The Recession Scenario Gets Real
A week ago, the main issue with the market seemed to be earnings and if the reports would save or doom the rally. But we have since been completely blindsided by fears of recession.
While earnings have so far not been impressive, the main event has suddenly become recession. Last week, the most recent jobs report was far worse than expected. There were numbers within that report that have reliably portended every recession since the 1970s. As a result, the stock market plunged, and interest rates crashed. The benchmark 10-year Treasury rate moved below 4% and Wall Street has assigned a 95% chance of the Fed cutting the Fed Funds rate by 0.50 basis points in September.
The S&P closed lower for the third straight week and indexes plunged on Monday. The Nasdaq has already fallen past correction territory of 10% below the high. A recession, which seemed highly unlikely any time soon just a few days ago, has now become the market’s new obsession.
Maybe it’s an overreaction. The market was toppy and had been showing a lot of vulnerability toward negative headlines. Bull markets often tend to ignore risks for a long time and then suddenly make up for lost time and overreact. It’s certainly possible that the market will sober up in the next few days and realize that a recession may not be as likely as recent panic indicates. We’ll see.
There is also an expectation that Iran will attack Israel any minute now and escalate the war in the Middle East. How much that is weighing on this market slide is impossible to say. But markets are often like this. You get months and months of very little volatility until you get a double dose.
The next several days will likely be crucial in determining if stocks will bounce back or if we have entered a steep and sudden decline. Stay tuned.
Past month activity
July 16
SOLD BIPC Sep 20th $35 calls at $3.00 or better
July 19
QCOM July 19th $200 calls at $12.00 – Expired
July 23
Purchased Cheniere Energy Partners, L.P. (CQP) - $53.04
July 30
Sold AMT Sep 20th $210 calls at $15.00 or better
August 6
FS KKR Capital Corporation (FSK) – Rating change “BUY” to “HOLD”
Main Street Capital Corporation (MAIN) – Rating change “BUY” to “HOLD”
Portfolio Recap
Alexandria Real Estate Equities, Inc. (ARE)
Yield: 4.6%
The niche REIT is holding up relatively well in the market duress. But it was performing worse than its REIT peers before the market got ugly. Although earnings were basically solid and Alexandria reiterated previous guidance, it missed on revenue. However, earnings were only up 5.4% while revenues jumped 7.4%. The lease rates were solid, and Alexandria reported a healthy number of acquisitions. It stumbled after a big surge higher after the earnings report, but the defensive characteristics may serve ARE well going forward with the increased recession fears. BUY
American Tower Corporation (AMT)
Yield: 3.0%
What market selloff? This data center REIT just made a new high. The cell tower REIT was helped by a strong earnings report last week. American Tower reported a better-than-expected 13.4% growth in adjusted funds from operations over last year’s quarter. Growth of existing cell towers is strong as new customers are being added to existing towers and the properties continue to expand in the U.S. and overseas. It also raised guidance for 2024. It surged to a nearly two-year high despite the market indexes falling and didn’t even budge during the steep Monday morning market selloff. It’s up over 32% in the last three months amid the improving interest rate outlook. BUY
Brookfield Infrastructure Corp. (BIPC)
Yield: 4.3%
This great infrastructure company stock has pulled back a little amid the market tumult after a great July when it rose over 17% for the month to the highest price since last fall. Brookfield reported solid earnings last week with 10% funds from operations growth over last year’s quarter. BIPC had been a stellar performer for many years prior to inflation and rising interest rates. But now interest rates are moving significantly lower, and the main threat is now a recession. That’s in Brookfield’s wheelhouse as its crucial assets are highly recession-resistant. BUY
Cheniere Energy Partners, L.P. (CQP)
Yield: 6.8%
This LNG exporter has also pulled back over the last several tumultuous days after a stellar July. The energy market sector took a hit as energy prices declined on recession fears. Trouble in the energy sector is a concern going forward if there is a recession. However, the likely escalation in the Middle East war may cause energy prices to spike higher over the next several weeks. The LNG export market adds a strong growth element that most of its peers don’t have. Cheniere reports earnings later this week or next week and can hopefully get a bump afterward. (This security generates a K1 form at tax time). BUY
Enterprise Product Partners L.P. (EPD)
Yield: 7.4%
Even this steady midstream energy partnership is taking a hit in this market. EPD is down 9% since hitting a new 52-week high in late July. Enterprise is not leveraged to energy prices and has a recession-resistant business, but that doesn’t always matter in the near term. This midstream energy partnership reported earnings last week that were solid. It technically missed estimates by a penny, but earnings were still up 12% over last year’s quarter. The distribution is also 5% higher than a year ago and there is still an industry standout 1.6 times distribution coverage with cash flow. (This security generates a K1 form at tax time). BUY
Rating change “BUY” to “HOLD”
FS KKR Capital Corporation (FSK)
Yield: 14.4%
Ouch! This ultra-high-yielding Business Development Company fell over 7% in just the last few days as recession fears exploded. It went from near the 52-week high to near the low just like that. It deals with small companies that tend to be more vulnerable to a recession, which is concerning. The BDC reports earnings this week, and we will see if this recession hysteria lasts. FSK is reduced to a HOLD rating in case the recession issue continues to gain traction. HOLD
Rating change “BUY” to “HOLD”
Main Street Capital Corporation (MAIN)
Yield: 5.9%
This BDC also has a lot of small business exposure, which is problematic during recessions. It’s down about 8% in August, as of midday on Monday, after having been in an uptrend since last fall. A recession would certainly change the dynamics. However, Main Street also reports earnings this week, and there is a possibility the market eases off this recession business in the days ahead. But there is a high risk of circumstances shifting against this BDC and the rating will be reduced to HOLD. HOLD
NextEra Energy, Inc. (NEE)
Yield: 2.6%
The regulated and alternative energy utility has barely budged in this market. NEE is in an uptrend and near the 52-week high. It is a highly defensive utility, and the recession fears make NEE more desirable. NextEra forecasts revenue growth of 8.3% per year over the next three years, compared to average growth of 4.7% for the electrical utility group. There is also growth anticipation of a steep acceleration in electricity demand in the years ahead prompted by onshoring of manufacturing, electric vehicle growth, and increasing data center electricity demand because of AI. Renewable demand is expected to grow the most. HOLD
ONEOK, Inc. (OKE)
Yield: 4.9%
This midstream energy company is taking a hit with the energy sector selloff. OKE is about 9% off the high as of midday on Monday. It moves with the overall energy sector amid volatility in the near term like the other midstream stocks. But ONEOK reports earnings this week. Past earnings have been rock solid with inflation protection and recession resilience. The high yield should be at a premium in a likely more sideways market going forward. It is a more volatile stock than the other midstream companies that have been in the portfolio. BUY
Qualcomm Corp. (QCOM)
Yield: 2.1%
The chipmaker crushed earnings forecasts for the June quarter and guided higher for the September quarter last week. But the stock fell on the day of the announcement on concerns about weaker-than-expected smartphone sales predicted for the December quarter. But the upgrade cycle is likely coming sometime next year. The recent behavior of the stock has been ugly. It’s down about 30% from the high in June, but it’s still up 15% for the year. It’s also encouraging that QCOM recovered completely from the steep Monday morning selloff in the stock by midday on Monday. QCOM will be volatile with the market and the technology sector in the near term, but the longer-term trajectory is still excellent. BUY
Realty Income Corp. (O)
Yield: 5.3%
This is the best relative performance for this legendary monthly income REIT in forever. Realty has moved to within pennies of the 52-week high while the rest of the world goes to Hell in a handbag. Interest rates are unmistakably heading significantly lower now, which reverses the biggest reason for Realty’s recent underperformance. The REIT also reports earnings this week, which could give it a further boost. Defensive stocks are going from the worst place to be to the best place to be. HOLD
Existing Call Trades
Sell MAIN September 20th $49.40 calls at $2.00 or better
MAIN had been riding high above the strike price but has fallen lower in a hurry. The market tumult from the recession fears beat this BDC up. We’ll see what happens with the market over the course of the week. But these calls embellish an already stellar income.
Sell BIPC September 20th $35 calls at $3.00 or better
The stock price has moved to within $2 of the strike price. But that weakness may be short-lived if the market bounces back. Defensive stocks are a great place to be invested right now. But if BIPC gets called we still have the other defensive portfolio positions. With these calls, we lock in a high income even if the market continues to flounder.
Sell AMT Sep 20th $210 calls at $15.00 or better
The calls were originally targeted at $11. But the day of the update the stock price spiked and you wouldn’t have gotten less than $15, so that is what the portfolio is using as the call price. AMT is riding high and looking strong right now. But in this market, you never know.
Current Recommendations
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Recent Price | Buy at or Under Price | Yield | Total Return |
| Alexandria Real Estate Eq. | ARE | 12/19/23 | $129.54 | $113.36 | $140.00 | 4.59% | -9.76% |
| American Tower Corp. | AMT | 1/23/24 | $202.26 | $234.64 | $220.00 | 2.76% | 18.02% |
| Brookfield Infrstr. Cp. | BIPC | 2/27/24 | $32.64 | $37.86 | $40.00 | 4.28% | 15.66% |
| Cheniere Energy Prtns. | CQP | 7/23/24 | $53.04 | $50.93 | $60.00 | 7.24% | -4.87% |
| Enterprise Product Ptnrs. | EPD | 2/27/24 | $27.61 | $28.34 | $30.00 | 7.37% | 6.92% |
| FS KKR Capital Corp. | FSK | 4/23/24 | $19.42 | $19.47 | NA | 14.38% | 4.06% |
| Main Street Capital Corp. | MAIN | 3/26/24 | $46.40 | $49.32 | NA | 8.39% | 9.04% |
| NextEra Energy, Inc. | NEE | 4/25/23 | $77.50 | $79.20 | NA | 2.60% | 5.63% |
| ONEOK, Inc. | OKE | 5/29/24 | $79.59 | $80.17 | $84.00 | 4.94% | 1.94% |
| Qualcomm Inc. | QCOM | 5/5/21 | $134.65 | $159.31 | $165.00 | 2.13% | 26.90% |
| Realty Income Corp. | O | 6/27/23 | $60.19 | $59.32 | NA | 5.32% | 5.31% |
| Call Trades | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| MAIN Sep 20 $49.40 call | MAIN240920C00049400 | Sell | 6/27/24 | $2.00 | $1.23 | $2.00 | 4.31% |
| BIPC Sep 20 $35.00 call | BIPC240920C00035000 | Sell | 7/16/24 | $3.00 | $4.35 | $3.00 | 9.19% |
| AMT Sep 20 $210 call | AMT240920C00210000 | Sell | 7/30/24 | $15.00 | $21.23 | $15.00 | 7.42% |
| as of close on 08/02/2024 | |||||||
| SOLD STOCKS | |||||||
| X | 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 | 15.08% |
| Qualcomm | QCOM | Called | 6/24/20 | $89.14 | 9/18/20 | $95 | 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% |
| U.S Bancorp | USB | Sold | 3/24/21 | $53.47 | 4/13/22 | $51 | -1.59% |
| Enterprise Product Ptnrs | EPD | Called | 3/17/21 | $23.21 | 4/14/22 | $24 | 11.25% |
| FS KKR Capital Corp. | FSK | Called | 10/27/21 | $22.01 | 4/14/22 | $23 | 13.58% |
| Xcel Energy Inc. | XEL | Called | 10/12/21 | $63.00 | 5/20/22 | $70 | 12.66% |
| Innovative Industrial Props. | IIPR | Sold | 3/23/22 | $196.31 | 7/20/22 | $93 | -51.23% |
| One Liberty Properties | OLP | Sold | 7/28/21 | $30.37 | 8/24/22 | $25 | -12.94% |
| ONEOK, Inc. | OKE | Called | 5/25/22 | $65.14 | 1/20/23 | $65 | 2.66% |
| Xcel Energy, Inc. | XEL | Called | 10/26/22 | $62.57 | 1/20/23 | $65 | 4.67% |
| Realty Income Corp. | O | Called | 9/28/22 | $60.37 | 2/17/23 | $63 | 5.41% |
| Medical Properties Trust | MPW | Sold | 1/24/23 | $13.22 | 3/21/23 | $8 | -38.00% |
| Brookfield Infrastructure Cp. | BIPC | Called | 11/9/22 | $42.43 | 7/21/23 | $45 | 8.72% |
| Star Bulk Carriers Corp. | SBLK | Sold | 6/1/22 | $33.30 | 8/8/23 | $18 | -31.38% |
| Visa Inc. | V | Called | 12/22/21 | $217.16 | 8/18/23 | $235 | 9.16% |
| Global Ship Lease, Inc. | GSL | Sold | 2/23/22 | $24.96 | 8/29/23 | $19 | -13.82% |
| ONEOK, Inc. | OKE | Called | 3/28/23 | $60.98 | 9/15/23 | $65 | 9.72% |
| Hess Corporation | HES | Called | 6/6/23 | $132.25 | 10/20/23 | $155 | 17.87% |
| Tractor Supply Company | TSCO | Sold | 9/26/23 | $203.03 | 11/28/23 | $200 | -1.02% |
| Digital Realty Trust | DLR | Called | 7/18/23 | $117.31 | 1/19/24 | $135 | 17.16% |
| Intel Corporation | INTC | Called | 7/27/22 | $40.18 | 1/19/24 | $43 | 9.76% |
| AbbVie Inc. | ABBV | Called | 7/25/23 | $141.63 | 3/15/24 | $160 | 15.11% |
| Marathon Petroleum Corp. | MPC | Called | 10/24/23 | $149.45 | 3/28/24 | $165 | 12.06% |
| The Williams Companies, Inc. | WMB | Called | 8/24/22 | $35.58 | 5/17/24 | $35 | 7.14% |
| 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 | 9/1/21 | $2.00 | 10/15/21 | $2.00 | 3.95% | |
| USB Nov 19 $60 call | out-of-money | 9/24/21 | $2.30 | 11/19/21 | $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% | |
| EPD Apr 14th $24 call | in-the-money | 3/2/22 | $1.25 | 4/14/22 | $1.25 | 5.69% | |
| FSK Apr 14th $22.50 call | in-the-money | 3/10/22 | $0.90 | 4/14/22 | $0.90 | 4.09% | |
| XEL May 20th $70 call | in-the-money | 3/30/22 | $3.00 | 5/20/22 | $3.00 | 4.76% | |
| SBLK July 15th $134 call | out-of-money | 6/1/22 | $1.60 | 7/15/22 | $1.60 | 4.80% | |
| OKE Oct 21st $65 call | out-of-money | 8/24/22 | $3.40 | 10/21/22 | $3.40 | 5.22% | |
| OKE Jan 20th $65 call | In-the-money | 11/25/22 | $3.70 | 1/20/23 | $3.70 | 5.68% | |
| XEL Jan 20th $65 call | in-the-money | 11/25/22 | $5.00 | 1/20/23 | $5.00 | 7.99% | |
| O Feb 17th $62.50 call | in-the-money | 12/28/22 | $3.00 | 2/17/23 | $3.00 | 4.97% | |
| QCOM Sep 16th $145 call | out-of-money | 7/20/22 | $11.75 | 9/16/22 | $11.75 | 8.73% | |
| V Mar 17th $220 call | out-of-money | 1/24/23 | $12.00 | 3/17/23 | $12.00 | 5.51% | |
| OKE May 19th $65 call | out-of-money | 4/11/23 | $2.70 | 5/19/23 | $2.70 | 4.43% | |
| V Jun 2 $230 call | out-of-money | 4/21/23 | $10.50 | 6/2/23 | $10.50 | 4.82% | |
| BIPC $45 July 21st call | in-the-money | 5/23/23 | $3.25 | 7/21/23 | $3.25 | 7.66% | |
| V $235 Aug 18th call | in-the-money | 7/11/23 | $9.00 | 8/18/23 | $9.00 | 4.13% | |
| GSL $20 Aug 18th call | out-of-money | 7/11/23 | $1.25 | 8/18/23 | $1.25 | 5.00% | |
| OKE $65 Sep 15 call | in-the-money | 9/15/23 | $3.20 | 7/25/23 | $3.20 | 4.92% | |
| INTC $35 Oct 20th call | out-of-money | 9/8/23 | $3.78 | 10/20/23 | $3.78 | 9.41% | |
| HES $155 Oct 20th call | in-the-money | 9/8/23 | $9.00 | 10/20/23 | $9.00 | 6.81% | |
| DLR $135 Jan 19th call | in-the-money | 11/22/23 | $6.00 | 1/19/24 | $6.00 | 5.11% | |
| INTC $42.50 Jan 19th call | in-the-money | 11/29/23 | $3.50 | 1/19/24 | $3.50 | 8.71% | |
| ABBV $160 Mar 15th call | in-the-money | 1/10/24 | $7.00 | 3/15/24 | $7.00 | 4.94% | |
| MPC $165 Mar 28th call | in-the-money | 2/14/23 | $10.00 | 3/28/24 | $10.00 | 6.69% | |
| QCOM $170 Apr 26th call | out-of-money | 3/12/24 | $10.00 | 4/26/24 | $10.00 | 7.42% | |
| WMB $35 May 17th call | in-the-money | 3/12/24 | $2.00 | 5/17/24 | $2.00 | 5.62% | |
| QCOM $200 July 19th call | out-of-money | 6/5/24 | $12.00 | 7/19/24 | $12.00 | 8.91% | |
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