What One Hand Gives, The Other Takes Away

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Includes: ANF, BMY, KSS, M, SBGI
by: George Acs
Summary

Investors listened to and walked away with very different interpretations of the words of Janet Yellen and Stanley Fischer.

Investors have demonstrated an acceptance of the notion of an interest rate increase, but they would clearly prefer to wait for it to become reality.

The GDP was again weak, but the important consumer component may be awakening, making an earlier than expected interest rate increase a possibility.

I'm not entirely certain I understood what happened on Friday.

While it's easy to understand the "one - two" punch, such as memorialized in Tennessee Ernie Ford's song "Sixteen Tons," it's less easy to understand what has happened when a gift is so suddenly snatched away.

After not having attended the previous year's Kansas City Federal Reserve Bank hosted soiree in Jackson Hole, this year Janet Yellen was there.

She was scheduled to speak on Friday morning and the market seemed to be biding its time all through the week hoping that Friday would bring some ultimate clarity.

Most expected that she would strike a more hawkish tone, but would do so in a way as to offer some comfort, rather than to instill fear. But instead of demonstrating that anticipation by buying stocks earlier in the week, traders needed the news and not the rumor.

The week was shaping up like another in a string of weeks with little to no net movement. Despite the usual series of economic reports and despite having gone through another earnings season, there was little to send markets anywhere.

Most recently, the only thing that has had any kind of an impact has been the return of the association between oil prices and the stock market and we all know that the current association can't be one that's sustainable.

So we waited for Friday morning.

After having sifted through that morning's GDP release, which revealed another quarter of soft numbers, showing the economy may not have been growing very strongly, it was time to listen to what Janet Yellen was prepared to say after nearly 2 months of silence.

But first, buried within those GDP numbers was an indication that the consumer may have finally started participating in the economy by spending their money on actual consumer goods. Since 70% of the GDP is based upon consumer activity, that has to be a good sign and one that many have been waiting to see evidenced for far more than a year.

That consumer participation may have come as some news to Macy's (NYSE:M), Kohl's (NYSE:KSS) and others that had little good to say about the past quarter and nothing good to say about the one upcoming.

But as with most things, messages are mixed.

In this case, though, Janet Yellen didn't really offer a mixed message.

More precisely, however, what she said wasn't interpreted as being a mixed message.

Investors moved the market nicely higher on hearing Yellen say that "the case for an increase in the federal funds rate has strengthened in recent months."

She didn't really offer any guidance as to what else the FOMC had to see before finally raising rates, but most investors interpreted her comments as indicating that there was an even chance of that occurring at the FOMC's December policy meeting.

They liked that.

That meant that there was still another 3 months of cheap money to play with and stock investors love cheap money as much as bond investors do not.

What stock investors apparently didn't like was when Stanley Fischer suggested that there could still be more than one rate hike between now and the end of 2016.

In what could only be interpreted as "too much of a good thing," the very idea of what we were all set up to expect a year ago, that is an upcoming year of small, multiple interest rate increases, began to bring sellers up front.

And so as the day and the week came to their ends, it was Stanley Fischer who ruled and demonstrated that whatever embrace investors had made of the idea of raising interest rates, it was pretty half hearted and a highly qualified endorsement.

The order of things often makes a difference.

If I knew that I was being faced with one hand that would give and the other hand that would take away, I would much prefer that the giving hand closed the show.

You can only appreciate loss if you've actually had something to lose and you can only really appreciate receiving a gift after having had nothing.

Unfortunately, the order of giving and taking left us with nothing but questions and uncertainty.

I'm not sure that's what anyone intended, but if you look at the past year's worth of statements and speeches from the various members of the FOMC, you might believe that a third mandate has been added to the Federal Reserve's short list.

If so, they've been wildly successful in sowing confusion and giving and taking hope and confidence away from anyone paying attention.

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

Bristol Myers Squibb (NYSE:BMY) may be a recent good example of the market's buyers giving and the market's sellers taking away.

It may also be a poster child for the old "you live by the sword, you die by the sword" expression, as it shares plummeted following some poorer than expected results from its late stage trials for an advanced non-small cell ling cancer drug.

That plummet took it to its yearly lows and while not too much time has passed, it may be stabilizing and ready for participation again.

The option market, for whatever it may know, isn't predicting too much movement in the upcoming week, but my sights are set a little longer term for this trade.

Bristol Myers Squibb is ex-dividend on October 5th, at a current 2.6% yield. It also reports earnings on October 27th.

That leaves consideration of the sale of an October 21st monthly contract in an effort to capture the dividend, capture nearly 2 months of premium and perhaps hold the stock long enough for some price recovery.

It also avoids the risk of earnings, as long as shares are assigned.

If not, I would consider rolling the expiring options over to either the November or December monthly contracts, or perhaps one of the extended weekly expiration dates.

Sinclair Broadcasting (NASDAQ:SBGI) isn't a terribly exciting stock, but it is one that I like to own and I'm especially drawn to it if it's about to be ex-dividend and trading at or below the mid-point of its most recent range.

Those are all the case for Sinclair Broadcasting at the moment and I'm considering either the sale of an in the money call, with the intent of a quick exit from the position due to early assignment or a near the money strike, with the hopes of capturing the dividend and some small gains on the shares, as well.

Among the things I like about Sinclair Broadcasting is that it is relatively immune form many of those things that can weigh down stocks and that are completely unpredictable and out of anyone's control.

Currency exchange rates, the price of oil and natural disasters come to mind. Where Sinclair broadcasting may be vulnerable, albeit along with most everyone else, is in an increasing interest rate environment, as assembling the broadcasting portfolio that it has in an expensive undertaking.

Even though my preference would be for a short term exposure, I've held shares before for longer time periods, partly because only monthly options are available. Additionally, if in a position to see short calls expire, I generally do not roll them over, due to their cost and reduced liquidity, unless shares are trading very close to the strike price as expiration nears.

Finally, as it always does, whenever I talk about the possibility of considering a position in Abercrombie & Fitch (NYSE:ANF), it comes with advisories.

Those shares are ex-dividend this week and even as I still sit on a much more expensive lot of shares, I welcome the dividend and consider testing the waters even further to capture more of that dividend.

The problem is that the dividend is always closely associated with earnings and that's the case this week, as well.

On a good day, Abercrombie & Fitch stock is prone to price spasms, but all bets are off when earnings are involved. Having already badly trailed the S&P 500 for the year and having fallen by about 25% from its 2016 high, there could be more downside pain, unless they know something that Macy's doesn't.

The option market is implying a price move of about 12% next week.

Ordinarily, I would consider the sale of puts if I thought that a 1% or more ROI for that sale could be realized at a strike price below the lower boundary predicted by options traders.

That is the case this week, but because of the dividend, my interest would be in considering a traditional buy/write, but only after earnings and only if shares fall sharply once earnings are announced on the morning before the ex-dividend date.

In that event, I might consider the sale of a deep in the money call, depending on the net premium available, in the event that deep in the money call is exercised by the buyer.

I might even consider looking at an extended weekly option, again being driven by the premium available and the resultant ROI, with or without the dividend capture being part of the calculation.

If it isn't there may then be an opportunity to get the dividend and an option premium, with some significant downside protection.

That might be the equivalent on both hands giving.

Traditional Stocks: Bristol Myers Squibb

Momentum Stocks: none

Double-Dip Dividend: Abercrombie and Fitch (8/31 $0.20), Sinclair Broadcasting ((8/30 $0.18)

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 ANF. 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 ANF, BMY or SBGI