Weekend Update – December 11, 2016

There are so many ways to look at most things.

Take a runaway train, for example.

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

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

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

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

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

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

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

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

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

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

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


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Weekend Update – September 18, 2016

 

Everyone has been there at one time or another in their lives.

Maybe several times a day.

There is rarely a shortage of things and events that don’t serve or conspire to make us crazy.

Recurring threats of a government shutdown; the 2016 Presidential campaign; the incompetence in the executive suites of Twitter (TWTR) and pumpkin flavored everything, for example.

I add the FOMC to that list.

Although his annual Twitter campaign against pumpkin flavored everything has yet to start this year, there is scant evidence that Marek Fuchs, a wonderful MarketWatch columnist, has actually gone crazy.

However, as opposed to the hyperbole that typically characterizes the situation when someone is claiming to be made “crazy,” traders may be actually manifesting something bordering on the insane as members of the Federal Reserve toy with the fragile flowers they are in real life.

The alternating messages that have come from those members, who at one time, not too long ago, were barely seen, much less heard, have unsettled traders as the clock is ticking away toward this coming week’s FOMC Statement release.

Couple their deeply seated. but questionably held opinions regarding the timing of an interest rate increase, with the continuing assertion that the FOMC will be “data dependent,” and a stream of conflicting data and if you are prone to be driven crazy, you will be driven crazy.

Or, at the very least, prone to run on sentences.

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Weekend Update – July 24, 2016

“When you’re a hammer, everything looks like a nail.”

That old saying has some truth to it.

Maybe a lot of truth.

When you think about stocks all day long everything seems to be some sort of an indicator as I look for a rational explanation to what is often a prelude to an irrational outcome.

Reducing the intricate character of what is found in nature to a mathematical sequence is both uplifting and deflating.

When the very thought of uplifting and deflating conjures up an image of a stock chart it may be time to re-evaluate things.

When you start seeing the beauty in nature as a series of peaks and troughs and start thinking about Fibonacci Retracements, it is definitely time to step back.

Sometimes stepping back is the healthy thing to do, but as the market has been climbing it’s most recent mountain that has repeatedly taken the S&P 500 to new closing highs, it hasn’t taken very many breaks in its ascent.

You don’t have to be a technician, nor a mountain climber to know that every now and then you have to regroup and re-energize.

You also don’t have to be a mountain climber to know that standing on the edge of a cliff is fraught with danger, just as each step higher adds to risk, unless there’s a place to rest.

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Weekend Update – May 29, 2016

We’ve all been part of one of those really disingenuous hugs.

Whether on the giving or the receiving side, you just know that there’s nothing really good coming out of it and somehow everyone ends up feeling dirty and cheapened.

Every now and then someone on the receiving end of one of those disingenuous hugs believes it’s the real thing and they are led down the wrong path or become oblivious to what is really going on.

This week the market gave a warm embrace and hug to the notion that the FOMC might actually be announcing an interest rate hike as early as its June 2016 meeting.

The chances of that even being a possibility was slight, at the very best, just 2 or 3 weeks ago. Since then, however, there has been more and more hawkish talk coming even from the doves.

The message being sent out right now is that the FOMC is like a hammer that sees everything as a nail. In that sense, every bit of economic news justifies tapping on the brakes.

Traditionally, those brakes were there to slow down an economy that was heating up and would then lead to inflation.

Inflation was once evil, but now we recognize that there are shades of grey and maybe even Charles Manson had some good qualities.

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Weekend Update – September 13, 2015

For those of a certain age, you may or may not recall that Marvin Gaye’s popular song “What’s Going On?” was fairly controversial and raised many questions about the behavior of American society both inside and outside of our borders during a time that great upheaval was underway.

The Groucho Marx character Rufus T. Firefly said “Why a four-year-old child could understand this report. Run out and find me a four-year-old child, I can’t make head or tail of it.”

While I could never answer that seminal question seeking an explanation for everything going on, I do know that the more outlandish Groucho’s film name, the funnier the film. However, that kind of knowledge has proven itself to be of little meaningful value, despite its incredibly high predictive value.

That may be the same situation when considering the market’s performance following the initiation of interest rate hikes. Despite knowing that the market eventually responds to that in a very positive manner by moving higher, traders haven’t been rushing to position themselves to take advantage of what’s widely expected to be an upcoming interest rate increase.

In hindsight it may be easy to understand some of the confusion experienced 40 years ago as the feeling that we were moving away from some of our ideals and fundamental guiding principles was becoming increasingly pervasive.

I don’t think Groucho’s pretense of understanding would have fooled anyone equally befuddled in that era and no 4 year old child, devoid of bias or subjectivity, could have really understood the nature of the societal transformation that was at hand.

Following the past week’s stealth rally it’s certainly no more clear as to what’s going on and while many are eager to explain what is going on, even a 4 year old knows that it’s best to not even make the attempt, lest you look, sound or read like a babbling idiot.

It’s becoming difficult to recall what our investing ideals and fundamentals used to be. Other than “buy low and sell high,” it’s not clear what we believe in anymore, nor who or what is really in charge of market momentum.

Just as Marvin Gaye’s song recognized change inside and outside of our borders, our own markets have increasingly been influenced by what’s going on outside of those borders.

If you have any idea of what is really going on outside of our borders, especially in China, you may be that 4 year old child that can explain it all to the rest of us.

The shock of the decline in Shanghai has certainly had an influence on us, but once the FOMC finally raises rates, which may come early as this week, we may all come to a very important realization.

That realization may be that what’s really going on is that the United States economy is the best in the world in relative terms and is continuing to improve in absolute terms.

That will be something to sing about.

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

With relatively little interest in wanting to dip too deeply into cash reserves, which themselves are stretched thinner than I would like, I’m more inclined to give some consideration to positions going ex-dividend in the very near future.

Recent past weeks have provided lots of those opportunities, but for me, this week isn’t as welcoming.

The two that have my attention, General Electric (NYSE:GE) and Las Vegas Sands (NYSE:LVS) couldn’t be more different, other than perhaps in the length of tenure of their Chairmen/CEOs.

I currently own shares in both companies and had shares of General Electric assigned this past week.

While most of the week’s attention directed toward General Electric is related to the European Union’s approval of its bid to buy Alstom SA (EPA:ALO), General Electric has rekindled my interest in its shares solely because of its decline along with the rest of the market.

While it has mirrored the performance of the S&P 500 since its high point in July, I would be happy to see it do nothing more than to continue to mirror that performance, as the combination of its dividend and recently volatility enhanced option premium makes it a better than usual candidate for reward relative to risk.

While I also don’t particularly like to re

purchase recently assigned shares at a higher price, that most recent purchase may very well have been at an unrealistically low price relative to the potential to accumulate dividends, premiums and still see capital appreciation of shares.

Las Vegas Sands, on the other hand, is caught in all of the uncertainty surrounding China and the ability of Chinese citizens to part with their dwindling discretionary cash. With highly significant exposure to Macau, Las Vegas Sands has seen its share price bounce fairly violently over the past few months and has certainly reflected the fact that we have no real clue as to what’s going on in China.

As expected, along with that risk, especially in a market with its own increasing uncertainty is an attractive option premium. Since Las Vegas Sands ex-dividend date is on a Friday and it does offer expanded weekly options, there are a number of potential buy/write combinations that can seek to take advantage of the option premium, with or without also capturing the dividend.

The least risk adverse investor might consider the sale of a deep in the money weekly call option with the objective of simply generating an option premium in exchange for 4 days of stock ownership. At Friday’s closing prices that would have been buying shares at $46.88 and selling a weekly $45.50 call option for $1.82. With a $0.65 dividend, shares would very likely be assigned early if Thursday’s closing price was higher than $46.15.

If assigned early, that 4 day venture would yield a return of 0.9%.

However, if shares are not assigned early, the return is 2.3%, if shares are assigned at closing.

Alternatively, a $45.50 September 25, 2015 contract could be sold with the hope that shares are assigned early. In that case the return would be 1.3% for the 4 days of risk.

In keeping with Las Vegas Sand’s main product line, it’s a gamble, no matter which path you may elect to take, but even a 4 year old child knows that some risks are better than others.

Coca Cola (NYSE:KO) was ex-dividend this past week and it’s not sold in Whole Foods (NASDAQ:WFM), which is expected to go ex-dividend at the end of the month.

There’s nothing terribly exciting about an investment in Coca Cola, but if looking for some relative safety during a period of market turmoil, Coca Cola has been just that, paralleling the behavior of General Electric since that market top.

As also with General Electric, its dividend yield is more than 50% higher than for the S&P 500 and its option premium is also reflecting greater market volatility.

Following an 8% decline I would consider looking at longer term options to try and lock in the greater premium, as well as having an opportunity to wait out some chance for a price rebound.

Whole Foods, on the other hand, has just been an unmitigated disaster. As bad as the S&P 500 has performed in the past 2 months, you can triple that loss if looking to describe Whole Foods’ plight.

What makes their performance even more disappointing is that after two years of blaming winter weather and assuming the costs of significant national expansion, it had looked as if Whole Foods had turned the corner and was about to reap the benefits of that expansion.

What wasn’t anticipated was that it would have to start sharing the market that it created and having to sacrifice its rich margins in an industry characterized by razor thin margins.

However, I think that Whole Foods will now be in for another extended period of seeing its share price going nowhere fast. While that might be a reason to avoid the shares for most, that can be just the ideal situation for accumulating income as option premiums very often reflect the volatility that such companies show upon earnings, rather than the treading water they do in the interim.

That was precisely the kind of share price character describing eBay (NASDAQ:EBAY) for years. Even when stuck in a trading range the premiums still reflected its proclivity to surprise investors a few times each year. Unless purchasing shares at a near term top, adding them anywhere near or below the mid-point of the trading range was a very good way to enhance reward while minimizing risk specific to that stock.

While 2015 hasn’t been very kind to Seagate Technology (NASDAQ:STX), compared to so many others since mid-July, it has been a veritable super-star, having gained 3%, including its dividend.

Over the past week, however, Seagate lagged the market during a week when the performance of the technology sector was mixed.

Seagate is a stock that I like to consider for its ability to generate option related income through the sale of puts as it approaches a support level. Having just recovered from testing the $46.50 level, I would consider the sale of

puts and would try to roll those over and over if necessary, until that point that shares are ready to go ex-dividend.

That won’t be for another 2 months, so in the event of an adverse price move there should be sufficient time for some chance of recovery and the ability to close out the position.

In the event that it does become necessary to keep rolling over the put premiums heading into earnings, I would select an expiration a week before the ex-dividend date, taking advantage of either an increased premium that will be available due to earnings or trading down to a lower strike price.

Then, if necessary, assignment can be taken before the ex-dividend date and consideration given to selling calls on the new long position.

Adobe (NASDAQ:ADBE) reports earnings this week and while it offers only monthly option contracts, with earnings coming during the final week of that monthly contract, there is a chance to consider the sale of put options that are effectively the equivalent of a weekly.

Adobe option contracts don’t offer the wide range of strike levels as do many other stocks, so there are some limitations if considering an earnings related trade. The option market is implying a move of approximately 6.7%.

However, a nearly 1% ROI may be achieved if shares fall less than 8.4% next week. Having just fallen that amount in the past 3 weeks I often like that kind of prelude to the sale of puts. More weakness in advance of earnings would be even better.

Finally, good times caught up with LuLuLemon Athletica (NASDAQ:LULU) as it reported earnings. Having gone virtually unchallenged in its price ascent that began near the end of 2014, it took a really large step in returning to those price levels.

While its earnings were in line with expectations, its guidance stretched those expectations for coming quarters thin. If LuLuLemon has learned anything over the past two years is that no one likes things to be stretched too thin.

The last time such a thing happened it took a long time for shares to recover and there was lots of internal turmoil, as well. While its founder is no longer there to discourage investors, the lack of near term growth may be an apt replacement for his poorly chosen words, thoughts and opinions.

However, one thing that LuLuLemon has been good for in the past, when faced with a quantum leap sharply declining stock price is serving as an income production vehicle through the sale of puts options.

I think that opportunity has returned as shares do tend to go through a period of some relative stability after such sharp declines. During those periods, however, the option premiums, befitting the decline and continued uncertainty remain fairly high.

Even though earnings are now behind LuLuLemon, the option market is still implying a price move of % next week. At the same time, the sale of a weekly put option % below Friday’s closing price could still yield a % ROI and offer opportunity to roll over the position in the event that assignment may become likely.

Traditional Stock: Coca Cola, Whole Foods

Momentum Stock: LuLuLemon Athletica, Seagate Technology

Double-Dip Dividend: General Electric (9/17 $0.23), Las Vegas Sands (9/18 $0.65)

Premiums Enhanced by Earnings: Adobe (9/17 PM)

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

Weekend Update – August 16, 2015

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

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

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

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

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

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

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

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

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

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

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

Plus, we can “vote the bums out.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So there’s always that.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

n.

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: DuPont

Momentum Stocks: Las Vegas Sands

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

Premiums Enhanced by Earnings: salesforce.com (8/20 PM)

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

Weekend Update – March 15, 2015

Anyone who has seen the classic movie “Casablanca” will recall the cynicism of the scene in which Captain Renault says “I’m shocked, shocked to find that gambling is going on in here!” seconds before the croupier hands him his winnings from earlier.

This week, the Chief Global Investment Strategist of Blackrock (NYSE:BLK) in attempting to explain a sell-off earlier in the week said “You’ve got the dollar up about 23 percent from the summer lows, and people are realizing this is starting to bite into earnings.”

No doubt that a stronger US Dollar can have unwanted adverse consequences, but exactly what people was Russ Koesterich referring to that had only that morning come to that realization?

How in the world could people such as Koesterich and others responsible for managing huge funds and portfolios possibly have been caught off guard?

Was he perhaps instead suggesting that somehow small investors around the nation suddenly all had the same epiphany and logged into their workplace 401(k) accounts in order to massively dump their mutual fund shares in unison and sufficient volume prior to the previous day’s closing bell?

Somehow that doesn’t sound very likely.

I can vaguely understand how a some-what dull witted middle school aged child might not be familiar with the consequences of a strengthening dollar, especially in an economy that runs a trade deficit, but Koesterich could only have been referring to those who were capable of moving markets in such magnitude and in such short time order. There shouldn’t be too much doubt that those people incapable of seeing the downstream impacts of a strengthening US Dollar aren’t the ones likely to be influencing market direction upon their sudden realization.

Maybe it just doesn’t really matter when it’s “other people’s money” and it is really just a game and a question of pushing a sell button.

This past week was another in which news took a back seat to fears and the fear of an imminent interest rate increase seems to be increasingly taking hold just at the same time as the currency exchange issue is getting its long overdue attention.

While there are still a handful of companies of importance to report earnings this quarter, the next earnings season begins in just 3 weeks. If Intel (NASDAQ:INTC) is any reflection, there may be any number of companies getting in line to broadcast earnings warnings to take some of the considerable pressure off the actual earnings release.

The grammatically incorrect, but burning question that I would have asked Russ Koesterich during his interview would have been “And this comes to you as a surprise, why?”

In the meantime, however, those interest rate concerns seem to have been holding the stock market hostage as the previous week’s Employment Situation report is still strengthening the belief that interest rate increases are on the near horizon, despite any lack of indication from Janet Yellen. In addition, the past week saw rates on the 10 Year Treasury Note decrease considerably and Retail Sales fell for yet another month, even while gasoline prices were increasing.

The coming week’s FOMC meeting may provide some clarity by virtue of just occurring. With so many focusing on the word “patience” in the FOMC Statement, whether it remains or is removed will offer reason to move forward as either way the answer to the “sooner or later” question will be answered.

Still, it surprises me, having grown up believing the axiom that the stock market discounts events 6 months into the future, that it has come to the point that fairly well established economic cycles, such as the impact of changing currency exchange rates on earnings, isn’t something that had long been taken into account. Even without a crystal ball, the fact that early in this current earnings season companies were already beginning to factor in currency headwinds and tempering earnings and guidance, should at least served as a clue.

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

Years ago, before spinning off its European operations, Altria (NYSE:MO) was one of my favorite companies. While I have to qualify that, lest anyone believed that their core business was the reason for my favor, it was simply a company whose shares I always wanted to trade.

In academic medicine we used to refer to the vaunted “triple threats.” That was someone who was an esteemed researcher, clinician and teacher. There really aren’t very many of those kind of people. While Altria may represent the antithesis to what a triple threat in medicine is dedicated toward, it used to be a triple threat in its own right. It had a great dividend, great option premiums and the ability to have share appreciation, as well.

That changed once Phillip Morris (NYSE:PM) went on its own and the option premiums on the remainder of Altria became less and less appealing, even as the dividend stayed the course. I found less and less reason to own shares after the split.

However, lately there has been some life appearing in those premiums at a time that shares have fallen nearly 10% in just 2 weeks. With the company re-affirming its FY 2015 guidance just a week ago, unless it too has a sudden realization that its now much smaller foreign operations and businesses will result in currency exchange losses, it may be relatively immune from what may ail many others as currency parity becomes more and more of a reality.

Lately, American Express (NYSE:AXP) can’t seem to do anything right. I say that, as both my wife and I registered our first complaints with them after more than 30 years of membership. Fascinatingly, the events were unrelated and neither of us consulted

with the other, or shared information about the issues at hand, before contacting the company.

My wife, who tends to be very low maintenance, was nearly apoplectic after being passed to 11 different people, some of whom acted very “Un-American Express- like.”

The preceding is anecdotal and meaningless information, for sure, but makes me wonder about a company that received a premium for its use by virtue of its service.

With the loss of its largest co-branding partner to take effect in 2016, American Express has already sent out notices to some customers of its intent to increase interest rates on those accounts that are truly credit cards, but my guess is that revenue enhancements won’t be sufficient to offset the revenue loss from the partnership dissolution.

To that end the investing world will laud American Express for its workforce cutbacks that will certainly occur at some point, and service will as certainly decline until that point that the consumers go elsewhere for their credit needs.

That is known as a cycle. The sort of cycle that perhaps highly paid money managers are unable to recognize, until like currency headwinds, it hits them on the head.

Still, the newly introduced uncertainty into its near term and longer term prospects has again made American Express a potentially attractive covered option candidate, as it has just announced a dividend increase and a nearly $7 billion share buyback.

Based on its falling stock price, you would think that Las Vegas Sands (NYSE:LVS) hasn’t been able to do anything right of late, either.

Sometimes your fortunes are defined on the basis of either being at the right place at the right time or the wrong place at the wrong time. For the moment, Macao is the wrong place and this is the wrong time. However, despite the downturn of fortunes for those companies that placed their bets on Macao, somehow Las Vegas Sands has found the wherewithal to increase its quarterly dividend and is now at 5%, yet with a payout ratio that is sustainable.

The company also has operating and profit margins that would make others, with or without exposure to Macao envious, yet its shares continue to follow the experiences of the much smaller and poorer performing Wynn Resorts (NASDAQ:WYNN). That probably bothers Sheldon Adelson to no end, while it likely delights Steve Wynn, who would rather suffer with friends.

With shares going ex-dividend this week and trading near its yearly low, it’s hard to imagine news from Macao getting much worse, particularly as China is beginning to play the interest rate game in efforts to stimulate the economy. The risk, however, is still there and is reflected in the option premium.

Given the risk – benefit proposition, I ask myself “WWSD?”

What would Sheldon Do?

My guess is that he would be betting on his company to do more than just tread water at these levels.

The Gap (NYSE:GPS) fascinates me.

I don’t think I’ve ever been in one of their stores, but I know their brand names and occasionally make mental notes about the parking conditions in front of their stores. Those activities are absolutely meaningless, as are The Gap’s monthly sales reports.

I don’t think that I can recall any other company that so regularly alternates between being out of touch with what the consumer wants and being in complete synchrony. At least that’s how those monthly sales statistics are routinely interpreted and share prices goes predictably back and forth.

The good thing about all of the non-sense is that the opportunities to benefit from enhanced option premiums actually occurs up to 5 times in a 3 month period extending from one earnings report to the next, as the monthly same store sales reports also have enhanced premiums. With an upcoming dividend during the same week as the next same store sales report in early April 2015, this is a potential position that I’d consider selling a longer term option, in order to take advantage of the upcoming volatility, collect the dividend and perhaps have some additional time for the price to recoup if it reacts adversely.

MetLife (NYSE:MET) has been trading in a range lately that has simply been following interest rates for the most part. As it awaits a decision on its challenge to being designated as “systemically important” it probably is wishing for rate increases to come as quickly as possible so that it can put as much of its assets to productive use as quickly as possible before the inevitable constraints on its assets become a reality.

With interest rate jitters and uncertainty over the eventual judicial decision, MetLife’s option premiums are higher than is typically the case. However, in the world of my ideal youth, the stock market would have already discounted the probabilities of future interest rate increases and the upheld designation of the company as being systemically important.

With Intel’s announcement, this wasn’t a particularly good week for “old technology.” For Seagate Technolgy (NASDAQ:STX) the difficulties this week were just a continuation since its disappointing earnings in January. After its earnings plunge and an attempted bounce back, it is now nearly 9% lower than at the depth of its initial January drop.

That continued drop in share price is finally returning shares to a level that is getting my attention. With its dividend, which is very generous and appears to be safe, still two months away, Seagate Technology may be a good candidate for the sale of put contracts and if opening such a position and faced with assignment, I would consider trying to rollover as long as possible, either resulting in an eventual expiration of the position or being assigned and then in a position to collect the dividend.

Finally, for an unprecedented fourth consecutive week, I’m going to consider adding shares of United Continental (NYSE:UAL) as energy prices have recaptured its earlier lows. Those lows are good for UAL and other airlines and by and large the share prices of UAL and representative oil companies have moved in opposite directions.

I had shares of UAL assigned again this past Friday, as part of a pairs kind of trade established a few weeks ago. I still hold the energy shares, which have slumped in the past few weeks, but would be eager to once again add UAL shares at any pullback that might occur with a bounce back in energy prices.

The volatility and uncertainty inherent in shares of UAL has made it possible to buy shares and sell deep in the money calls and still make a respectable return for the week, if assigned.

That’s a risk – reward proposition that’s relatively easy to embrace, even as the risk is considerable.

 

Traditional Stocks: Altria, American Express, MetLife, The Gap

Momentum Stocks: Seagate Technology, United Continental

Double Dip Dividend: Las Vegas Sands (3/19)

Premiums Enhanced by Earnings: none

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

Weekend Update – March 1, 2015

It was interesting listening to the questioning of FOMC Chairman Janet Yellen this week during her mandated two day congressional appearance.

The market went nicely higher on the first day when she was hosted by the more genteel of the two legislative bodies. The apparent re-embrace of her more dovish side was well received by the stock market, even as bond traders had their readings of the tea leaves called into question.

While the good will imparted by suggesting that interest rate increases weren’t around the corner was undone by the Vice-Chair on Friday those bond traders didn’t get vindicated, but the stock market reacted negatively to end a week that reacted only to interest rate concerns.

His candor, or maybe it was his opinion or even interpretation of what really goes on behind the closed doors of the FOMC may be best kept under covers, especially when I’m awaiting the likelihood of assignment of my shares and the clock is ticking toward the end of the trading week in the hope that nothing will get in the way of their appointed rounds.

Candor got in the way.

But that’s just one of the problems with too much openness, particularly when markets aren’t always prepared to rationally deal with unexpected information or even informed opinion. Sometimes the information or the added data is just noise that clutters the pathways to clear thinking.

Yet some people want even more information.

On the second day of Yellen’s testimony she was subjected to the questioning of those who are perennially in re-election mode. Yellen was chided for not being more transparent or open in detailing her private meetings. It seemed odd that such non-subtle accusations or suggestions of undue influence being exerted upon her during such meetings would be hurled at an appointed official by a publicly elected one. That’s particularly true if you believe that an elected official has great responsibility for exercising transparency to their electorate.

Good luck, however, getting one to detail meetings, much less conversations, with lobbyists, PAC representatives and donors. You can bet that every opacifier possible is used to make the obvious less obvious.

But on second thought, do we really need even more information?

I still have a certain fondness for the old days when only an elite few had timely information and you had to go to the library to seek out an updated copy of Value Line in the hopes that someone else hadn’t already torn out the pages you were seeking.

Back then the closest thing to transparency was the thinness of those library copy pages, but back then markets weren’t gyrating wildly on news that was quickly forgotten and supplanted the next day. That kind of news just didn’t exist.

You didn’t have to worry about taking the dog out for a walk and returning to a market that had morphed into something unrecognizable simply because a Federal Reserve Governor had offered an opinion in a speech to businessmen in Fort Worth.

Too much information and too easy access and the rapid flow of information may be a culprit in all of the shifting sands that seem to form at the base of markets and creating instability.

I liked the opaqueness of Greenspan during his tenure at the Federal Reserve. During that time we morphed from investors largely in the dark to investors with unbelievable access to information and rapidly diminishing attention spans. Although to be fair, that opaqueness created its own uncertainty as investors wouldn’t panic over what was said but did panic over what was meant.

If I had ever had a daughter I would probably apply parental logic and suggest that it might be best to “leave something to the imagination.” I may be getting old fashioned, but whether it’s visually transparent or otherwise, I want some things to be hidden so that I need to do some work to uncover what others may not.

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

It’s difficult to find much reason to consider a purchase of shares of Chesapeake Energy (NYSE:CHK), but exactly the same could have been said about many companies in the energy sector over the past few months. There’s no doubt that a mixture of good timing, luck and bravery has worked out for some willing to take the considerable risk.

What distinguishes Chesapeake Energy from so many others, however, is that it has long been enveloped in some kind of dysfunction and melodrama, even after severing ties with its founder. Like a ghost coming back to haunt his old house the legacy of Aubrey McClendon continues with accusations that he stole confidential data and used it for the benefit of his new company.

Add that to weak earnings, pessimistic guidance, decreasing capital expenditures and a couple of downgrades and it wasn’t a good week to be Chesapeake Energy or a shareholder.

While it’s hard to say that Chesapeake Energy has now hit rock bottom, it’s certainly closer than it was at the beginning of this past week. As a shareholder of much more expensive shares I often like to add additional lower cost lots with the intent of trying to sell calls on those new shares and quickly close out the position to help underwrite paper losses in the older shares. However, I’ve waited a long time before considering doing so with Chesapeake.

Now feels like the right time.

Its elevated option premiums indicate continuing uncertainty over the direction its shares will take, but I believe the risk-reward relationship has now begun to become more favorable as so much bad news has been digested at once.

It also wasn’t a very good week to be Bank of America (NYSE:BAC) as it well under-performed other large money center banks in the wake of concerns regarding its capital models and ability to withstand upcoming stress tests. It’s also never a good sign when your CEO takes a substantial pay cut.

If course, if you were a shareholder, as I am, you didn’t have a very good week, either, but at least you had the company of all of those analysts that had recently upgraded Bank of America, including adding it to the renowned “conviction buy” list.

While I wouldn’t chase Bank of America for its dividend, it does go ex-dividend this week and is offering an atypically high option premium, befitting the perceived risk that continues until the conclusion of periodic stress testing, which will hopefully see the bank perform its calculations more carefully than it did in the previous year’s submission to the Federal Reserve.

After recently testing its 2 year lows Caterpillar (NYSE:CAT) has bounced back a bit, no doubt removing a little of the grin that may have appeared for those having spent the past 20 months with a substantial short position and only recently seeing the thesis play out, although from a price far higher than when the thesis was originally presented.

While it’s difficult to find any aspect of Caterpillar’s business that looks encouraging as mining and energy face ongoing challenges, the ability to come face to face with those lows and withstand them offers some encouragement if looking to enter into a new position. Although I rarely enter into a position with an idea of an uninterrupted long term relationship, Caterpillar’s dividend and option premiums can make it an attractive candidate for longer term holding, as well.

Baxter International (NYSE:BAX) is a fairly unexciting stock that I’ve been excited about re-purchasing for more than a year. I generally like to consider adding shares as it’s about to go ex-dividend, as it is this week, however, I had been also waiting for its share price to become a bit more reasonable.

Those criteria are in place this week while also offering an attractive option premium. Having worked in hospitals for years Baxter International products are ubiquitous and as long as human health can remain precarious the market will continue to exist for it to dominate.

Las Vegas Sands (NYSE:LVS) has certainly seen its share of ups and downs over the past few months with very much of the downside being predicated on weakness in Macao. While those stories have developed the company saw fit to increase its dividend by 30%. Given the nature of the business that Las Vegas Sands is engaged in, you would think that Sheldon Adelson saw such an action, even if in the face of revenue pressures, as being a low risk proposition.

Since the house always wins, I like that vote of confidence.

Following a very quick retreat from a recent price recovery I think that there is more upside potential in the near term although if the past few months will be any indication that path will be rocky.

This week’s potential earnings related trades were at various times poster children for “down and out” companies whose stocks reflected the company’s failing fortunes in a competitive world. The difference, however is that while Abercrombie and Fitch (NYSE:ANF) still seems to be mired in a downward spiral even after the departure of its CEO, Best Buy (NYSE:BBY) under its own new CEO seems to have broken the chains that were weighing it down and taking it toward retail oblivion.

As with most earnings related trades I consider the sale of puts at a strike price that is below the lower range dictated by the implied move determined by option premiums. Additionally, my preference would be to sell those puts at a time that shares are already heading noticeably lower. However, if that latter condition isn’t met, I may still consider the sale of puts after earnings in the event that shares do go down significantly.

While the options market is implying a 12.6% move in Abercrombie and Fitch’s share price next week a 1% ROI may be achieved even if selling a put option at a strike 21% below Friday’s close. That sounds like a large drop, but Abercrombie has, over the years, shown that it is capable of such drops.

Best Buy on the other hand isn’t perceived as quite the same earnings risk as Abercrombie and Fitch, although it too has had some significant earnings moves in the recent past.

The options market is implying a 7% move in shares and a 1% ROI could potentially be achieved at a strike 8.1% below Friday’s close. While that’s an acceptable risk-reward proposition, given the share’s recent climb, I would prefer to wait until after earnings before considering a trade.

In this case, if Best Buy shares fall significantly after earnings, approaching the boundary defined by the implied move, I would consider selling puts, rolling over, if necessary to the following week. However, with an upcoming dividend, I would then consider taking assignment prior to the ex-dividend date, if assignment appeared likely.

Finally, I end how I ended the previous week, with the suggestion of the same paired trade that sought to take advantage of the continuing uncertainty and volatility in energy prices.

I put into play the paired trade of United Continental Holdings (NYSE:UAL) and Marathon Oil (NYSE:MRO) last week in the belief that what was good news for one company would be bad news for the other. But more importantly was the additional belief that the news would be frequently shifting due to the premise of continuing volatility and lack of direction in energy prices.

The opening trade of the pair was initiated by first adding shares of Marathon Oil as it opened sharply lower on Monday morning and selling at the money calls.

As expected, UAL itself went sharply higher as it and other airlines have essentially moved opposite

ly to the movements in energy prices over the past few months. However, later that same day, UAL gave up most of its gains, while Marathon Oil moved higher. A UAL share price dropped I bought shares and sold deep in the money calls.

In my ideal scenario the week would have ended with one or both being assigned, which was how it appeared to be going by Thursday’s close, despite United Continental’s price drop unrelated to the price of oil, but rather related to some safety concerns.

Instead, the week ended with both positions being rolled over at premiums in excess of what I usually expect when doing so.

Subsequently, in the final hour of trading, shares of UAL took a precipitous decline and may offer a good entry point for any new positions, again considering the sale of deep in the money calls and then waiting for a decline in Marathon Oil shares before making that purchase and selling near the money calls.

While the Federal Reserve may be data driven it’s hard to say what exactly is driving oil prices back and forth on such a frequent and regular basis. However, as long as those unpredictable ups and downs do occur there is opportunity to exploit the uncertainty and leave the data collection and interpretation to others.

I’m fine with being left in the dark.

 

Traditional Stocks: Caterpillar, Marathon Oil

Momentum Stocks: Chesapeake Energy, Las Vegas Sands, United Continental Holdings

Double Dip Dividend: Bank of America (3/4), Baxter International (3/9)

Premiums Enhanced by Earnings: Abercrombie and Fitch (3/4 AM), Best Buy (3/4 AM)

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

Weekend Update – December 14, 2014

On a cruise ship you only know the answer to the question of “How low can you go” once you’ve met the physical limits of your body and the limit of your ability to balance yourself.

Other than losing a little self-respect, maybe a little embarrassment in front of a bunch of drunken strangers, there’s not too much downside to playing the game.

When it comes to the price of oil the answer isn’t so clear, mostly because the answer seemed so clear for each of the past few weeks and has turned out to be anything other than clear. Besides the lack of clarity, the game has consequences that go well beyond self-respect and opening yourself up to embarrassment.

While we all know that at some point the law of “Supply and Demand” will take precedence over the intrusion of a cartel, the issue becomes one of time and how long it will take to set in motion the actions that are in response to the great opportunities created by low cost energy.

Until a few days ago we thought we were in recently uncharted territory, believing that the reduction in oil prices was due to an increase in supply that itself was simply due to increasing production in the United States.

However, with Friday’s release of China’s Industrial Production data, as well as an earlier remark by a Saudi Arabian Oil Minister, there was reason to now believe that the demand side of the equation may not have been as robust as we had thought.

While there’s not a strong correlation between sharply declining oil prices and recession, that has to now be considered, at least for much of the rest of the world.

The United States, on the other hand, may be going in a very different direction as is the rest of the world, until such factors as the relative strength of the US dollar begin to catch up with our good fortunes, as an example of yet another kind of cycle that has real meaning on an every day basis in an ever more inter-connected world.

While there may not be a substantive decoupling between the US and other world economies, at the moment all roads seem to be leading to our shores and cheap oil can keep that road a one way path longer than is usually the case with economic cycles.

When considering the amount of evil introduced into the world as a result of oil profits supporting nefarious activities and various political agenda in countries many of us never even knew existed, the idea that energy self-reliance is paramount strategically becomes tangible. It also should make us wonder why we’ve essentially ignored doing anything for the past 40 years and why we would delay, even for another second the ability to break free from a position of submissiveness.

While most free market capitalists don’t like the idea of a government hand, there is something to be said for government support of US oil production and exploration activities particularly when they are suffering from low prices due to their successes and might have to curtail activity, as some in the world would like to see.

Insofar as the success of US producers adds to the tools with which we may face the rest of the sometimes less than friendly world, there is reason for our government to act as an anti-cartel a

t times and keep prices artificially low, while protecting local producers from short term pain they endure that helps to make the nation lass susceptible to pressures from other nations who are more than happy to control our destiny.

Great time to increase the Strategic Petroleum reserve, anyone?

In the meantime, though, that pain is being shared among investors in most every sector, as the volatility index, which usually moves in a direction opposite the market, is again moving higher as it has a habit of doing every two months, or so.

As an option seller that’s one bar I like seeing moved higher and higher, until someone asks the obvious question”

“How high will it go?”

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

From just about every perspective the stocks considered this week reads as a “Who’s Who of Losers.”

Sometimes there are good reasons, other times the reasons aren’t quite as clear, but even as oil prices may be playing a game of “how low can you go,” individual stocks across all sectors are being taken along for a nasty ride, that thus far has been nothing more than a 3.5% move from its recent high.

McDonalds (NYSE:MCD) is an example of a stock that continually finds itself on the wrong side of $100 and periodically finds itself on the wrong side of public opinion, as well. At the moment, it’s on the wrong side of each of those challenges and there is probably an association between the two.

While the news can get worse for McDonalds, a DJIA component, as it releases more US and international sales data, it is finally doing something that its franchisees have been wanting for quite a while, as it returns to some sense of simplicity in its menu. That simplicity will help reign in costs that can then reign in customers who have to balance cost and health consciousness.

Another DJIA component, Verizon (NYSE:VZ) also had a bad week, as it lowered profit forecasts and is feeling the pain of its competition with other carriers. It is also feeling the pain of underwriting the true costs of the wildly popular iPhone 6.

Having patiently waited for shares to return to the $47.50 level, it breezed right through that, heading straight to its low point for 2014.

With an upcoming dividend and option premiums increasing along with the volatility of its share price, Verizon is again becoming appealing, although there will be the matter off those earnings next month, that we’ve already been warned about, but are still likely to come as a surprise when reality hits.

Yet another DJIA component, Caterpillar (NYSE:CAT) was on everyone’s “worst company and worst CEO” list and was even famously Jim Chanos’ short of the year back in July 2013. As most know, shares have traded well above those July 2013 levels and even with its recent 20% decline, it is still well above those levels.

While Caterpillar has some Chinese exposure there is often a reaction that is out of proportion to that exposure and that brings opportunity. I have long liked shares at $85, but it has been a long time since that level has been seen, much to Jim Chaos’ dismay. On the other hand, $90 may be close enough to consider initiating a position following this most recent round of weakness.

While EMC Corporation (NYSE:EMC) isn’t close to being a member of the DJIA it certainly wasn’t shielded from the losses, as it fell 6.5% on the week that was harsh to the technology sector, despite it being difficult to draw a straight line connecting oil and technology sectors.

Just a week or two ago I was willing to buy EMC shares at $30, but now, as with so many stocks, the question of “how low will it go?” must be raised, even if there is no logical reason to suspect anything lower, as long as it’s majority owned VMWare (NYSE:VMW) can do better than a 12% decline for the week.

The China story is reflected in 3 stocks highlighted this week and none of the stories are very good. Neither Joy Global (NYSE:JOY), Las Vegas Sands (NYSE:LVS) nor YUM Brands (NYSE:YUM) had very good weeks, as a combination of stories from China struck at the core of their respective businesses.

Las Vegas Sands goes ex-dividend this week and despite its name, has significant interests in Macao. The gaming news coming from Macao has been a stream of negativity for the past 4 months, including such issues as the impact of smoking bans on casino income.

I already own 2 lots of Las Vegas Sands and have traded in and out of some additional lots these past few months, It’s Chinese exposure certainly has risk at the moment, but the dividend and premiums at this very low price level can serve as a good entry point or even to average down on existing shares.

YUM Brands has had years of experience in the Chinese marketplace and has had numerous challenges and obstacles come its way. Public health scares of airborne diseases, tainted food supplies and more, in addition to the normal cycles that economies go through.

Somehow, YUM Brands has been able to survive an onslaught of challenges, although it has been relatively slow in boun

cing back from the latest food safety related issue. It lowered its profit forecasts this past week and took a very large hit, however, it subsequently recovered about half of the loss during the final two days of the week when the broader market was substantially lower.

Joy Global reports earnings next week and tumbled on Friday upon release of Chinese government data. The drop would seem consistent with Joy Global’s interests in China. However, what has frequently been curious is that Joy Global often paints a picture of its activity and importantly its forward activity in a light different from “official” government reports.

Following Friday’s pessimistic report from China, Joy Global plunged to its 5 year low in advance of earnings. Ideally, that is a more favorable condition if considering a position in advance of earnings, particularly if selling puts, as the concern for further drops can amplify the premiums on the puts and potentially provide a more appealing entry point for shares.

Blackberry (NASDAQ:BBRY) also reports earnings next week and it, too, has fallen significantly in the past month, having declined nearly 20% in that time.

I’m not really certain that anyone knows what its CEO John Chen has in mind for the company, but most respect his ability to do something constructive with the carcass that he was left with, upon arriving on the scene.

My intuition tells me that his final answer will be a sale to a Chinese company, as a last resort, and that will understandably be met with lots of resistance on both security and nationalism concerns. Until then, there’s always hope for making some money from the shares, but once that kind of sale is scuttled, the Blackberry story will have sailed.

For now, however, the option market is implying an 11.6% move in shares upon earnings news. Meanwhile, a 1.5% weekly ROI can be achieved through the sale of puts if shares do not fall more than 15%

Finally, after nothing but horrid news from the energy sector over the past weeks, at some point there comes a time when it just seems appropriate to pull the trigger and commit to a turnaround that is hopefully coming sooner, rather than later.

There is no shortage of names to choose from among, in that regard, but the one that stands out for me is the one that was somewhat ahead of the curve and has taken more pain than others, by virtue of having eliminated its dividend, which had been unsustainably high for quite a while.

Seadrill (NYSE:SDRL) is now simply an offshore drilling and services company, that is beleaguered like all of the rest, but not any longer encumbered by its dividend.

What it offers may be a good example of just how low something can go and still be a viable and respectable company, while offering a very attractive option premium that reflects the risk or the opportunity that is implied to come along with ownership of shares.

Although the bar on Seadrill’s price may still be lowered if more sector bad news is forthcoming, Seadrill may also be the first poised to pop higher once that

cycle reawakens.

Traditional Stocks: Caterpillar, EMC Corporation, McDonalds, Verizon

Momentum: Seadrill, YUM Brands

Double Dip Dividend: Las Vegas Sands (12/16 $0.50)

Premiums Enhanced by Earnings: Joy Global (12/17 AM), Blackberry (12/19 AM)

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

Weekend Update – November 2, 2014

 It’s really hard to know what to make of the past few weeks, much less this very past one.

On an intra-day basis having the S&P 500 down 9% from its high point seemed to be the stop right before that traditional 10% level needed to qualify as a bona fide “correction.”

But something happened.

What happened isn’t really clear, but if you were among those that credited the words of Federal Reserve Governor James Bullard, who suggested that the exit from Quantitative Easing should be delayed, the recovery that ensued now appears more of a coincidence than a result.

That’s because a rational person would have believed that if the upcoming FOMC Statement failed to confirm Bullard’s opinion there would be a rush to the doors to undo the rampant buying of the preceding 10 days that was fueled under false pretenses.

But that wasn’t the case.

In fact, not only did the FOMC announce what they had telegraphed for almost a year, but the previously dissenting hawks were no longer dissenters and a well known dove was instead the one doing the dissenting.

I don’t know about you, but the gains that ensued on Thursday, had me confused, just as the markets seemed confused in the two final trading hours after the FOMC Statement release. You don’t have to be a “perma-bear” to wonder what it’s going to take to get some of your prophesies to be fulfilled.

Even though Thursday’s gains were initially illusory owing to Visa’s (V) dominance of the DJIA, they became real and broadly applied as the afternoon wore on. “How did that make any sense?” is a question that a rationally objective investor and a perma-bear might both find themselves asking as both are left behind in the dust.

I include myself in that camp, as I didn’t take advantage of what turned out to be the market lows as now new closing highs have been set.

Those new highs came courtesy of the Bank of Japan on Friday as it announced the kind of massive stimulus program that we had been expecting to first come from the European Central Bank.

While the initial reaction was elation and set the bears further into despair it also may have left them wondering what, if any role rational thought has left in the processes driving stocks and their markets.

Many, if not most, agree that the Federal Reserve’s policy of Quantitative Easing was the primary fuel boosting U.S. stock markets for years, having drawn foreign investor demand to our shores. Now, with Japan getting ready to follow the same path and perhaps the ECB next in line, we are poised to become the foreigners helping to boost markets on distant shores.

At least that what a confused, beaten and relatively poorer bear thinks as the new week gets underway.

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

I love listening to Howard Schultz defending shares of Starbucks (SBUX) after the market takes the stock lower after earnings. No one defends his company, its performance and its outlook better than Howard Schultz.

But more importantly, he has always followed up his assertions with results.

As with many stocks over the past two weeks, Starbucks is one, that in hindsight I should have purchased two weeks ago, while exercising rational thought processes that got in the way of recognizing bargain prices. Friday’s drop still makes it too late to get shares at their lows of 2 weeks ago, but I expect Schultz to be on the correct side of the analysis once again.

There’s not much disagreement that it has been a rough month for the energy sector. While it did improve last week, it still lagged most everything else, but I think that the Goldman Sachs (GS) call for $75 oil is the turning point. Unfortunately, I have more energy stocks than I would have liked, but expect their recovery and am, hesitatingly looking to add to the position, starting with British Petroleum (BP) as it is ex-dividend this week. That’s always a good place to start, especially with earnings already out of the way.

While I continue to incorrectly refer to BP as “British Petroleum” that is part of my legacy, just as its Russian exposure and legal liabilities are part of its legacy. However, I think that all of those factors are fully  priced in. Where I believe the opportunity exists is that since the September 2014 highs up to the Friday’s highs, BP hasn’t performed as well as some of its cohorts and may be due for some catch-up.

I purchased shares of Intel (INTC) the previous week and was hoping to capture its dividend, as its ex-dividend date is this week. 

Last week Intel had quite a ride as it alternated 4% moves lower and then higher on Thursday and Friday. 

Thursday’s move, which caught most everyone by surprise was accompanied by very large put option trading, including large blocks of aggressive in the money puts with less than 2 days until expiration and even larger out of the money puts expiring in 2 weeks.

Most of the weekly puts expired worthless, as there was fairly low activity on Friday, with no evidence of those contracts getting rolled forward, as shares soared.

While initially happy to see shares take a drop, since it would have meant keeping the dividend for myself, rather than being subject to early assignment, I now face that assignment as shares are again well above the strike. 

However, while entertaining thoughts of rolling those shares over to a higher strike at the same expiration date or the same strike at next week’s expiration, I may also consider adding additional shares of Intel,  for its dividend, premiums and share appreciation, as well. Given some of the confusion recently about prospects for the semi-conductor industry, I think Intel’s vision of what the future holds is as good as the industry can offer if looking for a crystal ball.

What can possibly be said about Herbalife (HLF) at this point that hasn’t already been said, ad nauseum. I’m still somewhat stunned that a single author can write 86 or so articles on Herbalife in a 365 day period and find anything new to say, although there is always the chance that singular opinion expressed may be vindicated.

The reality is that we all need to await some kind of regulatory and/or legal decisions regarding the fate of this company and its business practices.

So, like any other publicly traded company, whether under an additional microscope or not, Herbalife reports earnings this week, having announced it also reached an agreement on Friday regarding a class action suit launched by a past dis

tributor of its products.

The options market is predicting a 16% movement in shares upon earnings release. At its Friday closing price, the lower end of that range would find shares at approximately $44. However, a weekly 1% ROI could still be obtained if selling a put option 35% below Friday’s close.

That is an extraordinary margin, but it may be borne out of extraordinary circumstances, as Monday’s earnings release may include other information regarding pending lawsuits, regulatory or legal actions that could conceivably send shares plummeting.

Or soaring.

On a more sedate, and maybe less controversial note, Whole Foods (WFM) reports earnings this week. I’m still saddled with an expensive lot of shares, that has been offset a bit by the assignment of 4 other lots this year, including this past week.

After a series of bad earnings results and share declines I think the company will soon be reporting positive results from its significant national expansion efforts.

While I generally use the sale of puts when considering an earnings related trade, usually because I would prefer not owning shares, Whole Foods is one that I would approach from either direction. While its payout ratio is higher than its peers, I think there may also be a chance that there will be a dividend increase, particularly as some of the capital expenditures will be decreasing.

While not reporting earnings this week, The Gap (GPS) is expected to provide monthly same store sales. It continues to do so, going against the retail tide, and it often sees its shares move wildly. Those moves are frequently on a monthly alternating basis, which certainly taxes rational thought.

Last month, it reported decreased same store sales, but also coupled that news with the very unexpected announcement that its CEO was leaving. Shares subsequently plummeted and have been very slow to recover.

As expected, the premium this week is significantly elevated as it reflects the risk associated with the monthly report. As with Whole Foods, this trade can also justifiably be approached wither from the direction of a traditional buy/write or put sale. In either case, some consideration should also be given to the fact that The Gap will also report its quarterly earnings right before the conclusion of the November 2014 option cycle, which can offer additional opportunity or peril.

Also like Whole Foods, I currently own a much more expensive lot of Las Vegas Sands (LVS), but have had several assigned lots subsequently help to offset those paper losses. Shares have been unusually active lately, increasingly tied to news from China, where Las Vegas Sands has significant interests in Macao.

Share ownership in Las Vegas Sands can be entertaining in its own right, as there has lately been a certain roller coaster quality from one day to the next, helping to account for its attractive option premium. In the absence of significant economic downturn news in China, which was the root cause of the recent decline, it appears that shares have found some support at its current level. Together with those nice premiums and an attractive dividend, I’m not adverse to taking a gamble on these always volatile shares, even in a market that may have some uncertainty attached to it.

Finally, Facebook (FB) and Twitter (TWTR) each reported earnings last week and were mentioned as potential earnings related trades, particularly through the sale of put options.

Both saw their shares drop sharply after the releases, however, the option markets predicted the expected ranges quite well and for those looking to wring out a 1% weekly ROI even in the face of post-earnings price disappointment were rewarded.

I didn’t take the opportunities, but still see some in each of those companies this week.

While Twitter received nothing but bad press last week and by all appearances is a company that is verging on some significant dysfunction, it is quietly actually making money. It just can’t stick with a set of metrics that are widely accepted and validated as having relevance to the satisfaction of analysts and investors.

It also can’t decide who to blame for the dysfunction, but investors are increasingly questioning the abilities of its CEO, having forgotten that Twitter was a dysfunctional place long before having gone public and long before Dick Costolo became CEO.

At its current price and with its current option premiums the sale of out of the money puts looks as appealing as they did the previous week, as long as prepared to rollover those puts or take assignment of shares in the event the market isn’t satisfied with assurances.

Facebook, on the other hand is far from dysfunctional. Presumably, its shares were punished once Mark Zuckerberg mentioned upcoming increased spending. Of course, there’s also the issue of additional shares hitting the markets, as part of the WhatsApp purchase.

Both of those are reasonable concerns, but it’s very hard to detract from the vision and execution by Zuckerberg and Cheryl Sandberg.

However, the option market continues to see the coming week’s options priced as if there was more than the usual amount of risk inherent in share pricing. I think that may be a mistake, even while its pricing of risk was well done the previous week.

Bears may be beaten and wondering what hit them, but a good tonic is profit and the sale of puts on Facebook could make bears happy while hedging their bets on a market that may put rational thought to rest for a little while longer.

Traditional Stocks:   Starbucks, The Gap

Momentum: Facebook, Twitter, Las Vegas Sands

Double Dip Dividend: British Petroleum (11/5), Intel (11/5)

Premiums Enhanced by Earnings: Herbalife (11/3 PM), Whole Foods (11/5 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.