Soaring Interest Rates and Less Earnings Confidence
This week got off to one ugly start.
The indexes plummeted on rising rate worries and disappointing Goldman Sachs (GS) earnings. The benchmark 10-year Treasury rate soared to 1.85 on Tuesday. That’s the highest level since the pandemic began and up from 1.34% as recently as last month.
This rate rise was to be expected. The Fed is tapering its bond-buying program, which was holding down longer-term rates. There is also persistent high inflation. December CPI came in at 7%, the highest increase yet and the eighth consecutive month above 5%.
A strong economy, Fed tapering, and inflation put upward pressure on rates, which are still below the pre-pandemic level and the average of between 2% and 3% in recent normal economies. The market is dealing with the cold reality of a situation that was already inevitable.
The bigger concern in the near term might be Goldman Sachs. Earnings were worse than expected. That could be a problem. Earnings have saved and reinvigorated this bull market through the whole pandemic recovery. Corporate earnings have been consistently phenomenal and better than expected. It’s still very early. But a retreat to average or even unexciting could remove the fuel propelling stocks higher.
Meanwhile, the big story so far this year is energy. While eight of the 11 S&P 500 sectors are lower so far for the year, the energy sector if up over 16% in just two weeks. High demand and rising prices are propelling those stocks, and the situation could last a while.
Trades past month
December 22nd
Purchased Visa Inc. (V) - $217.96
January 5
Sold OKE February 18 $60 calls at $2.75
January 12
Sold VLO February 25 $83 calls at $4.20
January 13
Sold USB February 25 $61 calls at $2.50
January 19
Sell AGNC Investment Corp. (AGNC)
Stock Portfolio Recap
Rating change “HOLD” to “SELL”
AGNC Investment Corp. (AGNC)
Yield 9.4%
This is the Promised Land. And the stock still flounders. The central rationale for buying and owning AGNC is that interest rates are likely to rise and AGNC should benefit. Higher long-term rates increase spreads and profits for this mortgage REIT. The 10-year Treasury just hit a two-year high. Other yield curve sensitive stocks (namely USB) have reacted positively. But not AGNC.
When the anticipated catalyst for moving higher occurs but the stock doesn’t cooperate, it’s time to rethink holding it. It is likely that the negative effect of the Fed tapering its bond-buying program, which includes U.S. government agency mortgage-backed securities, is outweighing the benefit of a steeper yield curve. The selling is putting downward pressure on valuation and the portfolio value.
Two calls for $0.50 each have been sold in AGNC since it was added to the portfolio last January. The $1.44 in dividends and the $1.00 in call premium provided a 15.72% income from the position. The total return should be about 14.12%, as the current share price is a few pennies below the purchase price. SELL
Enterprise Product Partners (EPD)
Yield 7.8%
The previously lagging midstream energy partnership may be on its way back to the 52- week high of 25.69 per share, and maybe higher (currently 24). EPD is benefitting from the energy rally, as energy is the top-performing market sector and is already up over 16% YTD. Meanwhile, it still sells at a dirt-cheap valuation, the sky-high distribution is very safe, and business is good. We will look to supplement that high yield income with a call premium if the stock moves higher. BUY
FS KKR Corp. (FSK)
Yield 11.1%
This BDC has also come alive. It’s up 13% in less than a month. That’s a great move for this high yielder. And it has completely broken the recent downtrend and appears poised to make a run back up to recent highs. Earnings were solid as FSK continues to benefit from the current environment. Strong economic growth is good for small companies. When it gets a little higher there should be a good call writing opportunity. BUY
KKR & Co., Inc. (KKR)
Yield 0.8%
The stock has been trending lower since hitting the high in early November. It hasn’t gotten much traction recently despite the rally in financial stocks this year. Business is still strong, and the company should have a good year in 2022. But this stock needs to break the downtrend. I will keep a close eye on it in the weeks ahead. When it does, there should be yet another good call writing opportunity. HOLD
One Liberty Properties, Inc. (OLP)
Yield 5.4%
This industrial REIT has performed better than expected. It broke out to a higher range after a strong earnings report. Yet the stock is still below the strike price for the calls written even after the strong performance. It may knock around here for a while before breaking out to a higher level. We’ll see what happens in the next month before options expiration. HOLD
ONEOK, Inc. (OKE)
Yield 6.0%
This midstream energy stock has been moving higher over the past month along with the rest of the energy sector. But the move has lagged the sector and even the typically slower moving EPD. It’s likely because there isn’t as much slack in OKE after it returned a whopping 69% in 2021. That said, OKE is still below the 52-week high and a long way below the pre-pandemic high, despite having higher earnings now. HOLD
Qualcomm Corp. (QCOM)
Yield 1.5%
QCOM has gone mostly sideways over the past two months. But the performance has been impressive under the circumstances. It didn’t pull back and consolidate after a huge move in November despite the fact that technology stocks have been under pressure. It didn’t really give up the gains from the last surge. It just stopped going higher for the time being. It is still reasonably priced and I like the prospects for the stock in the New Year. HOLD
U.S. Bancorp (USB)
Yield 2.9%
It’s a new all-time high. USB is up over 10% in just the first two weeks of this year. It’s loving the rising interest rates. Business has been quite strong in all areas except net interest income, which fell as the yield curve flattened. But now the yield curve is steadily steepening as the 10-year Treasury rate has soared to a new post-pandemic high. That should provide the missing piece of the puzzle for business to truly boom at the bank. And rates are likely to go higher. HOLD
Valero Energy Corp. (VLO)
Yield 4.7%
This red-hot stock keeps on going. After trending low for two months, it caught fire over the past month. VLO is up over 25% in the past month and 15% so far this year. It just hit a new post-pandemic high but is still below the pre-pandemic price and a long way from the all-time high. While I expect good returns over the course of this year, it’s tough to tell if it breaks out to a new level on this current run or consolidates before a move in later months. It looks like it’s getting stronger and the former scenario appears more likely. HOLD
Visa Inc. (V)
Yield 0.7%
The card company had been red hot. It had a temporary blip a few weeks ago, but it looks like the stock is back in business again. V should benefit from the international recovery this year, which has lagged the U.S. recovery. As travel returns, the very profitable cross border transaction should get a big boost while U.S. business is already booming. BUY
Xcel Energy Inc. (XEL)
Yield 2.7%
This alternative energy utility has done OK since being added to the portfolio and is still in an uptrend. But it really hasn’t been able to stretch its legs. It has been benefitting because it’s a utility, as investors are attracted to safety. But alternative energy stocks have been floundering, and that’s the side of the business that really drove this stock higher in the past. XEL should get a big boost when alternative energy stocks come back into favor. BUY
Existing Call Trades
Sell OLP February 18 $35 calls at $1.50 or better
As I mentioned above, the stock has been strong. It is making a home in this higher range since breaking out after the last earnings report. It recently even flirted with a new high. But the share price has rarely touched the strike price and has averaged well below it over the last month.
Sell QCOM January 21 $185 calls at $9.65 or better
This is a foot race coming down to the wire. QCOM is currently pennies above the strike price and the calls expire on Friday. The technology sector has been week on fears of rising interest rates and diminished profit and growth margins. QCOM has hung tough so far but has been averaging below the strike price over the last couple of months. But we’re set up for good returns either way. The calls provide a great income and prospects still look good for the stock in 2022. If QCOM is called, we will lock in a huge total return in a short time in an uncertain market.
Sell OKE February 18 $60 calls at $2.75 or better
Energy is very strong so far this year and OKE has been moving higher. It is currently more than 2 per share above the strike price. But there is still a month to go. Energy stocks have tended to surge higher for a while and then consolidate. We’ll see if there is another consolidation over the next month or if the selloff is sufficient to pull OKE below the strike price in a month.
Sell USB February 25 $61 calls at $2.50 or better
These rising interest rates are music to USB’s ears. The stock has been loving this current environment and has moved to a new high, a little above the current strike price. We’ll see if the party continues over the next month. This is the third call the portfolio has sold on this same position. The returns will be terrific whether the stock is called or not.
Sell VLO February 25 $83 calls at $4.20 or better
These calls finally reached the target price on Tuesday morning. In last week’s update, the calls were targeted a little above the then call price. But the stock has remained strong and the price was hit. I like the prospects for VLO over the course of the year but I’m much less certain what to expect over the next five weeks.
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Price on 1/14/22 | Buy at or Under Price | Yield | Total Return |
| AGNC Investment Corp. | AGNC | 1/13/2021 | 15.52 | 15.31 | 17.00 | 9.41% | 7.68% |
| Enterprise Product Partners | EPD | 3/17/2021 | 23.21 | 23.99 | 25.00 | 7.75% | 9.89% |
| U.S. Bancorp C | USB | 3/24/21 | 53.47 | 63.25 | 57.00 | 2.91% | 21.97% |
| Qualcomm Inc. C | QCOM | 5/5/21 | 134.65 | 188.69 | 140.00 | 1.44% | 42.05% |
| ONEOK, Inc. C | OKE | 5/26/21 | 52.51 | 62.61 | 60.00 | 5.97% | 23.16% |
| One Liberty Properties C. | OLP | 7/28/21 | 30.37 | 33.58 | 33.00 | 5.36% | 13.65% |
| KKR & Co., Inc. | KKR | 8/25/21 | 64.52 | 69.40 | 70.00 | 0.84% | 7.76% |
| Xcel Energy Inc. | XEL | 10/12/21 | 63.00 | 68.97 | 67.00 | 2.65% | 10.23% |
| FS KKR Capital Corp. | FSK | 10/27/21 | 22.01 | 22.38 | 24.00 | 11.08% | 4.82% |
| Valero Energy Corp. C | VLO | 11/17/21 | 73.45 | 85.20 | 85.00 | 4.60% | 17.54% |
| Visa Inc. | V | 12/22/21 | 217.96 | 214.67 | 225.00 | 0.70% | -1.51% |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Price on 1/14/22 | Sell To Price or Better | Total Return |
| OLP Feb 18 $35 call | OLP220218C00035000 | Sell | 11/19/21 | 1.50 | 0.85 | 1.50 | 4.94% |
| QCOM Jan 21 185 call | QCOM220121C00185000 | Sell | 11/30/21 | 9.65 | 5.46 | 9.65 | 7.17% |
| OKE Feb 18 $60 call | OKE220218C00060000 | Sell | 1/5/22 | 2.75 | 3.40 | 2.75 | 5.24% |
| USB Feb 25 $61 call | USB220225C00061000 | Sell | 1/13/22 | 2.50 | 3.30 | 2.50 | 4.68% |
| VLO Feb 25 $83 call | VLO220225C00083000 | Sell | 1/18/22 | 4.20 | 4.05 | 4.20 | 6.13% |
| 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 | 38.00 | 3.42% |
| Brookfield Infras. Ptnrs. | BIP | Called | 6/24/20 | 41.92 | 10/16/20 | 45.00 | 8.49% |
| Starbucks Corp. | SBUX | Called | 8/26/20 | 82.41 | 10/16/20 | 88.00 | 6.18% |
| Visa Corporation | V | Called | 9/22/20 | 200.56 | 11/20/20 | 200.00 | 0.00% |
| AbbVie Inc. | ABBV | Called | 6/2/20 | 91.04 | 12/31/20 | 100.00 | 12.43% |
| Enterprise Prod. Prtnrs. | EPD | Called | 6/24/20 | 18.14 | 1/15/21 | 20.00 | 15.16% |
| Altria Group | MO | Called | 6/2/20 | 39.66 | 1/15/21 | 40.00 | 7.31% |
| U.S. Bancorp | USB | Called | 11/25/20 | 44.68 | 1/15/21 | 45.00 | 1.66% |
| B&G Foods Inc, | BGS | Called | 10/28/20 | 26.79 | 2/19/21 | 28.00 | 4.42% |
| Valero Energy Inc. | VLO | Called | 8/26/20 | 53.70 | 3/26/21 | 60.00 | 11.73% |
| Chevron Corp. | CVX | Called | 12/23/20 | 85.69 | 4/1/21 | 96.00 | 12.95% |
| KKR & Co. | KKR | Called | 3/24/21 | 47.98 | 6/18/21 | 55.00 | 14.92% |
| Digital Realty Trust | DLR | Called | 1/27/21 | 149.17 | 7/16/21 | 155.00 | 5.50% |
| NextEra Energy, Inc. | NEE | Called | 2/24/21 | 73.76 | 9/17/21 | 80.00 | 10.00% |
| Brookfield Infras. Ptnrs. | BIP | Called | 1/13/21 | 50.63 | 10/15/21 | 55.00 | 11.65% |
| 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% | |