The Best Laid Plans

|
Includes: DWDP, EBAY, MRO, MS, PYPL
by: George Acs
Summary

Predicting the future can be a very humbling enterprise.

The FOMC's crystal ball now sees fewer opportunities for interest rate increases in 2016 and traders predictably celebrated that news..

With the price of oil continuing to climb higher the prediction that stocks would disassociate from oil hasn't been borne out, despite some occasional drifts away from one another.

Best laid plans often have a way of working out other than expected.

On slow days I make it a point to go and sit in anyone's waiting room, even without an appointment, just to read stale issues of business and news magazines.

Eventually I get up and leave and feel better about my track record.

Doing that tends to reinforce the belief that the "experts" called upon to predict what awaits in the future are invariably wrong, even as self tying sneakers depicted in "Back to the Future" may now become somewhat of a reality.

Sometimes it's the timing that's all wrong and sometimes it's the concept.

Unless you put much stock in a prediction, such as converting all of your assets to gold in anticipation of yet another Doomsday, they tend to be forgotten unless a dusty magazine is picked up.

The plan to be awash in the one true and universal currency might have seemed like a good idea until coming to the realization that it's hard to spread on a slice of bread, even if you actually had a slice of bread.

While you can't be very certain about the accuracy of a futurist's predictions, you can be very certain that no self-respecting expert on the future keeps a complete scorecard and most would probably be advocates of having physician's offices regularly rotate their stock of reading materials.

When the FOMC does finally decide to raise interest rates again most will likely have forgotten their earlier prediction of the need for a series of rate hikes.

Not too long ago the FOMC was predicting a more robust economy for 2016 than has been the case and this past week the members saw things somewhat differently.

To its credit, the FOMC and Chairman Yellen didn't disown the past, which sometimes, due to revisionism can be just as difficult to discern as the future.

For what seems like the longest time, I have seen a future that has traders finally coming to the belief that a growing economy was good news and the need to continue cheap money policy was bad news.

Conceptually that has to make sense, so I'll blame poor timing on the poor progress toward changing sentiment.

I've also been waiting for the longest time to see lower oil prices prod a consumer based economy toward growth and taking corporate revenues and profits to higher levels.

And I keep waiting for stock prices and oil prices to disassociate from one another during a period that oil prices are more influenced by oversupply and not reduced demand.

The track record on those is pretty abysmal, although for some very brief periods over the past few weeks it looked as if that disassociation might finally be coming.

If your memory can go back far enough, you may remember that as 2015 was coming to its end many were predicting that 2016 would follow the pattern seen in the year following a flat year in markets.

It didn't take very long for that prediction to itself fall flat.

But what no one would have predicted was that as bad as the first 6 weeks of the year had been, the subsequent 5 weeks would erase the losses and perhaps even serve to rehabilitate the earlier prediction.

There is little economic news next week other than release of the GDP, which has been less impressive than predicted of late.

I can confidently predict that it will have no impact on Friday's stock market close, but I'm not willing to venture as far into the future as the following Monday.

At least I'm capable of learning from my mistakes and am equally confident in predicting that will not always be the case.

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

One thing that I would not have predicted was just how shortly following the market's embrace of the Dow Chemical (NYSE:DOW) and DuPont (NYSE:DD) merger deal the price premium would be lost.

With shares trading just above their pre-merger disclosure and having had gone below that level in the early part of 2016, I've believed that there was relatively little merger related risk associated with those shares.

I had bought shares twice after the merger announcement and am ready to do so again, particularly as shares have had a somewhat irrational pattern of following the price of oil and now that trend is higher.

With its option premium still reasonably attractive as there is still a perception of either oil or merger related risk, I also have my eyes on its ex-dividend date, which is at the end of the month.

For that reason I would probably look at selling an extended weekly option and if faced with a possible early assignment, I would consider further rolling the option over, if only to get some additional premium to offset the loss of the dividend to the option buyer.

Among the things that many predicted, including myself, was that financial sector stocks would perform nicely as the path for interest rates after the FOMC's decision at the end of 2015 was going to be higher.

In anticipation that would be the case, I had purchased shares of Morgan Stanley (NYSE:MS) on 4 occasions in the 2 months leading up to that eventual decision.

That seemed like an easy thing to predict. It was a fifth purchase, that came a few weeks after the announcement that went counter to what seemed predictable.

Instead of interest rates continuing to move higher as any sane seer would have predicted, they went lower and lower, as did most financial sector stocks.

So here we are again with the feeling that now rates can only go higher, but without much confidence in when they will start to happen.

It may be the uncertainty of the latter that makes considering opening a position to be a more predictably rational thing to do.

Last week Williams Companies seemed like a good idea, particularly as there may have been some inefficiencies in its pricing and a divergence between the arbitrage and options communities regarding the prospects of its planned merger.

This week, Marathon Oil (NYSE:MRO) doesn't have the same kind of drama figuring into the equation, but along with a battered sector, it may have been price compressed more than most and with the prospects of a larger spring back.

However, even price stability in oil could create an attractive environment for accumulating very generous option premiums.

While those option premiums are attractive, I would probably sacrifice some of the assured premium by selling out of the money strikes in an effort to also capture some capital gains on shares.

As is often the case during periods of high market volatility or individual stock volatility, there may also be advantage in rolling over calls even if faced with assignment as the forward week premiums may be continuing to reflect greater uncertainty.

That was a nice formula in 2008, 2009 and the latter half of 2011 and I wouldn't mind seeing more of those opportunities appear.

Finally, having purchased eBay (NASDAQ:EBAY) a few weeks ago was like re-discovering an old, old friend.

I hadn't owned shares since the confirmation that eBay was going to spin off the driver of its growth, PayPal (NASDAQ:PYPL). There was probably some luck with having made that first purchase in over a year on the day before the market decided to end the craziness of the first 6 weeks of 2016.

With volatility at its peak for 2016 that was a good time to consider buying just about anything, if only you could have predicted what was in store in the subsequent 5 weeks.

I couldn't, but at the same time I couldn't resist the lure of eBay shares. Despite having climbed 5% since then, that performance pales in comparison to the S&P 500 which was nearly 10% higher during that time span.

What eBay is continuing to offer, even as volatility has started returning to the levels it had languished for up until the past 6 months, is an attractive option premium.

The reason I had found myself having purchased shares of eBay on 25 occasions during a 4 year period, despite not having owned any shares for more than a year of that time span, is that it tended to trade in a tight range, but due to occasional surges or plunges, offered a very attractive premium.

They say that you can't go back home, but predictably you do and sometimes it works out.

Traditional Stocks: Dow Chemical, eBay, Morgan Stanley

Momentum Stocks: Marathon Oil

Double-Dip Dividend: none

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 DOW, MRO, MS. 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 shares or sell puts in DOW, EBAY, MRO or MS