Inflation
It looks like the relentless bull market is finally running into trouble. The market indexes are down a lot for the third straight day.
But it’s not because the economy and corporate earnings aren’t delivering on the anticipated boom. They are. In fact, the economy is again exceeding expectations, even the lofty ones. S&P 500 earnings delivered whopping 50% growth in the first quarter, doubling expectations. GDP growth was 6.4% in the first quarter, and it’s just getting warmed up.
The economy is doing great, it’s the side affects that are causing concern, namely inflation. For the first time in forever, there is a supply problem. There aren’t enough products to meet demand. Usually, the problem is the other way around. It’s difficult to say what the modern market will make of this problem.
The jobs report missed by a mile, 233,000 new jobs versus an expected one million. Employers were willing and able to hire but they couldn’t find workers. The combination of high unemployment benefits and parents stuck at home because of school closings is causing a labor shortage. Housing supply is at the lowest level in more than 40 years. People can’t find enough houses to buy. Oil and gas supply also isn’t keeping up with demand.
A booming economy with trillions in stimulus chasing too few goods is a recipe for inflation. The April consumer price index came out this morning showing an increase of 0.9% over last month. That’s an annualized 10.8% rate. The market doesn’t like it.
The inflation concern has been particularly hard on technology and other growth stocks. It’s much better for energy and other commodity-oriented companies. But the scare is taking down most other sectors.
Of course, the inflation may well be a temporary glitch from the astronomical economic growth as the lockdowns and restrictions come down. We’ll see. But this inflation will probably last several months longer at least.
We’ll see how the market digests this in the days and weeks ahead. We already wrote several calls when the market was high. If the selloff gets uglier, it will likely present a buying opportunity, especially in sectors that are temporarily affected.
Trades this month
April 14th
Sell AGNC June 18th $17 call at $0.50 or better
April 28th
Sell KKR June 18 $55 calls at $3.00 or better
Sell USB June 18 $57.50 calls at $2.80 or better
May 4th
Buy Qualcomm stock (QCOM)
Stock Portfolio Recap
AGNC Investment Corp. (AGNC) Yield 8.0%
The environment of booming economic growth and inflation is great for AGNC. It’s really all about the spread, or difference between short-term and long-term rates. The net spread for AGNC has consistently increased from 1.3% in March of last year to 2.6% in the first quarter. The company uses leverage and that makes a big difference. The prospects of still higher rates are strong in the recovery later in the year. HOLD
Broadcom (AVGO) Yield 3.3%
The timing of this latest portfolio addition is proving to be unfortunate. The technology sector has since undergone a selloff to rival the one in March, so far. It isn’t because of a unique problem with the company. Growth from 5G is booming. It’s primarily because the sector is reacting to higher inflation. This is a new problem that hasn’t really been an issue for the last 30 years. We’ll see how the market shakes out. Until then, the rating will be lowered to a hold. HOLD
Brookfield Infrastructure Partners (BIP) Yield 3.8%
The infrastructure partnership announced fantastic earnings last week. Funds from operations per unit were up 20.8% versus last year’s first quarter as the strengthening global economy lifted volumes across its assets and recent acquisitions came online. This bodes very well for future quarters. The stock had been trending higher very slowly and still remains relatively cheap. It’s a good defensive holding as the market changes personality. BUY
Digital Realty Trust, Inc. (DLR) Yield 3.1%
This is a solid niche growth REIT in the expanding data center property business. It had been out-of-favor for a very long time until it recently started moving and a made a 15% upward move in a couple of months. It also reported solid earnings that the market liked a couple of weeks ago. It’s also important to note that DLR is a great down-market stock with a beta of just 0.11, which means it’s only about 10% as volatile as the overall market. It’s a nice position to have when the market gets dicey. BUY
Enterprise Product Partners (EPD) Yield: 7.8%
Midstream energy is an ideal place to be right now. You can still get sky-high yields that likely won’t last long. Plus they haven’t kept pace with the energy rally so far and sell at cheap valuations and have upward momentum. A 7.8% yield that is safe is a rare thing in the market. But when you combine that with likely appreciation in the months ahead, it really knocks the cover off the ball for income investors. BUY
KKR & Co. (KKR) Yield: 1.0%
The alternative investment wealth manager seems to have everything going for it right now. Earnings were spectacular with 63% growth over last years quarter as capital markets revenue more than doubled. Financial stocks are strong and likely to stay that way. But stocks rarely go straight up without taking a breather at some point. The quarters ahead should continue to be good, but the stock may have plateaued in the near term. HOLD
NextEra Energy Inc, (NEE) Yield 2.1%
This combination alternative energy utility stock had a nice rebound from the recent lows until the middle of April. It has since pulled back again. It appears to be a more sustained bout of weakness than previously expected. It’s a rare departure from the normal uptrend, and it’s happening ahead of a very promising environment for alternative energy stocks. Washington will likely not only offer tax breaks and other goodies but should make the sector stand out to investors. BUY
U.S. Bancorp (USB) Yield 2.8%
This best-in-class regional banking giant is still in an uptrend that began in early February. Since then, it’s moved over 40% higher. It’s a great environment for banks with a booming economy and rising interest rates likely. It can also perform well during times of inflation. But it has to plateau at least temporarily at some point. The stock looks good, but this was still a good level in which to write the calls. HOLD
Existing call trades
Sell AGNC June 18th $17 call at $0.50 or better
The positive earnings report as well as the strong economy and likely inflation has helped this stock move higher since we wrote the calls. The premium is priced well above the target level at 1.10. If you haven’t written the calls already you can still do so. The current call premium provides the equivalent of over nine months of dividends.
Sell KKR June 18 $55 calls at $3.00 or better
As I mentioned above, KKR may have topped out in the near term. It has been pulling back lately and the calls are priced well below the target. That’s okay. We may be able to keep the stock if it closes below the 55 strike price at expiration. In that case, we will likely get a good opportunity to write more calls in the future.
Sell USB June 18 $57.50 calls at $2.80 or better
USB has moved higher since we wrote the calls and the premiums are above target at 3.90. The stock has had a huge 40% move since February and may cool down, especially with the market pulling back and getting more dicey. It’s difficult to say where things will stand in five weeks. It’s still a good time to write these same calls at the higher price if you haven’t done so already.
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Price on 5/11/21 | Buy at or Under Price | Yield | Total Return |
| AGNC Investment Corp. | AGNC | 01/13/21 | 15.52 | 18.08 | 17.00 | 7.96% | 19.90% |
| Brookfield Infrastructure | BIP | 01/13/21 | 50.63 | 53.65 | 53.00 | 3.81% | 7.01% |
| Digital Realty Trust | DLR | 1/27/21 | 149.17 | 148.65 | 155.00 | 3.12% | 0.51% |
| NextEra Energy, inc. | NEE | 2/24/21 | 73.76 | 74.07 | 80.00 | 2.08% | 0.94% |
| Enterprise Product Partners | EPD | 3/17/21 | 23.21 | 23.15 | 25.00 | 7.78% | 2.01% |
| U.S. Bancorp | USB | 3/24/21 | 53.47 | 60.15 | 55.00 | 2.79% | 13.34% |
| KKR & Co. | KKR | 3/24/21 | 47.98 | 56.27 | 50.00 | 1.03% | 17.28% |
| Qualcomm Inc. | QCOM | 5/5/21 | 134.65 | 128.37 | 140.00 | 2.12% | -4.66% |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Price on 5/11/21 | Recent Price | Buy Under or | Total Return |
| AGNC June 18 $17 call | AGNC210618C0017000 | Sell | 4/13/21 | 0.50 | 1.10 | 0.50 | 3.20% |
| KKR June 18 $55 call | KKR210618C00055000 | Sell | 4/28/21 | 3.00 | 1.45 | 2.50 | 6.25% |
| USB June 18 $57.50 call | USB210618C00057500 | Sell | 4/28/21 | 2.80 | 3.90 | 2.50 | 5.24% |
| As of Close on 5/11/21 | |||||||
| 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 | 38.00 | 3.42% |
| Brookfield Infras. Ptnrs. | BIP | Called | 6/24/20 | 41.92 | 10/16/20 | 45.00 | 8.49% |
| Starbucks Corp. | SBUX | Called | 8/26/20 | 82.41 | 10/16/20 | 88.00 | 6.18% |
| Visa Corporation | V | Called | 9/22/20 | 200.56 | 11/20/20 | 200.00 | 0.00% |
| AbbVie Inc. | ABBV | Called | 6/2/20 | 91.04 | 12/31/20 | 100.00 | 12.43% |
| Enterprise Prod. Prtnrs. | EPD | Called | 6/24/20 | 18.14 | 1/15/21 | 20.00 | 15.16% |
| Altria Group | MO | Called | 6/2/20 | 39.66 | 1/15/21 | 40.00 | 7.31% |
| U.S. Bancorp | USB | Called | 11/25/20 | 44.68 | 1/15/21 | 45.00 | 1.66% |
| B&G Foods Inc, | BGS | Called | 10/28/20 | 26.79 | 2/19/21 | 28.00 | 4.42% |
| Valero Energy Inc. | VLO | Called | 8/26/20 | 53.70 | 3/26/21 | 60.00 | 11.73% |
| Chevron Corp. | CVX | Called | 12/23/20 | 85.69 | 4/1/21 | 96.00 | 12.95% |
| 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% | |