Tag: DOW

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Weekend Update – January 3, 3016

The "What If" game is about as fruitless as it gets, but is also as much a part of human nature as just about anything else.

How else could I explain having played that game at a high school reunion?

That may explain the consistent popularity of that simple question as a genre on so many people’s must read lists as the New Year begins.

Historical events lead themselves so beautifully to the "What If" question because the cascading of events can be so far reaching, especially in an interconnected world.

Even before that interconnection became so established it didn’t take too much imagination to envision far reaching outcomes that would have been so wildly different around the world even a century or more later.

Imagine if the Union had decided to cede Fort Sumpter and simply allowed the South to go its merry way. Would an abridged United States have been any where near the force it has been for the past 100 years? What would that have meant for Europe, the Soviet Union, Israel and every other corner of the world?

Second guessing things can never change the past, but it may provide some clues for how to approach the future, if only the future could be as predictable as the past.

Looking back at 2015 there are lots of "what if" questions that could be asked as we digest the fact that it was the market’s worst performance since 2008.

In that year the S&P 500 was down about 37%, while in 2015 it was only down 0.7%. That gives some sense of what kind of a ride we’ve been on for the past 7 years, if the worst of those years was only 0.7% lower.

But most everyone knows that the 0.7% figure is fairly illusory.

For me the "what if" game starts with what if Amazon (AMZN), Alphabet (GOOG), Microsoft (MSFT) and a handful of others had only performed as well as the averages.

Of course, even that "what if" exercise would continue to perpetuate some of the skew seen in 2015, as the averages were only as high as they were due to the significant out-performance of a handful of key constituent components of the index. Imagining what if those large winners had only gone down 0.7% for the year would still result in an index that wouldn’t really reflect just how bad the underlying market was in 2015.

While some motivated individual could do those calculations for the S&P 500, which is a bit more complex, due to its market capitalization calculation, it’s a much easier exercise for the DJIA.

Just imagine multiplying the 10 points gained by Microsoft , the 30 pre-split points gained by Nike (NKE), the 17 points by UnitedHealth Group (UNH), the 26 points by McDonalds (MCD) or the 29 points by Home Depot (HD) and suddenly the DJIA which had been down 2.2% for 2015, would have been another 761 points lower or an additional 4.5% decline.

Add another 15 points from Boeing (BA) and another 10 from Disney (DIS) and we’re starting to inch closer and closer to what could have really been a year long correction.

Beyond those names the pickings were fairly slim from among the 30 comprising that index. The S&P 500 wasn’t much better and the NASDAQ 100, up for the year, was certainly able to boast only due to the performances of Amazon, Netflix (NFLX), Alphabet and Facebook (FB).

Now, also imagine what if historically high levels of corporate stock buybacks hadn’t artificially painted a better picture of per share earnings.

That’s not to say that the past year could have only been much worse, but it could also have been much better.

Of course you could also begin to imagine what if the market had actually accepted lower energy and commodity prices as a good thing?

What if investors had actually viewed the prospects of a gradual increase in interest rates as also being a good thing, as it would be reflective of an improving, yet non-frothy, economy?

And finally, for me at least, What if the FOMC hadn’t toyed with our fragile emotions and labile intellect all through the year?

Flat line years such as 2015 and 2011 don’t come very often, but when they do, most dispense with the "what if" questions and instead focus on past history which suggests a good year to follow.

But the "what if" game can also be prospective in nature, though in the coming year we should most likely ask similar questions, just with a slight variation.

What if energy prices move higher and sooner than expected?

What if the economy expands faster than we expected?

What if money is running dry to keep the buyback frenzy alive?

Or, what if corporate earnings actually reflect greater consumer participation?

You may as well simply ask what if rational thought were to return to markets?

But it’s probably best not to ask questions when you may not be prepared to hear the answer.

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

For those, myself included, who have been expecting some kind of a resurgence in energy prices and were disbelieving when some were calling for even further drops only to see those calls come true, it’s not really clear what the market’s reaction might be if that rebound did occur.

While the market frequently followed oil lower and then occasionally rebounded when oil did so, it’s hard to envision the market responding favorably in the face of sustained oil price stability or strength.

I’ve given up the idea that the resurgence would begin any day now and instead am more willing to put that misguided faith into the health of financial sector stocks.

Unless the FOMC is going to toy with us further or the economy isn’t going to show the kind of strength that warranted an interest rate increase or warrants future increases, financials should fare well going forward.

This week I’m considering MetLife (MET), Morgan Stanley and American Express (AXP), all well off from their 2015 highs.

MetLife, down 12% during 2015 is actually the best performer of that small group. As with Morgan Stanley, almost the entirety of the year’s loss has come in the latter half of the year when the S&P 500 was performing no worse than it had during the first 6 months of the year.

Both Morgan Stanley and MetLife have large enough option premiums to consider the sale of the nearest out of the money call contracts in an attempt to secure some share appreciation in exchange for a somewhat lo0wer option premium.

In both cases, I think the timing is good for trying to get the best of both worlds, although Morgan Stanley will be among the relatively early earnings reports in just a few weeks and still hasn’t recovered from its last quarter’s poorly received results, so it would help to be prepared to manage the position if still held going into earnings in 3 weeks.

By contrast, American Express reports on that same day, but all of 2015 was an abysmal one for the company once the world learned that its relationship with Costco (COST) was far more important than anyone had believed. The impending loss of Costco as a branded partner in the coming 3 months has weighed heavily on American Express, which is ex-dividend this week.

I would believe that most of that loss in share has already been discounted and that disappointments aren’t going to be too likely, particularly if the consumer is truly making something of a comeback.

There has actually been far less press given to retail results this past holiday season than for any that I can remember in the recent and not so recent past.

Most national retailers tend to pull rabbits out of their hats after preparing us for a disappointing holiday season, with the exception of Best Buy (BBY), which traditionally falls during the final week of the year on perpetually disappointing numbers.

Best Buy has already fallen significantly in th e past 3 months, but over the years it has generally been fairly predictable in its ability to bounce back after sharp declines, whether precipitous or death by a thousand cuts.

To my untrained eye it appears that Best Buy is building some support at the $30 level and doesn’t report full earnings for another 2 months. Perhaps it’s its reputation preceding it at this time of the year, but Best Buy’s current option premium is larger than is generally found and I might consider purchasing shares and selling out of the money calls in the anticipation of some price appreciation.

Under Armour (UA) is in a strange place, as it is currently in one of its most sustained downward trends in at least 5 years.

While Nike, its arch competitor, had a stellar year in 2015, up until a fateful downtrend that began in early October, Under Armour was significantly out-performing Nike, even while the latter was some 35% above the S&P 500’s performance.

That same untrained eye sees some leveling off in the past few weeks and despite still having a fairly low beta reflecting a longer period of observation than the past 2 months, the option premium is continuing to reflect uncertainty.

With perhaps some possibility that cold weather may finally be coming to areas where it belongs this time of the year, it may not be too late for Under Armour to play a game of catch up, which is just about the only athletic pursuit that I still consider.

Finally, Pfizer (PFE) has been somewhat mired since announcing a planned merger, buyout, inversion or whatever you like to have it considered. The initially buoyed price has fallen back, but as with Dow Chemical (DOW) which has also fallen back after a similar merger announcement move higher, it has returned to the pre-announcement level.

I view that as indicating that there’s limited downside in the event of some bad news related to the proposed merger, but as with Dow Chemical, Best Buy and Under Armour, the near term option premium continues to reflect perceived near term risk.

Whatever Pfizer;’s merger related risk may be, I don’t believe it will be a near term risk. From the perspective of a call option seller that kind of perception in the face of no tangible news can be a great gift that keeps giving.

Traditional Stocks: MetLife. Morgan Stanley, Pfizer

Momentum Stocks: Best Buy, Under Armour

Double-Dip Dividend: American Express (1/6 $0.29)

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.

Visits: 17

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Weekend Update – September 20, 2015

This past Monday, prior to the market’s opening, I posted the following for Option to Profit subscribers:

“In all likelihood, at this point there are only two things that would make the market take any news badly.

The first is if no interest rate increase is announced.

Markets seem to have finally matured enough to understand that a rate hike is only a reflection of all of the good and future good things that are developing in our economy and are ready to move on instead of being paralyzed with fear that a rate hike would choke off anemic growth.

The second thing, though, is the very unlikely event of a rate hike larger than has been widely expected. That means a 0.5% hike, or even worse, a full 1% hike.

That would likely be met with crazed selling.”

Based on the way the market was trading this week as we were awaiting the FOMC Statement which was very widely expected to announce an interest rate increase, you would have been proud.

The proudness would have arisen as it seemed that the market was finally at peace with the idea that a small interest rate increase, the first in 9 years, wouldn’t be bad news, at all.

Finally, it seemed as if the market was developing some kind of a more mature outlook on things, coming to the realization that an interest rate hike was a reflection of a growing and healthy economy and was something that should be celebrated.

It always seemed somewhat ironic to me that the investing class, perhaps those most likely to endorse the concept of teaching a man how to fish rather than simply giving a handout, would be so aghast at the possibility of a cessation of a zero interest rate policy (“ZIRP”), which may have been tantamount to a handout.

The realization that ours was likely the best and most fundamentally sound economy in the world may have also been at the root of our recent disassociation from adverse market events in China.

So while the week opened with more significant weakness in China, our own markets began to trade as if they were now ready to welcome an interest rate increase and seeing it for what it really reflected.

All was well and in celebration mode as we awaited the news on Thursday.

As the news was being awaited, I saw the following Tweet. 

I don’t follow many people on Twitter, but Todd Harrison, the founder of Minyanville is one of those rare combinations of humility, great personal and professional successes, who should be followed.

I have an autographed copy of his book “The Other Side of Wall Street,” whose full title really says it all and is a very worthwhile read.

Like the beer pitchman, Todd Harrison doesn’t Tweet much, but when he does, it’s worth reading, considering and placing somewhere in your memory banks.

Many people in their Twitter profiles have a disclaimer that when they re-Tweet something it isn’t necessarily an endorsement.

When I re-Tweet something, it is always a reflection of agreement. There’s no passive – aggressiveness involved in the re-Tweet by saying “I endorse the re-Tweeting of this, but I don’t necessarily endorse its content.”

I believed, as Todd Harrison did, some 4 minutes before the FOMC statement release, that the knee jerk reaction to the FOMC decision wasn’t the one to follow.

But a funny thing happened, but not in a funny sort of way.

For a short while that knee jerk reaction would have been the right response to what should have been correctly viewed as disappointment.

What was wrong was a reversion back to a market wanting and believing that it was given another extension of the ZIRP handout. That took a market that had given up all of its substantial gains and made another reversal, this time going beyond the day’s previous gains.

With past history as a guide, going back to Janet Yellen’s predecessor, who introduced the phenomenon of the Federal Reserve Chairman’s Press Conference, the market kept going higher during the prepared statement portion of the conference and continued even higher as some clarification was sought on what was meant by “global concerns.”

Of course, everyone knew that meant China, although one has to wonder whether those global concerns also included the opinions held and expressed by Christine Legarde of the International Monetary Fund and others, who believe that it would be wrong for the FOMC to introduce an interest rate increase in 2015.

While some then began to wonder whether “global concerns” meant that the Federal Reserve was taking on a third mandate, it all turned suddenly downward.

With the exception of a very early Yellen press conference when she mischaracterized the FOMC’s time frame on rate increases and the market took a subsequent tumble, normally, Yellen’s dovish and dulcet tones are like a tonic for whatever may have been ailing the market/ This week, however, the juxtaposition of dovish and hawkish sentiments from the FOMC Statement, the subsequent press conference prepared statement and questions and answers may have been confusing enough to send traders back to their new found friend.

Logic.

Perhaps it was Yellen’s response that she couldn’t give a recipe to define what would cause the FOMC to act or perhaps it was the suggestion that the FOMC needn’t wait until their next meeting to act that sent markets sharply lower as they craved some certainty.

Or maybe it was a sudden realization that if markets had gone higher on the anticipation of a rate increase, logic would dictate that it go lower if no increase was forthcoming.

And so the initial response to the FOMC decision was the right response as the market may have shown earlier in the week that it was finally beginning to act in a mature fashion and was still capable of doing so as the winds shifted.

Perhaps the best question of that afternoon was one that pointed out an apparen

t inconsistency between expectations for full employment in the coming years, yet also expectations for inflation remaining below the Federal Reserve’s 2% target.

Good question.

Her answer “If our understanding of the inflation process is correct……we will see further upward pressure on inflation, may have represented a very big “if” to some and may have deflated confidence at the same time as a re-awakening was taking place that suggested that perhaps the economy wasn’t growing as strongly as had been hoped to support continued upward movement in the market.

That’s the downside to focusing on fundamentals.

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

As the market continues its uncertainty, even as it may be returning more to consideration of fundamentals, I continue to like the idea of going with some of the relative safety that may be found with dividends.

Last week I purchased more shares of General Electric (GE), hoping to capture both the dividend and the volatility enhanced premium. Those shares, however were assigned early, but having sold a 2 week option the ROI for the 3 days of holding reflected that additional time value and was a respectable 1.1%.

Even though I still hold some shares with an October 2, 2015 $25 expiration hanging over them, this week I find myself wanting to add shares of General Electric, once again, as was the case in each of the last two weeks.

Although there is no dividend in sight for another 3 months, the $25 neighborhood has been looking like a comfortable one in which to add shares as volatility has made the premiums more and more attractive and there may also be some short term upside to shares to help enhance the return.

A covered option strategy is at its best when the same stock can be used over and over again as a vehicle to generate premiums and dividends. For now, General Electric may be that stock.

Verizon (VZ) doesn’t have an upcoming dividend this week, but it will be offering one within the next 3 weeks. In addition to its recently increased dividend, the yield was especially enhanced by its sharp decline in share price at the end of the week as it gave some dour guidance for 2016.

There’s not too much doubt that the telecommunications landscape is changing rapidly, but if I had to put my confidence in any company within that smallest of sectors to survive the turmoil, it’s Verizon, as long as their debt load isn’t going to grow by a very unneeded and unwanted purchase of a pesky competitor that has been squeezing everyone’s margins.

I see Verizon’s pessimism as setting up an “under promise and over deliver” kind of scenario, as utilities typically find a way to thrive, but rarely want to shout up and down the streets about how great things are, lest people begin taking notice of how much they’re paying for someone else’s obscene profits.

Among those being considered that are going to be ex-dividend this week are Cypress Semiconductor (CY) and Green Mountain Keurig (GMCR).

I already own shares of Cypress Semiconductor and have a way to go to reach a breakeven on those shares which I purchased after its proposed buyout of another company fell through. I’ve held shares many times over the years and have become very accustomed to its significant and sizable moves, while somehow finding a way to return back to more normative pricing.

Following this past Friday’s decline its well below the $10 level that I’ve long liked for adding shares. With an ex-dividend date on Tuesday, if the trade is to be made, it will be likely done early in the week.

However, the other consideration is that Cypress Semiconductor is among the early earnings reporters and it will be reporting  on the day before its next option contract expires. For that reason, if considering a share purchase, I would probably look at a contract expiration beyond October, in the event of further price erosion.

Also going ex-dividend but not until Monday of the following week are Deere (DE) and Dow Chemical (DOW).

Like so many other stocks, they are badly beaten down and as a result are featuring an even more alluring dividend yield. However, their Monday ex-dividend date is something that can add to that allure, as any decision to exercise the option has to be made on the previous Saturday.

That presents opportunity to look at strategies that might seek to encourage early assignment through the sale of in the money call options utilizing expanded weekly options.

While Caterpillar (CAT) and others are feeling the pain of China’s economic slowdown, that’s not the case for Deere, but as is often the case, there are sympathy pains that become all too real.

Dow Chemical, on the other hand has continued to suffer from the belief that its fortunes are closely tied to oil prices. It;s CEO refuted that barely 9 months ago and subsequent earnings reports have borne out his contention, yet Dow Chemical continues to suffer as oil prices move lower.

If looking for a respite from dividends, both Bank of America (BAC) and Bed Bath and Beyond (BBBY) may be worth a look this week.

The financial sector was hard hit the past few days and Bank of America was additionally in the spotlight regarding the issue of whether its CEO should also hold the Chairman’s title.

As with Jamie Dimon before him who successfully faced the same shareholder issue and retained both designations, no one is complaining about the performance of Brian Moynihan.

Even as I sit on some more expensive shares that have options sold on them expiring in two weeks, I have no reason to complain.

Following a second consecutive day of large declines, Bank of America is trading near its support that has seemed to hold up well under previous assault attempts. As with other stocks that have suffered large declines, there is greater ability to attempt to capitalize on price gains without giving up much in the way of option premiums.

Bed Bath and Beyond reports earnings this week and has seen its price in steady decline for the past 4 months. Unlike others that have had a more precipitous decline as they’ve approached the pleasure of a 20% decline, Bed Bath and Beyond has done it in a gradual style.

While those intermediate points along the drop down may represent some resistance on the way back up, that climb higher is made easier when the preceding decline
wasn’t vertical.

When considering an earnings related trade I usually look for a weekly return of 1% or greater by selling put options at a strike price that’s below the bottom range implied by the option market. The preference is that the strike price that provides that return be well below that lower boundary, The lower, the better the safety cushion.

For Bed Bath and Beyond the implied move is about 6.3%, but there is no safety cushion below a $56.50 strike level to yield that 1% return. Therefore, instead of selling puts before earnings, I would consider, as has been the predominant strategy of the past two months, of considering the sale of puts after earnings are announced, but only if there is a significant price decline.

Finally, Green Mountain Keurig is going ex-dividend this coming week, but it hardly qualifies as being among the relatively safe universe of stocks that I would prefer owning right now.

I usually like to think about opening a position in Green Mountain Keurig through the  sale of puts. However, with the ex-dividend date this week that would be like subsidizing someone who was selling those puts for the dividend related price decline.

Other than the dividend, there’s is little that I could say to justify a long term position on Green Mountain and even have a hard time justifying a short term position.

However, Green Mountain’s ex-dividend day is on Friday and expanded weekly options are available.

I would consider the purchase of shares and the concomitant sale of deep in the money expanded weekly calls in an attempt to see those shares assigned early.

As an example, with Green Mountain closing at $56.74 on Friday, the October 2, 2015 $54.50 call option would have delivered a premium of $3.08.

For a rational option buyer to consider early exercise on Thursday, the price of shares would have to be above $54.79 and likely even higher than that, due to the inherent risk associated with owning shares, even if only for minutes on Friday morning after taking their possession.

However, if assigned early, there would be a 1.5% ROI for the 4 days of holding even if the shares fell somewhat less than 3.4%.

Their coffee and their prospects for continued marketplace success may both be insipid, but I do like the tortured logic and odds of the dividend related trade as we look ahead to a week where logic seeks to re-assert itself.

 

Traditional Stock: General Electric, Verizon

Momentum Stock: Bank of America

Double-Dip Dividend: Cypress Semiconductor (9/22), Deere (9/28), Dow Chemical (9/28), Green Mountain Keurig (9/25)

Premiums Enhanced by Earnings: Bed Bath and Beyond (9/24 PM)

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

Visits: 13

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Weekend Update – June 21, 2015

No matter how old you are, people love getting gifts.

That may even be the case when you end up paying for them yourself.

Sometimes, that’s the real surprise.

Last year, for example, I received a surprise birthday gift when hitting one of those round numbers. It was a trip to my favorite city, New Orleans, and I was further surprised by friends and family that had assembled there and then individually popped up at totally unexpected times and places.

The real surprise was when I received the hotel bill and then subsequently the other bills. While I’ll be forever remembering the moment a tap on my shoulder at a busy restaurant announced, “Sir, your drinks are here,” only to turn around and see one of my sons unexpectedly turn up holding a platter of shots. Priceless, but as long as we’re talking about price, I think that I would have chosen less costly libations had I known what was to be in store for me.

In hindsight, though, it was a great gift, but I paid the price as many expect will be the case after years of the Federal Reserve injecting liquidity into the system and keeping interest rates at historic lows, much as is now occurring throughout Europe and the world.

Following the FOMC Statement release this past week was Janet Yellen’s press conference and as one person said to me, hers was the “best tightrope walking” he’d ever seen.

Janet Yellenda, has a nice ring to it and she certainly did a great job of staying on course while questions came at her trying their best to throw her off message. Many of those questions were posed to see her lose her tight cling to the carefully nuanced words that served to tantalize, while hinting of what was ahead.

Instead of seeing the gift for what it was, they wanted to know when the bill would be coming due and maybe who was going to end up holding the bag when the celebrations were all over.

Of course, there are those really sick people for whom the gift would be seeing someone else fail or fall off that tightrope wire, but Yellen was better than any gust of wind that could come her way.

For those that had so recently come to expect that perhaps the FOMC would raise interest rates with this past week’s statement release, the market made it clear that they considered the delay as a real gift, even if the celebration and enjoyment lasted just for a day or so.

Sooner or later, there’s also a price that needs to be paid.

That gift, withholding the interest rate increase that just a couple of weeks ago seemed as if it might come this past week, not only was being delayed, but perhaps being delayed all the way to September. As if that gift wasn’t enough, there was a suggestion that any rate increase wasn’t necessarily going to be part of a planned series of regular rate increases, as had been the practice during the Greenspan era.

Could it get any better? At least that was how most heard her words as she delicately balanced them against one another, saying only those things that could be construed by willing ears as “Laissez les bons temps rouler,” as they like to say in New Orleans.

On Thursday, the day after the FOMC Statement release and press conference, it didn’t seem that it could get any better, as the market celebrated what could only be interpreted as a gift for stock investors.

Still, the reality is that while we are winding down a monetary policy era that has likely been to the benefit of our stock markets, the rest of the world is now beginning on that path and may offer stiff winds for us as the bill gets tallied.

The gales coming from Europe were evident this past week as the market was also reacting to the tightrope walk that Greece was doing as it vacillated between being reasonable and unrealistic.

Telling its IMF and ECB safety nets that there were better safety nets out there, while forgetting that neither Russia nor China has ever saved anyone without exacting a price that makes simple interest paid to the IMF and ECB look absolutely charitable, our own markets swayed along with those cross currents of uncertainty.

There may be lots of those cross currents ahead, so that balancing skill may come in very handy while waiting for earnings season to begin again in July and offering the possibility of getting grounded in fundamental reality.

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

Last week marked the second consecutive week in which I didn’t open any new positions, something that would have been unimaginable to me at any point during the past 7 or more years. This coming week I can see more of the same, as there’s very little compelling news ahead to make we want to let go of the cash in my hand. As the bill may be ready to come due soon, I’d like to be ready with that cash on hand to balance the cha

llenge of uncertainty.

Of course, as is usually the case, once the reality of the bill finally settles in, most of the time that represents an opportunity to again start moving forward.

For now, unless there is some further compelling reason to come from upcoming GDP, Retail Sales, Employment Situation and JOLTS reports to believe that the economy is heating up sufficiently to warrant a rate increase in July, the next catalyst may very well come from earnings.

This past week Oracle (NYSE:ORCL) reported earnings. It is among a very small handful of significant companies that report late in the cycle. In fact, their report was almost 3 months following the close of the quarter upon which they reported. While many of those reported soon after earnings season started, less than 2 weeks after the close of that quarter, the expectation for currency related revenue declines was so high at that time, that those companies didn’t see stock prices harshly punished for the dollar’s strength.

Now? Not so much.

Most, in fact, took the previous earnings report opportunity to provide decreased forward guidance as the expectation was that we were headed for US Dollar and Euro parity.

Nearly 3 months later that projection hasn’t become reality, as the US dollar has weakened significantly since March 31, 2015 and that can be expected to show up in the next quarter’s earnings reports. Unfortunately for Oracle share holders, had the company reported in April, there’s a chance that they would have gotten the same free pass as did others at that time.

Sinclair Broadcasting (NASDAQ:SBGI) and Comcast (NASDAQ:CMCSA) are both firmly in the control of their founding families and are on different ends of the spectrum when it comes to their approach to bringing content into the home.

The family nature of Comcast was highlighted this past Friday with the passing of its founder, Ralph Roberts, at age 95. My mother used to say, “they should never go younger,” and while I was never a fan of their product and service, the man was an outlier in many good ways.

With Comcast having recently been extricated from a potential buyout of another cable company, it’s also finding that there are opportunities outside of people’s television sets and streaming devices, as its ownership of Universal Studios makes it the beneficiary of some blockbuster movie releases.

On the downside, it is near its 52 week high as it gets ready to go ex-dividend the week after next. That gives some reason for pause, although neither Greece nor currency headwinds should be an issue, although rising interest rates can be particularly hurtful for a capital intensive company.

However, I especially like Monday ex-dividend dates and like the idea of being assigned early on those positions, as you can get an additional week of premium in exchange for giving up the dividend and holding the stock position for a shorter period of time than planned, while having the opportunity to re-invest the assignment proceeds into another position. With the availability of expanded weekly options on Comcast there are a number of different expiration dates that can be used in an effort to capture additional time premium or try to find the right balance between premium, dividend and time.

Sinclair Broadcasting is in the terrestrial business and just keeps getting larger and larger. It’s not particularly an exciting stock, but does trade with a fairly large price range without any particularly moving news.

It is now at a price that is still above its range mid-point, but that however, has been a reliable launching pad for new positions. With only monthly options available the time commitment is longer as the July 2015 cycle begins this coming week. With earnings coming during the August 2015 cycle any short term price decline necessitating a rollover may look to bypass additional earnings risk and go to a September 2015 expiration, which would also include an upcoming dividend.

Philip Morris (NYSE:PM) and Blackberry (NASDAQ:BBRY) can both elicit some emotional responses, but for very different reasons. Both have upcoming events this week that can offer some opportunity.

Philip Morris is ex-dividend this week and that dividend is very attractive. The company recently stopped its aggressive buyback program as it was feeling the pain of currency exchange and did so, ostensibly, in favor of the dividend. With a history of annual dividend increases coming for the third quarter of each year, there is some question as to wh

ether that will be possible this year, as cash flow is decreased from both currency and declining sales.

Earnings are scheduled to be reported on the day prior to the end of the July 2015 monthly cycle, so in the event that shares haven’t been assigned prior to that, I would consider attempting to rollover any expiring option to a date that may give sufficient time to recover from any price decline.

Blackberry reports earnings this week and is sitting precariously near its yearly lows. The options market is implying an 8% price move when earnings are released on Tuesday morning.

Blackberry usually has released earnings on Friday mornings over the past few years and I’ve generally overlooked it because my preference is to sell a weekly put on most earnings related trades. I further prefer those that report early in the week, so as to have time for some price recovery if at risk for assignment, particularly as some price recovery could ease the ability to rollover the position to delay or avoid assignment.

With a Tuesday morning report and the chance of achieving a 1% ROI at a strike just outside the range implied by the options market, the interest in a short put position is rekindled. However, the greatest likelihood is that I would be more inclined to consider a put sale after earnings, if the price declines, as the premium can really get further enhanced as the price challenges that 52 week low.

I currently own shares of Dow Chemical (NYSE:DOW) and am at risk of having those shares assigned in order to capture the dividend. With those contracts expiring on July 2, 2015 and the ex-dividend date of Friday, June 26th, the $0.42 dividend would require a price of at least $53.92 for the $53.50 options to be assigned early. If that looks like a possibility as trading nears it close on Thursday, I may consider rolling over the option position in order to secure the dividend.

However, with any price decline in shares, particularly if coming early in the week, I would consider adding additional shares and again consider selling call options for the following, holiday shortened week, or even for the week afterward.

Dow Chemical has recently been trading well off its lows that were fueled by decreasing oil prices. CEO Andrew Liveris, who has come under fire on his own for allegedly using his position to finance his lifestyle, did an excellent job in convincing investors that Dow Chemical was a beneficiary of decreasing oil prices, rather than a victim, as it was being treated early in 2015, prior to his going on the offensive.

I think that even if oil prices head moderately higher in the near term, Andrew Liveris would be able to convince people that was also to the benefit of Dow Chemical, just as I expect he’ll be able to convince internal Dow Chemical “watch dogs” that his personal actions were entirely appropriate.

Finally, I had Bank of America (NYSE:BAC) shares assigned this past week, but following weakness among financials on Friday, as well as following the week’s peak in interest rates, shares declined.

That decline, although still leaving shares near a 6 month high, does provide another entry point opportunity. While its shares may continue to be pressured if the bond market bids interest rates lower, the bond market knows exactly where interest rates are going to be headed and financials should be following along.

While the premiums aren’t spectacular, I would look at a potential purchase of shares with an eye toward a longer term holding trying to capitalize on share gains supplemented by option premiums while awaiting the reality of rate increases to come.

Traditional Stocks: Sinclair Broadcasting

Momentum Stocks: Bank of America

Double-Dip Dividend: Comcast (6/29), Dow Chemical (6/26), Philip Morris (6/23)

Premiums Enhanced by Earnings: Blackberry (6/23 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.

Visits: 12

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Weekend Update – March 22, 2015

The past week has to be one to make most people pause and try to understand the basis for what we just experienced.

In a week otherwise devoid of any meaningful news there was a singular event in the middle of the week and then a little bit of follow-up to help clarify that event.

That event was the release of this month’s FOMC Statement and the subsequent clarifying event was the press conference held by its Chair, Janet Yellen.

In its aftermath, I am more confused than ever.

Not so much about where interest rates are headed, nor when, but more about the thought processes that propel markets when expectations are so clearly defined and what our continuing expectations should be.

Most everyone who follows markets knows that the great debate of late has not been whether the FOMC was going to begin the process of raising interest rates, but when they were going to begin that process. Somehow, we believed that the answer to that question was going to come when we learned whether the word “patience” would continue to characterize the FOMC’s timetable with regard to its effort to “normalize the stance of monetary policy.”

Most had taken positions that the first rate increase would come either as early as this June or perhaps as late as September. The continuing use of the word “patience” was perceived as a sign that interest rate increases wouldn’t occur until sometime after June 2015.

So you have to excuse some confusion when the market reversed course by more than 300 points as it learned that the word “patience” was eliminated, but also received news that the FOMC didn’t foresee an interest rate increase before their next meeting in April 2015.

April?

That could mean that an increase by the May meeting was still on the table and the last time I looked, May came before June, especially if you believe a more hawkish approach is warranted.

Presumably, it was the fear of interest rate increases coming as early as June that was a source for recent market weakness.

As I parsed the words I couldn’t understand the way in which the news was initially embraced. While I expected that regardless of the wording outcome the market would find reason to move forward, I certainly didn’t expect the reaction that ensued, especially since the signal was so mixed and really offered nothing to get excited about, nor to fear.

No rate increase likely in April? That’s the best the FOMC could do?

But in a world where even the slightest of interest rate increases is feared, despite the past evidence suggesting that it should be embraced, the very thought of an increase possibly coming before June should have sent buyers heading for the exits.

Yet it was more than good enough, at least for a couple of hours, and actually represented the first in 7 trading sessions where the market reversed course intra-day, having had triple digit moves in opposite directions each and every one of those days.

Now clearly that has to inspire confidence for whatever is to come next.

It’s a good thing that I don’t believe very much in chart analysis, because it would otherwise be very tempting to notice that the previous 7 trading sessions shows a clear pattern of lower highs and higher lows when looking at the net change and an even more compelling series of higher highs and higher lows when looking at the DJIA closing levels.

Yet, at the same time, it has been nearly 4 weeks ever since the DJIA has been able to string together as little as 2 consecutive days of gains.

Perhaps not to coincidentally the last time the market was able to do that was on the occasion of Janet Yellen’s two day mandated congressional testimony during which time she re-iterated a dovish position regarding the initiation of interest rate increases. But barely 2 days later suspicion of her intentions set in as the Vice-Chairman of the FOMC, Stanley Fischer struck a more hawkish tone that just a week later seemed to be validated by the Employment Situation Report.

Despite the fact that there has been no other corroborating evidence to drive the data that the FOMC insists that it values, the market lost its forward momentum from February until Janet Yellen once again took center stage.

Why people just didn’t believe her all along is a mystery, just as it is a mystery that they again chose to believe her.

How long will the trust in her comforting words last this time?

Perhaps Friday’s GDP release, coming on the same day as a scheduled speech by Stanley Fischer will give us some idea of the staying power of the dove when faced with a circling hawk.

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

“PEE” categories.

It was neither a good week to be DuPont (NYSE:DD) nor eBay (NASDAQ:EBAY) as both received analyst downgrades and saw their shares fall significantly when compared to the S&P 500 over the previous 7 sessions.

DuPont’s downgrade came amid worries of problems in its agricultural and chemical segments, along with concerns about the kind of currency headwinds that we’re likely to be hearing much more about in the coming weeks as the next earnings season gets ready to begin.

While those are all important issues, certainly important enough to see DuPont’s shares fall nearly 9% relative to the S&P 500 in the past week, there was lots of activist related news that may be setting the stage for a more contentious kind of fight than Nelson Peltz usually gets himself into. However, it is that activist position that the analyst recognized as a risk to his overall negative outlook as Peltz took to the media last week to be both more accommodating in his requests to DuPont, but also to voice his frustrations.

In the meantime the recent drop in share price is similar to other such drops seen in the past year that have been at levels representing higher lows and that have set the stage for climbs to higher highs.

While Dow Chemical (NYSE:DOW) may be suffering from some of the same issues as DuPont and has the added liability of oil interests in Kuwait, it is at least seemingly at peace with its own activist investors, or at the very least the relations are not overtly adverse at the moment.

Dow Chemical has been very much tied to energy prices these past few months even as its CEO Andrew Liveris has clearly stated that on a net basis the decrease in energy prices is beneficial to Dow Chemical, as it pays more for energy input than it depends on revenue from energy outputs.

Shares are ex-dividend this week and are attractively priced, although as long as energy is under pressure and as long as Liveris’ contention goes ignored, the shares will be under pressure. I currently own shares and Dow Chemical was for a long time a staple in my portfolio, both as a long term holding and as a frequent trading vehicle. At the current price I think a new position could be used as either a longer term holding or a serial trade.

eBay has been absent from my portfolio for a couple of months as I’ve grown too uneasy with it flirting near the $60 level to consider re-purchasing shares. Even the $57.50 level puts me at unease, but a recent downgrade calling into question the value of its PayPal unit in light of increasing competition, most recently from Facebook (NASDAQ:FB) was welcome and did bring shares closer to the upper level at which I had some comfort.

Shares recovered nicely from the initial reaction to the downgrade, but still trailed the S&P 500 by 5% over the past 7 trading sessions.

In the past I have very much liked owning eBay when it was mired in a tight range, yet still delivered appealing option premiums due to the occasional earnings related surprises. The story changed once activism entered the picture and shares started moving beyond the 2 year price range in the belief that PayPal had great value beyond what was already reflected in eBay’s price.

With each passing day, however, the luster of PayPal may be diminishing, even as it still remains an extremely valuable brand and service.

As it sits at the upper end of where I would consider taking a position, I would be very interested in either adding shares and selling calls or selling puts on any further drop in price. If selling puts this is one position that I wouldn’t mind taking assignment on in the event of an adverse price move, but would still look at the possibility of simply rolling over those puts to forward weeks.

AbbVie (NYSE:ABBV) is increasingly becoming an interesting company. While it certainly has some challenges as it’s chief revenue generating drug goes off patent next year, it has certainly been actively pursuing other lucrative areas, including management of Hepatitis C and cancer therapy, with its planned purchase of Pharmacyclics (NASDAQ:PCYC).

While shares have recovered somewhat from its recent low following an analyst downgrade, they are still nearly 8% lower YTD, but the company is certainly not standing still. In addition to upside potential, the shares offer attractive option premiums and an upcoming dividend that’s well ahead of that offered by its one time parent.

I’m not much of a video gamer even though I can get easily get sucked in by useless activities of a repetitive nature. My guess is that a combination of lack of skill, lack of attention span and allegiance to pinball have kept me indifferent to much of the last 25 years of home entertainment.

This week, however, GameStop (NYSE:GME) and Activision (NASDAQ:ATVI) have my attention.

I was actually happy to see my shares of GameStop get assigned this past week ahead of earnings this week. The timing was good as its generous dividend was captured without having to think about the risk of its upcoming earnings.

GameStop is a company that many have written off for years, pointing toward its paleolithic business model, the challenges of brick and mortar as well as streaming competition and the always large short interest looming over shares.

But somehow it continues to confound everyone.

With shares about 10% higher in March the option market is implying a price move of 7.8% upon earnings release. Meanwhile a 1% ROI may be able to be obtained even if shares fall almost 10% following the news. As with eBay, GameStop is a company that I wouldn’t mind owning if puts were at risk of being assigned. However, I’d be much more willing to sell puts if there was some price weakness heading into earnings. Otherwise, I would wait until after earnings and again consider the sale of puts in the event of a large price drop.

The last time I purchased Activision was after its own large price drop following earnings this past February when the company announced record earnings but provided weak forward guidance.

Shares, however, recovered quickly as Activision announced a large share buyback and increased dividend. Since then the shares have been trading in a fairly tight range and they are ex-dividend this week.

That dividend, however, is an annual one and on that basis is paltry. However, if shares end up being a short term holding the dividend yield can be very attractive, especially taken together with the option premiums available when selling calls.

Finally, LuLuLemon (NASDAQ:LULU) reports earnings this week and appears to be back in favor with shoppers as the company appears to be sufficiently distanced from its founder. Time may have been the best of all remedies to their particular problem as shares have shown great recovery.

The option market is implying an earnings related move of 8% and a 1% ROI may be able to be obtained when selling puts at a strike level 10.1% below Friday’s closing price. In the past, LuLuLemon has had some very significant earnings moves, with 15-20% moves not being out of the norm.

However, unlike a number of other stocks mentioned this week, LuLuLemon had nicely out-performed the S&P 500 over the past 7 trading sessions. For that reason I would be inclined to wait until after earnings are released and would consider either a sale of puts or a buy/write in the event of a large price drop.

Traditional Stocks: AbbVie, DuPont, eBay

Momentum Stocks: none

Double Dip Dividend: Activision (3/26), Dow Chemical (3/27)

Premiums Enhanced by Earnings: GameStop (3/26 PM), LuLuLemon (3/26 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.

Visits: 11

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Weekend Update – January 25, 2015

About 2 years after he began trying to convince the world that he was the biggest and baddest central banker around, unafraid to whip out any part of his arsenal to fight a slumping European economy, Mario Draghi finally has decided to let actions speak for themselves.

With only a single mandate as a master, although hampered by many national masters in the European Union, a European version of Quantitative Easing will be introduced a mere 5 years after it was begun in the United States.

While in the past the bravado of Draghi’s words have spurred our markets higher and the lack of action have led to disappointment, this week’s details of the planned intervention were more than the previous day’s rumor had suggested and after a very short period of second guessing the good news delivered, the market decided that the ECB move would be very positive for stocks and had another one of those strong moves higher that you tend to see during bear markets.

We’ve had a lot of those, lately.

Whether an ECB quantitative easing will be good for US stock markets in the longer term may be questionable, much like the FOMC’s period of QE did little to promote European equity markets, but almost certainly gave home markets an advantage.

While US markets greatly out-performed their European counter-parts from the time QE was initially announced, they were virtually identical in performance for the preceding 10 year period.

If you are among those who believe that the great returns seen by the US markets since 2009 were the result of FOMC actions, then you probably should believe that European markets may now be relatively more attractive for investors. Besides, add the current strength of the US dollar into the mix and the thoughts of bringing money back to European shores and putting it to work in local markets may be very enticing if that puts you on the right side of currency headwinds.

The only real argument against that logic is that the FOMC’s actions helped to drive interest rates lower, making equities more appealing, by contrast. However, how much lower can European rates go at this point?

Meanwhile, although there is now a tangible commitment and the initial market action was to embrace the plan with open arms and emptied wallets in a knee jerk buying spree, there’s not too much reason to believe that it will offer anything tangible for markets immediately, or at all.

In the US experience we have seen that the need for and size of the intervention and the need for its continuation or taper begins the process of wondering whether bad news is good or good news is bad and introduces more paradoxical kinds of reactions to events, as professional traders become amateur reverse psychologists.

As markets may now take some time to digest the implications of an ECB intervention for at least the next 18 months, the question at hand is what will propel US markets forward?

Thus far, expectations that the benefit of lower energy prices will be that catalysts hasn’t been validated by earnings or forward guidance, although key reports, especially in the consumer sector are still to come. One one expect that the significant upward revisions of GDP would eventually make their way into at least the top line of earnings reports by the next quarter and might find their way into guidance during this quarter’s releases.

In addition to guidance from the consumer sector, earnings news and guidance from the energy sector, if pointing to bottom lines that aren’t as bad as the stock sell-offs would have indicated, could go a long way toward pushing the broader market higher. Some early results from Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) are encouraging, however, the coming two weeks may supply much more information as a number of major oil companies report earnings.

Of course, next week we could also return to an entirely US-centric news cycle and completely forget about European solutions to European woes. First comes an FOMC Statement release on Wednesday and then GDP statistics on Friday, either of which could cast some doubt on last week’s Retail Sales statistics that took many by surprise by not reflecting the increased consumer spending most believed would be inevitable.

The real test may be whether earnings can continue to meet our expectations as buybacks that had been inflating EPS data may be slowing.

Still, focusing on earnings is so much better than having to think about fiscal cliffs and sequestration.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. Additional earnings related trades may be seen in an accompanying article.

Dow Chemical (NYSE:DOW) reports earnings this week, but I’m not looking at it as an earnings related trade in the manner that I typically do, through the sale of out of the money puts.

In this case, I’m interested in adding shares to my existing holdings in the belief that Dow Chemical shares have been unduly punished as energy prices have plunged. While it does have some oil producing partnerships with Kuwait, as its CEO Andrew Liveris recently pointed out during the quiet period before upcoming earnings, Dow Chemical is a much larger user of oil and energy than it is a producer and it is benefiting greatly from reduced energy costs.

The market, however, hasn’t been seeing it the same way that Liveris does, so there may be some positive surprises coming this week, either for investors or for Liveris, who is already doing battle with activist investors.

While I generally like to sell near the money options on new positions, in this case I’m more interested in the potential of securing some capital gains on shares and would take advantage of the earnings related enhanced option premiums by selling out of the money calls and putting some faith in Liveris’ contention.

I can’t begin to understand the management genius of Richard Kinder and his various strategic initiatives over the years, nor could I keep track of his various companies. News of his decision to step down as CEO of Kinder Morgan (NYSE:KMI) seems well timed, considering the successful consolidation of the various companies bearing his name. In what may be the last such transaction under his leadership, a very non-distressed Kinder Morgan made an acquisition of a likely more distressed privately held Harold Hamm company with interests in the Bakken Formation.

What I do understand, though, is that shares of Kinder Morgan are ex-dividend this week and despite it being in that portion of the energy sector that has been largely shielded from the price pressures seen in the sector, it is still benefiting from option premiums that reflect risk and uncertainty. Getting more reward than you deserve seems like a good alternative to the more frequently occurring situation.

In a world where “old tech” has regained respect, not many are older than Texas Instruments (NASDAQ:TXN). It, too, goes ex-dividend this week, but does so two days after its earnings are released.

With shares less than 2% below its 52 week high, I’m reluctant to buy shares when the market itself has been so tentative and prone to large and sometimes unforeseen moves in either direction. However, in the event of a sizable decline after Texas Instruments reports earnings I may be interested in purchasing shares prior to the ex-dividend date.

Fastenal (NASDAQ:FAST) is also ex-dividend this week. While I generally don’t like to add shares at a higher price, having just bought Fastenal immediately before earnings and in replacement of shares assigned the previous month at a higher price, that upcoming dividend makes it hard to resist.

Fastenal, despite everything that may be going on in the world, is very much protected from the issues of the day. Low oil prices and a strong dollar mean little to its business, although low interest rates do have meaning, insofar as they’re conducive to commercial and personal construction projects. As long as those rates remain low, I would expect those Fastenal parking lots to be busy.

While there’s nothing terribly exciting about this company it has become one of my favorite stocks, while trading in a fairly narrow range. Although priced higher than my current lot of shares, it’s priced at the average entry point of my previous 10 positions over the past 18 months

While Facebook (NASDAQ:FB) doesn’t go ex-dividend this week, it does report earnings. In its nearly 3 years as a publicly traded company Facebook hasn’t had many earnings disappointments since it learned very quickly how to monetize its mobile platforms much more quickly than even its greatest protagonists believed possible.

The option market is implying a 6.2% price move, which is low compared to recent quarters, however, that is a theme for this week for a number of other companies reporting earnings this week.

Additionally, the cushion between the lower range strike price determined by the option market and the strike level that would return my desired 1% ROI isn’t as wide as it has been in the past for Facebook. That strike is 6.8% below Friday’s closing price.

For that reason, while I’ve liked Facebook in the past as an earnings related trade and still do, the likelihood is that if executing this trade I would only do so if shares show some weakness in advance of earnings or if they do so after earnings. In those instances I’d consider the sale of out of the money put contracts. Due to the high volume of trading in Facebook options it is a relatively easy position to rollover if necessary due to a larger than expected move lower, although I wouldn’t be adverse to taking possession of shares and then managing the position with the sale of calls.

American Express (NYSE:AXP) was another casualty within the financial services sector following its earnings report this past week, missing on both analyst’s estimates and its own projections for revenue growth. That disappointment added to the decline its shares had started at the end of 2014.

Since that time, while the S&P 500 has fallen 1.5%, American Express shares had dropped nearly 11%, exacerbated by disappointing earnings, with analysts concerned about future costs, despite plans to cut 4000 employees.

The good news is that American Express has recovered from these kind of earnings drops in he past year as they’ve presented buying opportunities. Along with the price drops comes an increase in option premiums as a little bit more uncertainty about share value is introduced. That uncertainty, together with its resiliency in the face of earnings challenges may make this a good time to consider a new position.

Finally, I wasn’t expecting to be holding any shares of MetLife (NYSE:MET) as Friday’s trading came to its close, having purchased shares last week and expecting them to be assigned on Friday, until shares followed the steep decline in interest rates to require that their option contracts be rolled over.

What I did expect, seeing the price head toward $49 in the final hour of trading was to be prepared to buy shares again this week and that expectation hasn’t changed.

What is making MetLife a little more intriguing, in addition to many others in the financial sector, is the wild ride that interest rates have been on over the past 2 weeks, taking MetLife and others along. With those rides comes enhanced option premiums as the near term holds uncertainty with the direction of rates, although in the longer term it seems hard to believe that they will stay so low as more signs of the economy heating up may be revealed this week.

With shares going ex-dividend on February 4, 2015 and earnings the following week, I may consider a longer term option contract to attempt to capture the dividend, some enhanced premiums, while offering some protection from earnings

surprises through the luxury of additional time for shares to recover, if necessary.

Somewhere along the line a decision will be made regarding the designation of MetLife as a “systemically important” financial institution that is “too big to fail.” While re-affirming that designation, despite MetLife’s protests that has negative consequences, I think that has already been factored into its share price, although it may result in some more dour guidance at some point that will still come as a surprise to some.

Traditional Stocks: American Express, Dow Chemical, MetLife

Momentum Stocks: none

Double Dip Dividend: Fastenal (1/28), Kinder Morgan (1/29), Texas Instruments (1/28)

Premiums Enhanced by Earnings: Facebook (1/28 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.

Visits: 19

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Weekend Update – January 4, 2015

If you follow the various winning themes for the past year, any past year for that matter, the one thing that seems fairly consistent is that the following year is often less than kind to the notion that good things can just keep happening unchanged.

Often the crowd has a way of ruining good things, whether it’s a pristine and previously unknown hidden corner of a national park or an obscure trend or pattern in markets.

Back in the days when people used to invest in mutual funds the sum total of many people’s “research” was to pick up a copy of Money Magazine and see which was the top performing fund or sector for the year and shift money to that fund for the following year.

That rarely worked out well.

You don’t have to think too far back to remember such things as “The January Effect” or “Dogs of the Dow.” The more they were written about and discussed, and the more widely they were embraced, the less effective they were.

The “Santa Claus Rally” wasn’t very different, at least this year, even as the final day of that period for a brief while looked as if it might end with an upward flourish, but that too disappointed.

Remember “Sell in May and then go away”?

Like most things, the more you anticipate joining in on all of the fun that others have been having, the more likely you’re going to be disappointed.

The latest patterns getting attention are the “years ending in 5” and “Presidential election cycles in years ending in 5.” They may have some history to back up the observations, but seemingly overlooked is the close association between those two events, that are not entirely independent of one another.

Since 2015 happens to be both a year ending in “5” and the year preceding a presidential election, it is clear that the only direction can be higher. What that leaves is the debate over how to get to the promised land. That, of course, is the issue of the merits of active versus passive management of stock portfolios.

For purposes of clarity, the only “merit” that really matters is performance.

Those who have used a simple passive strategy over the past two years, perhaps as simple as being entirely invested in the SPDR S&P 500 Trust (NYSEARCA:SPY) to the exclusion of everything else, would have been hoisted on the shoulders of the crowd while hedge fund managers would have been trampled underneath.

The past two years haven’t been especially kind to hedge fund managers, b

ut they have been trampled for very different reasons in that time.

In 2013 who but a super-human kind of investor could have kept up with the S&P 500 while also trying to decrease risk? It’s not terribly easy to match a 30% gain. Hedging has its costs and if markets go only higher those costs simply eat into profits.

In 2014, though, it was a different issue, as the only people who really prospered, in what was still a good year, were those who didn’t try to outsmart markets, as it was almost impossible to even begin classifying the market in 2014. The continual sector rotation either required lots of luck to be continually on the right side of trades or lots of real skill and talent.

Luck runs out. Skill and talents have greater staying power and there’s a reason that only a handful of money managers are well known and regarded for more than a year at a time.

What is fascinating about the market is that even as it ended the year with a very respectable gain those who tried to finesse the market by actively trading don’t have the same kind of elation about its performance.

Just ask them.

So the question is whether the simplicity of a passive strategy is going to again be superior to an active strategy in 2015

As an active trader I’d like to think that passivity will be passé as the new year begins. Of course, you do have to wonder how that arbitrary divide that begins after New Years can actually create an environment with a different character, but somehow that arbitrary divide creates a situation where very few years are like the year preceding it.

I have reason to believe that I have neither skill nor luck, so can only count on the observation that a good thing becomes less of a good thing with time.

Popularity is superficial, while history runs deep.

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

I also like to think that I’ve never really had an original thought.

This week’s potential stock selections to begin 2015 may be an excellent example of the lack of originality, as all of the names are either recent selections, purchases or assigned positions. Add to that their general lack of exciting qualities and you have a really impotent one – two punch to start the year.

With earnings season set to begin the week after this coming week there’s plenty of time for excitement. However, with the upcoming week featuring an FOMC Statement release and the Employment Situation Report, there’s already enough excitement in the upcoming week to want to add to it.

The scheduled events of this week also offer more than enough opportunity to add to this past week’s broad weakness, particularly if the FOMC emphasizes strong GDP data or there is unusually large employment growth, either of which could signal interest rate increases ahead.

In that kind of environment, even if widely expected, the immediate reaction would likely be a shock to the system and I would prefer my exposure to be offset by the security of size and quality. Characteristics that coincidentally may be found in components of the S&P 500, so favored by passivists.

Among those are three members of the DJIA.

General Electric (NYSE:GE), Intel (NASDAQ:INTC) and Verizon (NYSE:VZ) are among this week’s list.

Intel is a little bit of an anomaly to be included in the list, as it was the best performing of the DJIA stocks in 2014 and might, therefore, be reasonably expected to lag in 2015. However, I think that those who would have been prone to pile into the stock because of its performance in the past year would have already done so, as its most recent performance has trailed the S&P 500.

What appeals to me about Intel’s shares for a very short term trade is that the crowd turned very suddenly on them on Friday, giving up nearly all of an almost 3% gain earlier in the trading session. With that arbitrary divide creating its own unique trading dynamics, Intel may not receive quite the same attention as General Electric and Verizon, as those may garner notice because they are among those “dogs” that still have faithful adherents.

But beyond that, Intel still has a fundamentally positive story behind its climb in 2014 and may again be well aligned with the fortunes of a Microsoft (NASDAQ:MSFT), as it continues on its return to relevance. For a short term trade in advance of its upcoming earnings report on January 15, 2015, I wouldn’t mind it trading listlessly in return for the option premium.

General Electric is simply at a price point that I find attractive, having recently had shares assigned. It certainly hasn’t been a very attractive stock over the years for much of anything other than a covered option strategy, but it has been well suited for that, as long as it can continue to trade in a relatively narrow range.

Verizon will be ex-dividend this week and is down nearly 9% from its high in November. Bruised a little due to increasing competition among mobile providers and sustaining the expenses of subsidizing the iPhone, it will report earnings in less than 3 weeks and I might want to either be out of any position prior to then, or if not, use an extended weekly option if having to rollover a position to acquire some additional premium in protection, in the event of an adverse response to earnings.

Dow Chemical (NYSE:DOW) has had its fortunes most recently closely aligned to the energy sector. WHile owning a more expensive lot, I’ve traded other lots as shares have fallen in an effort to generate quick returns from option premiums and share appreciation.

As those shares again approach $45.50 I would like to do so again, but recognizing that oil is at a precarious level, as it gets closer to the $50 level, which if breached, could pull Dow Chemical even lower.

That increased volatility due to the uncertainty in the energy sector has made the option premiums much more appealing. However, even with that challenge, Dow Chemical has the advantage of a highly competent and long serving CEO who is increasingly responsive to the marketplace as he has activists breathing down his neck.

The Mosaic (NYSE:MOS) story isn’t one of being held hostage by an energy cartel and falling prices, as is the case with Dow Chemical, but rather it fell prey to the collapse of the much less well known potash cartel.

Hopefully, the time frame will be far shorter for Dow Chemical than it has been for Mosaic, as I’ve been sitting on some much more expensive shares for quite a while. In the interim, however, Mosaic has offered many opportunities for entering into new positions in the hopes of quick assignment and capturing option premiums, dividends and some occasional capital gains on shares.

While its next dividend is till some months away, it is now quickly again in the price range at which I like to consider adding shares again, although it could still go even lower. However, as long as it does continue trading in this relatively narrow range, it is capable of generating serial option premiums and even if its performance may seem mediocre on a yearly basis, its ROI can be very attractive.

I don’t get terribly excited about food stocks, but when looking for some relative calm, both Campbell Soup (NYSE:CPB) and Kelloggs (NYSE:K) may offer some respite from any tumult that may confront the market next week.

Both were recently assigned and at these levels I wouldn’t mind owning them again. In the case of Campbell Soup, that means the opportunity to capture its dividend and not be concerned about its next earnings until the March 2015 option cycle.

Kellogg is a stock that I would consider buying more often, however, the decision is related to how closely its price is to one of the strike levels on its monthly options.

Unlike Campbell Soup which has strikes at $1 intervals and many weekly options have $0.50 intervals, Kellogg options utilize $2.50 intervals, which can make the premiums relatively unattractive if the share price is at a distance from the strike at the time of the proposed sale of option contracts.

Finally, my plan to add shares of eBay (NASDAQ:EBAY) a couple of weeks agowent unrequited. The fact that its shares are now 2% lower doesn’t necessarily make me salivate over the prospects about adding shares now, as the past two weeks could have represented lost opportunities to generate option premiums and in a position to do so again in the coming week, as shares seem to be settling in at this higher level.

The coming year may be a fascinating one for eBay as the speculation grows about the planned spin off of PayPal, which may never make it to an IPO as it may be coveted by another company.

Of course, who might benefit from that detour is also open to question as eBay itself may be in the crosshairs of an acquiring behemoth.

For now, I still like owning eBay shares and usually selling near or in the money calls, but I would increasingly consider setting aside a portion of those shares for the kind of capital gains that so many have moaned about not having seen over the years as slings and arrows have consistently been thrown in eBay’s direction.

Traditional Stocks: Dow Chemical, eBay, General Electric, Intel, Kellogg, Mosaic

Momentum Stocks: none

Double Dip Dividend: Campbell Soup (1/8), Verizon (1/7)

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.

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Weekend Update – November 30, 2014

An incredibly quiet and uneventful week, cut short by the Thanksgiving Day holiday, saw the calm interrupted as a group of oil ministers from around the world came to an agreement.

They agreed that couldn’t agree, mostly because one couldn’t trust the other to partner in concerted actions what would turn out to be in everyone’s best interests.

If you’ve played the Prisoner’s Dilemma Game you know that you can’t always trust a colleague to do the right thing or to even do the logical thing. The essence of the game is that your outcome is determined not only by your choice, but also by the choice of someone else who may or may not think rationally or who may or may not believe that you think rationally.

The real challenge is figuring out what to do yourself knowing that your fate may be, to some degree, controlled by an irrational partner, a dishonest one or one who simply doesn’t understand the concept of risk – reward. That and the fact that they may actually enjoy stabbing you in the back, even if it means they pay a price, too.

Given the disparate considerations among the member OPEC nations looking out for their national interests, in addition to the growing influence of non-OPEC nations, the only reasonable course of action was to reduce oil production. But no single nation was willing to trust that the other nations would have done the right thing to maintain oil prices at higher levels, while still obeying basic laws of supply and demand, so the resulting action was no action. The stabbing in the back was probably in the minds of some member nations, as well.

If the stock market was somehow the partner in a separate room being forced to make a buying or selling decision based on what it thought the OPEC members would do, a reasonable stock market would have expected a reduction in supply by OPEC members in support of oil prices. After all, reasonable people don’t stab others in the back.

That decision would have resulted in either buying, or at least holding energy shares in advance of the meeting and then being faced with the reality that those OPEC members, hidden away, whose interests may not have been aligned with those of investors, made a decision that made no economic sense, other than perhaps to pressure higher cost producers.

And so came the punishment the following day, as waves of selling hit at the opening of trading. Not quite a capitulation, despite the large falls, because panic was really absent and there was no crescendo-like progression, but still, the selling was intense as many headed for the exits.

While fleeing, the question of whether this decision or lack of decision marked the death of the OPEC cartel, meaning that oil would start trading more on those basic laws and not being manipulated by nations always seeking the highest reward.

The more religious and national tensions existing between member nations and the more influence of non-member nations the less likely the cartel can act as a cartel.

The poor UAE oil minister at a press conference complained that it wasn’t fair for OPEC to be blamed for low oil prices, forgetting that once you form a cartel the concept of fairness is already taken off of the table, as for more than 40 years the cartel has unfairly squeezed the world for every penny it could get.

With the belief that the death of OPEC may be at hand comes the logical, but mistaken belief that the ensuing low oil prices would be a boon for the stock market. That supposition isn’t necessarily backed up by reality, although logic would take your mind in that direction.

As it happens, rising oil prices, especially when due to demand outstripping supply makes for a good stock market, as it reflects accelerating economic growth. Falling oil prices, if due to decreased demand is certainly not a sign of future economic activity. However, we are now in some uncharted territory, as falling prices are due to supply that is greater than demand and without indication that those falling prices are going to result in a near term virtuous cycle that would send markets higher.

What we do know is that creates its own virtuous cycle as consumers will be left with more money to spend and federal and state governments will see gas taxes revenues increase as people drive more and pay less.

The dilemma now facing investors is whether there are better choices than energy stocks at the moment, despite what seems to be irrationally low pricing. The problem is that those irrational people in the other room are still in control of the destinies of others and may only begin to respond in a rational manner after having experienced maximum pain.

As much as I am tempted to add even more energy stocks, despite already suffering from a disproportionately high position, the lesson is clear.

When in doubt, don’t trust the next guy to do the right thing.

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

When Blackstone (NYSE:BX) went public a number of years ago, just prior to the financial meltdown, imagine yourself being held an a room and being given the option of investing your money in the market, without knowing whether the privately held company would decide to IPO. On the surface that might have sounded like a great idea, as the market was heading higher and higher. But the quandary was that you were being asked to make your decision without knowing that Blackstone was perhaps preparing an exit strategy for a perceived market top and was looking to cash out, rather than re-invest for growth.

Had you known that the money being raised in the IPO was going toward buying out one of the founders rather than being plowed back into the company your decision might have been different. Or had you known that the IPO was an attempt to escape the risks of a precariously priced market you may have reacted differently.

So here we are in 2014 and Blackstone, which is the business of buying struggling or undervalued businesses, nurturing them and then re-selling them, often through public markets, is again selling assets.

Are they doing so because
they perceive a market peak and are securing profits or are they preparing to re-invest the assets for further growth? The dilemma faced is across the entire market and not just Blackstone, which in the short term may be a beneficiary of its actions trying to balance risk and reward by reducing its own risk.

The question of rational behavior may be raised when looking at the share price response to Dow Chemical (NYSE:DOW) on Friday. In a classic case of counting chickens before they were hatched I was expecting my shares to be assigned on Friday.

While I usually wait until Thursday or Friday to try to make rollovers, this past shortened week I actually made a number of rollovers on Tuesday, which were serendipitous, not having expected Friday’s weakness. The rollover trade that didn’t get made was for Dow Chemcal, which seemed so likely to be assigned and would have offered very little reward for the rollover.

Who knew that it would be caught up in the energy sell-off, well out of proportion to its risk in the sector, predominantly related to its Kuwaiti business alliances? The question of whether that irrational behavior will continue to punish Dow Chemical shares is at hand, but this drop just seems like a very good opportunity to add shares, both as part of corporate buybacks as well as for a personal portfolio. With my shares now not having been assigned, trading opportunities look beyond the one week horizon with an eye on holding onto shares in order to capture the dividend in late December.

The one person that I probably wouldn’t want to be in the room next to me when I was being asked to make a decision and having to rely on his mutual cooperation, would be John Legere, CEO of T-Mobile (NYSE:TMUS). He hasn’t given too much indication that he would be reluctant to throw anyone under the bus.

However, with some of the fuss about a potential buyout now on hiatus and perhaps the disappointment of no action in that regard now also on hiatus, shares may be settling back to its more sedate trading range.

That would be fine for me, still holding a single share lot and having owned shares on 5 occasions in the past year. Its option volume trading is unusually thin at times, however, and with larger bid – ask spreads than I would normally like to see. At its current price and now having withstood the pressures of its very aggressive pricing campaigns for about a year, I’m less concerned about a very bad earnings release and see upside potential as it has battled back from lower levels.

EMC Corp (NYSE:EMC) may also have had some of the takeover excitement die down, particularly as its most likely purchaser has announced its own plans to split itself into two new companies. Yet it has been able to continue trading at its upper range for the year.

EMC isn’t a terribly exciting company, but it has enough movement from buyout speculation, earnings and speculation over the future of its large VMWare (NYSE:VMW) holding to support an attractive option premium, in addition to an acceptable dividend.

I currently own sh

ares of both Coach (NYSE:COH) and Mosaic (NYSE:MOS). They both are ex-dividend this coming week. Beyond that they also have in common the fact that I’ve been buying shares and selling calls on them for years, but most recently they have been mired at a very low price level and have been having difficulty breaking resistance at $38 and $51, respectively.

While they have been having difficulty breaking through those resistance levels they have also been finding strength at the $35 and $45 levels, respectively. Narrowing the range between support and resistance begins to make them increasingly attractive for a covered option trade, especially with the dividend at hand.

I’ve been sitting on some shares of General Motors (NYSE:GM) for a while and they are currently uncovered. I don’t particularly like adding shares after a nice rise higher, as General Motors had on Friday, but at its current price I think that it is well positioned to get back to the $35 level and while making that journey, perhaps buoyed by lower fuel prices, there is a nice dividend next week and some decent option premiums, as well. What is absolutely fascinating about the recent General Motors saga is that it has been hit with an ongoing deluge of bad news, day in and day out, yet somehow has been able to retain a reasonably respectable stock price.

Finally, it’s another week to give some thought to Abercrombie and Fitch (NYSE:ANF). That incredibly dysfunctional company that has made a habit of large price moves up and down as it tries to break away from the consumer irrelevancy that many have assigned it.

Abercrombie and Fitch recently gave some earnings warnings in anticipation of this week’s release and shares tumbled at that time. If you’ve been keeping a score card, lately the majority of those companies offering warnings or revising guidance downward, have continued to suffer once the earnings are actually released.

The options market is anticipating a 9.1% price move this week in response to earnings. However, it would still take an 11.8% decline to trigger assignment at a strike level that would offer a 1% ROI for the week of holding angst.

That kind of cushion between the implied move and the 1% ROI strike gives me reason to consider the risk of selling puts and crossing my fingers that some surprise, such as the departure of its always embattled CEO is announced, as a means of softening any further earnings disappointments.

Traditional Stocks: Blackstone, Dow Chemical, EMC Corp, General Motors

Momentum: T-Mobile

Double Dip Dividend: Coach (12/3), Mosaic (12/2)

Premiums Enhanced by Earnings: Abercrombie and Fitch (12/3 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.

Visits: 18

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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.

Visits: 12

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Weekend Update – October 12, 2014

As The Federal Reserve’s policy of “Quantitative Easing” comes to an end the next phase considered should perhaps be one of instituting some form of “Quantitative Muzzling.”

Given comments contained in this past week’s FOMC statement had recognized global economic concerns, perhaps the Federal Reserve should consider expanding its dual mandate and reaching across the ocean to affix, adjust and tighten the right remedy.

As most of us learned sometime in childhood, words have consequences. However, we tend not to mind when the consequences are positive for us or when what we all know is left unsaid and ignored.

In each of the past two weeks words from the European Central Bank’s President Mario Draghi have had adverse impacts on global markets. While no one is overtly suggesting that ECB President’s should be seen and not heard, undoubtedly at least one person is thinking that, having applied a sloppy test of correlation to the market’s moves and Draghi’s words.

Such sloppy tests may have at least as much validity as the much discussed “key reversal” seen as trading closed on Wednesday and said to presage a bullish turnaround to the downtrend.

How did that work out for most people?

This week Draghi told us what everyone knows to be the truth, but what no one wants to hear. He simply said that there can be no growth in the European economies without economic reform.

That’s not different from what he said the previous week, as he pointed out that political solutions were necessary to deal with economic woes.

We also all know if it we have to rely on politicians to do the right thing, or make the difficult decisions, we’re not going to fare terribly well, hence the sell-offs. Why the Europeans can’t simply kick things down the road and then forget about it is a question that needs to be asked.

Compare the response to Draghi’s comments to the absolutely effusive response to this past week’s FOMC statement that simply said nothing and ignored answering the question that everyone wanted to ignore.

Despite everyone knowing what Draghi has been saying to be true, having had the same scolding take place in the U.S. just two years ago, no one with an investment portfolio wants to hear of such a thing, especially when it’s followed up with downgrades of Finland’s and France’s credit ratings.

Add to the mix the International Monetary Fund’s cut to its global growth forecast and you have spoken volumes to an already wary US market that was now eagerly eying any breach of the 200 day S&P 500 moving average (dma), as that had taken the place of the “key reversal” in the hearts and minds of technicians and foisted upon investors as being the gateway to what awaits.

Unfortunately, the message being sent with that technical indicator is a bearish one. While it has been breached on numerous occasions in the past 5 years, the most pronounced and prolonged stay below the 200 dma came in the latter half of 2011, a period when triple digit daily moves were commonplace and volatility was more than double the now nearly 2 year high level.

I miss those days.

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

When I first started thinking about a theme for this week’s article I decided to focus on stocks that had already undergone their own personal 10% correction.

That list grew substantially by the time the week came to its close following a brief FOMC induced rally mid-week and that thesis was abandoned.

As trading in the coming week opens at a DJIA level lower than where it began the year, there’s not much reason to start the week with any sense of confidence.

While the S&P 500 is only 5.2% below its recent high, putting it on par with numerous “mini-corrections” over the past two years, you don’t have to do a quantitative assessment to know that this decline feels differently from the others, as volatility is at a two year high point. The sudden appearance of triple digit moves have now gone from the mundane 100 point variety and have added 200 and 300 point ones into the arsenal.

For me, this week may be a little different. Heading into the week I have less cash reserves than I would like and less confidence than I would ordinarily need to dwindle it down further.

While it appears as if there are so many values to be had I would prefer to see some sign of stability before committing resources in my usual buy/write manner. Instead, I may be more likely to add new positions through the sale of out of the money puts, unless there is a dividend involved.

Additionally, while individual stocks may have compelling reasons to consider their purchases, this week I’m less focused on those specific reasons rather than the nature of their recent price declines and the ability to capitalize on the heightened option premiums associated with their recent volatility.

One of the benefits of this rising volatility environment is that option premiums grow as does the uncertainty. The sale of puts and anticipation of the need to rollover those puts in the event of further price erosion may be better suited to an environment of continuing price declines, rather than utilizing a traditional buy/write strategy.

Furthermore, as the premiums become more and more attractive, I find myself more inclined to attempt to rollover positions that might otherwise be assigned, as the accumulation of premiums can offer significant downside protection and reduces the need to find alternative investment candidates.

If you’re looking for a sector that is screaming “correction” you really don’t have to look beyond the Energy Sector. Hearing so many analysts calling for continued
decline in oil prices may be reason enough to begin considering adding positions.

Over the years I’ve lost track of how many times I’ve owned Halliburton (HAL), but other than during the 2008-2009 market crash, the time of the Deepwater Horizon disaster and during the tumultuous market of 2011, there haven’t been such precipitous declines in its price, as it has just plunged below its own 200 dma.

Although Halliburton doesn’t report earnings until the following week, next week’s premiums are reflective of the volatility anticipated. For anyone considering this position through a buy/write one factor to keep in mind is that it will be imperative to rollover the contract if expiration looks likely. That is the case because earnings are reported on the following Monday morning before trading opens so there won’t be a chance to create a hedging position unless done the previous week.

I have been waiting for an opportunity to repurchase shares of Anadarko Petroleum (APC) ever since a bankruptcy judge approved a pollution related settlement, that was part of its years earlier purchase of Kerr-McGee. Like Halliburton, it is now trading below its 200 dma, but it doesn’t report earnings until a week after Halliburton. However, it also offers exceptionally high option premiums as the perceived risk remains heightened in anticipation of further sector weakness.

Owing to its drops the final two days of the previous week, Dow Chemical (DOW) is now also trading below its 200 dma. It, too, is demonstrating an option premium that is substantially higher than has been the case recently, although the risk appears to be considered less than that seen for both Halliburton and Anadarko. With the exception of having received an “outperform” rating those past two days, Dow Chemical appears to have just been caught up in the market’s downturn.

Fastenal (FAST) has traded below its 200 dma since its last earnings report in July 2014 and was not helped by its latest report this past Friday. That was the case despite generally good revenues, but with softer margins that were expected to continue. Unlike the preceding stocks the option premiums are not expanded in reflection of heightened risk. In the event that this position is initiated with a put sale that is likely to be assigned, I would consider taking possession of shares rather than rolling over the puts, as shares go ex-dividend during the November 2014 option cycle.

For a stock whose price hasn’t done very much, eBay (EBAY) has been getting lots and lots of attention and perhaps it is that attention which has prompted it to finally decide to do what so many have suggested, by releasing plans to spin off its PayPal unit. eBay reports earnings this week and is always a prospect to exhibit a sizeable move. It is currently trading below the point that consider the mid-point of the price range that I like to see when considering a new position. As with some other potential earnings trades, it is a candidate for out of the money put sales before earnings or for those more cautious the sale of puts after earnings in the event of a large price drop upon earnings having been released.

Intel (INTC) reports earnings this week after having already been brutalized this past week along with the rest of the chip sector. Most recently I discussed some hesitancy regarding a position in Intel because it had two price gaps higher in the past few months. However, thanks to the past week it has now erased one of those price gaps that represented additional risk. As with Fastenal there is an upcoming ex-dividend date that may be a consideration in any potential trade.

Following YUM Brands’ (YUM) earnings report last week, many over-reacted during after hours trading and shares quickly recovered to end the following day higher, perhaps buoyed by the enthusiasm following the FOMC Statement. Shares did trend lower the rest of the week, but fared much better than the overall market. This coming week YUM Brands is ex-dividend and based upon its option premium is a veritable sea of calm, although it too is demonstrating growth in premiums as risk is generally heightened.

Finally, Best Buy (BBY) is one of those stocks that has seen its own personal correction, having fallen nearly 13% since the market high just 3 weeks ago. With so much attention having been placed on European concerns it’s hard to think of too many stocks that are so well shielded from some of those perceived risks. Although it doesn’t report earnings for more than a month, this is a position that I would like to maintain for an extended period of time, particularly with its currently bloated option premiums, heading into earnings, which I believe will reflect an improving discretionary spending environment, to Best Buy’s benefit.

Unless of course the muzzle falls off, in which case all bets are off for this week.

Traditional Stocks: Anadarko Petroleum, Dow Chemical, Fastenal, Halliburton

Momentum: Best Buy

Double Dip Dividend: YUM Brands (10/15)

Premiums Enhanced by Earnings: eBay (10/15 AM), Intel (10/14 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.

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Weekend Update – October 5, 2014

This week’s markets didn’t respond so positively when Mario Draghi, the head of the European Central Bank failed to deliver on what many had been expecting for quite some time.

The financial markets wanted to hear Draghi follow through on his previous market moving rhetoric with an ECB version of Quantitative Easing, but it didn’t happen. After two years of waiting for some meaningful follow through to his assertion that “we will do whatever it takes” Draghi’s appearance as simply an empty suit becomes increasingly apparent and increasingly worrisome.

On a positive note, as befitting European styling, that suit is exquisitely tailored, but still hasn’t shown that it can stand up to pressure.

It also wasn’t the first time our expectations were dashed and no one was particularly pleased to hear Draghi place blame for the state of the various economies in the European Union at the feet of its politicians as John Chambers, the head of Standard and Poor’s Sovereign Debt Committee did some years earlier when lowering the debt rating of the United States.

Placing the blame on politicians also sends a message that the remedy must also come from politicians and that is something that tends to only occur at the precipice.

While the Biblical text referring to a young child leading a pack of wild animals is a forward looking assessment of an optimistic future, believing that an empty suit can lead a pack of self-interested politicians is an optimism perhaps less realistic than the original passage.

At least that’s what the markets believed.

Befitting the previous week’s volatility that was marked by triple digit moves in alternating fashion, Draghi’s induced 238 point decline was offset by Friday’s 208 point gain following the encouraging Employment Situation Report. Whereas the previous week’s DJIA saw a net decline of only 166 points on absolute daily moves of 810 points, this past week was more subdued. The DJIA lost only 103 points while the absolute daily changes were 519 points.

The end result of Friday’s advance was to return volatility to where it had ended last week, which was a disappointment, as you would like to see volatility rise if there has been a net decline in the broader market. Still, if you’re selling options, that level is better than it was two weeks ago.

While Friday’s gain was encouraging it is a little less so when realizing that such memorable gains are very often found during market downtrends. There is at least very little doubt that the market behavior during the past two weeks represents some qualitative difference in its behavior and an isolated move higher may not be very reflective of any developing trend, but rather reactive to a different developing trend.

As with Draghi, falling for the rhetoric of such a positive response to the Employment Situation Report, may lead to some disappointment.

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

Many of the positions being considered this week are recently highlighted positions made more appealing following recent price pullbacks rather than on any company specific factors. Of course, when looking at stocks whose price has recently fallen at some point the question regarding value versus “value trap” has to be entertained.

With some increase in volatility, despite the rollback this week, I’ve taken opportunity to rollover existing positions to forward weeks when expanded option contracts have been available. As those premiums have increased a bit being able to do so helps to reduce the risk of having so many positions expire concurrently and being all exposed to a short term and sudden price decline.

Just imagine how different the outcome for the week may have been if Thursday’s and Friday’s results were reversed if you were relying on the ability to rollover positions or have them assigned.

However, with the start of earnings season this week there’s reason to be a little more attentive when selecting positions and their contract expiration dates as earnings may play a role in the premiums. While certainly making those premiums more enticing it also increases the risk of ownership at a time when the relative market risk may outweigh the reward.

One stock not reporting earnings this week, but still having an enriched option premium is The Gap (GPS). It opens the week for trading on its ex-dividend date and later in the week is expected to announce its monthly same store sales, being one of the few remaining companies to do so. Those results are inexplicably confusing month to month and shares tend to make strong price movements, frequently in alternating directions from month to month. For that uncertainty comes a very attractive option premium for shares that despite that event driven volatility tend to trade in a fairly well defined range over the longer term.

When it comes to their fashion offerings you may be ambivalent, but when it comes to that kind of price movement and predictability, what’s not to like?

If you’re waiting for a traditional correction, one that requires a 10% pullback, look no farther than Mosaic (MOS). While it had been valiantly struggling to surpass the $50 level on its long road to recovery from the shock of the break-up of the potash cartel, it has now fallen about 13% in 5 weeks. Most recently Mosaic announced a cutback in phosphate production and lowered its guidance and when a market is already on edge it doesn’t need successive blows like those offered by Mosaic as it approaches its 52 week low.

Can shares offer further disappointment when it reports earnings at the end of this month? Perhaps, but for those with a longer term outlook, at this level shares may be repeating the opportunity they offered upon hitting their lows on the cartel’s dissolution for serial purchase and assignment, while offering a premium enhanced by uncertainty.

Seagate Technology (STX) is also officially in that correctio

n camp, having dropped 10% in that same 5 week period. It has done so in the absence of any meaningful news other than perhaps the weight of its own share price, with its decline having come directly from its 52 week high point.

For a company that has become fairly staid, Pfizer (PFE) has been moving about quite a bit lately. Whether in the news for having sought a tax inversion opportunity or other acquisitions, it is clearly a company that is in need of some sort of catalyst. That continuing kind of movement back and forth has been pronounced very recently and should begin making its option premium increasingly enticing. With shares seemingly seeking a $30 home, regardless of which side it is currently on and an always attractive dividend, Pfizer may start getting more and more interesting, particularly in an otherwise labile market.

Dow Chemical (DOW) is one of those stocks that used to be a main stay of my investing. It’s price climb from the $40 to $50 range made it less so, but with the realization that the $50 level may be the new normal, especially with activist investor pressure, it is again on the radar screen, That’s especially true after this week’s price drop. I had been targeting the $52.50 level having been most recently assigned at $53.50, but now it appears to be gift priced. Unfortunately, it may be a perfect example of that age old dilemma regarding value, having already greatly under-performed the market since its recent high the “value trap” part may have already been played out.

While MasterCard (MA) is ex-dividend this week, it is certainly not one to chase in order to capture its dividend. With a payout ratio far below its competitors it would seem that an increase might be warranted. However, what makes MasterCard attractive is that it has seemingly found a trading range and is now situated at about the mid-point of that range. While there is some recent tumult in the world of payments and with some continuing uncertainty regarding its presence in Russia, MasterCard continues to be worth consideration, particularly as it too has significantly under-performed the S&P 500 in the past two weeks.

Equal in its under-performance to MasterCard during that period has been Texas Instruments (TXN). I’ve been eager to add some technology sector positions for a while and haven’t done so as often as necessary to develop some better diversification. Along with Intel (INTC) which I considered last week, as well, Texas Instruments is back to a price level that has my attention. Like Intel, it reports earnings soon and also goes ex-dividend during the October 2014 option cycle. Unlike Intel, however, Texas Instruments doesn’t have a couple of gap ups in price over the past three months that may represent some additional earnings related risk.

When it comes to under-performance it is possible that Coach (COH) may soon qualify as being synonymous with that designation. Not too surprisingly its past performance in the past two weeks, while below that of the S&P 500 may be more directly tied to an improved price performance seen in its competitor for investor interest, Michael Kors (KORS). However, Coach seems to have established support at its current level and may offer a similar opportunity for serial purchase and assignment as had been previously offered by Mosaic shares.

Finally, with the exception of YUM Brands (YUM) all of the other stocks highlighted this week have under-performed the S&P 500 since hitting its recent high on September 18, 2014. YUM Brands reports earnings this week and is often very volatile when it does so. This time, hover, the options market doesn’t seem to be expecting a very large move, only about 4.5%. Neither is there an opportunity to achieve a 1% ROI through the sale of a put option at a strike outside of the range implied. However, YUM Brands is one of those stocks, that if I had sold puts upon, I wouldn’t mind owning if there was a likelihood of assignment.

So often YUM Brands share price is held hostage to food safety issues in China and so often it successfully is able to  see its share price regain sudden losses. That, however, hasn’t been the case thus far since it’s summertime loss. There are probably little expectations for an upside surprise upon release of earnings and as such there may be some limited downside, perhaps explaining the option market’s subdued pricing.

If facing assignment of puts being sold with an upcoming ex-dividend date the following week, I would be inclined to accept assignment and proceed from the point of ownership rather than trying to continue avoiding ownership of shares. However, with the slightest indication of political unrest spreading from Hong Kong to the Chinese mainland that may be a decision destined for regret, just like the purchase of an ill-fitting and overly priced suit.

Traditional Stocks: Dow Chemical, Pfizer, Texas Instruments, The Gap

Momentum: Coach, Mosaic, Seagate Technology

Double Dip Dividend:  MasterCard (10/7)

Premiums Enhanced by Earnings: YUM Brands (10/7 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.

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