Druckenmiller And The Underside Of The Circle Of Life

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Includes: AAPL, AGN, IEP, MRO, PFE, SHAK, XOM
by: George Acs
Summary

Famed hedge fund manager Stanley Druckenmiller expressed some doubts about the ability of the stock market to climb higher in the near term.

Despite its claim to be "data dependent," one has to wonder whether the FOMC will be true to its credo.

The economic cycle of life doesn't seem to be playing out according to its traditional script as 2016 nears its midpoint.

Depending upon how concrete you are in interpreting the meaning of the concept of "the circle of life," the beginning and the end of that circle must be identical events as their points in space are coincident.

Various religions and philosophies believe that through a certain life path, another life awaits, but the rigorous requirements of geometry may be put aside in the process.

It's also not clear that there had been any data dependency in the formulation of the philosophical concept.

Life, death and rebirth almost read like a stock chart, except that the stock chart is plotted over time.

While new life generally brings joy, a geometric centric definition of "the circle of life" would both begin and end with that kind of joy.

On the other hand, a more philosophical interpretation of the concept has some diametrically different events, death and life, coinciding as the circle is closed.

Philosophy aside, markets have their own circle of life.

Start where you like in defining that circle, but among the components are low interest rates; increasing business investment for growth; increasing productivity; increasing corporate profits; increasing employment; increasing consumer spending; higher prices; higher interest rates; decreasing business investment; decreasing productivity; decreasing employment; decreasing consumer spending; and on and on.

That's more or less a traditional look at the way things usually go, but at the moment it's hard to know where in that circle we are, or if we even have a circle.

If the top of the circle represents the highest point of an economy, I think that I would have to agree with Stanley Druckenmiller, who at this week's Sohn Conference expressed the belief that the bull market was exhausted.

That would lead one to believe that perhaps revenues and, more important, corporate profits, had now peaked -- and that the eventual tonic to return to a virtuous cycle of increases across the board would be the lowering of interest rates.

Lower? But the FOMC, claiming to be data dependent, has clearly been ready to increase them.

One has to question where the data were when rates were increased late in 2015, but Druckenmiller also quipped that "quite ironically, this is the least 'data dependent' Fed we have had in history."

The circle of life tries to put a positive spin on what we all will inevitably face, but if late 2008 and early 2009 represented the inevitable bottoming out of the economy and stock markets, with the exception of stock prices since that time, it is still difficult to see real evidence of a rebirth having had taken place.

Increasing employment? Yes, but where is the spending? Where is the upward pressure on prices? Where are the corporate profits?

Where is the reason to increase interest rates?

This past week was an interesting one, with investors not really knowing what to believe or where on the circle we were standing.

With both the ADP Report and the Employment Situation Report coming with disappointingly low numbers, investors are left wondering what to do about bad news.

You can't blame them for being undecided as to whether bad news is good news for stocks or truly bad news for everyone.

With this earnings season having been fairly lackluster to date, we're now faced with retail earnings and there is already reason to believe that they will be less than robust.

If that turns out to be the reality, it's difficult to see the sunny side of the circle or how we can get there.

If we keep counting on the stock market following oil higher, there may be some real disappointment ahead, as the underside of the circle is more likely to reduce demand for energy.

Of course, simply following oil higher, as has been the case for the past two months in the absence of real demand increases, is also a sure path to disappointment when reality finally checks in.

On a positive note, if you're the kind that prefers to live in the ascendancy of a civilization, there is some comfort in the belief that the bottom of the circle may be nearing.

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

With its earnings now out of the way, Icahn Enterprises (NASDAQ:IEP), not to be confused with Icahn Capital Management, goes ex-dividend this week.

Given Icahn Enterprise's share price trajectory, it wouldn't be too surprising if its major share holder, Icahn Capital Management took on an activist role and perhaps tried to unseat management and board members, replacing them with their own, in a true circle of life exercise.

That scenario is pretty unlikely, but one does have to wonder whether Icahn Capital Management, now armed with lots of cash from its sale of its Apple (NASDAQ:AAPL) position, might not consider Icahn Enterprises to be bargain priced.

The nearly 11% dividend may be reason enough for Icahn's hedge fund to add shares and keep it by far the single largest holding of Icahn Capital Management.

On the downside, if considering a purchase, I would look at this more of a long term commitment, particularly as only monthly options are available and there are $5 strike units instead of the $0.50 ones that I prefer in the weekly variety of expirations.

Following the much larger than expected loss reported by Icahn Enterprises, which included both shortfalls on the top and bottom lines, there's probably some consternation going on, particularly as Icahn might like to have a cleaner balance sheet before being nominated as Treasury Secretary.

I've never visited a Shake Shack (NYSE:SHAK), but have been tempted the few times I've been in the vicinity of one. Fortunately, my better half reminds me that I may be just one clot away from the dark side of the circle of life.

After a flurry of buying and more buying after its IPO, lasting for about 2 months, I'm finally ready to consider a position, as Shake Shack reports earnings this week.

I generally like to wait at least 6 months before considering a new position in a new public company and we are now into the early part of the second year of shares trading.

Since Shake Shack has no dividend to factor into the equation, any consideration of opening a position before or after earnings is fairly straightforward for me.

I would only consider the sale of puts.

With an implied price move of about 8.7%, a 1% ROI on the sale of a weekly out of the money put could be achieved at a strike price approximately 9.7% below Friday's closing price.

Anything outside of the range predicted by the option market that returns 1% of more is fair game for consideration.

However, the trend for Shake Shack over the past few quarters has been to move lower after earnings have been announced and to surpass the levels predicted by the option market.

For that reason, if considering a position, I would be most inclined to do so after earnings. In the event that shares take a large drop lower, I would entertain the thought of selling puts, but might wait a bit to let some of the dust settle.

It was a tough week or two for some energy stocks, but I'm ready to revisit a position that I had assigned just a few weeks ago.

I can't necessarily say that there is anything inherently better about considering a position in Marathon Oil (NYSE:MRO) over Exxon Mobil (NYSE:XOM), but I have been burdened by a much more highly priced position in the former and I do like the idea of whittling down some of those paper losses with some high priced premiums from the purchase of new shares and sale of calls.

As an example of the potential return, based on Friday's $12.03 close, the sale of a weekly $12 call option at a premium of $0.44, would result in an ROI of 3.4% if assigned.

That could be a big "if." But there is sufficient liquidity in those options to likely be able to find a reasonable marginal ROI for subsequent weeks if continuing to roll over that position, perhaps taking advantage of the availability of extended weekly options to buy some time if awaiting a price rebound.

Finally, in a week where my considerations are more toward taking on risk, there's some comfort in a company like Pfizer (NYSE:PFE), which is ex-dividend this week.

There is a general consensus that Pfizer is dead money unless it does something very substantive. There was a time when that meant coming up with a new blockbuster drug.

Now, that means buying some other company that can come up with or has a blockbuster drug, as if Pfizer has no ability to do that on their own. That's despite having a good number of promising drugs in Phase 3 and that have decent sized target risk.

Pfizer is now trading near the level to which it climbed when rumors of a deal with Allergan (NYSE:AGN) broke. Even as news of that deal breaking apart became known, Pfizer shares had already given up the market's premium.

As the Allergan deal is now dead and not likely to be subject to rebirth, the sector is alive with activity and Pfizer isn't likely to sit on the sidelines.

Unless it engages in a bidding war, the market is likely to look at any initiatives as being good for the company and I would expect share price to rise.

In the meantime, there's the dividend and the option premium.

I wouldn't mind if Pfizer just traded in a range for a while and would be happy to see a different virtuous cycle of life.

One that sees the opening of a short call position, then its expiration, only to be followed by the sale of yet another.

Traditional Stocks: none

Momentum Stocks: Marathon Oil

Double-Dip Dividend: Icahn Enterprises (5/10 $1.50), Pfizer (5/11 $0.30)

Premiums Enhanced by Earnings: Shake Shack (5/12 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.

Disclosure: I am/we are long MRO. 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 IEP, MRO, PFE and SHAK