The Market Awaits the Fed
Cyclical stocks are getting creamed today. Energy is down the most. But industrials, materials, and financials are getting hit too.
Energy stocks are taking a beating after an OPEC meeting apparently went awry, fueling the perception that production will be higher than previously anticipated. Financials and industrials are reeling most likely from nervousness about the Fed meeting later this week, which should shed some light on the strength of the economy. As a result, the Dow is down over 300 points.
One day does not a trend make. While oil prices are down 1.9% today, the price per barrel of crude was up 4.2% last week. The market has been bashing cyclical stocks one day and slobbering over them the next. Technology has been bouncing up and down too. The market still can’t make up its mind.
There has, however, been a notable recent trend of more fear about growth than inflation. Investors are increasingly worrying about what will drive economic growth after the pandemic recovery. There are no easy answers. And things are still up in the air. But it could turn to worrying about inflation on a dime.
The Fed meeting could dictate the market gyrations over the next week. But it’s still a fluid situation. It’s hard to tell where the next big move will be.
I’m still bullish on energy and financials. I believe there is another big move before the year is over in both sectors. I also like technology very much, and positions in Qualcomm (QCOM) and Broadcom (AVGO) in particular. Technology stocks appear to be picking up after a four-month sideways funk.
When the dust from the current headlines fades, technology will still be where all the growth is. The market never sours on this sector for too long. And QCOM and AVGO are still relatively cheap while 5G should become a bigger story as the market adjusts to life after the pandemic recovery.
While the technology sector looks more encouraging, it’s tough to figure out where the market wants to go in the near term. It’s also summer. Summer markets are weird. Usually, the next big direction doesn’t get determined until summer ends. And summer markets are about reacting to the latest headlines, which have been all over the place.
Trades this month
June 15th
Sell DLR July 16th $155 calls at $8.00 or better
June 18th
AGNC June 18th $17 call at $0.50 - Expired
KKR June 18 $55 calls at $3.00 - Expired
USB June 18 $57.50 calls at $2.80 - Expired
KKR & Co. stock (KKR) – Called at $55
June 23rd
Sell AGNC August 20th $17 calls at $0.50 or better
Sell OKE August 20th $57.50 calls at $1.65 or better
Stock Portfolio Recap
AGNC Investment Corp. (AGNC) Yield 8.5%
Part of the reason for AGNC’s appeal, along with the booming economy, was the likelihood of a steeping yield curve. Since the company borrows at short-term rates and buys longer-term mortgages, a greater difference between long and short rates boosts profits. But the yield curve is flattening (for the time being) and investors are punishing yield-curve stocks. But the high dividend remains safe in the strong economy and the yield curve may indeed steepen over the rest of the year. BUY
Brookfield Infrastructure Partners (BIP) Yield 3.6%
New all-time highs here we come. A safe distribution from a defensive business with growing earnings is just what the doctor ordered in this slower-moving and uncertain market. It also might help that infrastructure is in the news and the subsector is gaining popularity with investors. BIP could also get a further boost if Congress passes any kind of infrastructure bill. BUY
Digital Realty Trust, Inc. (DLR) Yield 3.1%
DLR made a new high and then pulled back. The behavior is historically typical for this stock, which has trended distinctly higher on a bouncy line. Nothing has changed at the company. But somehow the market angst over the recent Fed statement hurt this stock in the near term. It may well move right back up to the highs. We’ll see. But this newsletter wrote a call at a highly advantageous time when the stock was near the high. We locked in a great income and will prosper from this position regardless of if it recovers to a new high or not. HOLD
Enterprise Product Partners (EPD) Yield 7.4%
This magnificently yielding stock continues to not get its just due. The distribution is stratospheric and rock solid while the stock price is a bargain valuation at well below the pre-pandemic high of 30 per share and the all-time high of over 40 per share (currently 24.59). Yet, EPD has still returned over 30% YTD. It’s still trending higher, despite the pullback several weeks ago, and should continue to provide solid price appreciation to go along with a 7.4% yield. BUY
NextEra Energy Inc, (NEE) Yield 2.1%
The move towards cyclical stocks over the last six months or so ahead of the anticipated full recovery has hurt this normally up-trending juggernaut. It’s still down 12% from the January high. But it is still one of the best regulated utilities in the country with the added benefit of growth from being the world’s largest producer of wind and solar. The high-growth clean energy business (which also gets more profitable every year) will have its day in the spotlight again, and probably in the near future. BUY
ONEOK, Inc. (OKE) Yield 6.5%
This midstream energy company, in the form of a regular corporation is just like EPD, except more volatile. It recovered very quickly from the selloff a couple of weeks ago and is not far from the recent high. Meanwhile. It is still well below the pre-pandemic price with much better earnings that are growing at a solid clip. If the midstream energy subsector trends higher in the months ahead, OKE should move higher faster than the overall group. BUY
Qualcomm (QCOM) Yield 1.9%
Yeah, the technology sector has been lackluster for the last four months. These stocks had to take a breather after a torrid run that led the market back from the pandemic lows. It’s also led the market for the last ten-, five- and three-year periods. Technology is where the growth is. We’re in a technological revolution that is gaining steam. Qualcomm is beautifully positioned to benefit from the 5G rollout in the near term and the stock should catch fire again at some point. It may be happening already. QCOM has been gaining some steam in recent weeks. BUY
U.S. Bancorp (USB) Yield 3.2%
This best-in-class regional bank stock got knocked back by the recent yield curve trade. But, like AGNC, this bank will benefit from the booming economy as loan volume grows. There is also the strong possibility that the correction in certain stocks brought about by the flattening of the yield curve will be short lived. The yield curve may indeed steepen of the rest of this year. USB should be okay either way. But if the yield curve steepens it should be a lot better than okay. HOLD
Existing call trades
Sell DLR July 16th $155 calls at $8.00 or better
There was a small window after the June 9th update was released to get these calls at the targeted price. Then the stock fell and the calls are now priced well below the target price at $2.55. It is very important to act quickly on covered call recommendations. The prices are volatile and can move quickly.
Sell AGNC August 20th $17 calls at $0.50 or better
I think there is a good chance that the yield curve steepens before the end of year and this stock benefits. But it might flounder for a while. That’s why we wrote these calls and locked in four months’ worth of dividends in the premium. The call price moved well below target at 0.36 and the stock doesn’t look like it’s going anywhere.
Sell OKE August 20th $57.50 calls at $1.65 or better
The midstream energy company stock has bounced back sooner than most midstream energy companies. As a result, the calls are selling above the target price at 2.20. I’m bullish on OKE over the remainder of the year, but you never forget about the short term in this weird market. If it does move higher and shares get called away, we will lock in a high total return and still have EPD for exposure to the high-yield midstream energy space.
CIA STOCK PORTFOLIO | |||||||
Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Price on 7/2/21 | Buy at or Under Price | Yield | Total Return |
AGNC Investment Corp. | AGNC | 01/13/21 | 15.52 | 16.94 | 17.00 | 8.50% | 13.87% |
Brookfield Infrastructure | BIP | 01/13/21 | 50.63 | 56.09 | 53.00 | 3.64% | 12.93% |
Digital Realty Trust | DLR | 1/27/21 | 149.17 | 150.27 | 155.00 | 3.09% | 2.33% |
NextEra Energy, inc. | NEE | 2/24/21 | 73.76 | 74.28 | 80.00 | 2.07% | 1.77% |
Enterprise Product Partners | EPD | 3/17/21 | 23.21 | 24.59 | 25.00 | 7.35% | 8.36% |
U.S. Bancorp | USB | 3/24/21 | 53.47 | 57.57 | 55.00 | 3.20% | 9.28% |
Qualcomm Inc. | QCOM | 5/5/21 | 134.65 | 142.58 | 140.00 | 1.91% | 6.43% |
ONEOK, Inc. | OKE | 5/26/21 | 52.51 | 57.39 | 60.00 | 6.52% | 9.29% |
EXISTING CALL TRADES | |||||||
Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Price on 7/2/21 | Sell To Price or Better | Total Return |
DLR Jul 16 $155 call | DLR210716C00155000 | Sell | 6/9/21 | 8.00 | 2.55 | 8.00 | 5.36% |
AGNC Aug 20 $17 call | AGNC210820C00017000 | Sell | 6/23/21 | 0.50 | 0.38 | 0.50 | 3.00% |
OKE Aug 20 $57.50 call | OKE210820C00057500 | Sell | 6/23/21 | 1.65 | 2.20 | 1.65 | 3.14% |
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% |
KKR & Co. | KKR | Called | 3/24/21 | 47.98 | 6/18/21 | 55.00 | 14.92% |
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% |