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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.

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Weekend Update – June 1, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That doesn’t sound like complacency.

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

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

Put me in that latter camp.

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

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

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

Mosaic (MOS) which goes ex-dividend th

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: Lowes, MasterCard, Whole Foods

Momentum: salesforce.com

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

Premiums Enhanced by Earnings: Joy Global (6/5 AM)

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

Visits: 5

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Weekend Update – November 24, 2013

Sometimes the strategy is self-defense. Sometimes it’s just doing what you need to do to keep beta at bay.

I don’t know about other people, but I’m getting a little more nervous than usual watching stocks break the 16000 level on the Dow Jones and the 1800 level on the S&P 500.

What’s next 5000 NASDAQ? Well that’s not so ludicrous. All it would take is 4 years of 6% gains and we would could set the time machine back to a different era.

In hindsight I know what I would do at the 5000 level.

For those old enough to remember the predictions of Dow 35000 all we need is a repeat of the past 56 months and we’re finally there and beyond.

This being a holiday shortened trading week adds a little bit to the stress level, because of the many axioms you hear about the markets. The one that I believe has as much validity as the best of them is that low volume can create artificially large market moves. When so many are instead focusing on the historical strength of markets during the coming week, I prefer to steer clear of any easy guide to riches.

When faced with a higher and higher moving market you could be equally justified in believing that momentum is hard to stop as you could believe that an inflection point is being approached. The one pattern that appears clear of late is that a number of momentum stocks are quickly decelerating when faced with challenges.

When I find myself a little ill at ease with the market’s height, I focus increasingly on “beta,” the measure of a stock’s systemic risk compared to the overall market. I want to steer clear of stock’s that may reasonably be expected to be more volatile during a down market or expectations of a declining market.

As a tool to characterize short term risk beta can be helpful, if only various sources would calculate the value in a consistent fashion. For example, Tesla (TSLA), which many would agree is a “momentum” stock, can be found to have a beta ranging from 0.33 to 1.5. In other words, depending upon your reference source you can walk away believing that either Tesla is 50% more volatile than the market or 67% less volatile.

Your pick.

While “momentum” and “beta” don’t necessarily have correlation, common sense is helpful. Tesla or any other hot stock du jour, despite a reported beta of 0.33, just doesn’t seem to be 67% less volatile than the overall market, regardless of what kind of spin Elon Musk might put on the risk.

During the Thanksgiving holiday week I don’t anticipate opening too many new positions and am focusing on those with low beta and meeting my common sense criteria with regard to risk. Having had many assignments to close out the November 2013 option cycle I decided to spread out my new purchases over successive weeks rather than plow everything back in at one time and risk inadvertently discovering the market’s peak.

Additionally, I’m more likely to look at either expanded option possibilities or monthly options, rather than the weekly variety this week. In part that’s due to the low premiums for the week, but also to concerns about having positions with options expiring this week caught in a possible low volume related downdraft and then being unable to find suitable new option opportunities in future weeks. If my positions aren’t generating revenue they’re not very helpful to me.

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

While eschewing risk may be in order when you think a market top is at hand, sometimes risky behavior can be just the thing when it comes to assembling a potentially profitable mix of stocks. In this case the risky behavior comes from the customers of Lorillard (LO), Philip Morris (PM) and Molson-Coors (TAP).

With word that Europeans may finally be understanding the risks associated with tobacco and may be decreasing use of their ubiquitously held cigarettes, Philip Morris shares had a rough week. The 6% drop accompanying what should be good news from a public health perspective brings shares back to a much more inviting level. Shares did successfully test an $85 support level and subsequently bounced back a bit too much for my immediate interest, but I would welcome another move toward that level, particularly as I would prefer an entry cost right near a monthly strike level.

Lorillard, on the other hand, has essentially no European exposure, but perhaps in sympathy gave up just a little bit from its 52 week high after a sustained run higher over the past 6 weeks. While there is certainly downside risk in the event of a lower moving market, shares do go ex-dividend this week and think of all of those people lighting up after a hearty Thanksgiving meal. The near term risk factors identified for Europe aren’t likely to have much of an impact in the United States market, where the only real risk factors may be use of the products.

That Thanksgiving meal may very well be complemented with a product from Molson Coors. I imagine there will also be those using a Molson Coors product while using a Lorillard product, perhaps even dousing one in the other. Shares, which are down nearly 5% from its recent highs go ex-dividend this week. Because of the strike prices available, Molson Coors is one position that I may consider using a November 29, 2013 option contract, as many more strike levels are available, something that is useful when attempting to capture both a decent option premium and the dividend, while also enticing assignment of shares.

Speaking of risky behavior, the one exception to the central theme of staying away from high beta names is the consideration of adding shares of Walter Energy (WLT). While the last 9 months have seen its shares plummet, the last three months have been particularly exciting as shares had gone up by as much as 75%. For those with some need for excitement this is certainly a candidate, with a beta value 170% greater than the average of all other recommended positions this week, the stock is no stranger to movement. But speaking of movement, although I don’t look at charts in any depth, there appears to be a collision in the making as the 50 dma is approaching the 200 dma from below. Technicians believe that is a bullish indicator. Who knows. What I do know is that the coal, steel and iron complex, despite a downgrade this past Friday of the steel sector, has been building a higher base and I believe that the recent pullback in Walter Energy is just a good opportunity for a quick trade, perhaps using the sale of puts rather than covered calls.

While not falling into the category of risky behavior, Intel’s (INTC) price movement this week certainly represents odd behavior. Not being prone to exceptionally large moves of late on Thursday it soared 3%, which by Intel’s standards really is soaring. It then fell nearly 6% the following day. While the fall was really not so odd given that Intel forecast flat revenues and flat operating profits, it was odd that the price had gone up so much the previous day. Buying on Thursday, in what may have been a frenzied battle for shares was a nice example of how to turn a relatively low risk investment into one that has added risk.

But with all of the drama out of the way Intel is now back to a more reasonable price and allows the ability to repurchase shares assigned the previous week at $24 or to just start a new position.

While I would have preferred that Joy Global (JOY) had retreated even further from its recent high, its one year chart is a nearly perfect image of shares that had spent the first 6 months of the year above the current price and the next 6 months below the current price, other than for a brief period in each half year when the relationship was reversed. Joy GLobal is an example of stock have a wide range of beta reported, as well, going from 1.14 to 2.17. However, it has also traded in a relatively narrow range for the past 6 months, albeit currently near the high end of that range.

With earnings scheduled later in the December 2013 option cycle there is an opportunity to attempt to thread a needle and capture the dividend the week before earnings and avoid the added risk. However, I think that Joy Global’s business, which is more heavily reliant on the Chinese economy may return to its recent highs as earnings are delivered.

Lowes (LOW) reported earnings this past week, and like every previous quarter since the dawn of time the Home Depot (HD) versus Lowes debate was in full force and for yet another quarter Lowes demonstrated itself to be somewhat less capable in the profit department. However, after its quick return to pricing reality, Lowes is once again an appealing portfolio addition. I generally prefer considering adding shares prior to the ex-dividend date, but the share price slide is equally compelling.

Hewlett Packard (HPQ) is one of those stragglers that has yet to report earnings, but does so this week. Had I known 35 years ago that a classmate would end up marrying its future CEO, I would likely not have joined in on the jokes. It is also one of those companies that I swore that I would never own again as it was one of my 2012 tax loss positions. I tend to hold grudges, but may be willing to consider selling puts prior to earnings, although the strike price delivering a 1% ROI, which is my typical threshold, is barely outside of the implied price move range of 8%. It’s not entirely clear to me where Hewlett Packard’s future path may lead, but with a time perspective of just a week, I’m not overly concerned about the future of the personal computer, even if Intel’s forecasts have ramifications for the entire industry.

Lexmark (LXK) is a company that I like to consider owning when there is also an opportunity to capture a dividend. That happens to be the case this week. When it announced that it was getting out of the printer business investors reacted much as you would have imagined. They dumped shares, which for most people are electronically maintained and not in printed form. After all, why own a printer company that says that printers are a dead end business? Who knew that Lexmark had other things in mind, as it has done quite nicely focusing on business process and content management solutions. While it has been prone to large earnings related moves or when shocking the investment community with such news as it was abandoning its most recognizable line of business, it has also been a rewarding position, owing to dividends and option premiums. However, always attendant is the possibility of a large news related move that may require some patience in awaiting recovery.

Finally, I find myself thinking about adding shares of eBay (EBAY) again this week, just as last week and 10 other times this past year. Perhaps I’m just obsessed with another CEO related missed opportunity. Shares didn’t fare too well based upon an analyst’s report that downgraded the company saying that shares were “range bound at $49-$54.” While that may have been the equivalent of a death siren, for me that was just validation of what had been behind the decision to purchase and repurchase shares of eBay on a regular basis. While being range bound is an anathema to most stock investors, it is a dream come true to a covered option writer.

Happy Thanksgiving.

Traditional Stocks: eBay, Intel, Lowes, Philip Morris

Momentum Stocks: Joy Global, Walter Energy

Double Dip Dividend: Lexmark (ex-div 11/26), Lorillard (ex-div 11/26), Molson-Coors (ex-div 11/26)

Premiums Enhanced by Earnings: Hewlett Packard (11/26 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 – March 17, 2013

Many stock charts look similar lately. For those old enough to remember Alan Greenspan’s first year as Chairman of the Federal Reserve Bank, the upward slope was all that many new investors and stock brokers had known for 5 years.

You may or may not recall how that second year went for him. It was the year that the stock market re-discovered the concept of gravity and the more complex notion of negative numbers.

To hear the one time Federal Reserve Chairman intone yesterday that the market is greatly undervalued sends whatever message you would like to hear when you digest his words.

“Irrational exuberance is the last term I would use to characterize the performance at the moment.”

The key to escaping responsibility and a stain on your prognosticating ability is the phrase “at the moment.” I use that a lot myself, as any moment can end up being the inflection point. It’s just too bad that the television cameras aren’t rolling at that point.

There’s much speculation lately about the source of any new money coming into the markets. Whether it’s refugees from the bond market or those that have sat on the sidelines since being shaken out sometime in the past 5 years. I’m not certain why the answer seems so hard to ascertain, but with all of the smug talk about those investors who represent the “smart money,” you might believe that any new money at the margins would be somewhat less smart. After all, besides perhaps being late to the party, they were either in bonds or cash all of this time.

How smart is that? Well, it depends on what side of the inflection you’re on when the question is asked.

Regardless of where any new money may be coming, all such funds are faced with the same dilemma. Do you chase something that’s already left the station or do you wait for the next opportunity to come along?

In a way, if you sell calls on your positions, you’re regularly faced with those question upon assignment. If you sell lots of weekly call options the question is a frequent one.

If you believe in history repeating itself, images such as this may be of concern:

Unless of course you’re very concrete, in which case there’s still three months left to frolic in higher prices and invest with impunity.

Approaching my fourth week of negativity and seeing a decrease in option income as a result of re-investing less of the proceeds of assigned shares, something has to reach a breaking point. Since the theoretical number of consecutive days that the market could go higher is unlimited, it may make sense to temper the conviction that only negative things wait ahead, especially for those unprepared.

Granted, the “doomsday preppers” that are featured on basic cable these days may not be the best of role models, there has to be something in-between that offers a compromise.

I think that compromise is avoiding most anything that your grandfather never had to opportunity to purchase.

The week’s selections are categorized as either Traditional, Momentum, or “PEE” (see details). Although my preference is to now look for high quality, dividend paying stocks as a defensive position, sadly, there are none such going ex-dividend this week.

I don’t recall the last time I considered so many stocks at any single time from the Dow Jones Index. In a month where the first 10 trading days took us higher, of the following Dow Index stocks only one outperformed the S&P 500.

Caterpillar (CAT) is approaching one of my favorite price points for its shares. Despite no negative news, other than what may be inferred though always questionable Chinese economic data, shares have been languishing and get more appealing daily. Those other heavy machinery companies without the potential Chinese exposure have been enjoying the market climb.

Home Depot (HD) has been a favorite stock ever since I dared to compare it to Apple (AAPL) in terms of performance, at a time that Apple was hitting on all cylinders. There’s nothing terribly exciting and there’s probably very little new information that can be added about Home Depot. It simply offers safety,a decent premium and continues to hit on all cylinders even as other more flashy companies have done otherwise. Let others debate whether increased housing sales are good or bad or whether it is a better buy than Lowes (LOW). It is simply a reliable portfolio partner.

JP Morgan Chase (JPM) is no longer made of Teflon, although its share price continues to be fairly resistant. With Congressional hearings starting today and findings that JP Morgan was indifferent, at best, to the risks that it was assuming in what became known as the “London Whale Trades,” it will re-join its banking brethren who are, by and large, seeing their stocks enjoy the results of the stress tests. The
increased dividend announced is a nice little touch, as well an inducement to add shares.

I rarely look at the Communication Services or Utilities sectors unless I want safety and dividends. That was a good formula early on in the process of recovering from 2007 plunge. But it may also be a good formula to protect against downwinds. Not necessarily a very exciting approach, but sleeping at night has its own merits. AT&T (T), although not going ex-dividend this week is expected to announce its ex-dividend date sometime in the April 2013 option cycle. It will be my Ambien.

Merck (MRK) was the lone Dow component company to have out-performed the S&P 500 through March 14, 2013, purely on the big bump when it received favorable news regarding its controversial Vytorin product. Recently its option premiums have started to become more compelling. I had hoped to purchase shares last week in order to capture the dividend, however, the Vytorin news disrupted that, as I chose not to chase.

Starbucks (SBUX) is a bit more expensive than I would like in order to pick up new shares, but I always prefer to get shares when it hovers near a strike price. Although your grandfather may not have been able to ever purchase shares of this company, it definitely has a business model of which he would approve. Basic and simple, while offering an addictive product worked well for tobacco companies and is equally and consistently successful at Starbucks.

The lone Momentum stock this week is Coach (COH). Having just had shares assigned at $49 and still owning some higher priced shares at $51, I rarely like to chase stocks as their prices have gone higher than their assigned price. However, I think that the worst is over for Coach and it still carries cache, despite some equivocation regarding its status in the luxury sector of retail.

I’ve had shares of Coach come in and out of my portfolio on a consistent basis ever since the first assault on its future and subsequent 10% drop in share price. It’s sometimes a little maddening how out-sized its moves are, but it does tend to gravitate back toward its pre-assault home.

Although I do want to eschew risk, there may be some earnings related trades this week that may still offer a reasonable risk-reward scenario.

With the exception of LuLu Lemon (LULU), all of the potential earnings related stocks are ones that I’ve happily owned in the past year and would be comfortable owning again. LuLu Lemon, however, is the only one of those potential plays that would fall into the Momentum category, although all are retailers or consumer discretionary companies.

Retailing based on what may turn out to be a fad is always a risky proposition and LuLu Lemon has certainly shown that it’s capable of exhibiting large price moves, both earnings related and otherwise. Someday, it may be on the wrong side of being a fad, but there’s currently no indication of that happening and impacting this current upcoming earnings release. Although it is capable of a 15% move in either direction, those a bit more daring may find the premiums associated with a 10% move appealing.

My shares of Tiffany were assigned this Friday, having been held for 181 days, as compared to just 26 days for positions opened in 2012. It’s was an interesting run, with lots of ups and downs, but its performance beat the S&P 500 for its holding period by 4.9%. Now offering weekly options, it is even more appealing to me as a casual purchase. With earnings this week and a significant recent run-up in price, put options are aggressively priced and attractive, if you don’t mind the possibility of owning shares.

Williams Sonoma (WSM) is one of those stocks for which I wished weekly options existed, especially as it offers earning related opportunities at the very beginning of a monthly cycle. It too, is very capable of 10% moves in either direction upon earnings, but as Coach, does have a tendency to return if the market reacts negatively.

The final earnings related trade is Nike (NKE). Although it is also capable of 10% moves, it doesn’t offer premiums quite as enhanced as some of the other names. However, it certainly doesn’t carry the risk of being a fad and so, even with a precipitous drop there can be reasonable expectations for a return to health. Even in the event of assignments of puts sold to capitalize on earnings, there are worse things in the world than owning shares of Nike.

Traditional Stocks: AT&T, Caterpillar, DuPont, Home Depot, JP Morgan, Merck, Starbucks

Momentum Stocks: COH

Double Dip Dividend: none

Premiums Enhanced by Earnings: LuLu Lemon (3/21 AM), Nike (3/21 PM), Tiffany (3/22 AM), Williams Sonoma (3/19 PM)

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

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

 

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Weekend Update – March 10, 2013

It only seems fitting that one of the final big stories of the week that saw the Dow Jones eclipse its nearly 6 year old record high would be the latest reports of how individual banks performed on the lmost recent round of “stress tests.” After all, it was the very same banks that created significant national stress through their equivalent of bad diet, lack of exercise and other behavioral actions.

Just as I know that certain foods are bad for me and that exercise is good, I’m certain that the banks knew that sooner or later their risky behavior would catch up with them. The difference is that when I had my heart attack the effects were restricted to a relatively small group of people and I didn’t throw any one out of their homes.

Having had a few stress tests over the years myself, I know that sometimes the anticipation of the results is its own stress test. But for some reason, I don’t believe that the banks that were awaiting the results are facing the same concerns. Although I’m only grudgingly modifying my behavior, it’s not clear to me that the banks are or at least can be counted to stay out of the potato chip bag when no one is looking.

Over the past year I’ve held shares in Goldman Sachs (GS), JP Morgan Chase (JPM), Wells Fargo (WFC), Citibank (C), Bank of America (BAC) and Morgan Stanley (MS), still currently holding the latter two. They have been, perhaps, the least stressful of my holdings the past year or so, but I must admit I was hoping that some among that group would just go and fail so that they could become a bit more reasonably priced and perhaps even drag the market down a bit. But in what was, instead, a perfect example of “buy on the rumor and sell on the news,” success led to most stressed bank shares falling.

The other story is simply that of the market. Now that its surpassed the 2007 highs it just seems to go higher in a nonchalant manner, not giving any indication of what’s really in the works. I’ve been convinced for the past 2 or three weeks that the market was headed lower and I’ve taken steps for a very mild Armageddon. Raising cash and using longer term calls to cover positions seemed like a good idea, but the only thing missing was being correct in predicting the direction of the market. For what it’s worth, I was much closer on the magnitude.

The employment numbers on Friday morning were simply good news icing on the cake and just added to my personal stress, which reflected a combination of over-exposure to stocks reacting to speculation on the Chinese economy and covered call positions in a climbing market.

Fortunately, the news of successful stress test results serves to reduce some of my stress and angst. With news that the major banking centers have enough capital to withstand severe stresses, you do have to wonder whether they will now loosen up a bit and start using that capital to heat up the economy. Not to beat a contrarian horse to death, but since it seems inevitable that lending has to resume as banking portfolios are reaching maturity, it also seems inevitable that the Federal Reserve’s exit strategy is now in place.

For those that believe the Federal Reserve was the prime sponsor of the market’s appreciation and for those who believe the market discounts into the future, that should only spell a market that has seen its highs. Sooner or later my theory has to be right.

I’m fine with that outcome and would think it wonderfully ironic if that reversal started on the anniversary of the market bottom on March 10, 2009.

But in the meantime, individual investment money still has to be put to work. Although I continue to have a negative outlook and ordinarily hedge my positions by selling options, the move into cash needs to be hedged as well – and what better way to hedge than with stocks?

Not just any stocks, but the boring kind, preferably dividend paying kind, while limiting exposure to more controversial positions. People have their own unique approaches to different markets. There’s a time for small caps, a time for consumer defensive and a time for dividend paying companies. The real challenge is knowing what time it is.

As usual, this week’s selections are categorized as being either Traditional, Momentum or Double Dip DIvidend (see details). As earnings season is winding down there appear to be no compelling earnings related trades in the coming week.

Although my preference would be for shares of Caterpillar (CAT) to approach $85, I’m heartened that it didn’t follow Deere’s (DE) path last week. I purchased Deere and subsequently had it assigned, as it left Caterpillar behind, for the first time in 2013, as they had tracked one another fairly closely. With the latest “news du jour” about a Chinese government commitment to maintaining economic growth, there may be enough positive news to last a week, at which point I would be happy to see the shares assigned and cash redeployed elsewhere.

Along with assigned shares of Deere were shares of McGraw Hill (MHP). It’s price spiked a bit early in the week and then returned close enough to the strike price that a re-purchase, perhaps using the same strike price may be a reasonable and relatively low risk trade, if the market can mai
ntain some stability.

There’s barely a day that goes by that you don’t hear some debate over the relative merits of Home Depot (HD) and Lowes (LOW). Home Depot happens to be ex-dividend this week and, unless it causes havoc with you need to be diversified, there’s no reason that both companies can’t be own concurrently. Now tat Lowes offers weekly options I’ve begun looking more frequently at its movement, not just during the final week of a monthly option cycle, which coincidentally we enter on Monday.

I rarely find good opportunity to purchase shares of Merck (MRK). It’s option premium is typically below the level that seems to offer a fair ROI. That’s especially true when shares are about to go ex-dividend. However, this week looks more appealing and after a quick look at the chart there doesn’t appear to be much more than a 5% downside relative to the overall market.

Macys (M) is another company that I’ve enjoyed purchasing to capture its dividend and then hold until shares are assigned. It’s trading about 6% higher than when I last held shares three weeks ago and is currently in a high profile legal battle with JC Penney (JCP). There is certainly downside in the event of an adverse decision, however, it now appears as if the judge presiding over the case may hold some sway as he has suggested that the sides find a resolution. That would be far less likely to be draconian for any of the parties. The added bonuses are that Macys is ex-dividend this week and it too has been added to the list of those companies offering weekly option contracts.

Cablevision (CVC) is one of New York’s least favorite companies. The distaste that people have for the company goes well beyond that which is normally directed at utilities and cable companies. There is animus director at the controlling family, the Dolans, that is unlike that seen elsewhere, as they have not always appeared to have shareholder interests on the list of things to consider. But, as long as they are paying a healthy dividend that is not known to be at risk, I can put aside any personal feelings.

Michael Kors (KORS) isn’t very consistent with the overall theme of staid, dividend paying stocks. After a nice earnings related trade a few weeks ago and rise in share price, Kors ran into a couple of self-made walls. First, it announced a secondary offering and then the founder, Michael Kors, announced a substantial sale of personal shares. It also may have more downside potential if you are one that likes looking at charts. However, from a consumer perspective, as far as retailers go, it is still” hot” and offers weekly options with appealing enough premiums for the risk. This turned out to be one of the few selections for which I couldn’t wait until the following week and sent out a Trading Alert on Friday morning.

Seagate Technology (STX) is another theme breaker. In the past I have had good fortune selling puts after price drops, which are frequent and sudden. The additional downside is that when drops do come, the recoveries are relatively slow, so patience may be required, as well as some tolerance for stress if selling puts and the price starts approaching the strike.

The final theme buster is Transocean (RIG). Is there anything that Carl Icahn is not involved with these days? Transocean has been a frequent trading vehicle for me over the years. Happy when weekly options became available, I was disappointed a few weeks ago when they disappeared. It is part of the “Evil Troika” that I often own concurrently. If purchased, Transocean will once again join British Petroleum (BP) in the portfolio, replacing Halliburton (HAL) which was assigned on Friday. Transocean has re-instituted the dividend, although it will still be a few months until the first such payment. Icahn believes that it is too little and too late. I don’t know how he would have the wherewithal to change the “too late” part, but most people would be happy with the proposed 4+% dividend.

Traditional Stocks: Caterpillar, Lowes

Momentum Stocks: McGraw Hill, Michael Kors, Seagate Technology, Transocean

Double Dip Dividend: Cablevision (ex-div 3/13), Home Depot (ex-div 3/12), Macys (ex-div 3/13), Merck (ex-div 3/13)

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

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

 

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Weekend Update – February 24, 2013

We all engage in bouts of wishful thinking.

On an intellectual level I can easily understand why it makes sense to not be fully invested at most moments in time. There are times when just the right opportunity seems to come along, but it stops only for those that have the means to treat that opportunity as it deserves.

I also understand why it is dangerous to extend yourself with the use of margin or leverage and why it’s beneficial to resist the need to pass up that opportunity.

What I don’t understand is why those opportunities always seem to arise at times when the well has gone dry and margin is the only drink of water to be found.

Actually, I do understand. I just wish things would be different.

I rely on the continuing assignment of shares and the re-investment of cash on a weekly basis. My preference is for anywhere from 20-40% of my portfolio to be turned over on a weekly basis.

But this past week was simply terrible on many levels. Whether you want to blame things on a deterioration of the metals complex, hidden messages in the FOMC meeting or the upcoming sequester, the market was far worse than the numbers indicated, as the down volume to up volume was unlike what we have seen for quite a while.

On Wednesday the performances of Boeing (BA), Hewlett Packard (HPQ) and Verizon (VZ), all members of the Dow Jones Industrials Index helped to mask the downside, as the DJIA and S&P 500 diverged for the day. Thursday was more of the same, except Wal-Mart (WMT) joined the very exclusive party. So far, this week is eerily similar to the period immediately following the beginning of 2012 climb and immediately preceding a significant month long decline of nearly 10%,beginning May 2012.

That period was also preceded by the indices sometimes moving in opposite directions or differing magnitudes and those were especially accentuated during the month long decline.

So what I’m trying to say is that with all of the apparent bargains left in the carnage of this trading shortened week, I don’t have anywhere near the money that I would typically have to plow in head first. I wish I did; but I don’t. I also wish I had that cash so that I wouldn’t necessarily be in a position to have it all invested in equities.

Although that margin account is overtly beckoning me to approach, that’s something that I’ve developed enough strength to resist. But at the same time, I’m anxious to increase my cash position, but not necessarily for immediate re-investment.

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

Cisco (CSCO) was one of those stocks that I wanted to purchase last week, but like most in a wholly unsatisfying week, it wasn’t meant to be. With earnings out of the way and some mild losses sustained during the past week, it’s just better priced than before.

Although there have been periods of time that I’ve owned shares of both Caterpillar (CAT) and Deere (DE), up until about $10 ago on each stock there has rarely been a time over the past 5 years that I haven’t owned at least one of them. This past week saw some retreat in their prices and they are getting closer to where I might once again be comfortable establishing ownership.

Lockheed Martin (LMT) is one of those stocks that I really wished had offered weekly option premiums. Back in the days when there was no such vehicle this was one of my favorite stocks. This week it goes ex-dividend and that always gets me to give a closer look, especially after some recent price drops. Dividends, premiums and a price discount may be a good combination.

Dow Chemical (DOW) has been in my doghouse of late. That’s not any expression of its quality as a company, nor of its leadership. After all, back when the market last saw 14,000, Dow Chemical was among those companies whose shares, dividends and option premiums helped me to survive those frightening days. But after 2009 had gotten well entrenched and started heading back toward 14000, the rest of the market just left Dow behind. Then came weekly options and Dow Chemical didn’t join that party. More recently, as volatility has been low, it’s premiums have really lagged. But now, at its low point in the past two months for no real reason and badly lagging the broad market, it once again looks inviting.

Lorillard (LO) was on my radar screen about a month ago, but as so often happens when it came time to make a decision there appeared to be a better opportunity. This week Lorillard goes ex-dividend. Unfortunately, it no longer offers a weekly option, but this is one of those companies that if not assigned this month will likely be assigned soon, as tobacco companies have this knack for survival, much more so than their customers.

MetLife (MET) was on last week’s radar screen, but it was a week that very little went according to script. Maybe this week will be better, but like the tobacco companies that are sometimes the bane of insurance companies, even when paying out death benefits, somehow these companies survive well beyond the ability of their customers.

United Healthcare (UNH) simply continues the healthcare related theme. Already owning shares of Aetna (AET), I firmly believe that whatever form national healthcare will take, the insurance companies will thrive. Much as they have done since Medicaid and Medicare appeared on the national landscape and they moaned about how their business models would be destroyed. After 50 years of moaning you would think that we would all stop playing this silly game.

The Gap (GPS) reports earnings this week, along with Home Depot (HD) as opposed to most companies that I consider as potential earnings related trades, there isn’t a need to protect against a 10-20% drop. At least I don’t think there is that kind of need. But whereas the concern of holding shares of some of those very volatile companies is real, that’s not the case with these two. Even with unexpected price movements eventually ownership will be rewarded. The fact that Home Depot gained 2% following Friday’s upgrade by Oppenheimer to “outperform” always leads me to expect a reversal upon earnings release.

On the other hand, when it comes to MolyCorp (MCP) there’s definitely that kind of need to protect against a 20% price decline. Always volatile, MolyCorp got caught in last week’s metal’s meltdown, probably unnecessarily, since it really is a different entity. Yet with an SEC overhang still in its future and some investor unfriendly moves of late, MolyCorp doesn’t have much in the way of good will on its side.

Nike (NKE) goes ex-dividend this week and its option premiums have become somewhat more appealing since the stock split.

Salesforce.com (CRM) is another of those companies that I’m really not certain what it is that they do or provide. I know enough to be aware that there is drama regarding the relationship between its CEO, Mark Benioff and Oracle’s mercurial CEO, Larry Ellison, to get people’s attention and become the basis of speculation. I just love those sort of side stories, they’re so much more bankable that technical analysis. In this case, a xx% drop in share price after earnings could still deliver a 1% ROI.

Finally, two banking pariahs are potential purchases this week. I’ve owned both Citibank (C) and Bank of America (BAC) in the past month and have lost both to assignment a few times. As quickly as their prices became to expensive to repurchase they have now become reasonably priced again.

Although Friday’s trading restored some of the temporarily beaten down stocks a bit, a number still appear to be good short term prospects. I emphasize “short term” because I am mindful of a repeat of the pattern of May 2012 and am looking for opportunities to move more funds to cash.

I don’t know if Friday’s recovery is a continuation of that 2012 pattern, but if it is, that leads to concern over the next leg of that pattern.

For that reason I may be looking at opportunities to increase cash levels as a defensive move. In the event that there are further signals pointing to a strong downside move, I would rather be out of the market and miss a continued upside move than go along for the ride downward and have to work especially hard to get back up.

I’ve done that before and don’t feel like having to do it again.

Traditional Stocks: Caterpillar, Cisco, Deere, Dow Chemical, MetLife, United Healthcare

Momentum Stocks: Citibank

Double Dip Dividend: Bank of America (ex-div 2/27), Lockheed Martin (ex-div 2/27), Lorillard (ex-div 2/27), Nike (ex-div 2/28)

Premiums Enhanced by Earnings: Home Depot (2/26 AM), MolyCorp (2/28 PM), Salesforce.com (2/28 PM), The Gap (2/28 PM)

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

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

 

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