- Government intervention, direct and indirect, was particularly active this week in determining market and individual stock movements.
- The boost to equities provided the previous week by Janet Yellen had no lingering effect this past week, being offset by a large revision to GDP.
- There's little reason to believe that trading on fundamentals is going to make a return in the very near future, even as earnings season arrives once again next week.
There wasn't much going on last week, but for what there was, you can be certain that there was a role played by some branch of government.
By no means I am a libertarian and I certainly understand the need for a beneficent government to protect those things that we hold dear, from assets to zoning, but this past week government seemed to be the singular driver of news during a week that was otherwise devoid of news.
For starters, we received yet another revision to the first quarter GDP, indicating a 2.9% decrease. That's not the sort of growth that engenders much confidence in the economy, but it's also the sort of report that doesn't engender much confidence in the reporter.
Certainly for a market that is said to discount the future, learning that what you believed to have been true was patently false has to also shake confidence, particularly when you begin to wonder whether your own government's reporting of economic data is any better than that from the nation we so readily disparage for the veracity of its reporting - China.
With the economic calendar so important each week, this coming week's early Employment Situation Report, which has been fairly inconsequential for the past 6 months, may prove otherwise if either it offers data consistent with the abysmal GDP statistic or is qualified by large downward revisions of previous months.
But with objective data reporting out of the way, the early part of the week was focused on Supreme Court rulings that were scheduled to be released as the current session comes to its end. The decision regarding the novel technology behind the Aereo product that delivers broadcast transmission to any internet enabled device was ruled unconstitutional and any company with local broadcasting interests soared on the decision. Essentially, the Supreme Court said that an antennae that is leased and captures broadcasts is illegal, while an antennae that is purchased and captures broadcast television is not.
Then the Internal Revenue Service came into focus as it ruled favorably on Iron Mountain's (NYSE:IRM) request to convert to a REIT, which was especially surprising since it had tentatively given an adverse opinion last year. The result was a surge in share price confounding those who believed that the price already fully discounted the opinion. This ruling could open the way for others to consider separating that portion of their business that generates revenues in corporate owned facilities into a REIT and enjoy those tax benefits.
Then there was the matter of the refiners that awoke Thursday morning to the shocking news that the US Department of Commerce was going to allow essentially unrefined oil to be exported, even without a license, thereby likely reducing margins at the refiners. That sector saw some brutalized victims and some clear victors from the decision.
Then there was the case of Verizon (NYSE:VZ) that had a contract in Germany canceled for fears that the NSA could use the devices as an easy conduit for surreptitiously gathering intelligence.
Finally, Barclays (NYSE:BCS) drew attention from local government as the New York State Attorney General's office filed suit against Barclays claiming "fraud and deceit" in the manner their dark pool trading was executed. Of course, when there's one cockroach you can be certain that there are more to be found, so the financial sector becomes more widely suspect as Barclays is scrutinized.
But to be clear, I was certainly on the side of government when Janet Yellen just the previous week gave reason to believe that interest rates would remain low, thereby suggesting that equities would be a more advantageous investment vehicle than bonds. Unfortunately, as soon as this past week started, that news was old and long forgotten, as the message had no carry over to this week's trading.
While some of last week's events were scheduled, others came as a surprise in more than their content. Hopefully this week will be one when the hand of government will remain invisible and allow the market to trade on something that hasn't been seen in a long while - fundamentals.
However, now isn't the time to hold one's breath and it's not necessarily likely that next week's beginning of another earnings season will be the time to do so, either.
As usual, the week's potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or "PEE" categories.
HollyFrontier (NYSE:HFC) was one of those brutalized refiners whose shares plummeted upon the news that certain unrefined products could now be exported. The share drop has brought HollyFrontier to the lower end of the range in which it had been trading and in which I currently own shares. I've done so on five occasions this year and have watched shares go up and down in alternating quantum stages during that time. While I believe the reaction to the news may have been overdone and would like to add shares, as HollyFrontier has an appealing option premium, regular dividend and routinely pays a special dividend, as well, I would likely await to see some stability in its price as the week opens before making the decision.
I've been waiting a while to re-purchase shares of DuPont (NYSE:DD) and after its surprise announcement of a lower earnings forecast on reduced seed sales that time may have arrived. At one time DuPont was a very frequent holding, but it's been nearly two years since that last purchase. Since that time DuPont has started offering weekly options and much more recently expanded weekly options, greatly increasing its appeal. Like many other stocks that I consider for purchase, DuPont has that nice troika of option premium, dividend and price stability that can serve to minimize some market tremors.
Another major decliner this week was Dollar General (NYSE:DG), which plunged upon news that its CEO was planning to retire sometime in 2015. Presumably, the rationale for that plunge was that the company was therefore less likely to be involved in a buyout or merger with Family Dollar Stores (NYSE:FDO) as has been rumored, in the near term.
That doesn't really seem to make very much sense to me. If the union of those two companies makes sense, as many believe that it does for both companies, it's not terribly likely that a company would give up on the idea and simply go on hiatus. They would most certainly get the process moving at an appropriate time, while ensuring that CEO succession was closely aligned with the objectives defined by the board, which will continue to be chaired by its current CEO who has indicated he would stay on during the transition period.
I actually purchased some shares in the final couple of hours on Friday in the belief that I could get a quick assignment while shares recovered and anticipated doing another purchase this coming week.
Instead, shares stumbled while trading in a wide range in the final hour and I eventually rolled over shares. However, I think that the reaction was very much not only an over-reaction, but also the wrong reaction to what was really benign news. That leaves me in a position to consider further adding shares this week.
Verizon seems to be paying a price for the US government's alleged spying on German Prime Minister Angela Merkel and is reportedly losing government contracts in Germany to Deutsche Telecom (OTCPK:DTEGF) over concerns that Verizon cell phones may be eminently capable of doing the NSA's bidding overseas. A late day recovery restored shares above $49, but I would be anxious to purchase shares if approaching that level again, mindful of its ex-dividend date the following week.
Bristol-Myers is a frequent holding and I currently own two lots, having saved one from assignment specifically because I wanted to retain the dividend this week. It has traded in a range recently as some good news about a drug used in the treatment of melanoma has lifted shares from the low end of that range that I believe may carry shares back toward the $52 range if the overall market doesn't fade.
Medtronic has been much in the news lately due to its proposed $43 billion buyout of Covidien (NYSE:COV), an Ireland based company. While inversions are increasingly in our lexicon these days, this merger makes sense on more than just a tax basis.
Trading near its yearly highs isn't generally a place I want to be when opening a position, but I don't foresee any near term threat to Medtronic's share price and it does offer a decent dividend, made more appealing if shares are assigned relatively quickly.
Sysco is just one of those companies that is everywhere you probably don't always want to be. It's non-flashy, utilitarian and below the radar, yet it is fairly indispensable and reliable in terms of what it offers to a broad range of customers. Shares have only recently begun trading weekly and expanded weekly options, and while offering a nice dividend and option premium, they also offer some opportunity for share appreciation.
Finally, Whole Foods (NASDAQ:WFM) also goes ex-dividend on July 1, but purchasing for the purposes of capturing the paltry dividend may be as bad of an idea as it has been for me to have purchased shares in the past. I currently own shares and have watched them tumble as the company faced increasing competition, bad weather and significant expansion efforts. In addition, an occasional comment too many and too controversial by one of its co-CEOs does nothing to help it recover its former glory.
Whole Foods is one of those rare companies that has previously recovered its lost glory, although it did take nearly 7 years to return to its 2005 price peak. I don't really have the kind of patience, but the extent of the climb isn't as steep as in the past.
I think that its bad news is behind it and it has shown some stability at its current price. While I often like to purchase shares after a price drop, especially if I already own shares, I haven't found the reason to do so with Whole Foods while watching its value erode.
Unless there's a report coming from government agencies next week citing health hazards of organic food, I'm finally ready to add to my Whole Food holdings and may as well take that puny dividend for my troubles.
Traditional Stocks: DuPont, HollyFrontier, Verizon, Whole Foods
Momentum: Dollar General
Double Dip Dividend: Bristol-Myers Squibb (7/1), Medtronic (7/1), Sysco (7/1)
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.
Additional disclosure: I may buy/add shares or sell puts in BMY, DD, DG, HFC, MDT, SYY, VZ and WFM