It's As Clear As Mud

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Includes: DWDP, GILD, KSS, M, MET
by: George Acs
Summary

This week's initial earnings releases by national retailers should raise doubts about the strength of consumer led economic growth.

Markets rallied on those initial reports despite that response being inconsistent with the reasoning behind the response to last week's Employment Situation Report.

The release of government Retail Sales data did little to suggest that the FOMC had a basis to implement an interest rate increase at this time.

When the news came that Thursday's close brought concurrent record closing highs in the three major stock indexes for the first time since 1999, it seemed pretty clear what the theme of the week's article should be.

But as I thought about the idea of partying like it was 1999, what became clear to me was I had no idea of why anyone was in a partying kind of mood on Thursday as those records finally fell.

Ostensibly, the market was helped out by the 16% or so climbs experienced by the first of the major national retailers to report their most recent quarterly earnings.

Both Macy's (NYSE:M) and Kohl's (NYSE:KSS) surged higher, but there really wasn't a shred of truly good news.

At least not the kind of news that would make anyone believe that a consumer led economy was beginning to finally wake up.

The market seemed to like the news that Macy's was going to close 100 of its stores, while overlooking the 3.9% revenue decline in the comparable quarter of 2015.

In the case of Kohl's the market completely ignored lowered full year guidance and focused on a better than expected quarter, also overlooking a 2% decline in comparable quarter revenue.

For those looking to some good retail news as validating the belief that the FOMC would have some basis to institute an interest rate increase in 2016, there should have been some disappointment.

That's especially true when you consider that the last surge higher was in response to the stronger than expected Employment Situation Report in what could only be interpreted as an embrace of economic growth, even if leading to an increased interest rate environment.

With Friday's Retail Sales Report showing no improvement in consumer participation, you do have to wonder about those signs pointing toward that rate hike.

Of course the official Retail Sales data are backward looking and it's really only the future that matters, but for that matter, the early retail reports aren't exactly painting an optimistic picture for whatever remains in 2016.

It can't be clear to anyone what awaits. Other than repeating the usual refrains such as interest rates can't get any lower, oil prices can't get any lower and stocks can't go any higher, the only thing that is clear is that whatever is anticipated is so often unrealized.

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

I'm not really sure why Dow Chemical (NYSE:DOW) was punished as the past week came to its close. Of course, I understand that news of institutional buyers lightening their own load of shares can have a direct impact on the supply and demand equation and can also create a sense of needing to get out of the same position by investor lemmings.

I suppose that there may be others looking to escape over the next few days even as there is little to suggest a fundamental reason for heading for the exits.

While I already own 2 lots of its shares, I view the decline of last week as an opportunity to add shares, as the decline may have been simply nothing more than needing to digest some of its recent gains.

Dow Chemical probably has little downside with regard to its complex proposed deal with DuPont (DD) and probably has some upside potential when approval is at hand. In the meantime, however, simply continuing to trade in its recent range, along with its still generous option premiums and dividends, makes Dow Chemical an appealing potential position.

With earnings now out of the way and following a 10% decline, Gilead Sciences (NASDAQ:GILD) is again looking attractive.

As with Dow Chemical, institutional investors have been reportedly been net sellers of shares and those shares are now at a 2 year low.

While it might be a serious mistake to believe that those shares couldn't go any lower, there are some near term inducements to consider a position at this time and to do so without regard to what may be substantive issues for those with a longer term horizon on the company, its products and its shares.

In addition to a nice premium, particularly relative to an overall decreasing volatility environment, there is an upcoming dividend.

That dividend is still a few weeks away, so there could be some consideration to initially establishing a position through the sale of put options.

There is considerable liquidity in that market and if faced with assignment there could be ample opportunity to keep the short put position alive by rolling it over to the following week.

With that upcoming dividend, however some attention may need to be given to the possibility of taking assignment in an effort to then capture the dividend.

Finally, I'm not certain how many times in a lifetime I can consider buying shares of MetLife (NYSE:MET). It is a stock that I am almost always on the fence about whether the timing is just right.

One of the things about it and some other stocks that really creates a timing problem for me is when earnings and an ex-dividend date are tightly entwined. Putting the two together, sometimes even their sequencing requires some additional thought.

Too much thought is often something that only serves to muddy things and in my case is often the reason that I end up not owning MetLife shares.

I've already done enough thinking in my lifetime, so there's really not much reason to go and look for more opportunities requiring analysis of any kind.

Now, however, with both of those events in the back mirror and with nearly 3 months to go until they become issues again, it may be time to consider those shares once again.

The theory, which is getting really long in the tooth, is that interest rates have to be heading higher. As we all know, however, regardless of how true that may logically have to be, there's nothing in our past to have prepared us for such a long and sustained period of ultra-low interest rates.

And so MetLife has not followed interest rates higher, because interest rates haven't gone higher, much to everyone's continuing surprise.

Not that this past week's retail results would give anyone reason to believe that the economy really is heating up and that interest rates will follow, you still can't escape the "sooner or later" school of logic.

I know that I can't.

At its current level and with some decent downside support, I think that this may be a good point to get back on that rising interest rate bandwagon and use MetLife as the vehicle to prosper from systemically increased costs.

Traditional Stocks: Dow Chemical, MetLife

Momentum Stocks: Gilead Sciences

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. 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, GILD and MET