Oil and Interest Rates Soar as the Market Bleeds
Things are getting ugly out there. And I expect it to get worse before it gets better.
The market had its worse day since March yesterday. The worry de jour was the debt limit. I believe the issue will be resolved long before a default occurs one way or another. But this teetering market can’t take any negative news.
The market is already struggling with the delta variant, the Fed’s inevitable tightening, and possible contagion from the Chinese real estate firm Evergrande’s default. It’s also due for a correction in the historically worst months of the year for the market, September and October.
Of course, you never know what the market will do in the near term. It has a long history of confounding even the best prognosticators. However, I do believe the risk of a correction in the near term is significantly greater than usual. We’ll see what happens, but it’s prudent to exercise some caution at this juncture.
Despite the crummy market, there is some good news in the portfolio.
The yield trade, highlighted in the past monthly issue, is working. The 10-year Treasury rate has been soaring. It has risen from 1.28% to the current 1.51% in the last two weeks. As a result, portfolio positions AGNC Investment Corp. (AGNC) and U.S. Bancorp (USB) have rallied despite the negative market. I also believe this is just the beginning of the move higher.
Also, energy stocks are finally rallying as oil prices are heading higher and approaching the 52-week high amidst limited supply and soaring demand. The Energy Select Sector SPDR Fund (XLE) is up over 13% in just the past week. The energy rally is finally sparking a move higher in Enterprise Product Partners (EPD), Chevron (CVX), Valero Energy (VLO) and ONEOK (OKE). This may be the start of the move we’ve been waiting for.
Of course, a market correction would likely end the rally in the yield curve and energy stocks. But they should hold up relatively well in a correction and resume the rally when the market recovers. Despite the dicey market, six portfolio positions have some positive momentum.
High Yield Tier
AGNC Investment Corp. (AGNC – yield 8.9%) – Things are looking a lot better for this mortgage REIT. The 10-year Treasury rate has been soaring and steepening the yield curve. A steeper yield curve has been the missing ingredient for AGNC as the dividend is safe and business is solid in the strong economy. The price hasn’t really moved up much yet. But if the 10-year rate keeps trending higher, which I think it will, the stock price should continue to appreciate. BUY
Blackrock Enhanced Capital and Income Fund (CII – yield 5.4%) – This covered call ETF was reduced to a hold a couple of weeks ago as this market continues to look dicey. The fund’s price movements tend to mimic those of the overall market. It will remain a hold until I believe we are out of the woods in terms of an elevated risk of correction. HOLD
Enterprise Product Partners (EPD – yield 8.4%) – It was another lousy week for energy stocks. But things remain very solid operationally for this midstream partnership. Business should continue to improve in the recovery over the rest of the year and that huge dividend is safe. But for now, energy stocks are being held captive by the virus. We probably won’t see a significant move higher until news improves on the virus front. BUY
ONEOK Inc. (OKE – yield 6.3%) – The same thing is true for this midstream energy company. But it tends to move a lot faster than EPD when the going gets good. It’s had a nice 13% move higher in just the past week. And OKE still has a long way to go just to get back to pre-pandemic levels. I expect OKE to trend higher and most likely have a big up move before the end of the year. BUY
Realty Income (O – yield 4.3%) – This legendary income REIT tends to bounce around on an upward trend. Lately, it’s had the downside of one of those bounces. But business is still solid, and demand will remain resilient for a high and safe monthly dividend. This isn’t a stock for trading. It’s one you hang on to through volatility and collect the dividend while the price likely recovers and trends higher over the course of the next year. HOLD
STAG Industrial (STAG – yield 3.6%) – Even this superstar industrial REIT is having a tough time of it this month. It’s down 7.5% since making a new high at the beginning of September. That’s okay. I feel basically the same way about STAG as O. It does tend to be more volatile, however, because it’s a cyclical REIT. But that should be a good thing in the months ahead. HOLD
Verizon Communications (VZ – yield 4.7%) – VZ is a strong down-market stock that is good to have in a dicey market like this. Plus, there is still a hope that 5G becomes a bigger story after the current headlines fade. Despite the lackluster performance, VZ is worth holding here because of its strong track record in down markets and its future potential to rally as a result of increased profits from the 5G rollout. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 4.8%) – ABBV hasn’t recovered from the selloff after the FDA announced it will require a warning label on its new immunology drug Rinvoq one month ago. It’s not good news because this is a star drug that AbbVie needs to overcome lost revenues when Humira loses its U.S. patent in 2023. But it isn’t a game changer. The story is still intact. Meanwhile, ABBV has strong technical support around the current level. BUY
Broadcom Inc. (AVGO – yield 2.9%) – The current high-inflation and rising-rate environment is not good for technology stocks. The tech sector took the brunt of the selloff earlier this week. AVGO had been behaving better than the overall sector after great earnings that beat expectations. But it is unlikely to go anywhere in the midst of a technology sector selloff which may not be over. But I believe in Broadcom. When we get out of the current weak patch, the stock should benefit from the 5G rollout while it’s also built for long-term growth. BUY
Brookfield Infrastructure Partners (BIP – yield 3.6%) – Everything looks good for this infrastructure partnership. Business is solid and getting better as the recent Inter Pipeline acquisition should take earnings growth to a higher level over the next year. But the stock continues to trend very slowly higher in an up-and-down fashion.
True to form, BIP has pulled back after making a new all-time high earlier this month. HOLD
Chevron Corp. (CVX – yield 5.2%) – This could be the Promised Land at long last. Oil prices are soaring and appear to be on verge of eclipsing the 52-week and a multi-year highs. For many months I’ve been expecting another rally in energy. It looks like this might be it. CVX popped almost 10% in just the last week. The second half of the year should be spectacular for profits as oil prices are high and demand is strong. HOLD
Rating change “HOLD” to “SELL”
Digital Realty Trust (DLR – yield 3.1%) – Although we did take profits in DLR when it started to weaken a couple weeks ago, it has since done precisely what I feared it might. It’s broken through technical support on the downside. We kept half of the position because the stock moves independently of the overall market at a time when the market is looking increasingly treacherous. But it appears to be independently heading lower. It should be okay over the long term, but I don’t want to hang on through many months of languishing. It’s also not a bad time to take some money off the table. SELL
Eli Lilly and Company (LLY – yield 1.5%) – This is a great company and a fantastic stock for the longer term. It tends to move up and down on an upward trend.
Recently, we are seeing the downside of that behavior. We did take profits in LLY when it was a lot higher last month. But after a huge surge higher, LLY has pulled back nearly 20% from the high. Things are still solid at the company, and I still consider recent weakness a mere typical downdraft in the upward trend. When the stock starts to reverse course, I will likely raise it to a BUY. HOLD
KKR & Co. Inc. (KKR – yield 0.9%) – There’s an issue with this asset manager stock. It was down 6% on Monday over concern about the likely Evergrande default. Markets sold off as fear spread of contagion from the Chinese real estate problems. KKR has real estate investments that would be negatively affected if the issue escalates into a bigger crisis. As of now, it looks like the issue will most likely be contained. For now, we will hold on and see. But if the issue persists or gets worse, I will consider taking profits. HOLD
Qualcomm Inc. (QCOM – yield 1.9%) – This chipmaker has been taking it from two directions. Not only is the overall tech sector weak, but Qualcomm was already reeling because of problems in China, where it does a fair amount of business. I don’t know when things will get better for the stock, but I’m still confident it will shine again. Earnings have been spectacular and will likely remain excellent for the next several quarters. Things also look solid further down the road. I believe in the stock and it’s in oversold territory. BUY
Spectrum Brands Holdings, Inc. (SPB – yield 1.8%) – Even after the 19% surge a few weeks ago after the announcement of the sale of the Home Improvement unit for $4.3 billion, I still like the stock from here. The home business is booming and will likely remain stronger than before, long after the pandemic. Also, the high debt level had been an impediment to stock performance and the recent sale removes it. BUY
U.S. Bancorp (USB – yield 3.0%) – Most businesses hate higher interest rates, but not regional banks. For them, higher interest rates mean higher profits as loan spreads increase net interest income. That’s why USB has been moving higher despite the crummy market. As I mentioned in the last monthly issue, rates are likely to trend higher. The recent move is probably just the beginning. BUY
Valero Energy Corp. (VLO – yield 5.5%) – The resurgence of energy stocks is a beautiful thing for this high-leverage energy play. It’s up over 12% in just the last week and has broken out of its recent range. Oil prices are soaring amidst supply constraints and high demand and the energy sector has been one of the few bright spots in this otherwise ugly market. I believe this energy move has a lot more to go. I will upgrade VLO to a BUY when the high risk of a market correction abates. HOLD
Safe Income Tier
Invesco Preferred ETF (PGX – yield 4.9%) – After falling during the pandemic, this preferred stock ETF has recovered and is back near the pre-pandemic high. This preferred stock ETF is much less volatile than the stock market while providing a big yield. It also adds diversification as preferred stock performance is historically not correlated to the stock and bond markets. HOLD
NextEra Energy (NEE – yield 2.0%) – This regulated/alternative utility used to be a superstar stock that investors loved to buy as a conservative way to play the growth in clean energy. But it’s just been a utility stock this year. It rallies when cyclical stocks struggle and falls when cyclical stocks go higher. It has moved lower over the past couple of weeks during the cyclical rally. That’s okay. A defensive cyclical alternative rounds out the portfolio. But NEE is much more than this. Eventually, alternative energy will come back in favor and NEE will benefit. BUY
Xcel Energy (XEL – yield 3.0%) – Ouch. XEL has been bouncing around all year long. It’s now near the low point of a downward move. The stock is down over 10% since early September. XEL is still a great clean energy play that will come back into vogue before long. But this cyclical rally might last awhile longer and hold back XEL in the near term. For patient longer-term investors, this is a great entry point for the stock. BUY
| High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on 9/29/21 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| AGNC Investment Corp. (AGNC) | 04-14-21 | 17 | Monthly | 1.44 | 9.00% | 16 | -4% | 8.9% | BUY | 1 |
| Blackrock Enhanced Cap & Inc. (CII) | 07-13-21 | 21 | Monthly | 1,12 | 5.2% | 21 | -2% | 5.4% | HOLD | 1 |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.10% | 22 | -6% | 8.4% | BUY | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 7.00% | 59 | 13% | 6.3% | BUY | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.1% | 66 | 6% | 4.3% | HOLD | 1 |
| STAG Industrial (STAG) | 03-21-18 | 24 | Monthly | 1.45 | 3.5% | 40 | 98% | 3.6% | HOLD | 1/2 |
| Verizon Communications (VZ) | 02-12-20 | 58 | Qtr. | 2.51 | 4.7% | 55 | -1% | 4.7% | HOLD | 1 |
| Current High Yield Tier Totals: | 5.5% | 22.0% | 5.5% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 109 | 59% | 4.8% | BUY | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.9% | 490 | 11% | 2.9% | BUY | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 3.6% | 56 | 68% | 3.6% | HOLD | 2/3 |
| Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 5.5% | 104 | 16% | 5.2% | HOLD | 1 |
| Digital Realty Trust (DLR) | 09-09-20 | 147 | Qtr. | 4.64 | 2.9% | 147 | 3% | 3.1% | SELL | 1/2 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 229 | 48% | 1.5% | HOLD | 1/3 |
| KKR & Co. Inc. (KKR) | 03-09-21 | 48 | Qtr. | 0.58 | 0.9% | 61 | 28% | 0.9% | HOLD | 1 |
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.9% | 130 | 61% | 1.9% | BUY | 1/3 |
| Spectrum Brands Holdings, Inc. (SPB) | 08-11-21 | 81 | Qtr. | 1.68 | 2.1% | 95 | 18% | 1.8% | BUY | 1 |
| U.S. Bancorp (USB) | 12-09-20 | 45 | Qtr. | 1.68 | 3.3% | 60 | 35% | 3.0% | BUY | 1 |
| Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 6.0% | 70 | -5% | 5.5% | HOLD | 1/2 |
| Current Dividend Growth Tier Totals: | 3.2% | 31.1% | 3.1% | |||||||
| Safe Income Tier | ||||||||||
| Invesco Preferred (PGX) | 04-01-14 | 14 | Monthly | 0.74 | 4.9% | 15 | 56% | 4.9% | HOLD | 1/2 |
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.8% | 79 | 86% | 2.0% | BUY | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 62 | 150% | 3.0% | BUY | 2/3 |
| Current Safe Income Tier Totals: | 3.2% | 97.3% | 3.3% | |||||||
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