Forget Russia, Worry About Inflation
Earnings have been terrific again. Rising corporate profits have so far kept stocks out of correction territory. But earnings season is ending. And problems are growing.
The market rallied strongly on Tuesday as fears of a Russian invasion of Ukraine subsided. But it is just a secondary market concern, avoided temporarily. The main event is still inflation and Fed tightening. Those issues are not going away anytime soon.
Inflation obviously isn’t getting better yet because it’s still getting worse. January CPI registered a whopping 7.5% year-over-year inflation, the worst such number in 40 years. It’s the ninth straight month of inflation over 5%. And it has been getting worse every month.
Even if this inflation turns out to be more temporary, it will still linger for a while at this point. Businesses are already factoring higher prices into their plans. It’s getting baked into the cake. And the Fed is way behind the curve.
The market is grappling with the fact that the Fed will end its bond purchases and raise rates sooner and higher than previously anticipated. But there is a strong risk that the Fed will have to be more aggressive than currently anticipated. The market hates surprises and uncertainly. It may have to grapple with another negative adjustment or two to the anticipated Fed tightening.
That said, it’s not all gloom and doom. The economy will likely continue to grow above trend for several quarters. We are still likely in the early stages of a bull market and recovery. But it is reasonable to expect a much more volatile and more sideways market than we have seen in the last few years.
It’s a great time to sell covered calls when stock prices are high and strong premiums can be had. It’s also still a great market for energy stocks, and to a lesser degree financial stocks.
Trades Past Month
Sold VLO February 25 $83 calls at $4.20
SOLD AGNC Investment Corp. (AGNC) - $15.06
QCOM January 21 $185 calls at $9.65 – Expired
Xcel Energy (XEL) – rating change “BUY” to “HOLD”
FS KKR Capital Corp. (FSK) – rating change “BUY” to “HOLD”
Sell V Mar 25 $230 calls at $9.00 or better - Pending
Stock Portfolio Recap
Enterprise Product Partners (EPD)
After a big surge in December and January, EPD has leveled off. But it is still trending very slowly and choppily higher. There’s a lot to like about this midstream energy partnership right now. For one, energy is still hot and will likely remain so for a while, and EPD should benefit from the rising sector. Also, the stock is very cheaply valued and pays a stratospheric and safe yield. (This security generates a K1 form at tax time). BUY
FS KKR Corp. (FSK)
This high-yielding Business Development Company hung very tough through the recent market tumult. It’s also provided some capital appreciation, based on Tuesday’s market action. The stock looks poised to get back to the recent highs of 23 and change per share. The call premiums still aren’t good enough but an opportunity should arise if the stock moves a little bit higher. HOLD
KKR & Co., Inc. (KKR)
This alternative asset investment manager stock has been trending down since early November. If it does not reverse the trend in the next week or two, it will be time to sell the position. It had a huge run in the fall but it has since given it all back. Earnings were solid. KKR bested estimates and distributable earnings more than doubled and asset under management increased 87% from the year ago quarter.
It is entirely possible that the market is concerned that results have peaked. Also, business is still booming, growth rates will slow. The excess has already been removed from the stock price and fundamentals dictate positive performance from here. But unless stock performance complies soon, KKR will be sold. HOLD
One Liberty Properties, Inc. (OLP)
This industrial REIT has really been clobbered so far this year after performing exceptionally well in the prior months. Stellar earnings had propelled the stock to new highs. But the recent ugly market has taken all those gains away. It’s down about 17% from the high in early January. REITs have been one of the worst-performing sectors and OLP is a more cyclical and aggressive one. But the 6% payout should continue to make it attractive and real estate should hold up well against inflation. HOLD
ONEOK, Inc. (OKE)
This best-in-class midstream energy company looked poised to make a run at a new 52-week high, but it pulled back a little recently. It has everything going for it and I expect new highs at some point in the not-too-distant future. The stock is also above the strike price will only days to go before expiration and it looks like it will be called. But you never know in this crazy market. HOLD
Qualcomm Corp. (QCOM)
The chip maker stock mostly hangs around near the top of the recent range after the big surge in November. But it also tends to dip lower when the market gets particularly ugly for tech stocks. It’s coming off one of those dips now. QCOM is a tough call from here. Technology stock don’t like inflation and rising rates and that is a situation that should last throughout the year. But QCOM is in an exceptional growth period and should continue to outperform the sector. HOLD
U.S. Bancorp (USB)
This regional bank stock has been indecisively bouncing around. It took a hit in the recent down market and is attempting a recovery from there. But I think the environment should be very supportive this year as the economy still grows above trend and interest rates likely rise. There is no good reason for USB to be lower priced now than it was in the fall. It’s tough to say what the stock will do in the near term, but I expect it to be higher six months from now. HOLD
Valero Energy Corp. (VLO)
The refiner stock was riding high and made a new 52-week high this past Friday, although it has pulled back this week. The company killed it on earnings as it beat estimates by a lot. As anticipated, Valero is benefitting from much higher volumes and margins and demand and pricing is strong. Refining crack spreads, the difference between the cost and price of refined products, recently hit multi-year highs. Yet the stock is still below the pre-pandemic highs. HOLD
Visa Inc. (V)
The card company stock has leveled off since getting a big bump on earnings. The stock jumped over 10% on the day of the report and 14% for the week. As anticipated, international business is picking up as are the very profitable cross border transaction as travel returns. The stock should continue to have a good year as the company benefits from a fuller recovery in 2022.
It’s worth noting that the calls highlighted last week never achieved the targeted price. That’s OK. We’ll be patient. A couple of up days and the price can be hit. We successfully targeted a price that took a while to achieve on QCOM calls. But if the stock and call price doesn’t cooperate this time, we’ll just remove the trade and try again later. BUY
Xcel Energy Inc. (XEL)
This alternative energy utility had been solid and barely budged during the market turmoil of last month. Earnings were solid as Xcel met earnings expectations and beat on revenues. The stock had been trending high since late November but it has pulled back in over the past week. Hopefully, last week turns out to be an aberration but we’ll see. Don’t forget, XEL also has the added benefit of being on an uptrend and providing a safe way to play the growth in alternative energy. HOLD
Existing Call Trades
Sell OLP February 18 $35 calls at $1.50 - Expiring
The calls expire on Friday at a strike price of 35 per share, 14% higher than the current price. It is almost a certainty that these shares will not be called. The calls were sold when the stock was near the high but it has pulled back a lot this year as REITs have been performing poorly. I still like the stock longer term.
Sell OKE February 18 $60 calls at $2.75 - Expiring
These calls also expire on Friday. But this stock is likely to be called. Shares are currently almost 3 per share above the strike price. But this market can be volatile and you never know. Even if shares are called, we have milked this position for a fantastic income as we have collected three call premiums in addition to the dividend, not to mention a strong total return.
Sell USB February 25 $61 calls at $2.50 or better
Despite a positive environment for banks, USB is still sort of knocking around and the price is currently 2 per share below the strike price with about 10 days to go until expiration. It could go either way at this point. We also sold three calls on this position and have already gotten a fantastic income.
Sell VLO February 25 $83 calls at $4.20 or better
This stock had another strong run to new heights after we sold the calls. It seems unlikely that shares will not be called in 10 days because the stock is more than $5 per share above the strike price. But VLO is volatile and so is this market. We’ll see what happens.
|CIA STOCK PORTFOLIO|
|Open Recommendations||Ticker Symbol||Entry Date||Entry Price||Recent Price||Buy at or Under Price||Yield||Total Return|
|Enterprise Product Partners||EPD||3/17/21||$23.21||$24.15||$25.00||7.54%||12.80%|
|U.S. Bancorp C||USB||3/24/21||$53.47||$57.87||$57.00||3.14%||11.60%|
|ONEOK, Inc. C||OKE||5/26/21||$52.51||$62.92||$60.00||5.80%||25.73%|
|One Liberty Properties C.||OLP||7/28/21||$30.37||$29.57||$33.00||6.09%||0.07%|
|KKR & Co., Inc.||KKR||8/25/21||$64.52||$60.57||$70.00||0.96%||-6.95%|
|Xcel Energy Inc.||XEL||10/12/21||$63.00||$66.40||$67.00||2.73%||6.12%|
|FS KKR Capital Corp.||FSK||10/27/21||$22.01||$21.83||$24.00||11.36%||2.24%|
|Valero Energy Corp. C||VLO||11/17/21||$73.45||$89.72||$85.00||4.26%||25.18%|
|EXISTING CALL TRADES|
|Open Recommendations||Ticker Symbol||Initial Action||Entry Date||Entry Price||Recent Price||Sell To Price or better||Total Return|
|OLP Feb 18 $35 call||OLP220218C00035000||Sell||11/19/21||$1.50||$0.05||$1.50||4.94%|
|OKE Feb 18 $60 call||OKE220218C00060000||Sell||1/5/22||$2.75||$3.45||$2.75||5.24%|
|USB Feb 25 $61 call||USB220225C00061000||Sell||1/13/22||$2.50||$0.18||$2.50||4.68%|
|VLO Feb 25 $83 call||VLO220225C00083000||Sell||1/18/22||$4.20||$6.77||$4.20||6.13%|
|V Mar 25 $230 call||V220325C00235000||Sell pending||$6.52||$9.00||4.10%|
|as of close on 2/14/2022|
|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%|
|Brookfield Infras. Ptnrs.||BIP||Called||6/24/20||$41.92||10/16/20||$45||8.49%|
|Enterprise Prod. Prtnrs.||EPD||Called||6/24/20||$18.14||1/15/21||$20||15.16%|
|B&G Foods Inc,||BGS||Called||10/28/20||$26.79||2/19/21||$28||4.42%|
|Valero Energy Inc.||VLO||Called||8/26/20||$53.70||3/26/21||$60||11.73%|
|KKR & Co.||KKR||Called||3/24/21||$47.98||6/18/21||$55||14.92%|
|Digital Realty Trust||DLR||Called||1/27/21||$149.17||7/16/21||$155||5.50%|
|NextEra Energy, Inc.||NEE||Called||2/24/21||$73.76||9/17/21||$80||10.00%|
|Brookfield Infras. Ptnrs.||BIP||Called||1/13/21||$50.63||10/15/21||$55||11.65%|
|AGNC Investment Corp||AGNC||Sold||1/13/21||$15.52||1/19/22||$15||5.92%|
|Security||In/out money||Sell Date||Sell Price||Exp. Date||$ 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%|
|BIP Oct 15 $55 call||in-the-money||9./01/2021||$2.00||10/15/21||$2.00||3.95%|
|USB Nov 19 $60 call||out-of-money||9/24.2021||$2.30||11/19.2021||$2.30||4.30%|
|OKE Nov 26 $65 call||out-of-money||10/20/21||$2.25||11/26/21||$2.25||4.28%|
|KKR Dec 17 $75 call||out-of-money||10/26/21||$3.50||12/17/21||$3.50||5.42%|
|QCOM Jan 21 $185 Call||out-of-money||11/30/21||$9.65||1/21/22||$9.65||7.17%|