Yields Rise, Stocks Fall
It doesn’t look good.
The market is selling off on Tuesday after briefly recovering last week. The latest worry is the debt limit. While this issue is likely to be resolved without any disaster one way or another, it puts a negative weight on an already teetering market.
The market is already grappling with the Delta variant, the Fed’s inevitable tightening, and possible contagion from the Chinese real estate firm Evergrande’s default. It’s also due for a correction in the historically worst months of the year for the market, September and October.
Of course, the market is vulnerable to a correction at any time. But this time poses a much higher risk than usual. Even if the market does sell off, it’s not the end of the world. Corrections are healthy. And the market should recover quickly because money has no place to go but stocks.
We’ll see what happens in the days and weeks ahead. But there is also some good news for the portfolio.
The yield trade, highlighted in our last monthly issue, is working. The 10-year Treasury rate has been soaring. It has risen from 1.28% to the current 1.53% in the last two weeks. As a result, portfolio positions AGNC Investment Corp. (AGNC) and U.S. Bancorp (USB) have rallied despite the negative market. I expect the yield to continue to trend higher too.
Also, energy stocks are finally rallying as oil prices are heading higher and approaching the 52-week high. The Energy Select Sector SPDR Fund (XLE) is up over 13% in just the past week. The energy rally is finally sparking the move higher in Enterprise Product Partners (EPD) and ONEOK (OKE). This may be the start of the move we’ve been waiting for.
Of course, a market correction would likely end the rally in the yield curve and energy stocks. But they should hold up relatively well in a correction and resume the rally when the market recovers. Despite the dicey market, four of the eight portfolio positions have some positive momentum.
Trades this month
September 1
Sold BIP October 15 $55 calls at $2.00
September 8
Sell USB October 15 $57.50 calls at $1.70 or better – Pending
September 17
NEE September 17 $80 calls at $3.50 – Expired
NextEra Energy, Inc. (NEE) stock – Called $80.00
September 22
Sell USB October 15 $57.50 calls at $1.70 or better – Remove
September 24
Sell USB November 19 calls at $2.30 or better
Trade Alert: Sell USB calls
Sell USB November 19 $60 calls at $2.30 or better
Expiration date: November 19
Strike price: $60
Call price: $2.30
U.S. Bancorp (USB)
These calls are very slightly in-the-money. I do like the prospects for USB over the remainder of the year, as I believe longer-term interest rates will trend higher and thus increase the bank’s net interest income profits. But the market looks dangerous in the near term.
Despite the increasingly volatile market and growing near-term risks, U.S. Bancorp is rallying. The reason is the announcement of the purchase of Mitsubishi UFJ Financial Group (MUFG) for $8 billion. It will enhance the bank’s west coast presence and the market seems to like the deal, as the stock is up in a down market.
The stock is at a three-month high on recent news and I want to use the current strength to lock in a high income.
Here are the three scenarios.
- The stock closes above the $60 strike price at expiration.
Call premium: $2.30
Dividends: $1.36 (4/15, 7/15, 10/15)
Appreciation: $6.53 ($60.00 strike price minus $53.47 purchase price)
Total: $10.19 (total return will be 19% in eight months)
- The stock price closes below our $60 strike price.
Call premium: $2.30
Dividends: $1.36
Total: $3.66 (total income return of 6.8% in eight months)
- The stock price declines.
The decline will be offset by the $3.66 in income. Of course, the stock price may still be above the original 53.47 per share purchase price.
Stock Portfolio Recap
AGNC Investment Corp. (AGNC)
Yield 8.9%
So far, so good. I mean that since reiterating the BUY recommendation for AGNC in last week’s monthly issue as a yield curve trade the 10-year Treasury has soared and AGNC has risen. As I mentioned, the high monthly dividend was safe in the past environment but the stock was floundering because the yield curve had flattened. It looks like the situation is reversing and AGNC should continue to move higher. BUY
Brookfield Infrastructure Partners (BIP)
Yield 3.6%
This infrastructure partnership recently made new highs, which is why it was a good time to write the calls. The company is doing very well. Earnings should be strong this year and profits should get a further bump from the Inter Pipeline acquisition. But BIP has a pattern of pulling back after a surge. Plus, the market is in very dicey time of year. We generated a high income while the getting was good. BIP has been slowly moving up but not taking off in this volatile market. HOLD
Enterprise Product Partners (EPD)
Yield 8.2%
It looks like energy stocks are finally coming alive again. The price of oil is soaring and the Energy Select Sector SPDR Fund (XLE) is up 13% in the last week. This could be the beginning of the event we’ve been waiting for. EPD is still 16% below the 52-week high and 26% below the pre-pandemic high. We’ll see what happens in the coming days and weeks. It’s undervalued and unloved and needs a big rally in the sector to get it going. BUY
KKR & Co., Inc. (KKR)
Yield 1.0%
There’s an issue with this asset manager stock. It was down 6% last Monday over concern about the likely Evergrande default. Markets sold off as fear spread of contagion from the Chinese real estate problems. KKR has real estate investments that would be negatively affected if the issue escalates into a bigger crisis. As of now, it looks like the issue will most likely be contained. But KKR hasn’t recovered with the overall market. For now, we will hold on and see. But the rating is reduced to a HOLD until there is more clarity on this situation. HOLD
One Liberty Properties, Inc. (OLP)
Yield 5.9%
This diversified industrial REIT is solid. The industrial REIT niche is a good one as demand exceeds current supply of the properties. But the defensive trade has moved out of vogue. Despite weakness in the REIT sector overall, OLP is holding tough. The stock may not shine in the weeks ahead as the market grapples with multiple issues. But it should hold relatively steady and have its day in the sun again down the road. BUY
ONEOK, Inc. (OKE)
Yield 7.0%
It is the same general situation for this midstream energy company as with EPD, but it moves faster. OKE has soared about 10% is the past week. The stock tends to do very well when the getting is good. So far, cyclical stocks have benefitted in this volatile September market. If the situation continues, OKE should deliver some excellent price appreciation. If the market corrects, the OKE rally will likely pause but then resume its rally in the aftermath. BUY
Qualcomm Corp. (QCOM)
Yield 1.9%
I’ve been saying for months how business is booming for this semiconductor stock but it remains undervalued. Now, technology stocks are getting weaker. The recent trend toward cyclical companies and away from technology may last a while longer. But QCOM is already beaten down and when things turn around it can move fast and make up for lost time. BUY
U.S. Bancorp (USB)
Yield 3.0%
Like AGNC, USB has been benefitting from the steepening yield curve. The stock moved over 7% high in the last week as the 10-year rate broke out. The bank is firing on all other cylinders and the yield spread was the only thing holding back the stock. The rising yield could take the stock to another level. But the market could be disrupted in the short term by a possible correction. Therefore, this portfolio decided to lock in the benefit of the recent move by selling a call. BUY
Existing Call Trades
Sell BIP October 15 $55 calls at $2.00 or better
These calls were written several dollars in-the-money when the stock was near the all-time high. BIP has a pattern of pulling back after making new highs. And that’s what it has done in recent weeks. The stock is now below the strike price and the calls are well below the target price. The market looks dicey now and these calls may have been timed just right.
Sell USB November 19 $60 calls at $2.30 or better
The calls were targeted via a Trade Alert send to your email last Friday. If you didn’t act on that alert yet, the calls are currently at higher prices of around $3.00 per call. It’s a good trade if you have not sold the calls already.
The stock has been moving higher thanks to the rise in the 10-year Treasury, as I expected it eventually would. Ordinarily, I would refrain from writing a call and let the stock run for a while. But I don’t trust the current market. It’s due for a correction and is looking increasingly dicey. Under the circumstances, I thought it prudent to lock in the recent gains with a high call premium.
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Price on 9/27/21 | Buy at or Under Price | Yield | Total Return |
| AGNC Investment Corp. | AGNC | 01/13/21 | 15.52 | 16.24 | 17.00 | 8.91% | 10.79% |
| Brookfield Infrastructure | BIP | 01/13/21 | 50.63 | 56.24 | 53.00 | 3.65% | 14.26% |
| Enterprise Product Partners | EPD | 3/17/21 | 23.21 | 21.82 | 25.00 | 8.25% | -1.96% |
| U.S. Bancorp | USB | 3/24/21 | 53.47 | 61.10 | 55.00 | 3.01% | 15.98% |
| Qualcomm Inc. | QCOM | 5/5/21 | 134.65 | 133.48 | 140.00 | 2.04% | 0.10% |
| ONEOK, Inc. | OKE | 5/26/21 | 52.51 | 58.90 | 60.00 | 6.35% | 14.19% |
| One Liberty Properties, inc. | OLP | 7/28/21 | 30.37 | 30.74 | 33.00 | 5.86% | 1.85% |
| KKR & Co., Inc. | KKR | 8/25/21 | 64.52 | 61.53 | 0.94% | -4.63% | |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Price on 9/27/21 | Sell To Price or Better | Total Return |
| BIP Oct 15 $55 call | BIP211015C00055000 | Sell | 9/1/21 | 2.00 | 1.50 | 2.00 | 3.95% |
| USB Nov 19 $60 call | USB211119C00060000 | Sell | 9/24/21 | 2.30 | 2.77 | 2.30 | 4.30% |
| 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% |
| Digital Realty Trust | DLR | Called | 1/27/21 | 149.17 | 7/16/21 | 155.00 | 5.50% |
| NextEra Energy, Inc. | NEE | Called | 2/24/21 | 73.76 | 9/17/21 | 80.00 | 10.00% |
| 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% | |