Weekend Update – May 24, 2015

There was a time, a long time ago, that people actually made telephone calls and the ones on the receiving end didn’t have Caller ID to screen those calls.

Back in those days, without any screening device, there were lots of wrong numbers. Sometimes, if it got to the point that you actually began to recognize the voice on the other end, those wrong numbers could become annoying. Of course, the time of the day also played a role in just how annoying those wrong numbers could be and they always seemed to come at the worst of times.

For example, just imagine how bad the timing might be if you discovered that the wrong GDP numbers had played a role, maybe a major role, in helping stock markets move higher in the belief that interest rate increases weren’t going to be imminent.

Somehow, that’s not as funny as the intentionally wrong number prank phone calls made by Bart Simpson.

Although anyone could make the honest mistake of dialing a wrong number, in the back of your mind you always wondered what kind of an idiot doesn’t know how to dial? After all, it was just a simple question of transposing numbers into action.

Otherwise, numbers were a thing of beauty and simply reflected the genius of mankind in their recognition and manipulations.

For many years I loved arithmetic and then I learned to really enjoy mathematics. The concept that “numbers don’t lie” had lots of meaning to me until I learned about interpretative statistics and came to realize that numbers may not lie, but people can coerce them into compromising themselves to the point that the numbers themselves are blamed.

As we’ve all been on an FOMC watch trying to predict when a data driven Federal Reserve would begin the process of increasing rates it’s a little disconcerting to learn that one of the key input numbers, the GDP, may not have been terribly accurate.

In other words, the numbers themselves may have lied.

As those GDP reports had been coming in over the past few months and had been consistently disappointing to our expectations, many wondered how they could possibly be reflecting a reality that seemed to be so opposite to what logic had suggested would be the case.

But faced with the sanctity of numbers it seemed a worthless exercise to question the illogical.

While many of us are wary of economic statistics that we see coming from overseas, particularly what may be self-serving numbers from China, there’s basically been a sense that official US government reports, while subject to revision, are at least consistent in their accuracy or inaccuracy, as the methodology is non-discriminatory and applied equally.

It really comes as a blow to confidence when the discovery is made that the methodology itself may be flawed and that it may not be a consistently applied flaw.

The word for that, one that we heard all week long, was “seasonality.”

The realization that the first quarter GDP was inaccurate puts last month’s FOMC minutes released this past week in a completely different light. While the FOMC Governors may not have been inclined to increase rates as early as this upcoming June’s meeting, that inclination may at least have been partially based upon erroneous data. That erroneous data, although perhaps isolated to a particular time of the year, therefore, may also impact the rate of change observed in subsequent periods. Those projected trends are the logical extension of discrete data points and may also contribute to policy decisions.

But not so readily once you find that you may have been living a lie.

Next week, a holiday shortened trading week, ends with the release of the GDP and may leave us with the question of just what to do with that data.

This past Friday, Federal Reserve Chairman Janet Yellen gave an address and didn’t offer any new insights into the thoughts of the FOMC, particularly as the issue of the integrity of data was concerned.

With the S&P 500 resting for the week at what may either be a resistance level or a support level, what she also didn’t do was to offer stock market bulls a reason to believe that a dovish FOMC would take a June interest rate increase off the table to offer a launching pad.

As the market sits right below its record closing highs and with earnings season begin to wind down, taking those always questionable numbers away with them until the next earnings season begins in less than 2 months, all we have left is the trust in the consistency and accuracy of economic reports. However, taking a look at both the Shanghai and Hang Seng Indexes, maybe questionable numbers isn’t such a bad thing, after all.

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

Coach (NYSE:COH) and Michael Kors (NYSE:KORS) have been very much linked in people’s minds ever since Coach’s very disappointing sales and earnings report in July 2013. At that time the storyline was that Coach was staid and uninteresting and had been supplanted in all ways by Kors.

To a large degree that mindset still continues, despite Kors steep descent from its highs of 2014. What has gone unnoticed, however, is that other than for the 6 month period after that disastrous earnings report in 2013, Coach shares have actually out-performed Kors through most of the time thereafter.

Coach didn’t fare terribly well after its most recent earnings report and its price has since returned back to where it had built a comfortable base. With an ex-dividend date upcoming the following week I think that I’m ready to add shares to a more expensive pre-existing lot that has been waiting for more than a year to be assigned and the past 8 months to be joined by another lot to help alleviate its misery.

With that upcoming dividend and with this week being a shortened trading week and offering lessened option premiums, I would likely consider a purchase of Coach shares and the sale of an extended weekly option, probably also seeking some capital gains on shares by using an out of the money strike price.

Kors on the other hand is reporting earnings this week and the option market is implying a 7.5% price movement. While not a very big differential, a 1% ROI may be achieved with the sale of a weekly put option if the shares fall less than 8.3% next week. If willing to add an additional week to the put contract expiration that would allow a fall of almost 10% before being at risk of assignment of shares.

Normally I don’t like to go more than a week at a time on a put sale unless needing to rollover a put that is deep in the money in order to prevent or delay assignment. However, the premiums this week are somewhat lower because of the holiday and that means that risk is a little bit higher if selling puts with a particular ROI as a goal in mind.

While Coach has been resistant to being buried and cast away, it’s hard to find a company that has had more requiems written for it than GameStop (NYSE:GME).

With game makers having done well of late there may be reason to delay a public performance of any requiem for yet another quarter as GameStop continues to confound investors who have long made it a very popular short position.

Unlike Kors, which pays no dividend, I do factor a dividend into the equation if selling puts in advance or after earnings are reported. GameStop reports earnings this week and will be ex-dividend sometime during the June 2015 option cycle.

With the option market having an implied price move of 6.2% as earnings are released, a 1% ROI can be achieved with the sale of a weekly put if shares don’t fall more than 6.8%. However, if faced with assignment, I would try to rollover the put options unless the ex-dividend date is announced and it is in the coming week. In that event, I would take assignment and consider the sale of calls with the added goal of also capturing the dividend.

I’ve been waiting a long time to re-purchase shares of Baxter International (NYSE:BAX) and always seem drawn to it as it is about to go ex-dividend. This week’s ex-dividend date arrives at a time when shares are approaching their yearly low point. I tend to like that combination particularly when occurring in a company that is otherwise not terribly volatile nor prone to surprises.

As with some other trades this week I might consider bypassing the weekly option and looking at an extended weekly option to try to offset some of the relatively higher transaction costs occurring in a holiday shortened week.

Qualcomm (NASDAQ:QCOM) is also ex-dividend this week and seems to have found stability after some tumultuous trading after its January 2015 earnings report. With some upcoming technology and telecom conferences over the next 2 weeks there may be some comments or observations to shake up that stability between now and its next earnings report. However, if open to that risk, shares do offer both an attractive option premium and dividend.

With shares currently situated closer to its yearly low than its high it is another position that I would consider selling an extended weekly option and seeking to also get some capital gains on shares by using an out of the money strike price.

Finally, retail hasn’t necessarily been a shining beacon of light and whatever suspicions may surround the GDP, there’s not too much question that retailers haven’t posted the kind of revenues that would support a consumer led expansion of the economy, although strangely shoes may be exception.

One of the more volatile of the shoe companies has been Deckers Outdoor (NYSE:DECK) and if the option market is any judge, it is again expected to be volatile as it rep

orts earnings this week.

The option market is implying a 10.5% price move in one direction or another this coming week as earnings are released and guidance provided.

Meanwhile, a 1% ROI could potentially be achieved from the sale of a put option if the shares don’t fall more than 15.4%. That’s quite a differential and may be enough to mitigate the risk in the shares of a company that are very prone to significant ups and downs.

As with Kors, there is no dividend to factor into any decision if faced with the need to either embrace or avoid assignment. In that event, I would likely try to roll the put options over to a forward week in an attempt to outlast any decline in share price and wait out price recovery, while still generating premium income.

That sounds good on paper and when it does work out that way, adding up all of those premiums on a piece of paper reminds you how beautiful simple numbers can still be.

Traditional Stocks: none

Momentum Stocks: Coach

Double Dip Dividend: Baxter International (5/28), Qualcomm (6/1)

Premiums Enhanced by Earnings: Deckers (5/28), GameStop (5/28 PM), Kors (5/27 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 – April 20, 2014

I really didn’t see this past week coming at all.

Coming off of an absolutely abysmal week that saw the market refuse to follow up good news with further gains and instead plunging some 400 points in 2 days there were so many reasons to believe that markets were finally headed lower and for more than just a quick dip.

While I strongly believe in not following along with the crowd there has to be some bit of you that tells the rest of you not to completely write off what the crowd is thinking or doing. On horse racing, for example, the favorite does still have its share of wins and the Cinderella long short story just doesn’t happen as often as everyone might wish.

To completely ignore the crowd is courting disaster. At least you can occasionally give the crowd their due.

But this past week wasn’t the week to have done so. This was absolutely the week to have ignored virtually everyone. Unfortunately, this was also the week that I chose not to do so and went along with the crowd. The argument seemed so compelling, but that probably should have been the first clue.

What made this past week so unusual was that hardly anyone tried to offer a reason for the inexplicable advance forward. Not only did the market climb strongly, but it even reversed a late day attempt to erase large gains and ended up closing at its highs for the day. We haven’t seen anything like that lately, as instead we’ve seen so many gains quickly evaporate. For the most part I felt like an outsider because i didn’t open very many new positions last week, but it was rewarding enough to have heard such little pontification, as few wanted to admit that the unexpected had occurred.

With the S&P 500 now less than 2% from its high, it does make you wonder whether the concept of a correction being defined on the basis of a 10% decline is relevant anymore. Although its much better to think in terms of relative changes, as expressed by percentages, but perhaps our brains are wired to better understand absolute movements. Maybe we interpret a 400 point move as being no different from any other 400 point move, regardless of what the baseline is for either and simply take the move as a signal to reverse.

It’s tempting to think that perhaps we’re simply returning to the recent pattern of small drops on the order of 5% and then returning to unchecked climbs to new records. Of course, that would be in the realm of the "expected."

I have little expectation for what the next week may bring, as trying to figure out what is now driving the markets seems very futile of late. While I don’t think of "going along for the ride" as a very satisfying strategy I may be content to do so if the market continues moving higher for no apparent reason. But without any real indication of a catalyst I’m not terribly excited about wholeheartedly endorsing the move higher in a tangible way.

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

Not all stocks shared in last week’s glory. JP Morgan Chase (JPM) and Unitedhealth Group (UNH) in part accounted for the DJIA lagging the S&P 500 for the week.

JP Morgan and Unitedhealth both felt some backlash after some disappointing earnings reports. For JP Morgan, however, it has been about a year since there’s actually been anything resembling good news and yet its stock price, up until the past week had well out-performed the S&P 500. I’ve been waiting for a return to a less pricey entry point and after the past week it’s arrived following a 9% drop this month. With little reason to believe that there’s any further bad news ahead it seems to offer low enough risk for its reward even with some market weakness ahead.

Unitedhealth Group’s decline was just slightly more modest than that of JP Morgan and it, too, has returned to a price level that I wouldn’t mind owning shares. I haven’t done so with any regularity but the entry price is getting less expensive. As more news emerges regarding the Affordable Care Act there is potential for Unitedhealth Group to go in either direction. While its most recent earnings disappointed, there may be some optimism as news regarding enrollments by younger people.

Fastenal (FAST) is a company that I like very much, but am a little reluctant to purchase shares at this level, if not for the upcoming dividend that I would like to capture. I’ve long thought of Fastenal as a proxy for the economy and lately shares have been trading near the upper end of its range. While that may indicate some downside weakness, Fastenal has had good resilience and has been one of those monthly contracts that I haven’t minded rolling over in the past, having owned shares 5 times in the past 6 months.

You probably can’t get much more dichotomous than Kohls (KSS) and Abercrombie and FItch (ANF). While Kohls has reliably sat its current levels and doesn’t live and die by fads and arrogance, Abercrombie has had its share of ups and downs and always seems to find a way to snatch defeat from victory. Yet they are both very good covered option trades.

With Kohls having recently joined Abercrombie in the list of those stocks offering expanded weekly options it is an increasing attractive position that offers considerable flexibility, good option premiums and a competitive dividend.

Abercrombie, because of its volatility tends to offer a more attractive option premium, but still offers an attractive enough dividend. Following some recent price weakness I may be more inclined to consider the sale of puts of Abercrombie and might be willing to take assignment of shares, if necessary, rather than rolling over put contracts.

This week there are a number of companies reporting earnings that may warrant some consideration. A more complete list of those for the coming week are included in an earlier article that looks at opportunities in selling put contracts in advance of, or after earnings. Of the companies included in that article the ones that I’ll most likely consider this week are Cree (CREE), Facebook (FB) and Deckers (DECK).

All are volatile enough in the own rights, but especially so with earnings to be released. I have repeatedly sold puts on Cree over the past few months with last week having been the first in quite a while not having done so. It can be an explosive mover after earnings, just as it can be a seemingly irrational mover during daily trading. It has, however, already fallen approximately 8% in the past month. My particular preference when considering the sale of puts is to do so following declines and Cree certainly fulfills that preference, even though my target ROI comes only at a strike level that is at the very edge of the range defined by its implied volatility.

Deckers has only fallen 5% in the past month and it, too can be explosive at earnings time. As with Cree, for those that are adventurous, the sale of deep out f the money puts can offer a relatively lower risk way of achieving return on investment objectives. In this case, while the implied volatility is 10.1%, a share drop of less than 13.2% can still return a weekly 1% ROI.

Facebook has generally performed well after earnings announcements. Even the past quarter, when the initial reaction was negative, shares very quickly recovered and surpassed their previous levels. As with all earnings related trades entered through the sale of puts my goal is to not own shares at a lower price, but rather to avoid assignment by the rollover of put contracts, if necessary, in the hope of waiting out any unforeseen price declines and eventually seeing the put contracts expire, while having accumulated premiums.

Finally, it seems as if there’s hardly a week that I don’t think about adding or buying shares of Coach (COH). Having already owned it on 5 occasions in 2014 and having shares assigned again this past week, it’s notable for its stock price having essentially stayed in place. That’s what continually makes it an attractive candidate.

This week, however, there is a little more risk if shares don’t get assigned, as earnings are reported next week and Coach has been volatile at earnings for the past two years.

For that reason, this week, Coach may best be considered as a trade through the sale of puts with the possible need to rollover the puts if assignment seems likely. That rollover, if necessary, would then probably be able to be done at a lower strike price as the implied volatility will be higher in the week of earnings.

Traditional Stocks: Momentum Stocks: JP Morgan, Kohls, United Healthcare

Momentum: Abercrombie and Fitch, Coach

Double Dip Dividend: Fastenal (ex-div 4/23)

Premiums Enhanced by Earnings: Cree (4/22 PM), Deckers (4/24 PM), Facebook (4/23 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 – February 23, 2014

When this past week was all said and done, it was hard to discern that anything had actually happened.

Sure, there was an Olympics being staged and fomenting revolution in Ukraine, but it was a week when even the release of FOMC minutes failed to be news. Earnings season was winding down, the weather was in abeyance and the legislative docket was reasonably non-partisan.

I could have spent last week watching the grass grow if it hadn’t been covered in a foot of snow.

In its own way, despite the intermediate and alternating moves approaching triple digits, the past week was a perfect example of reversion to the mean. For those that remember 2011, it was that year in a microcosm.

The coming week promises to be no different, although eight members of the Federal Reserve are scheduled to speak. While they can move markets with intemperate or unfiltered remarks, which may become more meaningful as “hawks” assume more voting positions, most people will likely get their excitement from simply reading the just released 2008 transcripts of the Federal Reserve’s meetings as the crisis was beginning to unfold. While you can learn a lot about people in times of crisis, other than potential entertainment value the transcripts will do nothing to add air to the vacuum of the past week. What they may contain about our new Chairman, Janet Yellen, will only confirm her prescience and humor, and should be a calming influence on investors.

As a covered option investor last week was the way I would always script things if anyone would bother opening the envelope to read what was inside. While I have no complaints about 2012 or 2013, as most everyone loves a rising market, 2011 was an ideal market as the year ended with no change. Plenty of intermediate movement, but in the end, signifying nothing other than the opportunity to seemingly and endlessly milk stocks for their option premiums that were nicely enhanced by volatility.

Although I’ve spent much of the past year expecting, sometimes even waiting at the doorstep for the correction to come, the past few weeks have been potentially dangerous ones as I’ve had optimism and money to spend. That can be a bad combination, but the past 18 months have demonstrated a pattern of failed corrections, at least by the standard definition, and rebounds to new and higher highs.

While there may be nothing to see here, there may be something to see there as the market may again be headed to new neighborhoods.

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). A companion article this week explores some additional earnings related trades.

In a week that Wal-Mart (WMT) again disappointed with its earnings report, once again the market failed to follow its lead. In the past year Wal-Mart has repeatedly disappointed, yet the market has disconnected form its leadership, other than for a brief two hours of panic a few months ago when Wal-Mart announced some increasing inventory levels. That panic quickly resolved once Wal-Mart explained their interpretation of inventory levels.

However, one does have to wonder under what economic circumstances does Wal-Mart not meet expectations? Is the economy thriving and people are moving to other retailers, such as Target (TGT) or even Sears (SHLD) or are they moving to Family Dollar Store (FDO)? WHile it is possible that Wal-Mart may simply be suffering from its own bad economic and internal forecasting, there isn’t much reason to be sanguine about retailing. My money is on Family Dollar.

One source that I use for information lists Family Dollar as going ex-dividend this week, however, I haven’t found that to be corroborated anywhere else and historically the first quarter ex-dividend date is in the second week of March. If shares do go ex-dividend this week I would have significant enthusiasm for adding shares, but even in the absence of that event I’m inclined to make that purchase.

Coming off two successive weeks of garnering more than the usual number of dividends, this week is relatively slim pickings. Weyerhauser (WY) and Molson Coors (TAP) both go ex-dividend this week, but both are near the bottom of my list for new purchases this week.

While I like Molson Coors, at the moment the product holds some more appeal than the stock, which is trading near its yearly high point. However, with earnings now out of the way and Canadians around the world celebrating Olympic victories, what better way to show solidarity than to own shares, even if just for a week? Other than potential technical indicators which may suggest an overbought condition, there isn’t too much reason to suspect that in a flat or higher moving market during the coming week, Molson Coors shares will decline mightily. With shares as the body and a head composed of a nice premium and dividend, it just may be time to indulge.

Weyerhauser is a perfectly boring stock. Often, i mean that in a positive sense, but in this case I’m not so certain. I’ve owned shares since May 2013 and would be happy to see them assigned. Despite Weyerhauser offering a dividend this week, my interests are more aligned with re-establishing a position in International Paper (IP). In addition to offering a weekly option, which Weyerhauser does not, its options liquidity and pricing is superior. While it is trading near its yearly high, it has repeatedly met resistance at that level. As a result, while eager to once again own shares, I would be much more willing to do so even with just a slight drop in price.

While offering only a monthly option is a detriment as far as Weyerhauser is concerned, it may be a selling point as far as Cypress Semiconductor (CY) goes. I like to consider adding shares when it is near a strike price as it was after Friday’s close. Shares can be volatile, but it tends to find its way back, especially when home is $10. WHile earnings aren’t due until April 17, 2014, that is just one day before the end of the monthly cycle. Therefore, if purchasing shares of Cypress at this time, I would be prepared to set up for ownership through the May 2014 cycle in the event that shares aren’t assigned when the March cycle comes to an end, in order to avoid being caught in a vortex if a disappointment is at hand. The dividend and the premiums will provide some solace, however.

Although I had shares of Fastenal (FAST) assigned this past week and still own some more expensive shares, this company, which I believe is a proxy for economic activity, has been a spectacular covered call trade and has lent itself to serial ownership as it has reliably traded in a defined range. It doesn’t report earnings until April 10, 2014, but it does have a habit of announcing altered guidance a few weeks earlier. That can be annoying if it comes at the end of an option cycle and potentially removes the chance of assignment or even anticipated rollover, but it’s an annoyance I can live with. After two successive quarters of reduced guidance my expectation is for an improved outlook.

I haven’t owned shares of Deere (DE) for a few months as it had gone on a ride higher, just as Caterpillar (CAT), another frequent holding, is now doing. Deere is now trading at the upper range of where I typically am interested in establishing a position, but after a 7% decline, it may be time to add shares once again. It consistently offers an option premium that has appeal and in the event of longer than anticipated ownership its dividend eases the wait for assignment.

While I would certainly be more interested in Starbucks (SBUX) if its shares were trading at a lower level, sometimes you have to accept what may be a new normal. I had nearly a year elapse before coming to that realization and missed many opportunities in that time with these shares. It does, however, appear that the unbridled move higher has come to an end and perhaps shares are now more likely to be range bound. As with the market in general it’s that range that others may view as mediocrity of performance that instead may be alternatively viewed as the basis for creating an annuity through the collection of option premiums and dividends.

I’ve never been accused of having fashion sense, so it’s unlikely that I would ever own any Deckers (DECK) products at the right time. One minute they sell cool stuff, the next minute they don’t and then back again. Just like the story of most stocks themselves.

What is clear is that they have become cool retailers again and impressively, shares have recovered from a recent large decline. With earnings due to be announced this week the option market is implying a 12.3% potential movement in shares. In the meantime, if you can set your sights on a lowly 1% ROI for the week’s worth of risk a 16.3% drop can still leave you without the obligation to purchase the shares if having sold puts.

Less exciting, at least in terms of implied moves, is T-Mobile (TMUS). It also reports earnings this week and there has to be some thought to what price T-Mobile is paying and will be paying for its very aggressive competitive stance. While its CEO John Legere, may be a hero to some for taking on the competition, that may very quickly fade with some disappointing earnings and cautionary guidance. the option market is pricing a relatively small move of 8.7%, while current option pricing can return a 1% ROI on a strike level 9.5% lower than Friday’s close. Although that’s not much of a margin of difference, I may be more inclined to consider the sale of puts if shares drop substantively on Monday in advance of Tuesday morning’s announcement. Alternatively, if not selling puts in advance of earnings and shares do significantly fall following earnings, there may be potential to do the put sale at that time.

Finally, Abercrombie and Fitch (ANF) reports earnings this week. It is one of the most frustrating and exhilirating of stocks and I currently own two lots. My personal rule is to never own more than three, so I still have some room to add shares, or more likely sell puts in advance of its earnings. Abercrombie and FItch is a nice example of how dysfunction and lowered expectations can create a stock that is so perfectly suited for a covered option strategy. Its constant gyrations create enhanced option premiums that are also significantly impacted by its history of very large earnings related price changes.

For those that have long invested in shares the prospect of a sharp decline upon earnings can’t come as a surprise. However, with a 10.7% implied price move this coming week, one can still achieve a 1% ROI if shares fall less than 15.3%, based on Friday’s closing price.

Traditional Stocks: Deere, Family Dollar Store, Fastenal, International Paper, Starbucks

Momentum Stocks: Cypress Semiconductor

Double Dip Dividend: Molson Coors (ex-div 2/26)

Premiums Enhanced by Earnings: Abercrombie and Fitch (2/26 AM), Deckers (2/27 PM), T-Mobile (2/25 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.