The Market Stares toward the Election
While the stock market has held its own amidst growing uncertainty and some bad news, it has lost its upward momentum over the past 10 days.
There’s the on-again/off-again stimulus plan, the Covid resurgence, and the upcoming election. I think the market still sees the big prize of a strong recovery and an end to this pandemic ahead. For those reasons it is holding up. But the growing risk makes it difficult to gain traction.
I expect a strong bull market on the other side of the election and pandemic, but things could be dicey in the near term. It’s not so much that the market cares who will win the election. It’s that it fears a contested result and uncertainty dragging on.
The current situation has dried up the call premiums. As well, the resilient market has limited opportunities to pick up stocks cheap and write calls later. For those reasons, there isn’t much activity in the portfolio right now. There is only one outstanding call. But things can change fast. And they will.
Several of the existing stock positions do not yet have positive momentum. But that may changes soon, and I will look to write a call in the near future. It’s important to note that generating a high income on stocks can be a feast or famine proposition. Often opportunities abound, or they dry up quickly.
There’s no reason to force a bad trade, especially when there is a good chance of volatility in the near future and huge opportunities that are likely to follow post election and post pandemic.
Stock Portfolio Recap
AbbVie Inc. (ABBV) Yield 5.6%
The stock is continuing to flounder. It does have some technical support at the current level. Health care has been one of the worst performing sectors of the market over the last three months despite the defensive nature of the business and the strong tailwind from the aging population. A possible reason is the expectation of a Biden victory by investors. There is more uncertainty regarding a possible approach to the sector from a Biden Administration. However, unless the sector is radically altered ABBV should continue to perform well. In fact, the current price represents a solid opportunity to get into the stock cheap if you don’t own it already. BUY
Altria (MO) Yield 8.8%
The cigarette company stock is trading near a historic low valuation. It also pays a massive yield that is rock solid, as the company has more than enough free cash flow to cover it. The company also has solid growth prospects in other areas that can offset the volume declines over time. The massive yield alone should be enough to lure investors in a world where the 10-year Treasury is paying just 0.81%. When the stock get some upward momentum there should be an opportunity to write another call. BUY
Enterprise Product Partners (EPD) Yield 10.4%
This energy stock is still going nowhere. The market hasn’t warmed to energy and the perception that Biden will win is creating even more of a headwind, as he is perceived to be less fossil fuel friendly. That said, an economic rebound will have to lift the fortunes of this midstream energy company. The recovery the market is already pricing in will necessary boost business for Enterprise. After the company’s earning report next week, I expect the stock to pick up. While the results may not be great, it will likely be the last challenged quarter, and investors will look ahead to much better results in the future. Earnings or post election should be a catalyst for EPD to move higher. BUY
Valero Energy (VLO) Yield 9.60%
This story is similar to that of EPD. The market is unlikely to give this stock anything until at least the other side of third quarter earnings, which report this week, and maybe the other side of the election and pandemic. Although refining margins have greatly improved in the last several months, there is still a big inventory to work through. For that reason, third quarter earnings are likely to be lousy. But after that, the market will look to significantly improved results going forward. It should be a low point. BUY
Visa (V) Yield 0.60%
This company is basically a license to print money as it collects fees on unholy amounts of transactions on a daily basis. However, business has been hurt by the pandemic. But that’s what creates the opportunity. The stock is almost never cheap unless there is a recession or bear market. Visa announces earnings next week. We’ll see. There is also a lot of uncertainty ahead regarding the election. The stock could pull back. But that’s okay. We took a more cautious approach writing the calls with a strike price at, or even slightly above, the market price and locked in a huge call premium on a stock that will surely bounce back even if it goes down. BUY
Existing call Trades
Sell SBUX October 16 $87.50 call at $3.30 – Expired and called
Sell BIP October 16 $45 call at $1.95 or higher- Expired and called
V Nov 20 $200 call at $10.00 or higher
The stock has pulled back in the past couple of weeks from a high of about 206 to under 200. The move has mimicked the overall market as uncertainty regarding the election draws closer. The calls have moved below the targeted price of 10 to the current 6.40 as near term optimism has waned. That was expected. I maintain the 10 targeted price as this stock can also rebound quickly.