Don’t Believe the Rally, Yet
Isn’t this fun? The market is up big today. But things have been very ugly. And we might not be out of the woods yet.
As of yesterday’s close, the S&P 500 was down 12.49% YTD. The technology stock-heavy Nasdaq was about 19% lower for the year and more than 20% below the November high, officially in bear market territory. The latest down leg is because the Russia/Ukraine situation is getting worse.
The economic fallout is worse than expected. The U.S. announced a ban on Russian oil, which only accounts for about 8% of petroleum imports. It had been feared that Europe would do the same. And Russia accounts for a massive 30% of Europe’s oil and 40% of its natural gas needs. That could really send prices into the stratosphere.
In addition, wheat prices are soaring as Russia and the Ukraine apparently produce a huge share of the world’s wheat. Wheat is in everything, and the development will send food prices even higher, along with energy prices.
The situation is making already-out-of-control inflation even worse. February CPI is expected to be about 8%, the highest in 40 years. Given recently rising prices, it won’t be the peak. Inflation is likely to keep getting worse for a while.
Inflation and a tightening Fed were problems the market looked forward to worrying about after the Russia/Ukraine thing went away and stocks rallied. But the crisis is making the next problem worse at the same time.
Of course, stocks are having a huge rally so far today. It’s mostly because it seems unlikely that Europe will ban Russian energy or that Germany has stated that it has enough reserve energy to last through the winter anyway. It could also be investors bargain hunting after a big selloff. But I still don’t trust this market.
Sure, it’s probably a good time to buy. I believe stocks will be higher later this year. But I have no idea how this Russia/Ukraine mess will unfold. And the market is at the mercy of the latest crisis headlines right now. With an unacceptable degree of confidence that the crisis will fade and the selling will end, I’m not going to recommend any new stock purchases at this time.
It is, however, a good time to sell calls. Certain portfolio positions have managed to thrive in this environment and have moved near the highs in a still uncertain market. Last week, we targeted calls in the red-hot energy sector stock Enterprise Product Partners (EPD). This week we target a call on the plucky FS KKR Corp. (FSK) as it has moved near the high.
Trades Past Month
February 18
OLP February 18 $35 calls at $1.50 – Expired
OKE February 18 $60 calls at $2.75 - Expired
ONEOK, Inc. (OKE) stock - Called
February 23
Sell V Mar 25 $230 calls at $9.00 or better – Remove
Purchased Global Ship Lease, Inc. (GSL) - $24.96
February 25
VLO February 25 $83 calls at $4.20 – Expired
Valero Energy Inc. (VLO) stock – Called
March 2
Sold EPD April 14 $24 calls at $1.25
March 9
Sell FSK April 14 $22.50 calls at $0.90 or better
Trade Alert
Sell FSK April 14 $22.50 calls at $0.90 or better
Expiration date: April 14
Strike price: $22.50
Call price: $0.90
FS KKR Capital Corp. (FSK)
This Business Development Company (BDC) is behaving very well in a lousy market. Despite the S&P 500 being down more than 12% YTD, FSK has managed to move higher. Its businesses are thriving in the strong economy. But the market environment remains very uncertain amidst the Russia situation and high inflation. With FSK nearly at the 52-week high, it’s a good time to augment that huge yield with a call premium.
Here are the three scenarios.
1. The stock closes above the $22.50 strike price but near it at expiration
Call premium: $0.90
Dividends: $1.25(1/4,4/4)
Appreciation: $0.49 ($22.50 strike price minus $22.01 purchase price)
Total: $2.64 (total return will be 12% in less than 6 months)
2. The stock price closes below but near our $24 strike price.
Call premium: $0.90
Dividends: $1.25
Total: $2.15 (total income of 9.8% in less than 6 months)
3.The stock price declines.
The decline will be offset by the $2.15 in income.
Stock Portfolio Recap
Enterprise Product Partners (EPD)
Yield 7.3%
The stock is a slow mover that doesn’t move much. But it has been moving higher lately amidst the torrid energy rally this year. EPD is up 18% YTD in a down market. It also moved to within kissing distance of the 52-week high. Meanwhile, it sells at a dirt cheap valuation and that sumptuous 7.3% yield is very safe. EPD should continue to be a good place to be for the rest of the year. However, it only seems to move higher when the energy sector is on the run. Since energy is up a stratospheric 39% YTD, the sector is overdue for a breather. That’s why calls were sold on EPD. (This security generates a K1 form at tax time). HOLD
FS KKR Corp. (FSK)
Yield 10.9%
I’m proud of this cyclical and high-yielding BDC. It’s been an awful market this year for just about everything except energy. But FSK has returned over 10% YTD, besting the overall market by a lot and its peers by more. It just made a brand new 52-week high yesterday. In this highly uncertain market, it’s prudent to take advantage of the recent upside and sell a call to supplement that phenomenal dividend yield. HOLD
Global Ship Lease, Inc. (GSL)
Yield 5.4%
This is another potentially vulnerable type of stock that has done yeoman’s work in this tough market. GSL can be volatile. But it has been finding its way higher. During the S&P correction and the Nasdaq bear market amidst a geopolitical crisis, this international shipping company is up over 20% YTD. That’s how good the container shipping business is right now.
But I don’t want to sell a call on it yet. It’s managed to stagger higher in an ugly market. It could really take off when the market stabilizes. I’m going to suspend the normal playbook on this one and give into my greed. BUY
One Liberty Properties, Inc. (OLP)
Yield 6.0%
REITs are acting better and so is OLP. Real Estate had been the worst performing sector of the S&P 500 this year. But the sector has turned around and become one of the best performing sectors over the last month. OLP is special being in the higher growth industrial REIT area and didn’t really deserve to get knocked back. It was a victim of temporary sector gyrations. It’s been recovering. Hopefully, it gets back near where it was before too long, and we’ll sell another call. HOLD
Qualcomm Corp. (QCOM)
Yield 1.8%
Ouch! QCOM has had one of its worst weeks in a long time. It tended to hang tough near the high end of the recent range until things get particularly ugly in the market and the sector. And things have been awfully ugly of late. QCOM broke through the recent lows into new downward territory this past week. It’s up today but had been down 12% in less than a week.
It may have some support around this level. We’ll see. But I still like the stock longer term. This is a tough time for technology stocks, but QCOM is a standout with huge earnings growth from the 5G rollout and terrific prospects for beyond. I’m watching it closely, but it feels like panic to sell it here. HOLD
U.S. Bancorp (USB)
Yield 3.5%
It’s been ugly. Financial stocks have gotten creamed in the latest Russia/Ukraine down leg of the market. The crisis is causing a temporary reversal of the prevailing situation. Interest rates have been falling on growth fears amidst the uncertainty of the crisis. But market angst will likely fade. Meanwhile, inflation is getting even worse. It’s worth being patient through the current volatility because a bank-friendly environment should reemerge in a relatively short time. HOLD
Visa Inc. (V)
Yield 0.7%
V has been hit even harder by the recent financial sector woes. It’s also vulnerable to the geopolitical uncertainty as investors shun stocks exposed to the global economy. U.S. business is already booming, and the global recovery is growing Visa’s business to a higher level in 2022. Last quarter proved that. There is an issue of Visa suspending business in Russia, but that should have a small impact. If the Russia thing doesn’t turn out to be a global disaster, the global economy will continue to thrive, and V should spring right back. HOLD
Xcel Energy Inc. (XEL)
Yield 2.8%
This alternative energy utility stock had floundered badly through most of February. But it has been springing back with a vengeance and got to within bad breath distance of the 52-week high. The reason is that alternative energy stocks have been red hot as conventional energy prices go through the roof. The situation makes clean energy a more viable and economic alternative. I like the stock longer term and the recent wild swings are externally induced in a crazy market. HOLD
Existing Call Trades
Sell EPD April 14 $24 calls at $1.25 or better
These calls were originally targeted at $1.10 in last week’s update. But the calls were chosen a day before the issue became available. And by then you shouldn’t have gotten less than $1.25 for the calls. The calls are even higher now and worth selling if you haven’t done so already. As I mentioned above, I like EPD going forward. But it tends to move with the energy sector, which has soared 39% YTD and may have gotten ahead of itself in the near term.
| 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 | $25.54 | $25.00 | 7.28% | 19.29% |
| U.S. Bancorp | USB | 3/24/21 | $53.47 | $53.25 | $57.00 | 3.46% | 2.69% |
| Qualcomm Inc. | QCOM | 5/5/21 | $134.65 | $150.76 | $140.00 | 1.80% | 13.95% |
| One Liberty Properties | OLP | 7/28/21 | $30.37 | $30.14 | $33.00 | 5.97% | 2.00% |
| Xcel Energy Inc. | XEL | 10/12/21 | $63.00 | $70.16 | $67.00 | 2.78% | 12.18% |
| FS KKR Capital Corp. | FSK | 10/27/21 | $22.01 | $23.10 | $24.00 | 10.91% | 8.19% |
| Visa Inc. | V | 12/22/21 | $217.96 | $191.71 | $225.00 | 0.79% | -11.90% |
| Global Ship Lease, Inc. | GSL | 2/23/22 | $24.96 | $27.75 | $28.00 | 3.59% | 11.18% |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| EPD Apr 14th $24 call | EPD220414C00023000 | Sell | 3/2/21 | $1.25 | $1.58 | $1.25 | 5.39% |
| FSK Apr 14th $22.50 call | FSK 220414C00022500 | Sell Pending | $0.81 | $0.90 | 4.89% | ||
| as of close on 3/8/2022 | |||||||
| 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 | 3.42% |
| Brookfield Infras. Ptnrs. | BIP | Called | 6/24/20 | $41.92 | 10/16/20 | $45 | 8.49% |
| Starbucks Corp. | SBUX | Called | 8/26/20 | $82.41 | 10/16/20 | $88 | 6.18% |
| Visa Corporation | V | Called | 9/22/20 | $200.56 | 11/20/20 | $200 | 0.00% |
| AbbVie Inc. | ABBV | Called | 6/2/20 | $91.04 | 12/31/20 | $100 | 12.43% |
| Enterprise Prod. Prtnrs. | EPD | Called | 6/24/20 | $18.14 | 1/15/21 | $20 | 15.16% |
| Altria Group | MO | Called | 6/2/20 | $39.66 | 1/15/21 | $40 | 7.31% |
| U.S. Bancorp | USB | Called | 11/25/20 | $44.68 | 1/15/21 | $45 | 1.66% |
| 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% |
| Chevron Corp. | CVX | Called | 12/23/20 | $85.69 | 4/1/21 | $96 | 12.95% |
| 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% |
| ONEOK, Inc. | OKE | Called | 5/26/21 | $52.51 | 2/18/22 | $60 | 19.62% |
| KKR & Co. | KKR | Sold | 8/25/21 | $64.52 | 2/23/22 | $58 | -9.73% |
| Valero Energy Inc. | VLO | Called | 11/17/21 | $73.45 | 2/25/22 | $83 | 15.53% |
| 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% | |
| 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% | |
| OLP Feb 18 $35 Call | out-of-money | 11/19/21 | $1.50 | 2/18/22 | $1.50 | 4.94% | |
| OKE Feb 18 $60 Call | in-the-money | 1/5/22 | $2.75 | 2/18/22 | $2.75 | 5.24% | |
| USB Feb 25 $61 call | out-of-money | 1/13/22 | $2.50 | 2/25/22 | $2.50 | 4.68% | |
| VLO Feb 25 $83 call | in-the-money | 1/18/22 | $4.20 | 2/25/22 | $4.20 | 6.13% | |