Same As It Ever Was

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Includes: GM, JPM, MS, STX, WFM
by: George Acs

Summary

The difference between the first half of the first quarter of 2016 and its second half was astonishing, especially with a lack of any substantive reason for the difference.

A return to a dovish tone by Janet Yellen may have been responsible for the week's strength, as the Employment Situation Report added to confusion over what policy actions await.

Earnings season starts anew in just 2 weeks, but there may be little reason to believe it will finally become the catalyst we have long expected it to be.

I used to love comic books, but I was definitely never in the market for comic books based on great literature, unless a book report was due.

Normally engaged in less high brow reading pursuits, I knew enough to focus on key phrases found in the great works of literature. Those often held the theme and offered insight without having to commit to reading from cover to cover.

Unfortunately, sometimes those phrases from different comic books tended to coalesce and my graded book reports were often characterized by large red question marks.

Lyrics to a song may have no relationship to famous snippets from great works of literature, but this week reminded me of the "Talking Heads" always poignant question that one may find oneself asking:

"Well... How did I get here?"

It was really a week with no real direction, but it was the "Same As It Ever Was" and a perfect ending to the first quarter of 2016, which was truly a tale of two very different markets halves with much ado signifying nothing.

Despite there not being anything really different having occurred from one half of that quarter to the next half your head would have irreparably rolled had you succumbed to the temptation to cut loose, sell and run following the first 6 weeks.

For the Madame DeFarge's of the world keeping track of some of the decimated hedge funds and their performance, some of their sales in the face of mounting losses in particular positions offered both risk and opportunity to others.

If you stood around on March 31st, as the first quarter of 2016 came to its end and asked the same question as did the Talking Heads, you'd have no answer, unless you drew from upon some of those great literary snippets.

It was truly a tale of two markets with much ado signifying nothing.

With no real catalysts other than the bouncing price of oil, the final week of the quarter got somewhat of a lift from a one time reliable dove who had returned to her roots.

The market's reaction to the suggestion that the US economy and the world's economies may not be growing as strongly as anticipated by those having projected a series of interest rate increases in 2016, was clearly an embrace.

The shifting reaction to Friday's Employment Situation Report was more one of confusion, that even had cable television's talking heads wondering the same as the viewers.

"Well.... how did I get here?"

Of course, it would also help to know, as the second quarter of 2016 got its start, just where we're headed next as earnings season begins in just 2 weeks.

If it will truly be same as it ever was, earnings won't be much of a catalyst as it's unlikely that the kind of confidence exhibited by Jamie Dimon was widespread in the last quarter.

If it was same as it ever was it would be unlikely to see companies, acting as the stewards of shareholder's interests, actually doubling down on their buybacks at bargain share prices and doing the only thing that has reliably worked to increase earnings per share.

When you can't grow earnings, just shrink the number of shares.

And to really make it same as it ever was, make certain to do that as shares are reaching their highs.

For the rest of us just watching, it may just be that out generation's great piece of literature may turn out to be "The Walking Dead."

I don't yet know whether there are any great or memorable literary phrases to be found among those pages, such as "It was the best of times, it was the zombiest of times," but the title is too dangerously close to the reality of 2016.

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

One place where there has not been a tale of two halves has been in the financial sector.

To some degree that's curious, because many ascribe the turnaround that began on February 11th to the announcement that JP Morgan's (NYSE:JPM) Jamie Dimon could no longer resist the bargain price that the shares of his own company represented.

Yet the financial sector has under-performed the S&P 500 both in the first half of the first quarter of 2016 and in its second half, as well.

That's not to say that the performance of the financial sector in the final 6 weeks of the first quarter was bad, it's just that Jamie Dimon may have been better served by placing his confidence in a zombie index.

Among those badly battered during the first quarter of 2016, and in fact, in a bear correction, has been Morgan Stanley (NYSE:MS).

I currently own shares, having also bought shares and surrendered them to assignment on 4 previous occasions in a 1 month period, at the end of 2015.

Contrast that to the lot purchased on January 4, 2016 and you can really see a tale of two stories.

Looking at a 10 Year Treasury Note rate of 1.8%, I don't think that many talking heads would have predicted that to be the case at the end of the first quarter, except perhaps as an April Fool's joke.

Unless you believe that interest rates will keep setting one foot deeper and deeper into the grave, there may still be more of a recovery in store for financial sector stocks as the second quarter awaits.

Seagate Technology (NASDAQ:STX) is among a handful of stocks whose obituary has been written over and over again. Not because it is a poorly run company, but because for years the prevailing wisdom has been that storage was no different from a commodity, with every ear of corn being indistinguishable from the next.

As an end user, that may be very true. I don't particularly care what's inside the box nor what kind of technology it encompasses, but someone must still care and it can't all be related to price.

Performance and features must still be part of the equation.

For investors, Seagate Technology may not represent a truly great "investment" any longer, but for traders it has long been a repository of opportunity and excitement.

I generally like to consider Seagate Technolgy in terms of a sale of put options and I especially like its current price. That's especially the case since its very recent performance a 9% decline in the past 10 days.

Selling puts in the face of such losses usually entails a heightened option premium which offers greater downside protection.

In the past I have enjoyed rolling over those put positions as Seagate Technology often makes large and unexpected moves in either direction. Rolling over allows continuing premiums to accumulate while awaiting price recovery and expiration of the short put position.

The caveat is that Seagate Technology will report earnings in just 3 weeks. In the event that a short position is still open or in jeopardy of being assigned, I would consider rolling the position over to something other than the next weekly expiration date, in order to buy some additional time in the event of an unfavorable price movement.

The heightened premium that comes along with earnings risk may allow that rollover to be accomplished at a lower strike price, as well, offering a bit more of a cushion.

Of course, the other caveat is that a few weeks after earnings, Seagate is expected to be ex-dividend and that dividend is very rich.

It appears to still be marginally sustainable, but with an ex-dividend date coming up, I would rather be in a position to own shares, get the dividend and have a call option buyer subsidize some of the share price dividend related reduction. That's certainly preferable to being a put seller and subsidizing a reduced premium in the face of a known drop in share price.

One dividend that isn't very rich is the one that Whole Foods (NASDAQ:WFM) is offering this coming week.

I have not had good success with Whole Foods share ownership over the years, especially if I include the missed opportunities in its early years.

In addition to two uncovered lots that I currently own, previously owned lots have mostly all required more maintenance than they may have been worth, even if having out-performed the S&P 500 during the various holding periods.

Sometimes, that's not enough.

At the moment, what Whole Foods has going for it is that it is approaching a point at which it has found support. While approaching that point and trading at a long standing mid-point of its price range, shares are offering a respectable option premium while also being ex-dividend this week.

I like that combination, despite not having liked my past experiences.

In the season of redemption, this may be the one that I like the most for the week.

Finally every week brings a reminder of just how imperfect of a science investing in stocks can be.

To some degree a portion of that imperfection has to come from those who are paid to be analytical and quantitative in the pretense that there actually is some sort of science behind what makes stock prices move.

General Motors (NYSE:GM) announced monthly sales and despite having been higher, they didn't meet expectations.

That reminded me of something Jamie Dimon said more than a year ago at Davos, when he so cynically and appropriately said that maybe the analysts were wrong in the expectations and that JP Morgan was right on its targets.

Even in science there are expectations of imperfections in theory that result in a need for tolerances. In stock investing when those expectations are realized there isn't much in the way of tolerance.

However, rather than giving up on the theory behind the science, everyone keeps returning, only to so often be caught in the very same current.

At this price and following this disappointment, I simply like shares of General Motors. Having just lost shares to assignment at a bit more than $1 above Friday's close, that is the kind of opportunity that a serial buy and write kind of trader longs for even if it represents nothing novel nor exciting.

Traditional Stocks: General Motors, Morgan Stanley

Momentum Stocks: Seagate Technology

Double-Dip Dividend: Whole Foods (4/6 $0.13)

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.

Disclosure: I am/we are long GM, MS, WFM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may buy/add shaers or sell puts in zGM, MS, STX and WFM