines.

With a shareholder meeting later this month and shares going ex-dividend this week, the monthly option, which is all that is offered, is very attractive, particularly since there is little of controversy expected at the upcoming shareholder meeting.

Also going ex-dividend this week, and also with strong historical family ties, is Johnson and Johnson (NYSE:JNJ). What appeals to me about shares right now, in addition to the dividend, is that while they have been trailing the S&P 500 and the Health Care SPDR ETF (NYSEARCA:XLV) since early 2009, those very same shares tend to fare very well by comparison during periods of overall market weakness.

In the process of waiting for that weakness the dividend and option premium can make the wait more tolerable and even close the performance gap if the market decides that 2022 on the S&P 500 is only a way station toward something higher.

Finally, there are probably lots of ways one can rationalize the share price of salesforce.com (NYSE:CRM). Profits, though, may not be high on that list.

salesforce.com has certainly been the focus of lots of speculation lately regarding a sale of the company. However, of the two suitors, I find it inconceivable that one of them would invite the CEO, Marc Benioff back into a company that already has a power sharing situation at the CEO level and still has Larry Ellison serving as Chairman.

I share price was significantly buoyed by the start of those rumors a few weeks ago and provide a high enough level that any disappointment from earnings, even on the order of those seen with Linkedin (NYSE:LNKD), Yelp (NYSE:YELP) and others would return shares to levels last seen just prior to the previous earnings report.

The options market is implying a 7.3% earnings related move next week. After a recent 8% climb as rumors were swirling, there is plenty of room for some or even all of that to be given back, so as with both Best Buy and Hewlett Packard, I wouldn’t be overly aggressive in this trade prior to earnings, but would be very interested in joining in if sellers take charge on an earnings disappointment. However, since there is no dividend in the picture, if having sold puts and subject to possible exercise, I would likely attempt to rollover the puts rather than take assignment.

But either way, I can rationalize the outcome.

Traditional Stocks: Cisco, MetLife

Momentum Stocks: none

Double Dip Dividend: Cablevision (5/20), Johnson and Johnson (5/21)

Premiums Enhanced by Earnings: Best Buy (5/21 AM), Hewlett Packard (5/21 PM), salesforce.com (5/20 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 – November 16, 2014

The past week was one of the quietest ones that could have been imagined.

The biggest stories of the week were the broken scaffolding that left two window washers dangling on the edge of the new “One World Trade Center” and the successful landing of Rosetta on a faraway comet after a 10 year mission.

With the exception of a late in the week rumor of a buyout of one oilfield services company by another, there really was nothing to propel markets as it was an extraordinarily quiet week on the economic news front, only slightly punctuated by a relatively obscure statistic that suddenly may be an important one in the coming months.

Years ago the single most important economic report came on a weekly basis. If anyone remembers all the way back to the 1980s you may recall how everyone waited for Thursdays and the release of the “M2 Money Supply” statistic.

If you do remember that you may also remember the inflation in the 1980s and can understand why M2 was watched so closely. Inflation was “Enemy #1” and the M2 Supply was linked to that evil. At one time M2 was used by the Federal Reserve to steer the economy in attempting to avoid a renewed bout of inflation.

You don’t hear much talk about M2 anymore as it was replaced by a more direct reliance on interest rates, especially the “Fed Funds Rate.” We still care about interest rates, but sometimes a little too much. Right now we seem overly concerned about when the Federal Reserve will begin to finally increase interest rates forgetting how that which helps to bring about inflation is exactly what we’ve been pining for a sign of the economy finally getting some footing.

This week we finally heard about something that wasn’t really new but got lots of comments and focus. Just a few months ago Federal Reserve Chairman Janet Yellen suggested that we should start paying more attention to the “quit rate” that was included in the “Job Openings and Labor Turnover Summary” also known as the “JOLT” Summary.

That acronym may be very unintentionally appropriate, as sometimes a jolt is exactly what’s needed to get things back into gear.

While many fight over whether the monthly Employment Situation Report should be looked at through the lens of the “U-6” measure of employment, Yellen is suggesting that the decision of people to quit their jobs in the belief that they can now land another, presumably better paying job, is telling of an economy that is heading in the right path and that will introduce some wage inflation.

That’s the kind of jolt this economy has needed. Not just more jobs, but better paying jobs that allow consumers to begin consuming again. Instead of fearing inflation, there should be some realization that a degree of inflation is exactly what this economy has needed for a long time.

One of my sons will likely be included in the next “JOLT” Summary, as he quit a job in which he was more of a low priced commodity and started on a new and much better paying job. He also bought a new car that week.

See how it works? It’s all about the discretionary spending. That’s what really fuels everything, as part of a virtuous cycle of jobs and consumerism.

Given the mixed results reported by some major retailers this week there definitely needs to be some enhancements to the top line and the only thing that can bring that about is an energized consumer jolted back to life.

For anyone that has been either on the receiving end or delivery end of paddles that are meant to jolt you back to life you know just how important that kick start is, but you also know that too much of a good thing brings its own problems.

Having been witness to the late 1970s and early 1980s there is certainly a degree of hesitance when inflation enters into the equation, but somewhere there may be a person in a position to steer the economy who understands that the extremes of the continuum aren’t the only possible outcomes.

Janet Yellen gives all indications of being the person who can jolt and withdraw jolt as signs of economic life warrant.

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

Another company bound to benefit from any improvement in employment, especially the kind that results in increased ability to engage in discretionary spending is Fastenal (FAST). This is a company that I’ve come to look at as a reflection of the real economy and while it has traded in a very narrow range it has been an excellent covered call trade.

It simply sells those things that are measures of economic development and expansion to both other business, middlemen and do it yourself kind of people. What they sell reflects a wide and varied kind of activity. They sometimes have q habit of providing revised guidance a few weeks before earnings and those occasional surprises help to create a reasonable option premium in advance of earnings, in addition to the enhancement that may come with earnings.

Dow Chemical (DOW) had a few false starts this week, jumping significantly higher and then giving back much of the gains on successive days. Those moves came before and after the announcements of additional share buybacks and an increased dividend. Shares closed up nicely on Friday continuing the hesitant optimism of earlier in the week, after having fallen from its highs of the day, only to rally back in an otherwise mediocre tape.

Add into the mix the presence of an activist investor and a long tenured CEO that is as tough as he can be charming and you have the makings of a company that will continue seeing pressures from both sides in support of shares, even though that may be a by-product of a more personal kind of battle. However, as a shareholder, you don’t necessarily care how you get to your objective, as long as you get there. Having some entertainment accompany the journey can just be an added bonus.

Joy Global (JOY) is another of these companies that trades with quite a bit volatility and is highly levered to activity in China, as well as to the veracity of reports from China. None of those are particularly endearing qualities, but Joy Global has been a company that routinely bounces back from disappointment over prospects of slowdowns in Chinese construction and infrastructure activity. It will report earnings in just a few weeks and will also be ex-dividend prior to that, so there are some events that have to be considered if entering into a new position, particularly if hoping for a quick exit.

While the majority of the systemically important companies have already reported earnings, there are quite a few of the more highly volatile companies reporting earnings this week. Among those that have caught my attention for this week are Best Buy (BBY), GameStop (GME), Green Mountain Keurig (GMCR) and salesforce.com (CRM).

Rather than considering any of them on the basis of their fundamental businesses, strengths or challenges awaiting them, I see them as potential opportunities based only on their recent price behaviors.

One thing that they all have in common is that they’ve all had recent runs higher in price. Another thing that they have in common, befitting the level of risk associated with their upcoming earnings is very high option premiums.

In order to achieve a 1% ROI on the sale of put contracts Best Buy, GameStop, Green Mountain Keurig and salesforce.com could still fall by approximately 9.2%, 21.3%, 10.5%, and 7%, respectively without assignments of puts sold. Meanwhile, their respective implied volatilities are 7.5%, 12%, 8.8% and 6.2%.

However, another thing that they share in common, at least from my perspective is that due to their recent runs higher, they may be prone to even harder falls than those implied moves might indicate. For that reason, I’m more inclined to consider the sale of puts after earnings for any of those companies that may in fact fall hard upon their releases, especially for salesforce.com, which offers the least amount of cushion between the implied move and the strike at which the ROI objective is attained.

On the other hand, GameStop offers the greatest cushion, so may be one to consider the sale of put options prior to earnings. As always, the sale of puts may require some additional attention, especially if hoping to avoid assignment if share price goes below the strike level selected.

Finally, it may be yet another week to think about Twitter (TWTR). Whether using the service or not, there’s no denying that it is a company whose stock is in search of direction, very much as many believe its company is in need of direction.

While no one has been criticizing the company on the basis of its earnings there is certainly lots of confusion about what Twitter plans to be and how it will get there, especially if it can’t decide on how to measure its activities and relate those to revenues.

This past week put the Twitter story into focus. Shares soared at its first analysts day meeting, up about 10% until Standard and Poor’s delivered an unsolicited credit report on the company, placing it at a “junk” level designation.

Granted, that S&P, by virtue of having performed an unsolicited analysis didn’t have access to the same company records as it ordinarily does when assessing a company’s credit worthiness, but the market immediately reversed course and sent shares sharply lower.

As was the case last week, I already had sold Twitter puts. I rolled those over on Thursday as Twitter was falling sharply and mat sell even more puts this week, particularly if there is some opening weakness to begin the week.

For anyone following this trade, it is one that may see lots of ups and downs and may require more maintenance, particularly in deciding whether to roil over puts to a forward week or take assignment in the event of adverse movement, but it can be a serially satisfying trade. Friday’s bounce again higher, perhaps after the realization that the S&P rating may have been based on incomplete information, may simply be one of many bounces ahead.

Traditional Stocks: Dow Chemical, Fastenal

Momentum: Joy Global, Twitter

Double Dip Dividend: none

Premiums Enhanced by Earnings: Best Buy (11/20 AM), GameStop (11/20 AM), Green Mountain Keurig (11/19 PM), salesforce.com (11/19 PM)

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

Weekend Update – June 1, 2014

I read an excellent article by Doug Kass yesterday. Most of all it explained the origin and definition of the expression “Minsky Moment” that had suddenly come into vogue and received frequent mention late this past week.

I enjoy Kass’ perspectives and opinions and especially admire his wide range of interests and willingness to state his positions without spinning reality to conform to a fantasy.

Perhaps it was no coincidence that the expression was finding its way back to use as Paul McCulley, late of PIMCO, who had coined the phrase, was being re-introduced to the world as the newest PIMCO employee, by a beaming Bill Gross.

The basic tenet in the Kass article was that growing complacency among investors could lead to a Minsky Moment. By definition that is a sudden collapse of asset values which had been buoyed by speculation and the use of borrowed money, although that didn’t appear to be the basis for the assertion that investors should prepare for a Minsky Moment.

Kass, however, based his belief in the possibility of an impending Minsky Moment on the historically low level of market volatility, which he used as a proxy for complacency. In turn, Kass simply stated that a Minsky Moment “sometimes occurs when complacency sets in.”

You can argue the relative foundations of those suppositions that form the basis for the belief that it may be opportune to prepare for a Minsky Moment. Insofar as it is accurate to say that sometimes complacency precedes a Minsky Moment and that volatility is a measure of complacency, then perhaps volatility is an occasional predictor of a sudden and adverse market movement.

Volatility is a complex concept that has its basis in a purely statistical and completely unemotional measure of dispersion of returns for an investment or an index. However, it has also been used as a reflection of investor calm or anxiety, which as far as I know has an emotional component. Yet volatility is also used by some as a measure the expectation of a large movement in one direction or another.

Right now, the low volatility indicates that there has been little dispersion of price, or put another way there has been very little variation in price in the recent past. Having gone nearly 2 years without a 10% correction most would agree, without the need for statistical analysis, that the variation in stock price has been largely in a single direction.

However, few will argue that volatility is a forward looking measure.

Kass noted that “fueled by new highs and easy money, market observers are now growing more optimistic.”

Coincidentally enough, on the day before the Kass article appeared, I wrote in my Daily Market Update about complacency and compared it to the 1980s and 2007.

Of course, that was done through the lens of an individual investor with money on the line and not a “market observer.”

While I’m very mindful of volatility, especially as low volatility drives down option premiums, it doesn’t feel as if the historic low volatility is reflective of individual investor complacency. In fact, even among those finding the limelight, there is very little jumping up and down about the market achieving new daily highs. The feeling of invincibility is certainly not present.

Anyone who remembers 1987 will recall that there was a 5 year period when we didn’t know the meaning of a down market. Complacency is when you have a certain smugness and believe that things will only go your way and risk is perceived to be without risk.

Anyone who remembers 2007 will also recall how bored we became by new daily record highs, almost as if they were entitlements and we just expected that to keep being the new norm.

I don’t know of many that feel the same way now. What you do hear is that this is the least liked and respected rally of all time and the continuing expectation for some kind of reversal.

That doesn’t sound like complacency.

While the Volatility Index may be accurately portraying market prices that have demonstrated little variation over a finite time frame, I don’t believe that it remotely reflects individual investor sentiment.

As opposed to earlier times when new market highs were seen as preludes to even greater rewards you may be hard pressed to find those who believe that the incremental reward actually exceeds the risk of pursuing that reward.

Put me in that latter camp.

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

One stock that I really haven’t liked very much has been Whole Foods (WFM). I say that only because it has consistently been a disappointment for me and has reflected my bad market timing. WHile I often like to add shares in positions that are showing losses and using a “Having a Child to Save a Life” strategy, I’ve resisted doing so with Whole Foods.

However, it finally seems as if the polar vortex is a thing of the past and the market has digested Whole Foods’ expansion and increased cap-ex and its strain on profits. But that’s a more long term perspective that I rarely care about. Instead, it appears as if shares have finally found a floor or at least some stability. At least enough so to consider trying to generate some income from option sales and perhaps some capital gains on the underlying shares, as well, as I believe there will be some progress toward correcting some of its recent price plunge.

Mosaic (MOS) which goes ex-dividend th

is week is one stock that I’ve been able to attenuate some of the pain related to its price drop upon news of the break-up of the potash cartel, through the use of the “Having a Child to Save a Life” strategy. Shares have slowly and methodically worked their way higher since that unexpected news, although have seen great resistance at the $50 level, where it currently trades.

While I don’t spend too much time looking at charts, Mosaic, if able to push past that resistance may be able to have a small gap upward and for that reason, if purchasing shares, I’m not likely to write calls on the entire position, in anticipation of some capital gain on shares, in addition to the dividend and option premiums.

Holly Frontier (HFC) also goes ex-dividend this week. Like so many stocks that I like to consider, it has been recently trading in a range and has occasional paroxysms of price movement. Those quick and unpredictable moves keep option premiums enticing and its tendency to restrict its range have made it an increasingly frequent target for purchase. It is currently trading near the high of my comfort level, but that can be said about so many stocks at the moment, as they rotate in and out of favor with one another, as the market reaches its own new highs.

Lowes (LOW) us one of those companies that must have a strong sense of self-worth, as it is always an also-ran to Home Depot (HD) in the eyes of analysts, although not always in the eyes of investors. It, too, seems to now be trading in a comfortable range, although that range has been recently punctuated by some strong and diverse price moves which have helped to maintain the option premiums, despite overall low market volatility.

MasterCard (MA) was one of the early casualties I experienced when initially beginning to implement a covered call strategy. I never thought that it would soar to the heights that it did and my expectations for it to drop a few hundred points just never happened, unless you don’t understand stock splits.

For some reason, while Apple (AAPL) shares never seemed too expensive for purchase, MasterCard did feel that way to me although at its peak it wasn’t very much higher than Apple at its own peak. Also, unlike Apple which will start trading its post-split shares this week, that split isn’t likely to induce me to purchase shares, while the split in MasterCard was a welcome event and re-introduced me to ownership.

With a theme of trading in a range and having its price punctuated by significant moves, MasterCard has been a nice covered option trade and I would be welcome to the possibility of re-purchasing shares after a recent assignment. With some of the uncertainty regarding its franchise in Russia now resolved and with the hopes that consumer discretionary spending will increase, MasterCard is a proverbial means to print money and generate option income.

I was considering the purchase of shares of Joy Global (JOY) on Friday and the sale of deep in the money weekly calls in the hope that the shares would be assigned early in order to capture its dividend, as Friday would have been the last day to have done so. That would have prevented exposure to the coming week’s earnings release.

Instead, following a nearly 2% price drop I decided to wait until Monday, foregoing the modest dividend in the hope that a further price drop would occur before Thursday’s scheduled earnings.

With its reliance on Chinese economic activity Joy Global may sometimes offer a better glimpse into the reality of that nation that official data. With its share price down approximately 6% in the past month and with my threshold 1% ROI currently attainable at a strike level that is outside of the lower boundary defined by the implied move, the sale of put contracts may have some appeal.

If there may be a poster child for the excesses of a market that may perhaps be a sign of an impending Minsky Moment, salesforce.com (CRM) should receive some consideration. Although there are certainly other stocks that have maintained a high profile and have seen their fortunes wax and wane, salesforce.com seems to go out of its way to attract attention.

Following a precipitous recent decline in price over the past few days shares seemed to be on the rebound. This past Friday morning came word of an alliance with Microsoft (MSFT), a company that salesforce.com’s CEO, Marc Benioff, has disparaged in the past.

While that alliance still shouldn’t be surprising, after all, it is all about business and personal conflict should take a back seat to profits, what was surprising was that the strong advance in the pre-open trading was fairly quickly reversed once the morning bell was rung.

With a sky high beta, salesforce.com isn’t a prime candidate for consideration at a time when the market itself may be at a precipice. However, for those with some room in the speculative portion of their portfolio, the sale of puts may be a reasonable way to participate in the drama that surrounds this stock. However, I would be inclined to consider rolling over put options in the event that assignment looks likely, rather than accepting assignment.

Finally, everyone seems to have an opinion about Abercrombie and Fitch (ANF). Whether its the actual clothing, the marketing, the abhorrent behavior of its CEO or the stock, itself, there’s no shortage of material for casual conversation. Over the past two years it has been one of my most frequent trades and has sometimes provided some anxious moments, as it tends to have price swings on a regular basis.

Abercrombie reported earnings last week and I had sold puts in anticipation. Unlike most times when I sell puts my interest is not in potentially owning shares at a lower price, but rather to simply generate an option premium and then hopefully move on without shares nor obligation. However, in the case of Abercrombie, if those put contracts were to have fallen below their strike levels, I was prepared to take delivery of shares.

While rolling over such puts would have been a choice, Abercrombie does go ex-dividend this week and its ability to demonstrate price recovery and essentially arise from ashes it fairly well demonstrated.

My preference would have been that Abercrombie had a mild post-earnings
loss, as it is near the higher end of where i would consider a purchase, but it’s an always intriguing and historically profitable position, despite all of the rational reasons to run fro ownership of shares.

Traditional Stocks: Lowes, MasterCard, Whole Foods

Momentum: salesforce.com

Double Dip Dividend: Abercrombie and Fitch (6/3), Holly Frontier (6/4), Mosaic (6/3),

Premiums Enhanced by Earnings: Joy Global (6/5 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 – 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 – 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 – July 7, 2013

Much has been made of the recent increase in volatility.

As someone who sells options I like volatility because it typically results in higher option premiums. Since selling an option provides a time defined period I don’t get particularly excited when seeing large movements in a share’s price. With volatility comes greater probability that “this too shall pass” and selling that option allows you to sit back a bit and watch to see the story unwind.

It also gives you an opportunity to watch “the smart money” at play and wonder “just how smart is that “smart money”?

But being a observer doesn’t stop me from wondering sometimes what is behind a sudden and large movement in a stock’s price, particularly since so often they seem to occur in the absence of news. They can’t all be “fat finger ” related. I also sit and marvel about entire market reversals and wildly alternating interpretations of data.

I’m certain that for a sub-set there is some sort of technical barrier that’s been breached and the computer algorithms go into high gear. but for others the cause may be less clear, but no doubt, it is “The Smart Money,” that’s behind the gyrations so often seen.

Certainly for a large cap stock and one trading with considerable volume, you can’t credit or blame the individual investor for price swings, especially in the absence of news. Since for those shares the majority are owned by institutions, which hopefully are managed by those that comprise the “smart money” community, the large movements certainly most result in detriment to at least some in that community.

But what especially intrigues me is how the smart money so often over-reacts to news, yet still can retain their moniker.

This week’s announcement that there would be a one year delay in implementing a specific component of the Affordable Care Act , the Employer mandate, resulted in a swift drop among health care stocks, including pharmaceutical companies.

Presumably, since the markets are said to discount events 6 months into the future, the timing may have been just right, as a July 3, 2013 announcement falls within that 6 month time frame, as the changes were due to begin January 1, 2014.

By some kind of logic the news of the delay, which reflects a piece of legislation that has regularly alternated between being considered good and bad for health care stocks, was now again considered bad.

But only for a short time.

As so often is seen, such as when major economic data is released, there is an immediate reaction that is frequently reversed. Why in the world would smart people have knee jerk reactions? That doesn’t seem so smart. This morning’s reaction to the Employment Situation report is yet another example of an outsized initial reaction in the futures market that saw its follow through in the stock market severely eroded. Of course, the reaction to the over-reaction was itself then eroded as the market was entering into its final hour, as if involved in a game of volleyball piting two team of smart money against one another.

Some smart money must have lost some money during that brief period of time as they mis-read the market’s assessment of the meaning of a nearly 200,000 monthly increase in employment.

After having gone to my high school’s 25th Reunion a number of years ago, it seemed that the ones who thought they were the most cool turned out to be the least. Maybe smart money isn’t much different. Definitely be wary of anyone that refers to themselves as being part of the smart money crowd.

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

As a caveat, with Earnings Season beginning this week some of the selections may also be reporting their own earnings shortly, perhaps even during the July 2013 option cycle. That knowledge should be factored into any decision process, particularly since if you select a shorter term option sale that doesn’t get assigned, since yo may be left with a position that is subject to earnings related risk. By the same token, some of those positions will have their premiums enhanced by the uncertainty associated with earnings.

Both Eli Lilly (LLY) and Abbott Labs (ABT) were on my list of prospective purchases last week. Besides being a trading shortened week in celebration of the FOurth of July, it was also a trade shortened week, as I initiated the fewest new weekly positions in a few years. Both shares were among those that took swift hits from fears that a delay in the ACA would adversely impact companies in the sector. In hindsight, that was a good opportunity to buy shares, particularly as they recovered significantly later in the day. Lilly is well off of its recent highs and Abbott Labs goes ex-dividend this week. However, it does report earnings during the final week of the July 2013 option cycle. I think that healthcare stocks have further to run.

AIG (AIG) is probably the stock that I’ve most often thought of buying over the past two years but have too infrequently gone that path. While at one time I thought of it only as a speculative position it is about as mainstream as they come, these days. Under the leadership of Robert Ben Mosche it has accomplished what no one believe was possible with regard to paying back the Treasury. While its option premiums aren’t as exciting as they once were it still offers a good risk-reward proposition.

Despite having given up on “buy and hold,” I’ve almost always had shares of Dow Chemical (DOW) over the past 5 years. They just haven’t been the same shares f
or very long. It’s CEO, Andrew Liveris was once the darling of cable finance news and then fell out of favor, while being roundly criticized as Dow shares plummeted in 2008. His star is pretty shiny once again and he has been a consistent force in leading the company to maintain shares trading in a fairly defined channel. That is an ideal kind of stock for a covered call strategy.

The recent rise in oil prices and the worries regarding oil transport through the Suez Canal, hasn’t pushed British Petroleum (BP) shares higher, perhaps due to some soon to be completed North Sea pipeline maintenance. British Petroleum is also a company that I almost always own, currently owning two higher priced lots. Generally, three lots is my maximum for any single stock, but at this level I think that shares are a worthy purchase. With a dividend yield currently in excess of 5% it does make it easier to make the purchase or to add shares to existing lots.

General Electric (GE) is one of those stocks that I only like to purchase right after a large price drop or right before its ex-dividend date. Even if either of those are present, I also like to see it trading right near its strike price. Its big price drop actually came 3 weeks ago, as did its ex-dividend date. Although it is currently trading near a strike price, that may be sufficient for me to consider making the purchase, hopeful of very quick assignment, as earnings are reported July 19, 2013.

Oracle (ORCL) has had its share of disappointments since the past two earnings releases. Its problems appear to have been company specific as competitors didn’t share in sales woes. The recent announcement of collaborations with Microsoft (MSFT and Salesforce.com (CRM) says that a fiercely competitive Larry Ellison puts performance and profits ahead of personal feelings. That’s probably a good thing if you believe that emotion can sometimes not be very helpful. It too was a recent selection that went unrequited. Going ex-dividend this week helps to make a purchase decision easier.

This coming week and next have lots of earnings coming from the financial sector. Having recently owned JP Morgan Chase (JPM) and Morgan Stanley (MS) I think I will stay away from those this week. While I’ve been looking for new entry points for Citigroup (C) and Bank of America (BAC), I think that they’re may be a bit too volatile at the moment. One that has gotten my attention is Bank of New York Mellon (BK). While it does report earnings on July 17, 2013 it isn’t quite as volatile as the latter two banks and hasn’t risen as much as Wells Fargo (WFC), another position that I would like to re-establish.

YUM Brands (YUM) reports earnings this week and as an added enticement also goes ex-dividend on the same day. People have been talking about the risk in its shares for the past year, as it’s said to be closely tied to the Chinese economy and then also subject to health scare rumors and realities. Shares do often move significantly, especially when they are stoked by fears, but YUM has shown incredible resilience, as perhaps some of the 80% institutional ownership second guess their initial urge to head for the exits, while the “not so smart money” just keeps the faith.

Finally, one place that the “smart money” has me intrigued is JC Penney (JCP). With a large vote of confidence from George Soros, a fellow Hungarian, it’s hard to not wonder what it is that he sees in the company, after all, he was smart enough to have fled Hungary. The fact that I already own shares, but at a higher price, is conveniently irrelevant in thinking that Soros is smart to like JC Penney. In hindsight it may turn out that ex-CEO Ron Johnson’s strategy was well conceived and under the guidance of a CEO with operational experience will blossom. I think that by the time earnings are reported just prior to the end of the August 2013 option cycle, there will be some upward surprises.

Traditional Stocks: Bank of New York, British Petroleum, Dow Chemical, Eli Lilly, General Electric,

Momentum Stocks: AIG, JC Penney

Double Dip Dividend: Abbott Labs (ex-div 7/11), Oracle (ex-div)7/10)

Premiums Enhanced by Earnings: YUM Brands (7/10 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as act
ionable 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.

   

Weekend Update – May 26, 2013

That was the crash, dummy.

“I’ll know it when I see it,” is a common refrain when you’re at a loss for just the right descriptors or just can’t quite define what it is that should be obvious to everyone.

While there are definitions for what constitutes a recession, for example, an individual may have a very good sense of personally being in one before anyone else recognizes or confirms its existence.

Certainly there’s also a distinction between a depression and a recession, but it’s not really necessary to know the details, because you’ll probably know when you’ve transitioned from one to another.

The same is probably true when thinking about the difference between a market crash and a market correction. While people may not agree on a standard definition of what constitutes either, a look at your own portfolio balance can be all the definition that you need.

I’ve been waiting, even hoping for a correction for over two months now. That hoping came to a crescendo as a covered option writer with the expiration of many May 2013 contracts and finding more cash than I would have liked faced with the aspects of either being re-invested at a top or sitting idly.

Then came Federal Reserve Chairman Ben Bernanke’s congressional testimony and the mixed signals people perceived. Was it tapering or not tapering? Was it now or later?

What came as a result was what some called a “Key Reversal Day.” That is a day when the market reaches new highs and then suddenly reverses to go even lower than the previous day’s low. It’s thought that the greater the range of movement and the greater the trading volume the more reliable of an indicator is the reversal,

On both counts the aftermath of the reaction to Bernanke’s words, or as the “Bond King” Bill Gross of PIMCO called “talking out of both sides of his mouth” was significant.

Was that the beginning of the long over-due correction? After all we are now in the 52nd month of the current bull run, which has been the duration of the past two.

With news that the Japanese market lost more than 7% overnight following our own key reversal day was the sense that the correction may take on crash-like qualities, but instead our own markets almost had another key reversal day, but this time in the other direction. After an early 150 point drop and subsequent recovery all that was missing was to have exceeded the previous day’s high point.

Correction? Crash? That was so yesterday. It’s time to move on, dummy

While hopeful that some kind of correction might bring some meaningful opportunities to pick up some bargains, the correction was too shallow and the correction to the correction was too quick.

So this week is more of the same. Nearly 50% cash and no place to go other than to be mindful of a great 1995 article by Herb Greenberg that has some very timeless investing advice in the event of a crash, having drawn upon some Warren Buffett, Bob Stovall and Jeremy Siegel wisdom.

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

Already owning shares of both Deere (DE) and Caterpillar (CAT), as I often do, a frequent companion is their more volatile counter-part, Joy Global (JOY). Always sensitive to news regarding the Chinese economy, Joy Global reports earnings this week, as well, which certainly adds to its risk profile. Most recently the news coming out of China has pointed toward slowing growth, although historically the Chinese data have demonstrated as much ability to contradict themselves longitudinally as the US data. I believe bad news is already incorporated into the current prices of the heavy machinery sector and all three of these companies are trading within a long established price range that provides me some level of comfort, even in a declining market. For that reason, I may also add shares of Deere, particularly if it approaches $85.

Morgan Stanley (MS) has gone along the uphill ride with the rest of the financial sector in recent weeks. It was among the many stocks whose shares I lost to assignment at the end of the May 2013 cycle, but it too, has been a constant portfolio companion. It tends to have greater European exposure than its US competitors, but for the time being it appears as if much of the European drama is abating. Over the past year it’s shares have traded in a wide range but has shown great resilience when the price has been challenged and has offered very attractive premiums to help during the periods of challenge.

Unlike the prior week, this past week wasn’t very good for the retailers. WIth earnings now past, one of the elite, JW Nordstrom (JWN) goes ex-dividend this week. While it still has downside room, even after a 3% earnings related drop along with the rest of the more “high end” oriented retailer sector, it will likely out-perform other lesser retailers in the event of a market pause.

Also in the higher end range, Michael Kors (KORS) has been one of my recent favorites, although I must admit I didn’t see the reason for the excitement on a retail level during a recent early morning trip to the mall. No matter, I’m not in their demographic. What I do know is that their shares move with great ease in either direction, other reversing course during the trading session and it offers an appealing option premium. That premium is a bit more enhanced as it reports earnings this week and I may look to establish a position after having shares also assigned recently.

I approach any purchases in the Technology sector with some concern for being over-invested in such shares. Although Cypress Semiconductor (CY) is now trading 10% higher from where I had shares recently assigned on two previous occasions it continues to offer a reasonably attractive options premium and trades in a stable price range.

Lexmark (LXK) is now well above the strike price that I had shares recently assigned. It’s appeal is enhanced by being ex-dividend this week and the knowledge that it appears to have gotten beyond the initial shock that this “printer maker” was getting out of the “Printer maker” business. Thus far, it appears as if the transition to a more content management and solutions oriented company is proceeding smoothly.

Also going ex-dividend this week is one of the little known, but largest owner of television stations around the nation. Sinclair Broadcasting (SBGI). It may be in position to pick up a rare gem as an ABC station in Washington, DC is rumored to be available for purchase. While it has appreciated significantly in the past two months, it’s shares are down approximately 7% from recent highs.

Not that I would suggest lighting up one of their products while watching a fine situation comedy being broadcast by SInclair, but Lorillard (LO), which assuages some of its health related guilt by offering a rich dividend, does go ex-dividend this week. It too, has been trading higher of late, but is down just a bit from its recent high.

Finally, Salesforce.com (CRM) reported earnings after this past Thursday’s (May 23, 2013) closing bell. The market assessed an 8% penalty for its disappointing numbers, but that should just be a minor bump in their road and not likely a deep pothole. Unfortunately, I didn’t execute the earnings related put sale trade last week as I thought I might, which would have returned 1% even in the face on an 8% drop in share price, but this week brings new opportunity, only on the share purchase and option sale side.

In fact, I was so convinced by the previous paragraph that I sent out that Trading Alert on Friday rather than waiting for Tuesday.



Traditional Stocks: Cypress Semiconductor, Deere, Morgan Stanley, Salesforce.com

Momentum Stocks: none

Double Dip Dividend: JW Nordstrom (ex-div 5/29), Lexmark (ex-div 5/29), Lorillard (ex-div 5/29), Sinclair Broadcasting ex-div 5/29)

Premiums Enhanced by Earnings: Joy Global (5/30 AM), Michael Kors (5/29 AM)

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.