May 2012 Results - Hot Wash

(This month's recap is a "hot wash" - not all of the usual data is available so I'm rushing to print with what I have.)

Well, to begin with, I never thought direct management of the Rescue My IRA was going to be easy.  May was a tough month for the account when you measure it strictly on market valuations - "paper" gains and losses. Somewhere along the way I came across an old market bon mot: “Sell in May and go away;” at times, that seemed like it could have been good advice, as the market was in a steady decline for the entire month.

There was a complex bunch of account activities this month.  I decided to clear out the ACM shares, a legacy holding, and the transaction had its pros and cons – a capital loss as I sold below the share basis, but bringing the account fully into compliance with my trading plan on the positive side.  Also, my COP shares spun out a part of the business; that meant a portion of that holding wasn’t in compliance with the trading plan and I had to reconcile it – in the end, I have a small loss overall on that position. 

Meanwhile, May is a month where many holdings passed ex-dividend dates, and I rolled-out a number of the positions, sometimes into August or September, so my income from option premiums remained high and met my goals.  The fact that I now have some September contracts in the portfolio means that for some of my positions I really did sell in May and go away!

On a month-to-month basis the combination of the three return producing activities – share price gains, dividends, and option premiums – shows a net negative return for May.  It’s not as bad as it could have been, and I feel better about the account overall since it’s now wholly in line with the trading plan and diversification is improved. 

I have a feeling, however, that the summer months are going to test my commitment to this strategy.

 Here are the statistics for May 2012:

Account Status:
Total Account Value, 5/31/2012 Statement:  Not Available at the time of this post…but down for the month!
Total Cash Reserve, 6/1/2012 Statement:  $8,251.07
Core Stock Positions (as of 4/30/2012):   ADM (300 shares), CSX (400 shares), DOW (200 shares), GE (500 shares), GLW (700 shares), HAL (300 shares), ITW (200 shares), MSFT (300 shares), NOC (200 shares), SWK (100 shares), SPLS (500 shares), URS (400 shares), WAG (300 shares)

Performance Metrics:
Option Premiums Collected (net, month of May):  $2,092.84
Capital Gains Collected (net, month of April): -$6,917.14

Dividends Collected (recognized on the ex-date): $1,891.46
Interest on Cash Reserve (estimated total): $0.06
Total, Absolute Return:  -$2,932.78
Absolute Return, Percentage Basis:  -2.30%
Annualized Return, Percentage Basis:  -27.96%

Next Month To-dos:
During June, seven positions have forecast ex-dividend dates.  I haven’t done much in terms of figuring which might be close to a share price that would result in an early call, but I don’t think many of them are at risk for that. The total take from dividends will be about $420, or 0.33%, an amount that translates to nearly four percent annually!  That's a second month of good dividend income.  Here’s the ex-date forecast:

·         HAL on 6/4

·         SWK on 6/4

·         URS on 6/13

·         SPLS on 6/21

·         GE on 6/23

·         DOW on 6/27

·         ITW on 6/27

As far as covered call contracts forecast to expire in June go, there are currently only two positions.  These are substantially off of their strike price and neither has a dividend ex-date before the options expire, so I’m likely to either do an adjustment by rolling-out or simply let the current contracts expire.  Here’s the list of June contracts:     

·         NOC 60 (x2)

·         ITW 57.50 (x2)

Consolidated Lessons Learned:

Concentration of capital:  I had held 800 shares of ACM in this account since the inception of Rescue My IRA.  That represented the highest concentration of value in the account, and I had always been concerned about the need to reduce the holding to something closer to the average position, especially since ACM is not a dividend stock and doesn’t meet my trading rules.

I had observed what happens to this company when it reports a bad quarter once before.  Last August the shares tumbled from $28 to around $21 on poor earnings news, but that was before I started the account and my calculated basis was around $25, so I continued to hold. I sold covered calls at a 25 strike on the position after I transferred it into Rescue My IRA.

Although the share price had gotten back to around $24, this month the company took another significant hit in share price after announcing a bad quarter, so I decided to face the music and divest.  The size of the position means I took a hefty loss on the position to do so, but was relieved to quickly have the capital back at work in a stock that met the requirements I’ve set for the account.

Still, you’re not supposed to buy high and sell low (thanks Dennis!) – so I’ll be working hard to make sure this doesn’t happen again!

Watch and understand the news:  The second position worth noting as a “learning experience” was what happened to COP.  I’ve had a good experience with this stock over the last ten years since it pays a steady dividend and reliable earnings that have meant share price gains. 

The company undertook some strategic “financial engineering” with some of its assets this year, and I didn’t fully understand the impact that would have in the price of the shares.  I received shares from the spinoff of these assets – I recognized this as a dividend payment – and the price of the original COP holding was adjusted downward.  The option I had on the position was adjusted to be for original COP and the spinoff PSX, which would not pay dividends in the future.

So I closed out the option, and after doing some Monte Carlo with the COP position, net of PSX, decided to close it and put it somewhere else.  The transaction resulted in a loss of about $187 on this position, which had a basis of $6,988.  That works out to a 2.7% loss on this position, which I’ve held since November 2011, but because it improves the quality of the portfolio overall, I can take it in stride.

The lesson learned is to watch the news diligently on Rescue My IRA positions, and consider carefully the impact these types of events can have on the shares.  I’ve never been a big fan of financial engineering by any firms, as I feel that this kind of activity masks management failures.  So it’s something I will keep an eye out for in future positions.