What the Fed!
Day after day for weeks, months, financial analysts and pundits debated mightily what the Fed would say about tapering and interest rates at its most recent meeting. It was as though the fate of our economy, if not all humanity, hung in the balance. Within a short 24-hour period three huge pieces of economic data emerged: the Fed announced (after what seemed like an eternity of skirting the issue), that indeed an official taper would soon begin, employment numbers came out stronger than expected, and congress finally passed the long-awaited infrastructure bill.
If you had these critical pieces of data in advance, you would have certainly bet that interest rates would rise, but in fact they declined upon the release of this clearly bullish (for the economy, interest rate) news. Just another in a long line of examples as to why spending too much time analyzing and predicting macro-economic events is less than useless.
Article by Scott Kyle
Rear View Mirror Analysis
Speaking of less than useless, Wall Street Analysts charged with making stock recommendations are notorious for changing their ratings only once the damage has been done. There are countless examples where analysts covering a particular stock lower their rating from a screaming Buy to a Hold (which is just a kind way of saying Sell), or Underweight (another great euphemism for Sell). As though to add insult to injury, these analysts will often change their price target to the very price the stock just cratered to – super helpful for those who had been buying the stock based on their previously rosy forecasts and materially higher price targets.
A recent case in point is that of PTON. At the open on November 5th, based on earnings news from the night before, the stock promptly dropped about 35% from the mid-$80s to the mid-$50s; down from a 52-week high of over $171. JP Morgan then lowered its rating and target to $90 from $138, while Trust Securities reduced its target to $68 from $130. A handful of others lowered their ratings to the $70 range from targets around $120-$130 as well.
This is just one example where investment professionals, who spend their lives learning the intricacies of a company – speaking to management, customers, and the like – change their views on a company and cut their price targets in half over night - after the price has already been crushed. I have never paid any attention to Wall Street analysts’ predictions, other than as contrarian indicators. If you see this kind of situation, one good rule to invest by is to wait at least 3 days before considering an investment, as often selling begets selling the near-term. In the case of PTON, the stock has floated down another nearly 20% since that fateful day in November. Rather than listening to others, who in many cases have an inherent conflict of interest (I.e., Investment-banking interests), form your own opinion independent of the crowd.
Article by Scott Kyle
Keep Your Options Open (Continued)
Last month we discussed the various factors when deciding to roll (or not roll) a covered call position. Another question that comes up often (especially when equities are performing well) is whether to write covered calls on a specific position in the first place. Before jumping to the conclusion (spoiler alert: it depends on myriad factors), it’s important to first consider the goal of the position and how it fits into the overall strategy of the portfolio and client. For example, is the position part of an income generating strategy or is it a directional growth play? If it’s the former, then it’s important to stick to the disciplined path set forth (read: last month’s post) and not be consumed by FOMO that the position might be in the money at expiration and thus called away (sold). If the position is part of a growth play (i.e. a small position in a higher volatility stock that has large swings like a TSLA or RIVN) then the income generated by a covered call option may be muted by the price movement of the underlying security, in which case forgoing calls or selling the option very far out of the money (much higher than the market price of the stock) could be the best course of action.
One of the myriad benefits of options is the precision they offer in terms of the mix of income they can generate and price profit potential. If you are seeking higher income, then sell closer to the money calls. Is price appreciation your focus? Then sell an option at a strike price well above the current market price.
As stated before, discipline, is key. A knowledgeable, patient, and well-trained Financial Advisor can help you determine which investment strategies are best for you and set forth a near and long-term plan to implement them.
Article by Patrick Fischer