September 21, 2022

All Eyes on the Fed

The market has turned decidedly negative after last week’s worse-than-expected inflation report. This week, all eyes are on the Fed.

The Fed is widely expected to raise the benchmark Fed Funds by 0.75% for the third straight time. But some Wall Street types are worried that it could be a 1.00% hike. In the grand scheme of things that’s not a big difference. But Wall Street suffers from short-sightedness. And not the kind that can be corrected with glasses.

If the hike is just 0.75%, the market will probably rally in relief. A 1.00% hike could prompt another leg down in the market this week. We’ll see. But the general narrative is the same regardless.

Inflation isn’t going anywhere yet. The Fed is desperately scrambling to make up for the fact that it’s a year late and a dollar short in countering price pressures. The four hikes so far haven’t even moved the needle. It is becoming increasingly obvious that it will take a deeper recession to get prices down.

We’re likely heading toward a situation where bad news will be good news. The more the economy rolls over in the months ahead, the sooner the Fed will stop hiking rates, and the sooner the economy can recover. Recessions aren’t historically that bad for stocks because they start rallying before it’s over. It’s the state of “looming recession” with no end in sight that is much worse for stocks.

Unfortunately, things are likely to get worse before they get better in this market. There will be very attractive buying opportunities ahead of the next bull market. But not yet.

Trades This Past Month

August 24th
SOLD One Liberty Properties (OLP) - $24.89Purchased Williams Companies Inc. (WMB) - $35.58SOLD OKE October 21st $65 calls at $3.40

August 30th
Star Bulk Carriers Corp. (SBLK) – Rating change “HOLD” to “SELL 1/2"Qualcomm Corp. (QCOM) – Rating change “BUY” to “HOLD”

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

Portfolio Recap

Global Ship Lease, Inc. (GSL)
Yield: 8.17%
GSL had held up remarkably well during the market’s selloff from the August highs after getting crushed in the spring. But this latest round of selling has taken the stock down again. The company recently announced several new charter agreements that will boost earnings going forward. Shipping stocks may also be in a secular bull market as supply, especially container ships, remains tight. The longer-term trajectory should be higher. HOLD

Intel Corp. (INTC)
Yield: 5.0%
The chipmaker just made a massive investment in chip production. It partnered with BIP for a $30 billion investment in a semiconductor fabrication plant where Intel will maintain majority control by providing 51% of the capital. It’s a big and bold move. But the stock is still under pressure as growing recession worry weighs on projected PC sales over the next year. We’ll see if the tech sector continues to be under pressure in the days and weeks ahead. HOLD

ONEOK, Inc. (OKE)
Yield: 6.3%
Even this very well-positioned midstream energy player has taken a hit over the last week. But I consider it a buying opportunity. Business is very strong and will likely remain so even in a recession. The stock sells at a compelling valuation with a very high dividend that is safe. ONEOK is also one of the very few companies that can continue to thrive amid both recession and inflation. Panicky selling pulls it down anyway. But that’s the best time to get in. BUY

Star Bulk Carriers Corp. (SBLK)
Yield: 33.42%
Most of what I said about GSL above is also true for SBLK. But it has been a little weaker recently because, unlike GSL, it didn’t report unexpected good news to counter the overall market decay, and it pulled back a lot in the recent market selloff. 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. 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: 2.4%
The recent worse-than-expected inflation report and rising interest rates are taking the tech sector down and QCOM with it. Investors worry that inflation and high rates will cut into growth margins. At the same time, a slowing economy will hurt smartphone sales and Qualcomm’s profits. But the company is projected to continue to grow earnings by 23% in the second half of the year even with slower phone sales factored in. That’s a huge growth rate for the low multiple at which QCOM currently sells. The selling is overdone as earnings continue to be strong and the stock already sells at a cheap valuation. It can move higher fast and make up for lost time when the going gets good again. In the meantime, we are generating a high income from the stock with call premiums. HOLD

Visa Inc. (V)
Yield: 0.8%
As a cyclical stock, V gets selling pressure when the market reels over recession worries. But inflation isn’t a problem for Visa. On weakness, V usually falls to right around the 200 per share level. But the recent selling has taken it to a new lower level, around 190 per share. That’s a reflection of how serious the recent market selling is. Profits are soaring as the covid restrictions have come down internationally, but the stock has been held back by recent panic selling in the market. HOLD

The Williams Companies, Inc. (WMB)
Yield: 5.3%
The rally in this stock has certainly petered over the last few weeks. Just about everything has moved lower, and even WMB is no exception. But the same things that I mentioned above about OKE are also true of WMB. Natural gas demand is resilient. Earnings per share shot up 29% in the first half of 2022 versus the same period last year. The recently reported quarter featured a whopping 48% earnings per share spike over last year’s quarter. Williams also increased 2022 earnings guidance. Like OKE, it offers value and a high and safe yield in an industry with strong dynamics. BUY

Existing Covered Call Trades

QCOM Sep 16^th $145 calls at $11.75 – ExpiredCall premium: $11.75
Dividends: $4.22
Total: $15.97 (total income of 11.9% in 16 months, and an income return of 18.8% with the earlier call)

It’s been a tough market for technology. The total return is slightly negative for QCOM since it was purchased more than a year ago in May of 2021. But we have been able to milk the stock for a great income, 18.8% between the dividends and the two call premiums. We still hold a stock that is performing very well operationally and should be higher in the intermediate term.

Sold OKE October 21^st $65 calls at $3.40 or better
The stock is down since the market turned distinctly uglier after last week’s inflation report. It’s about 5 per share below the strike price with a month to go before expiration. It could go either way. But it is prudent to take a high income where we can get it in this market. And even if midstream stocks thrive over the next month, we still have WMB.