Well, That Was Confusing

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Includes: F, GM, M, MET, MS
by: George Acs
Summary

The past week's Employment Situation Report infused the market and traders with lots of confusion.

The FOMC's ability to project the economy's performance may be in need of rehabilitation considering December 2015's increase.

Markets have little to guide them as the week is set to begin and we await the certainty of the FOMC's Statement release.

While so many people are still confused over the "Transgender Bathroom" issue, the real confusion came from this week's Employment Situation Report.

With the odds of an interest rate hike by the FOMC's June meeting seemingly increasing every day, you would really have to believe that the FOMC knew what was going to be in the economic news cards.

The increasing hawkish talk all seemed to be preparing us for a rate hike in just 2 weeks. Judging by the previous week's market performance you would certainly have been of the belief that traders were finally at personal peace with the certainty of that increase.

The concept of being at personal peace is confusing to some.

I'm personally confused as to how it could have taken so long to see the obvious, unless we're talking about stocks, interest rates and investor's reactions.

What I find ironic is that the proposal for all inclusive bathrooms is really age old, at least at the NYSE, when there was a recent time that there was only a need for a single sex bathroom, anyway.

Just like many of us know, what a great degree of certainty, which camp we belong to when nature beckons, the lines seemed to be increasingly drawn with regard to interest rates.

Even as the talk heated up there were still clear interest rate doves, albeit in diminished numbers compared to their hawkish brethren, sistren and "transgendren."

Now, though, the certainty is muddled.

Since I don't use public restrooms, I don't really understand all of the controversy, nor do I understand the angst over a suspected 0.25% interest rate increase.

Nor do I understand why grown and highly educated men, women and others could be so engaged in their spreading their convictions, which even under the close scrutiny of historical hindsight, could never be validated.

With this past Friday's Employment Situation Report most everyone was taken by surprise. Not only were current job creation numbers lower than expected, but downward revisions to previous months didn't help to paint an optimistic picture, even as the unemployment rate continued to decline.

So what about that June interest rate hike that had been increasingly suggested by those in a position to decide?

You do have to wonder whether the Federal Reserve members are testing the waters among the investing community and gauging responses.

I hope not.

I don't think that they really need a triple mandate or need to have their focus sullied. It's enough that we've already seen an FOMC that expresses concern over China and may be further influenced by EU interest rates and even the possibility of Britain's exit from the European Union.

No doubt that everything going on in the world just adds to the confusion. While the FOMC continually avers that it is "data driven," perhaps it would be helpful to know what data is under the microscope and how it is weighted.

It might even be instructive to know what the data considered had been when the December 2015 interest rate increase was announced.

Nearly 6 months later it may still be difficult to see what the FOMC had seen based on the existing data and projections.

The market, in its confusion, finished the past week absolutely flat, although it did recover from some significant losses during three of the shortened trading week's sessions.

That included a recovery following Friday's early morning confusion. Those recoveries, though, may only lead us to a week or so of perpetuating the confusion as we wonder whether the FOMC has been setting up the market for a summer rate hike or whether the FOMC has just been completely misreading the economy.

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

I didn't open any new positions last week and there doesn't really seem to be much indication as to what the coming week holds, so I'm not overly certain about my activity level.

That extends to stocks, too.

But with some of its recent weakness and a healthy dividend, I think that it may end up being a relatively easy decision to add to my General Motors (NYSE:GM) holdings.

It is now at a price approximately mid-way between recent highs and lows and that is often one of my preferred entry points. I also often prefer an entry point right in advance of an ex-dividend date, so the stars may be aligning for General Motors.

Already owning shares of both General Motors and Ford (NYSE:F), the current lots that I own aren't generating any premium income and they are only made tolerable by their dividends.

While I expect that each will someday make contributions beyond those dividends, I look at each lot of shares as a standalone entity and see an upcoming lot of General Motors as a vehicle for a premium, a dividend and perhaps some small capital appreciation, as well.

I also own some shares of Macy's (NYSE:M) and they were the first retail earnings disappointment of this recent earnings season. One of my current lots is uncovered and like General Motors, the dividend makes it tolerable, as do previously accumulated option premiums.

Macy's is ex-dividend on Monday of the following week. I especially like those kind of situations where there may be an unity to purchase shares and then sell in the money calls with an expiration date of the week of the ex-dividend.

In such cases, if the shares are assigned early, they must be called away at the end of the current week. In that case, the call seller effectively receives an enhanced weekly premium. That enhancement, which comes from the time portion of the premium, in essence is like getting a portion of the dividend.

However, in this instance, I may consider an extended weekly option, but perhaps using a near the money strike price, anticipating some continued capital appreciation in shares, as well.

If that capital appreciation materializes before the ex-dividend date, the chance for early assignment may still exist, but the loss of the dividend could easily be offset by the combination of option premium and capital appreciation, along with the opportunity to take assignment proceeds and put them back to work the very next week.

Finally, sometimes in the midst of confusion, there is opportunity.

I don't know of anyone who believes that interest rates are going to continue staying where they are and they certainly can't get much lower.

Of course, that kind of confidence is bound to get slapped down and reminds me of the same belief when it came to the price of oil.

But the reality is that Friday's Employment Situation Report shock probably won't last too long insofar as the interest rate sensitive financial sector is concerned. The rates on the 10 Year Treasury have gone up and down in fits and starts and following Friday's decline is at a fairly well established level of support.

With that in mind, I have a hard time deciding between MetLife (NYSE:MET) and Morgan Stanley and may consider both as the week is ready to begin.

While neither should be considered as harboring undue risk, their option premiums are reflective of undue risk.

However, as opposed to stocks that truly do reflect significant risk and are typically best suited for shorter term holding periods, both MetLife and Morgan Stanley could easily be held for the longer term and offer attractive dividends, as well, in the event of a longer term holding period.

As I've done recently with some energy holdings, which have certainly been volatile, I would embrace the enhanced premium and even consider rolling over positions if they were likely to be assigned, as well.

As long as those premiums are enriched, the lure of holding onto those positions, particularly in light of a real risk that may be less than the perceived risk, is strong.

There isn't too much confusion about that in my mind.

Traditional Stocks: MetLife, Morgan Stanley

Momentum Stocks: none

Double-Dip Dividend: General Motors (6/8 $0.38), Macy's (6/13 $0.38)

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, M, 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 GM, M, MET and MS