October 12, 2022

Waiting on September Inflation

Things haven’t been pretty in this market, to say the least. The summer rally topped in the middle of August, and it’s been downhill ever since. In September, the selloff became more inclusive and took just about everything down, including previously buoyant defensive stocks.

The main catalyst for the selling was the August inflation numbers that came out in September. Core inflation was far worse than expected, at a time when investors were hopeful that inflation had already peaked and there would be a light at the end of the tunnel. The market, which doesn’t take disappointment well, has since priced away most of that hope.

Today, we wait on September’s CPI report. We’ll see what happens. If the number comes in around what’s expected or better, stocks should rally somewhat. The PPI (Producer Price Index) came out today and was just a little bit worse than expected, but the rate of increase is far less than it was earlier in the year. Stocks have moved higher since the report. That might be a good omen.

This is a much more cynical and cranky market than it was ahead of last month’s inflation report. Expectations are far lower. It should take little to placate already pessimistic investors. Even if the number is awful again, it is unlikely to prompt the level of selling we saw over the last month. And a less-than-awful number might be well received. We’ll see.

Hopefully, there will be some sort of rally. But even if the market goes on to make new lows, the bulk of the selling is likely over, and we are probably much closer to the end of the bear market than the beginning. At some point there will be huge opportunity. Stay tuned.

Trades This Past Month

September 16
QCOM Sep 16th $145 calls at $11.75 - Expired

September 28
Purchased Realty Income (O) - $60.37

Portfolio Recap

Global Ship Lease, Inc. (GSL)
Yield 9.4%
GSL sold off with the rest of the market over the last couple of weeks but stayed above the July lows, indicating that a bottom may already be in. It’s true that shipping rates have fallen amid recession fears. But GSL already locked in higher rates than have existed for many years and added a significant amount of new higher-priced charters. Operationally, the company is strong and longer-term trends still favor container shipping. It has fallen in sympathy with the overall market but should still be a longer-term winner. HOLD

Intel Corp. (INTC)
Yield 5.7%
The stock continues to be under pressure along with the rest of the tech sector in a market where value and fundamentals don’t matter right now. The stock is also facing headwinds as the chip sector continues to face pressure in the slowing economy while the company is undergoing a massive expansion program. The short term is ugly, but the dividend should continue to be safe with a very low payout ratio. It’s a long-term hold that should pay off over time. HOLD

ONEOK, Inc. (OKE)
Yield 7.0%
OKE has moved higher from the September low but continues to perform unimpressively despite being well-positioned to handle inflation and even recession. The recent selloff expanded the scope of victims and just about everything got crushed. Right now, momentum matters more than fundamentals. Nevertheless, OKE has qualities that should be highly desirable in the current environment. The stock pays a huge dividend that remains far above traditional fixed rates. Business remains strong and will likely continue to be even in a recession. BUY

Realty Income Corp. (O)
Yield 5.2%
This legendary monthly income payer recently hit the 52-week low and remains a long way from the pre-pandemic high, despite having higher earnings. REITs have been under pressure from rising rates as it raises costs for growth projects. But Realty just made a large acquisition and should get strong growth because of that over the next year.

This stock has been clobbered along with just about everything else in this market. But this legendary income stock has been a remarkably consistent performer over the years. It has averaged a better than 14% annual return since its inception in 1994. And that performance is a lot higher for those who purchased near the 52-week low. A great company with a fantastic track record is on sale. BUY

Star Bulk Carriers Corp. (SBLK)
Yield 34.01%
Most of what I said about GSL above is also true for SBLK. The intermediate-term prognosis remains excellent for dry bulk shipping while the market is struggling with newfound worries about the U.S. and global economies. But dry bulk shipping still has a highly favorable supply/demand dynamic despite rates having dipped recently. Half of the position was sold to be cautious in this turbulent and unpredictable market. Hopefully, the remaining position can hold up and we can collect another huge dividend. HOLD

Qualcomm Corp. (QCOM)
Yield 2.7%
This is a company that is performing very strongly on an operational basis. It has consistently killed it on earnings as it continues to benefit from 5G phone sales. It’s true that sales are expected to be pressured by the slowing economy, but Qualcomm still expects to grow earnings by 23% in the second half of the year. The stock has already sold off more than enough to account for the reduced growth. But tech is under pressure and this is an unforgiving market that doesn’t care about fundamentals.

The stock will trade in sympathy with the sector and likely be under pressure as long as the tech selling continue. But because of Qualcomm’s strong growth and operational performance it tends to recover as soon as the selling abates. Tech stocks will rally again and when they do QCOM should make up for lost time in a hurry. HOLD

Visa Inc. (V)
Yield 0.8%
As a cyclical stock, V is getting beaten up along with just about everything else in the market right now. But because of very strong fundamentals at the company and great prospects for growth even in a slowing economy, V should recover quickly when the market stabilizes and take off when it recovers. V has consistently been one of the first stocks to get back on track whenever the selling abates, and it should be a very strong performer on the other side of this bear market. HOLD

The Williams Companies, Inc. (WMB)
Yield 5.9%
This midstream energy company in the form of a corporation is one of the few stocks that has moved higher so far this month. Part of the reason is that Williams announced that it expects strong third and fourth quarters and reaffirmed 2022 guidance near the high end of the previous range as the natural gas assets remain strong performers. WMB had great momentum before the recent selloff because it’s ideal for the current environment of inflation and recession. Hopefully the stock will remain strong the rest of the year. BUY

Existing Covered Call Trades

Sold OKE October 21 $65 calls at $3.40 or better
These calls were sold when the stock was riding high before the market bloodbath that began in the middle of September. Right now OKE is more than $10 per share below the strike price with just nine days to go before options expiration. In the absence of a furious rally over the next week, the stock will not be called and we will keep it after expiration. I like the prospects of OKE over the rest of the year and am happy to keep the stock. It’s also great to generate a big income in this market.