History Versus the Rally
The year started with a rotten prognosis. But investors haven’t gotten the memo, at least not yet.
So far, it has been a terrific year in the market. Things have been turning around. Last year’s losers are the biggest winners. The broader S&P 500 index is up 5.2% YTD and 13% from the October low. The Nasdaq is up 11.2% so far this year. And this investor optimism is not without reason.
Inflation has been steadily declining, despite an upward tick in January. The Fed is almost done raising rates. The Central Bank is seen as highly unlikely to raise the Fed Funds rate much above 5%, and it’s already 4.75%. Meanwhile, the economy is solid and showing no signs of recession. GDP growth was a solid 2.6% last quarter. The Atlanta Fed is forecasting 2.4% growth in the first quarter.
There has been growing optimism that we can get through this inflation and Fed rate hiking cycle without much economic pain. That’s what seems to be happening so far. But this latest “soft landing” rally is facing a formidable foe – history.
Rate hikes almost always slow the economy. But there is typically a long lag time. It has taken on average about a year to 18 months for the negative effects of rate hikes to filter through the economy. That means the damage already done may not be evident for several months yet. But that other shoe is likely to drop.
Since 1961, the Fed has embarked on nine inflation-busting rate hiking cycles. Eight of those cycles have led to recession. The yield curve has inverted, where short-term rates are now higher than longer rates. That means the market expects things to cool off. This phenomenon has almost always preceded a recession.
Is it possible we avoid a recession? It is. Every cycle is different. And this is a particularly weird one following the highly unusual pandemic shutdown and recovery. While it is certainly possible that things will go differently this time, it isn’t likely. And it’s a bad bet.
It’s is more likely that the negative prognosis at the start of this year has simply been pushed back. The buoyant economy will likely make inflation stickier, and the Fed aggressive for longer. And the recession part of the cycle won’t happen until late this year or early next year. That’s good for now, but bad for later.
The market will have difficulty mustering a rally with lasting traction with so many roadblocks ahead. Markets tend to anticipate six to nine months into the future, and stocks will be impeded from moving into the next bull market until investors can see beyond the recession and into the next recovery.
The hot cyclical stocks/cold defensive stocks YTD situation is unlikely to last. Most of the rest of the year is likely to provide better relative performance for the more defensive plays. Dividends and income are likely to be the best route to good returns.
What to Do now
The current BUY-rated positions are the defensive stocks including Williams Companies (WMB), Brookfield Infrastructure Corporation (BIPC), and Medical Properties Trust (MPW). I expect the relative performance of these stocks to improve in the months ahead as these are businesses with revenues that can continue to thrive in both inflation and recession.
Calls were sold on Visa (V) and a call is targeted on Qualcomm (QCOM) after these stocks have rallied in the early part of this year. There is a strong chance this cyclical rally will fade and the recent spike in prices presents a great opportunity to lock in a high call premium while things are good.
The shipping stocks, Global Ship Lease (GSL) and Star Bulk Carriers (SBLK), are also cyclical but may be on somewhat of a different schedule. Shipping rates are likely to get a boost as the Chinese economy continues to open up after the oppressive Covid restrictions. That may offset a slowing global economy.
Income should be king in a market that may be sideways or worse in the months ahead. We will continue collecting dividends and look for opportunities to add new positions and sell calls when opportunities arise.
Monthly Recap
January 24
Purchased Medical Properties Trust, Inc. (MPW) - $13.22
Sold V March 17 $220 calls at $12.00
February 17
O February 17 $62.50 calls at $3.00 – Expired
Realty Income (O) – Called
February 21
Sell QCOM March 31 $130 calls at $7.00 or better
Featured Action: Sell QCOM March 31 $130 calls at $7.00 or better
Expiration date: March 31
Strike price: $130
Call price: $7.00
Qualcomm (QCOM)
The chip maker stock is showing signs of having bottomed out, as noted above. The stock has flirted with the 130 per share level for the first time in a while, although it has pulled back recently. The premium is ambitious and probably cannot be had at least for several days. But it is certainly possible that the stock rallies enough to generate that high a premium. If not, we can wait until later. But it is worth taking advantage of the recent rally to generate a high income in this stock in this uncertain market.
Here are the three scenarios.
1. The stock closes above the $130 strike price at expiration.
Call premium: $7.00
Dividends: $5.72
Appreciation: -$4.65 ($134.65 purchase price minus $130 strike price)
Total: $8.07 (total return will be 6% in 22 months; however, the total QCOM return will be 21.9% if you sold the previous two calls for $9.65 and $11.75)
2. The stock price closes below but near our $130 strike price.
Call premium: $7.00
Dividend: $5.72
Total: $12.72 (total income of 9.5% in 22 months, or a 25.3% income return if you sold the other two calls on the same position)
3. The stock price declines.
There will be $12.72 in income or the $34.12 in total income will offset the likely temporary decline.
Portfolio Recap
CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Recent Price | Buy at or Under Price | Yield | Total Return |
| Qualcomm Inc. | QCOM | 5/5/21 | $134.65 | $127.72 | NA | 2.35% | -1.82% |
| Visa Inc. | V | 12/22/21 | $217.96 | $223.56 | NA | 0.81% | 3.56% |
| Global Ship Lease, Inc. | GSL | 2/23/22 | $24.96 | $19.62 | NA | 7.65% | -16.65% |
| Star Buld Carriers Corp. | SBLK | 6/1/22 | $33.30 | $21.62 | NA | 23.59% | -22.27% |
| Intel Corporation | INTC | 7/27/22 | $40.18 | $27.61 | NA | 5.29% | -28.79% |
| The Williams Companies | WMB | 8/24/22 | $35.58 | $31.26 | $38.00 | 5.73% | -9.83% |
| Brookfield Infrastructure Cp. | BIPC | 11/9/22 | $42.43 | $43.44 | $46.00 | 3.58% | 3.19% |
| Medical Properties Trust | MPW | 1/24/23 | $13.22 | $12.96 | $15.00 | 8.95% | -1.97% |
EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| V Mar 17 $220 call | V230317C00215000 | Sell | 1/24/23 | $12.00 | $7.55 | $12.00 | 5.51% |
| QCOM Mar 31 $130 call | QCOM230331C00130000 | Sell pending | $6.90 | $7.00 | 5.20% | ||
| as of close on 2/17/2023 | |||||||
SOLD STOCKS | |||||||
| Security | Ticker Symbol | Action | Entry Date | Entry Price | Sale Date | Sale Price | Total Return |
| Innovative Industrial Props. | IIPR | Called | 6/2/20 | $87.82 | 9/18/20 | $100.00 | 15.08% |
| Qualcomm | QCOM | Called | 6/24/20 | $89.14 | 9/18/20 | $95.00 | 7.30% |
| U.S. Bancorp | USB | Called | 7/22/20 | $36.26 | 9/18/20 | $38 | 3.42% |
| Brookfield Infras. Ptnrs. | BIP | Called | 6/24/20 | $41.92 | 10/16/20 | $45 | 8.49% |
| Starbucks Corp. | SBUX | Called | 8/26/20 | $82.41 | 10/16/20 | $88 | 6.18% |
| Visa Corporation | V | Called | 9/22/20 | $200.56 | 11/20/20 | $200 | 0.00% |
| AbbVie Inc. | ABBV | Called | 6/2/20 | $91.04 | 12/31/20 | $100 | 12.43% |
| Enterprise Prod. Prtnrs. | EPD | Called | 6/24/20 | $18.14 | 1/15/21 | $20 | 15.16% |
| Altria Group | MO | Called | 6/2/20 | $39.66 | 1/15/21 | $40 | 7.31% |
| U.S. Bancorp | USB | Called | 11/25/20 | $44.68 | 1/15/21 | $45 | 1.66% |
| B&G Foods Inc, | BGS | Called | 10/28/20 | $26.79 | 2/19/21 | $28 | 4.42% |
| Valero Energy Inc. | VLO | Called | 8/26/20 | $53.70 | 3/26/21 | $60 | 11.73% |
| Chevron Corp. | CVX | Called | 12/23/20 | $85.69 | 4/1/21 | $96 | 12.95% |
| KKR & Co. | KKR | Called | 3/24/21 | $47.98 | 6/18/21 | $55 | 14.92% |
| Digital Realty Trust | DLR | Called | 1/27/21 | $149.17 | 7/16/21 | $155 | 5.50% |
| NextEra Energy, Inc. | NEE | Called | 2/24/21 | $73.76 | 9/17/21 | $80 | 10.00% |
| Brookfield Infras. Ptnrs. | BIP | Called | 1/13/21 | $50.63 | 10/15/21 | $55 | 11.65% |
| AGNC Investment Corp | AGNC | Sold | 1/13/21 | $15.52 | 1/19/22 | $15 | 5.92% |
| ONEOK, Inc. | OKE | Called | 5/26/21 | $52.51 | 2/18/22 | $60 | 19.62% |
| KKR & Co. | KKR | Sold | 8/25/21 | $64.52 | 2/23/22 | $58 | -9.73% |
| Valero Energy Inc. | VLO | Called | 11/17/21 | $73.45 | 2/25/22 | $83 | 15.53% |
| U.S Bancorp | USB | Sold | 3/24/21 | $53.47 | 4/13/22 | $51 | -1.59% |
| Enterprise Product Ptnrs | EPD | Called | 3/17/21 | $23.21 | 4/14.2022 | $24 | 11.25% |
| FS KKR Capital Corp. | FSK | Called | 10/27/21 | $22.01 | 4/14/22 | $23 | 13.58% |
| Xcel Energy Inc. | XEL | Called | 10/12/21 | $63.00 | 5/20/22 | $70 | 12.66% |
| Innovative Industrial Props. | IIPR | Sold | 3/23/22 | $196.31 | 7/20/22 | $93 | -51.23% |
| One Liberty Properties | OLP | Sold | 7/28/21 | $30.37 | 8/24/22 | $25 | -12.94% |
| ONEOK, Inc. | OKE | Called | 5/25/22 | $65.14 | 1/20/23 | $65 | 2.66% |
| Xcel Energy, Inc. | XEL | Called | 10/26/22 | $62.57 | 1/20//2023 | $65 | 4.67% |
| Realty Income Corp. | O | Called | 9/28/22 | $60.37 | 2/17/23 | $63 | 5.41% |
EXPIRED OPTIONS | |||||||
| Security | In/out money | Sell Date | Sell Price | Exp. Date | $ return | Total % Return | |
| IIPR Jul 17 $95 call | out-of money | 6/3/20 | $3.00 | 7/17/20 | $3.00 | 3.40% | |
| MO Jul 31 $42 call | out-of-money | 6/17/20 | $1.60 | 7/31/20 | $1.60 | 4.03% | |
| ABBV Sep 18 $100 call | out-of-money | 7/15/20 | $4.60 | 9/18/20 | $4.60 | 5.05% | |
| IIPR Sep 18 $100 call | in-the-money | 7/22/20 | $5.00 | 9/18/20 | $5.00 | 5.69% | |
| QCOM Sep 18 $95 call | in-the-money | 6/24/20 | $4.30 | 9/18/20 | $4.30 | 4.82% | |
| USB Sep 18 $37.50 call | in-the-money | 7/22/20 | $2.00 | 9/18/20 | $2.00 | 5.52% | |
| BIP Oct 16 $45 call | in-the-money | 9/2/20 | $1.95 | 10/16/20 | $1.95 | 4.65% | |
| SBUX Oct 16 $87.50 call | in-the-money | 10/16/20 | $3.30 | 10/16/20 | $3.30 | 4.00% | |
| V Nov 20 $200 call | in-the-money | 9/22/20 | $10.00 | 11/20/20 | $10.00 | 4.99% | |
| ABBV Dec 31 $100 call | in-the-money | 11/18/20 | $3.30 | 12/31/20 | $3.30 | 3.62% | |
| EPD Jan 15 $20 call | in-the-money | 11/23/20 | $0.80 | 1/15/21 | $0.80 | 4.41% | |
| MO Jan 15 $40 call | in-the-money | 11/25/20 | $1.90 | 1/15/21 | $1.90 | 4.79% | |
| USB Jan 15 $45 call | in-the-money | 11/25/20 | $2.00 | 1/15/21 | $2.00 | 4.48% | |
| BGS Feb 19 $27.50 call | in-the-money | 12/11/20 | $2.40 | 2/19/21 | $2.40 | 8.96% | |
| VLO Mar 26 $60 call | in-the-money | 2/10/21 | $6.50 | 3/26/21 | $6.50 | 12.10% | |
| CVX Apr 1 $95.50 call | in-the-money | 2/19/21 | $4.30 | 4/1/21 | $4.30 | 5.02% | |
| AGNC Jun 18 $17 call | out-of-money | 4/13/21 | $0.50 | 6/18/21 | $0.50 | 3.21% | |
| KKR Jun 18 $55 call | in-the-money | 4/28/21 | $3.00 | 6/18/21 | $3.00 | 6.25% | |
| USB Jun 16 $57.50 call | out-of-money | 4/28/21 | $2.80 | 6/18/21 | $2.80 | 5.24% | |
| DLR Jul 16 $155 call | in-the-money | 6/16/21 | $8.00 | 7/16/21 | $8.00 | 5.36% | |
| AGNC Aug 20 $17 call | out-of-money | 6/23/21 | $0.50 | 8/20/21 | $0.50 | 3.00% | |
| OKE Aug 20 $57.50 call | out-of-money | 6/23/21 | $3.50 | 8/20/21 | $3.50 | 6.67% | |
| NEE Sep 17 $80 call | in-the-money | 8/11/21 | $3.50 | 9/17/21 | $3.50 | 4.75% | |
| BIP Oct 15 $55 call | in-the-money | 9./01/2021 | $2.00 | 10/15/21 | $2.00 | 3.95% | |
| USB Nov 19 $60 call | out-of-money | 9/24.2021 | $2.30 | 11/19.2021 | $2.30 | 4.30% | |
| OKE Nov 26 $65 call | out-of-money | 10/20/21 | $2.25 | 11/26/21 | $2.25 | 4.28% | |
| KKR Dec 17 $75 call | out-of-money | 10/26/21 | $3.50 | 12/17/21 | $3.50 | 5.42% | |
| QCOM Jan 21 $185 Call | out-of-money | 11/30/21 | $9.65 | 1/21/22 | $9.65 | 7.17% | |
| OLP Feb 18 $35 Call | out-of-money | 11/19/21 | $1.50 | 2/18/22 | $1.50 | 4.94% | |
| OKE Feb 18 $60 Call | in-the-money | 1/5/22 | $2.75 | 2/18/22 | $2.75 | 5.24% | |
| USB Feb 25 $61 call | out-of-money | 1/13/22 | $2.50 | 2/25/22 | $2.50 | 4.68% | |
| VLO Feb 25 $83 call | in-the-money | 1/18/22 | $4.20 | 2/25/22 | $4.20 | 6.13% | |
| EPD Apr 14th $24 call | in-the-money | 3/2/22 | $1.25 | 4/14/22 | $1.25 | 5.69% | |
| FSK Apr 14th $22.50 call | in-the-money | 3/10/22 | $0.90 | 4/14/22 | $0.90 | 4.09% | |
| XEL May 20th $70 call | in-the-money | 3/30/22 | $3.00 | 5/20/22 | $3.00 | 4.76% | |
| SBLK July 15th $134 call | out-of-money | 6/1/22 | $1.60 | 7/15/22 | $1.60 | 4.80% | |
| OKE Oct 21st $65 call | out-of-money | 8/24/22 | $3.40 | 10/21/22 | $3.40 | 5.22% | |
| OKE Jan 20th $65 call | In-the-money | 11/25/22 | $3.70 | 1/20/23 | $3.70 | 5.68% | |
| XEL Jan 20th $65 call | in-the-money | 11/25/22 | $5.00 | 1/20/23 | $5.00 | 7.99% | |
| O Feb 17th $62.50 call | in-the-money | 12/28/22 | $3.00 | 2/17/23 | $3.00 | 4.97% | |
| QCOM Sep 16th $145 call | out-of-money | 7/20.2022 | $11.75 | 9/16/22 | 11.75 | 8.73% | |
Brookfield Infrastructure Corporation (BIPC)
Yield: 3.6%
The infrastructure juggernaut reported 12% funds from operations (FFOs) per share growth in 2022 and 10.9% in the fourth quarter versus last year’s comparable periods. The company is benefiting as recent acquisitions come online, particularly a big acquisition of North America midstream energy company Inter Pipeline. The stock has been weak lately because of rising interest rates as Brookfield has a high level of debt as well as a strong dollar. But rates and dollar strength have abated, and earnings will remain resilient. BUY
Brookfield Infrastructure Corporation (BIPC)
Next ex-div date: February 27, 2023
Global Ship Lease, Inc. (GSL)
Yield: 7.6%
Things are looking up for this container shipping company. Despite having pulled back a little over the past couple of days, GSL is up over 17% YTD and at the highest price since the summer. The longer-term supply/demand dynamic is positive for container shipping and the stocks may be in a longer-term bull market. Plus, the stock sells at an extremely low valuation compared to its five-year averages. The company announces fourth-quarter earnings soon and hopefully will get an additional lift from that. HOLD
Global Ship Lease, inc. (GSL)
Next ex-div date: February 21, 2023
Intel Corp, (INTC)
Yield: 5.3%
In a terrible time for Intel, there is a glimmer of hope in the latest bad news. The fourth-quarter earnings were terrible, and the company indicated results will be lousy again next quarter as PC demand continues to plunge in a sluggish global economy. But the stock didn’t really falter after that news. That suggests that the market already priced in a rotten first half. INTC looks to have already bottomed out. Meanwhile, the company is employing a massive cost-cutting program and new products should also help the bottom line in the second half of this year and beyond. HOLD
Intel Corporation (INTC)
Next ex-div date: May 4, 2023, est.
Medical Properties Trust, Inc. (MPW)
Yield: 8.9%
The hospital REIT had some very good news last week. The stock lost more than half its value last year because of rising interest rates and concerns about some of its tenants’ ability to pay rent. Its top tenant had been on particularly shaky ground. But that tenant announced the sale of some of its properties in Utah. The sale gives it a cash infusion to pay money owed to MPT and the REIT can now get a healthier tenant for the sold properties. These events put the dividend on much more solid ground and the stock soared over 8% on the day of the news.
MPW still remains in a technical uptrend that began in October. The dividend is safe, and the operational performance of the company is solid. The company reports earnings this week that can hopefully give the stock a boost, as earnings grew by better than 30% last quarter and should be good again this quarter. With a defensive business, this should be a good year. BUY
Medical Properties Trust, Inc. (MPW)
Next ex-div date: March 15, 2023
Star Bulk Carriers Corp. (SBLK)
Yield: 23.6%
The company reported earnings last week and revenue was in line while earnings missed slightly. Earnings per share fell 17.7% from the same quarter last year as shipping rates are far lower. That was expected but the future looks better. For one, the company sells at less than four times earnings, an absurdly low valuation for a company with bright longer term prospects. It also announced a $0.60 quarterly dividend payable in March.
SBLK had been sort of bouncing around in a certain range for many months but has recently broken out to the highest level since August. Lower shipping rates and a slower global economy have already been factored into the stock and it is likely still the early innings of a multiyear positive cycle for shipping. The shipping company may have already seen the bottom with better times ahead. HOLD
Star Bulk Carriers Corp. (SBLK)
Next ex-div date: February 27, 2023
Qualcomm Corp. (QCOM)
Yield: 2.3%
It’s been a rough market for QCOM. The stock is down over 21% for the last one-year period. But the longer-term prognosis remains bright and the stock is also showing signs of having perhaps bottomed out. Qualcomm reported lousy earnings for the last quarter and it appears that the next quarter won’t be much better. Yet the stock remained quite resilient after the report. That suggests that this news was already factored into the stock price, and the market is looking towards improvement in the second half of the year. QCOM is up over 16% YTD and recently cracked the 130 per share level for the first time since September. HOLD
Qualcomm Inc. (QCOM)
Next ex-div date: March 1, 2023
Visa Inc. (V)
Yield: 0.8%
The payments processing company is a great stock for the longer term. Markets like this are great times for longer-term investors to buy a stock like this. The near-term performance has picked up as well. V is up about 8% YTD as financial stock performance has improved. It also recently hit the highest level since last April, although it has pulled back somewhat since. Much will depend on the performance of the overall market in the near term. But even if the market rolls over, V held up remarkably well last year with a -3.4% return and should thrive in the likely rebound this year. HOLD
Visa Inc. (V)
Next ex-div date: May 9, 2023, est.
The Williams Companies, Inc. (WMB)
Yield: 5.6%
After outperforming the market and its peers in the selloff this fall, WMB has been lagging both in recent months. It has a business that should well endure recession or inflation or both. The problem is that it is more leveraged to natural gas prices than some of its peers, which have crashed of late. However, those prices are likely to spring back in the months ahead as the selling has been overdone amidst solid demand. It may outperform the market and its peers in the months ahead. BUY
The Williams Companies, Inc. (WMB)
Next ex-div date: March 10, 2023
Active Covered Call Trades
O February 17 $62.50 calls at $3.00 - Expired
Call premium: $3.00
Dividends: $1.25 (10-15, 11-15, 12-15, 1-15, 2-15)
Appreciation: $2.13 ($62.50 strike price minus $60.37 purchase price)
Total: $6.38 (total return of 10.6% in less than 5 months)
The stock was called away last Friday as the price was more than $3 per share above the strike price at expiration. The total return isn’t bad in this market for less than five months and we also generated a solid income. The call seems unfortunate but it also might not be a bad idea to take some profits after this uncertain market has rallied 14% from the October low.
Sell V March 17 $220 calls at $12.00 or better
V has been looking better this year. It broke through to the highest level since April, but has since pulled back. V is now only a little more than $3 per share above the strike price with almost a month to go before the calls expire. V is a cyclical stock that could pull back if the market sours on cyclical stocks and we locked in sizable call premium when the stock was hot.
Income Calendar
Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Income Advisor for an explanation of how dates are estimated.
The next Cabot Income Advisor issue will be published on March 28, 2023.
