The Boom Versus Inflation
The market is still in an uptrend and not far from the highs. But things are changing.
The market had a fairly steep selloff over the first three days of last week but then recovered over the last two days. This week it’s been wobbly.
The issues are supply problems and inflation. While the economy is delivering on the booming growth, supplies can’t keep up. Businesses can’t find workers to hire. Housing supply is at a four-decade low. Industry-wide chip shortages are hurting technology and automobile sales.
These supply issues have another negative consequence. A booming economy and trillions in stimulus chasing too few goods is a recipe for inflation. And it’s here. The April consumer price index (CPI) was the highest in more than a decade, reflecting over 10% annualized inflation.
Not only is inflation an unfortunate side effect of the rapid pick-up in the economy, but the higher prices and supply issues threaten to hold the anticipated booming growth back. The market might have to reconfigure those growth projections. And that would be bad.
That said, it remains unclear whether these issues are a temporary and natural side effect of the strongest economic growth in many decades or something more serious. If supply problems are severe enough to curtail the anticipated boom, that’s a problem. The inflation is likely temporary but could be a bigger issue if it lingers beyond this juncture of the recovery.
At this point, I would still bet on the bulls. The supply issues will likely get fixed over time and any growth hindrance will likely be recovered in the future. But we’ll see how things shake out.
In the meantime, we wrote several calls on portfolio positions when the market was higher and looking stronger. And several other positions are stronger on a relative basis in this wobbly market.
Trades this month
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 7.9%
Earnings were great. There’s a booming economy and likely rising interest rates. This point in time is simply a wonderful habitat for AGNC and the price keeps trending higher, ever so slowly. Shares are fairly valued at this point but the environment is so good the price is likely to trend up from here. HOLD
Broadcom (AVGO) Yield 3.3%
This company is one of the backbones of the technological revolution. Technology isn’t going away. In fact, 5G will launch it to a new level. But right now, the sector is under pressure. For now, fears of inflation in a sector that has perhaps rallied too much over the past year is winning the battle over Broadcom’s stellar earnings and bright future. Short-term market gyrations will do what they’ll do. But AVGO will win the battle in the future. Patience should pay handsomely with this one. HOLD
Brookfield Infrastructure Partners (BIP) Yield 3.9%
The infrastructure partnership announced fantastic earnings in the latest quarter. The strengthening global economy lifted volumes across its assets and recent acquisitions came online. This bodes very well for future quarters. But the stock has done jack squat this year. It’s still wallowing at the same price it was in the middle of January. But it still pays a nearly 4% distribution and it could get a big benefit as infrastructure becomes a hotter subsector in the post-pandemic environment. BUY
Digital Realty Trust, Inc. (DLR) Yield 3.1%
Aside from the long-term advantage of being in a growth business (data center properties), there are a couple things to like about DLR in the near term. One is that after going sideways for a long time the stock broke out to a new near-term high, which is positive from a technical perspective. The other is that it’s a fantastic stock to own in turbulent markets. It has a microscopic beta of just 0.11, meaning that it tends to move independently of the overall market. It’s good to have a stock like that in the portfolio, especially as things get a little dicey. BUY
Enterprise Product Partners (EPD) Yield: 7.4%
Good times for Enterprise, and other midstream energy companies, may finally be upon us. The high yield in this low-yield world is becoming increasingly irresistible. EPD is now within bad breath distance of the 52-week high. As the economy booms, so does the demand for energy and Enterprise’s volumes and profits. The stock is still eons below the pre-pandemic price as things go unmistakably the right way. We’ll collect the fat distribution until it becomes super attractive to write a covered call. BUY
KKR & Co. (KKR) Yield: 1.0%
It looks like this high-flying alternative investment wealth manager is finally taking a breather. It had been in a furious uptrend since late February. But it’s pulled back in the past 10 days as the market grapples with inflation issues. We wrote covered calls near the high. The stock may bounce around and consolidate for a while but I expect the price to be nicely higher by the end of the year. 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 in 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 2.7%
This best-in-class regional banking giant stock isn’t tiring out. While other financial companies are taking a breather after a nice run, USB is still forging upward. A booming economy and higher interest rates are just what the doctor ordered for banks. And USB is a great one that pays a high dividend. The stock may catch its breath for a while in the near future, but it should continue to trend higher the rest of this year. 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 $1.42. Many of the outstanding calls are being exercised early as investors find it advantageous to acquire the stock and collect the monthly dividend. It’s rare but calls are occasionally exercised early. It seems to be happening a lot in the case of AGNC because of the monthly dividend.
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 at $1.80. That’s okay. We may be able to keep the stock if it closes below the 55 per share 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 way above the target price at $5.06. This stock seems to be defying the market and the recent turbulence. It’s right around the pre-pandemic highs and could hit some resistance here after a nice run higher. It’s still a good time to write these calls if you haven’t done so already. The premiums are high and there is a fair chance that the stock will pull back over the next month
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Price on 5/17/21 | Buy at or Under Price | Yield | Total Return |
| AGNC Investment Corp. | AGNC | 01/13/21 | 15.52 | 18.21 | 17.00 | 7.91% | 20.76% |
| Brookfield Infrastructure | BIP | 01/13/21 | 50.63 | 53.38 | 53.00 | 3.87% | 6.47% |
| Digital Realty Trust | DLR | 1/27/21 | 149.17 | 148.22 | 155.00 | 3.13% | 0.22% |
| NextEra Energy, inc. | NEE | 2/24/21 | 73.76 | 71.90 | 80.00 | 2.14% | -2.01% |
| Enterprise Product Partners | EPD | 3/17/21 | 23.21 | 24.17 | 25.00 | 7.45% | 6.51% |
| U.S. Bancorp | USB | 3/24/21 | 53.47 | 62.21 | 55.00 | 2.70% | 17.22% |
| KKR & Co. | KKR | 3/24/21 | 47.98 | 55.44 | 50.00 | 1.05% | 15.85% |
| Qualcomm Inc. | QCOM | 5/5/21 | 134.65 | 129.80 | 140.00 | 2.10% | -3.60% |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Price on 5/17/21 | Recent Price | Buy Under or | Total Return |
| AGNC June 18 $17 call | AGNC210618C0017000 | Sell | 4/13/21 | 0.50 | 1.23 | 0.50 | 3.20% |
| KKR June 18 $55 call | KKR210618C00055000 | Sell | 4/28/21 | 3.00 | 1.90 | 2.50 | 6.25% |
| USB June 18 $57.50 call | USB210618C00057500 | Sell | 4/28/21 | 2.80 | 4.70 | 2.50 | 5.24% |
| As of Close on 5/17/21 | |||||||
| 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% | |