Let Me Get This Straight

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Includes: AABA, GS, HPE, HPQ, MET, PYPL, SBGI
by: George Acs

Summary

Following last Friday's GDP release, the direction of the economy as envisioned by FOMC members may not be materializing according to script.

Sometimes the smartest guys in the room may end up leaving the room.

With still 5 months left in the year, the certainty of an interest rate increase in 2016 may be following market volatility lower.

Let me get this straight.

The people sequestered in their nearly meeting for 2 days in Washington and who only have to consider monetary policy in the context of a dual mandate are the smartest guys in the room?

We often hear the phrase "the smartest guys in the room."

Sometimes it's meant as a compliment and sometimes there may be a bit of sarcasm attached to its use.

I don't know if anyone can sincerely have any doubt about the quality of the intellect around the table at which members of the FOMC convene to make and implement policy.

While there may be some subjective baggage that each carries to the table, the frequent reference to its decisions being "data drive" would have you believe that the best and brightest minds would be objectively assessing the stream of data and projecting their meaning in concert with one another.

One of the hallmarks of being among the smartest in the room is that you can see, or at least are expected to see what the future is more likely to hold than can the person in the next room. After all, whether you're the smartest in the room and happen to be at Goldman Sachs (NYSE:GS) or at the Federal Reserve, no one is paying you to predict the past.

If you're a Goldman Sachs shareholder and you're using its share price as a measure, you may have been wondering if the smarts left the room sometime in 2013, albeit coming back for an occasional visit to slum with old friends.

I went to high school with their previous CFO. I can tell you that he was a pretty smart guy among a school of very smart guys. While I was proud of my standardized test scores and they opened up doors, they were absolutely mediocre within the context of the entire graduating class.

From the date he left Goldman Sachs in January 2013, those shares have trailed the S&P 500 by 10%.

You might also be wondering about the Federal Reserve and the smaller subset of its members comprising the FOMC.

When an interest rate increase was announced in December 2016, there were more than subtle hints that 2016 would herald a series of small interest rate increases.

Why would anyone do that?

Clearly, the smartest guys in the room had to believe that the economy was showing signs of growth in the year ahead that would warrant those increases. Mere mortals may not have seen those signs or have had the confidence to proceed and effect policy change.

In the meantime, 2016 has had nothing but mixed signals coming from the economy and even more muddled signals coming from individual members of the FOMC.

As individuals it may be difficult to lay aside some of the biases that pepper interpretation of data, but once in the room and at the table, the smartest should be able to set aside subjectivity.

So it may be even more disappointing that as last Friday's GDP data was released, there wasn't much in the way of news to suggest that the economy was warranting even consideration of an interest rate increase, much less an actual increase.

On the day before the GDP was released, the betting was that there was nearly a 50% chance of seeing an interest rate hike in by December 2016.

Now, even with lots more data to come over the course of the next 5 months, that certainty is sure to decrease, just as market volatility and uncertainty decreases in tandem.

What may be clear is that the designation of being the "smartest in the room," may be no different from what we see in most every stock chart.

Prices wax and wane and perhaps so does the ability to live up to the "smartest" designation.

Or maybe the smartest guy had also left the room, just as may have been the case at Goldman Sachs.

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

As I look around at all of the issues of the day and the sort of things that can and have moved the stock market lately, Sinclair Broadcasting (NASDAQ:SBGI), which reports earnings this week, doesn't share too many of the risks faced by so many.

Unless of course you put lots of faith into charts, in which case everything has been telling you to sell, sell, sell.

Whether its the Bollinger Band, the MACD Signal or the 50 and 200 day moving averages, I think that the proverbial horse has left the gait and shares happen to be at a price that has served me well in the past.

Sinclair Broadcasting, even as we think less and less of terrestrial broadcasting is a growing behemoth, that like its print brethren is probably not going to really be disappearing anytime soon.

Unlike most earnings related trades, I don't think that I'm interested in pursuing this one through the sale of puts. There isn't enough liquidity and as a result the bid- ask spreads are just too great to be able to reliably roll these over to avoid assignment.

In addition, sometime in the September 2016 option cycle there is an ex-dividend date, so I would be inclined to either do a buy/write before earnings with a September 2016 expiration or, if concerned about earnings, wait until after their announcement.

In that case, if shares do sink lower, I would then consider selling out of the money current month puts and would take share assignment, if necessary, rather than attempting to roll the puts over. Then, if possible, I would attempt to sell calls on the newly assigned shares in the hopes of securing the dividend, the option premium and perhaps some capital gains on the shares, as well.

PayPal (NASDAQ:PYPL) on the other hand, does face some of the challenges that many others do. Currency exchange rates and consumer lethargy are in the equation and despite slightly increased guidance, shares didn't too terribly well after recently reporting earnings.

Unlike Sinclair Broadcasting, though, PayPal options have nice liquidity and offer extended weekly expirations.

With no dividend to complicate the decision, this is a position that could easily lend itself to consideration of the sale of put options. At its current price, I could envision PayPal as being a potential opportunity for serial rollover or serial sale of puts, even as the share price may increase and existing short put positions expire.

Hewlett Packard (NYSE:HPQ) seems about as unexciting as anything, except for perhaps Yahoo (YHOO). Sometimes the mighty fall and sometimes their offspring get far more attention than the staid parent that seems to be going nowhere.

I rolled over some Hewlett Packard options last week and have watched as the Hewlett Packard Enterprise (NYSE:HPE) spin off has continued to perform very well.

I lost those shares to assignment, but their combination, during their respective holding periods had been very good and I think that Hewlett Packard, which reports earnings near the end of the August 2016 has potential to generate some respectable returns, as well.

While my initial interest would be in the sale of weekly call options, if in a position to later consider rolling over, I would keep my eye on the upcoming earnings and then the ex-dividend date a few weeks later.

In so doing, Hewlett Packard could easily become a longer term holding and ideally one that could generate some additional periodic income by virtue of the sale of call options along the way.

Finally, MetLife (NYSE:MET) is ex-dividend this week and the thesis that it stands to benefit in the early stages of a rising interest rate environment has been waiting a long time for that environment to manifest itself.

Besides that problem, shares are at a near term high having recovered from a nearly 11% one day drop after the "Brexit" vote and Janus' Bill Gross opining that insurers, banks and pension funds were "slowly going bankrupt."

I don't particularly like to go after stocks after that kind of a recovery, but I think that there may be more ahead. Of course, the other problem is that the day before the ex-dividend date, MetLife will report earnings, so to get this dividend you may really have to earn your money.

The option market is expecting only a 3.7% move in either direction, so the option premiums are not that bloated as earnings do approach, but there shouldn't be too much reason to suspect that MetLife will take a different course from others in the financial sector that have already reported.

Since there is an ex-dividend date, rather than selling puts to take advantage of an earnings related opportunity, I would execute a buy/write using an at the money strike weekly or extended weekly or a slightly out of the money August 2016 expiration date.

In any of those cases an early assignment in the event of an earnings related price surge would result in a very nice 3 day ROI, even if ceding the dividend to the option buyer.

I like those kind of scenarios, especially if there some other identifiable target to re-invest the proceeds of the early assignment

Traditional Stocks: Hewlett Packard

Momentum Stocks: PayPal

Double-Dip Dividend: MetLife (8/4 $0.40)

Premiums Enhanced by Earnings: Sinclair Broadcasting (8/3 AM)

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 HPQ.

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 HPQ, MET, PYPL and SBGI

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