This Rally Hinges on the Fed
It was a strong October in the market with the S&P 500 up more than 6% for the month. But the index was up over 8% in the second half of the month after recovering from the low.
What’s going on, and can it last?
Part of this rally is a bounce off the low, which is normal for bear markets and has already occurred several times this year. But there are glimmers of hope that the market may have already bottomed. That hope is largely predicated on the notion that we may be at the peak of the Fed’s aggressiveness. All eyes will be on the Fed this week for confirmation.
While the Central Bank is widely expected to raise the Fed Funds rate by 0.75% for the fourth time this year at Wednesday’s meeting, there’s increasing speculation that the pace will slow from here. The Fed has previously stated that it will target a 4.5% to 5.0% rate by next year. After this week, the rate will be about 4%. That means there will only be about 0.5% to 1.00% to go and the worst of the hiking should be over.
At least, that’s what many are thinking. There’s a lag time between raising rates and the effects rippling through the economy and price pressures. The Fed may at least pause after achieving the targeted rate to see what happens. All ears will be on Chairman Jerome Powell’s Wednesday statement. The market will need some excuse for a confirmation of hopeful expectation to continue the rally. A disappointment should mean the end of the rally.
We’ll see what happens. But even if the Fed indicates it will slow for now, there are still other issues. If the hikes have the Fed’s desired effect, investors will have to contend with lousy earnings and a deeper recession in the quarters ahead. And there is still no guarantee that the currently targeted rate level will be sufficient to tame inflation.
That said, an end to this Fed hiking cycle, which is largely responsible for this bear market, could be nearing a turning point. It could be the first tangible signal of a turnaround. We’ll see.
Trades Past Month
October 21
OKE October 21 $65 calls at $3.40 – Expired
October 26
Purchased Xcel Energy (XEL) – $62.57
Portfolio Recap
Global Ship Lease, Inc. (GSL)Yield: 8.7%It’s been ugly for shipping companies as a recession looms here and the global economy slows down despite powerful secular dynamics in the industry and with Global in particular. There is a near-term catalyst when the company reports earnings next week. There should be impressive growth as the company has greatly expanded its fleet and booked higher contract rates for charters than existed before. Hopefully, we will see a near-term bounce from that. HOLD
Intel Corp. (INTC)Yield: 5.6%This stock may well have bottomed. The company reported earnings last week that missed estimates and lowered 2022 guidance, and INTC traded higher on the news. Revenue shrunk 20% from last year’s quarter but beat estimates while earnings of $0.25 per share were short of the expected $0.32. Intel also lowered 2022 revenue estimates to $63 billion to $64 billion, below the previous guidance of $65 billion to $68 billion. Intel cited a “pronounced slowdown in demand” but improvement in the beleaguered PC sector.
The bad news was already in the stock as it sells near book value. It also has significant promise in its growing foundry business that should be further aided by government subsidies. The company isn’t at risk of bankruptcy and the dividend is safe with a low payout ratio. It looks like the bottom is already in and the stock should rise from here. HOLD
ONEOK, Inc. (OKE)Yield: 6.3%After a steep selloff in September, OKE is busting a move. It’s up over 20% from the low in September. But it’s still a long way from the April high, down 19%. OKE is negative for the year but has still vastly outperformed the overall market. The stock has also underperformed its midstream energy peers this year. But this lagging performance is still hard to explain. Earnings in the natural gas arena are resilient and continued to grow through the pandemic. It should be resilient this recession as well considering the huge natural gas demand in Europe and Asia from supply chain issues and the war. It pays a huge dividend and has automatic inflation adjustments built into its contracts. Markets can do anything in the short term, but rationality usually wins over eventually. BUY
Realty Income Corp. (O)Yield: 4.8%This legendary monthly income payer is up over 13% from the low in mid-October. It took a drubbing from rising interest rates along with other conservative dividend-paying stocks during the last selloff. But the selling is likely overdone as Realty’s earnings should be resilient in a recession and interest rates may also move lower. In addition, Realty should grow above normal rates and a recent large acquisition should prompt strong growth in the quarters ahead. BUY
Star Bulk Carriers Corp. (SBLK)Yield: 37.1%Most of what I said about GSL above is also true for SBLK. The intermediate-term prognosis remains excellent for dry bulk shipping while the market is struggling with worries about the U.S. and global economies. But dry bulk shipping still has a highly favorable supply/demand dynamic despite rates having dipped recently. Half of the position was sold to be cautious in this turbulent and unpredictable market. There are key dates ahead. One is the earnings report on November 16. The other is the ex-dividend date the following week. The dividend is so massive it’s important to hold the stock and get the next one. HOLD
Qualcomm Corp. (QCOM)Yield: 2.5%The tech sector still can’t get out of its own way. Inflation and rising interest rates persist and tech earnings continue to be downgraded. Even though business is strong, QCOM can’t fight the gravity of a sinking sector. However, Qualcomm reports earnings today. The company had forecasted earnings growth of 23% in the second half of this year. Hopefully another positive report will get the stock moving higher. HOLD
Visa Inc. (V)Yield: 0.9%Visa reported earnings last week that once again killed it. Revenue spiked 22% and earnings were up 27% from last year’s quarter. The payments processing giant continues to benefit from the end of Covid restrictions despite the slower economy. V got a nice bump after earnings. But the situation is murkier going forward as the U.S. and global economies continue to deteriorate and the dollar continues to rise in value. The stock is nearly the price and the timing where a high-priced covered call makes sense. Hopefully it can move a little higher from here. HOLD
The Williams Companies, Inc.Yield: 5.2%This midstream energy company in the form of a corporation has also recovered nicely after a steep fall in September. It’s up over 17% from the September low and only about 12% from the 52-week high and recently topped the 200-day moving average. Williams reported earnings yesterday that topped estimates with earnings growth of 15% over last year’s quarter. A big reason for the strong earnings is resilient natural gas demand, something that is likely to endure through the recession based on shortages overseas. The stock is getting a bump and the good times should continue. BUY
Xcel Energy Inc.Yield: 3.0%This most recent addition to the portfolio reported a slight miss in earnings last week. But the stock has been trending higher anyway because it was oversold in the September market plunge. XEL is up over 12% since the low in mid-October. This stock does tend to bounce around a lot on a longer-term upward trend. It should also benefit from new legislation from Washington that will reduce costs on its considerable clean energy production. The stock should be solid in a recession and we got in at a good price. BUY
| 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 | $117.66 | NA | 2.52% | -10.09% |
| Visa Inc. | V | 12/22/21 | $217.96 | $207.16 | NA | 0.86% | -4.44% |
| Global Ship Lease, Inc. | GSL | 2/23/22 | $24.96 | $17.10 | NA | 8.68% | -28.89% |
| ONEOK, Inc. | OKE | 5/25/22 | $65.14 | $59.32 | $67.00 | 6.26% | -6.05% |
| Star Buld Carriers Corp. | SBLK | 6/1/22 | $33.30 | $17.42 | NA | 37.07% | -41.07% |
| Intel Corporation | INTC | 7/27/22 | $40.18 | $28.43 | NA | 5.02% | -28.52% |
| The Williams Companies | WMB | 8/24/22 | $35.58 | $32.73 | $38.00 | 5.20% | -6.79% |
| Realty Income Corporaton | O | 9/28/22 | $60.37 | $62.27 | $63.00 | 4.78% | 4.00% |
| Xcel Energy Inc. | XEL | 10/26/22 | $62.57 | $65.11 | $65.00 | 2.99% | 4.06% |
EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| as of close on 10/31/2022 | |||||||
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% |
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% | |
| QCOM Sep 16th $145 call | out-of-money | 7/20.2022 | $11.75 | 9/16/22 | 11.75 | 8.73% | |