Here Comes the Fed
The Central Bank came with its December announcement this afternoon. The market has been anxiously anticipating this meeting. And it’s a little nervous, as well it should be.
Inflation is soaring out of control. The consumer price index came out at 6.8% in November, the highest in 39 years. The Producer Price Index, which measures wholesale prices on the way to the consumer, was a higher-than-expected 9.6%, the highest since that number has been reported.
The Fed blew this one. They dismissed this inflation as “transitory” and continued aggressive stimulus undaunted. Now, the central bankers have realized their mistake and will have to make up for lost time by expediting the bond purchase taper and raising the Fed Funds rate. The market isn’t sure how hawkish the Fed will be today.
Faster-than-expected unwinding will be bad for the market. Anything less will be good. We’ll see what happens. The saving grace could be Omicron. The virus works against the current problems as renewed lockdowns would slow the economy and reduce inflation.
The market hasn’t been sure whether to worry about inflation and the Fed or the virus. That’s why you see cyclical stocks rally one day and then get clobbered the next. Maybe today will provide more direction.
In portfolio, the energy stocks and financial stocks have been lousy. They sold off with the Omicron news and have been bouncing around ever since. However, inflation is likely to persist and the economy remains strong. Those pressures should drive these cyclical stocks higher in the months ahead.
Meanwhile, the more defensive portfolio stocks have been killing it. The utility stocks, NextEra (NEE) and Excel Energy (XEL), are soaring. The healthcare stocks, AbbVie (ABBV) and Eli Lilly (LLY), are doing even better.
High Yield Tier
AGNC Investment Corp. (AGNC – yield 9.4%) – This floundering mortgage REIT dipped below the previous resistance level of around 16 per share. It has been moving closer to the 15 per share level. Lately, it has been getting knocked around with cyclical stocks amidst virus concerns and Fed tightening. But factors are still very much in place for rising interest rates going forward with a still strong economy and persistent inflation. I still a believer at this point. BUY
Blackrock Enhanced Capital and Income Fund (CII – yield 5.7%) – This covered call ETF is a good place to be looking ahead to a more choppy and sideways market in the New Year. It provides a higher level of income at the expense of capital appreciation potential. The should be a good trade. Plus, the more defensive nature and high dividend should be attractive to investors in 2022. BUY
Compass Diversified (CODI – yield 4.5%) – This superstar Business Development Company (BDC) has caught a tailwind of late. The stock is up about 13% in the last two weeks. Compass has had very strong earnings growth over the last year is because of new acquisitions as well as the economic recovery. Small businesses tend to thrive disproportionately in a recovering economy. The stock has been bouncing around on an upward trend. Hopefully, this latest spike has further to go. BUY
Enterprise Product Partners (EPD – yield 8.5%) – This midstream energy partnership has had a decent year, returning about 17%. However, it has underperformed the market in a year where energy is the top performing sector, and it has significantly underperformed the midstream energy index. The likely reason for the underperformance is the fact that Enterprise moves a lot of oil, and the market sees that as a dying business over time. But the stock is still cheap and the high distribution is very safe. BUY
ONEOK Inc. (OKE – yield 6.2%) – This has been one of the very best midstream energy stocks. It that has vastly outperformed its peers. But it does still get bounced around with the energy sector in the near term. And the latest bounce has been lower as Omicron fears and the Fed are pushing cyclical stocks lower. We’ll see how this plays out in the near term. But I still like OKE for the months and quarters ahead. HOLD
Realty Income (O – yield 4.3%) – This is a solid income and defensive play that has been trending higher for a long time and should have further to go. But it has been floundering a bit lately as cyclical stocks and retail stocks have been taking it on the chin. It’s still set up well going into the New Year as investors are likely to gravitate towards income and safety in a flatter market. HOLD
STAG Industrial (STAG – yield 3.2%) – This industrial REIT has been a solid performer all year long. It had gone straight up until early September. Since then, it has surged and then pulled back on a still upward trend. It recently made another new all-time high and is not far from that level right now. While the market is busy freaking out over Omicron and the Fed, STAG is making new all-time highs. Business is good for the REIT and will likely stay that way whether the virus or inflation wins in the next few months. HOLD
Dividend Growth Tier
Rating change “BUY” to “HOLD”
AbbVie (ABBV – yield 4.4%) – The biopharmaceutical giant is back in business. While the overall market has sort of flopped around, ABBV has been on fire. It’s up over 12% so far in December and 20% since late October. It has also soared to a new 52-week and finally eclipsed the all-time high from 2018. Fantastic earnings recovered the stock from a selloff in late summer over the FDA announcement of a warning label for one of its most promising drugs. Plus, healthcare stocks have been top performers recently. Meanwhile, ABBV still sells at a dirt-cheap valuation of less than 10 times forward earnings. It might have further to go on this run. But the high after a surge is not the best entry point for the stock, so it is being reduced to a HOLD. HOLD
Broadcom Inc. (AVGO – yield 2.6%) – This technology stock has also been red hot. It moved up 14% this month and over 30% since early October. It recently got a huge boost from a stellar earnings report and a raising of the dividend. Results were much better than expected as the company continues to benefit from the 5G rollout. It also received a series of analyst upgrades and higher price targets. The stock is making up for lost time after a mostly lackluster year and may have further to run. BUY
Brookfield Infrastructure Partners (BIP – yield 3.6%) – This infrastructure partnership is in an unmistakable longer-term uptrend, albeit a bouncy one. It soars to new highs and then pulls back, rinse and repeat. At this point, BIP is near the low after the retreat from recent highs. But this is likely short-term noise, considering business is solid and growing. Earnings should accelerate in the quarters ahead because of a recent acquisition. HOLD
Chevron Corp. (CVX – yield 4.6%) – Energy stocks are getting hit with virus and Fed concerns. But CVX is still not very far off the high. It tends to be less volatile than the sector as a whole but it mimics the overall direction. Energy may be in a downdraft right now, but the still strong economy, inflation and high energy demand should lift this stock higher in the months ahead. HOLD
Eli Lilly and Company (LLY – yield 1.3%) – WOW. LLY is up 9% today at this point. And it is within just a few dollars of the 52-week high. The reason for the big day is that the pharmaceutical company raised revenue and profit forecasts for 2021 and 2022 and announced plans to rollout 20 new medicines over the next 10 years. That’s big, especially considering the stock had soared earlier this year on the prospects of approval of a new Alzheimer’s drug. The raised guidance doesn’t even have anything to do with that. The company is killing it with its other new drugs and strong pipeline. HOLD
KKR & Co. Inc. (KKR – yield 0.8%) – After the huge surge in October and early November, this alternative investment asset manager stock has morphed into a cyclical groupie. It’s consolidating because it had to and now it just bounces around with the fortunes of the financial sector, which change with the wind in the near term. I still like financials over the next year, and KKR in particular. But it looks like it will ride out the rest of the year in a similar fashion as the past month. HOLD
Qualcomm Inc. (QCOM – yield 1.5%) – The huge rally that drove QCOM 40% higher in a month has leveled off. But the behavior is still encouraging. The stock is hanging tough near the recent highs despite choppy waters for the tech sector. It still looks like it wants to go higher as soon as external pressures abate. It seems to be just consolidating a bit after a huge move, but it still sells at a cheap valuation and future prospects are stellar. HOLD
Spectrum Brands Holdings, Inc. (SPB – yield 1.7%) –This stock pulled back recently. After a huge boost from earnings last month, SPB has lost nearly all of the gains. Consumer stocks have been under pressure lately. But there really isn’t a good reason for the pullback. It sells home products. If the virus gets bad and results in more lockdowns, sales will likely go higher. Inflation is a bigger worry. But the company seems to be handling it well. The stock got a bunch of upgrades and price target raises after earnings and guidance exceeded expectations. HOLD
U.S. Bancorp (USB – yield 3.2%) – The regional bank stock is really taking it on the chin lately. From the recent stock performance, you would never know that business at the bank is booming and will likely get even better as interest rates likely trend higher. It had been floundering because of higher cost and still low net interest income. Then it took another hit as cyclical stocks were hurt and the yield curve flattened again. But the prognosis is still excellent for this bank and stock over the next year. HOLD
Valero Energy Corp. (VLO – yield 5.7%) – This stock is at the mercy of the energy sector performance in the near term. It sold off during the Omicron scare and has been bouncing around with gyration of cyclical stocks. But business is strong with strong demand and pricing for gasoline, diesel and heating oil. VLO is also an excellent inflation hedge while inflation continues to get worse. It should have another time in the sun before too long. HOLD
Safe Income Tier
Invesco Preferred ETF (PGX – yield 4.9%) – After falling during the pandemic, this preferred stock ETF has recovered. PGX 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 1.7%) – It’s official: This large and well-known alternative energy utility is on a tear. It was wallowing in a subpar year and suddenly caught fire. NEE is up 9% in the last few weeks and 17% since the middle of October. It is now at the new all-time high and looks like it has further to run. In the near term, NEE is benefiting from a flight to safety. Longer term is should make up for lost time when alternative energy stocks come back into vogue. BUY
Xcel Energy (XEL – yield 2.7%) – This alternative energy utility continues to make a sustained, yet choppy, move above the recent low. It is likely the normal range pattern will deliver higher prices in the months ahead. XEL seems well on its way as it just hit the highest price since September. The pattern dictates that the stock will move at least a few dollars higher from the current price. It will likely catch up to NEE. BUY
| High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on 12/15/21 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| AGNC Investment Corp. (AGNC) | 04-14-21 | 17 | Monthly | 1.44 | 9.10% | 15 | -7% | 9.4% | BUY | 1 |
| Blackrock Enhanced Cap & Inc. (CII) | 07-13-21 | 21 | Monthly | 1,12 | 5.6% | 21 | 3% | 5.7% | BUY | 1 |
| Compass Diversified (CODI) | 10-13-21 | 31 | Qtr. | 1.44 | 5.0% | 30 | 5% | 4.5% | BUY | 1 |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.30% | 21 | -9% | 8.5% | BUY | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 6.00% | 59 | 17% | 6.2% | HOLD | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.2% | 67 | 15% | 4.3% | HOLD | 1 |
| STAG Industrial (STAG) | 03-21-18 | 24 | Monthly | 1.45 | 3.3% | 45 | 127% | 3.2% | HOLD | 1/2 |
| Current High Yield Tier Totals: | 5.5% | 37.5% | 5.6% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 130 | 90% | 4.4% | HOLD | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.6% | 590 | 39% | 2.6% | BUY | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 3.6% | 57 | 73% | 3.6% | HOLD | 2/3 |
| Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 4.7% | 118 | 32% | 4.6% | HOLD | 1 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 245 | 68% | 1.3% | HOLD | 2/3 |
| KKR & Co. Inc. (KKR) | 03-09-21 | 48 | Qtr. | 0.58 | 0.8% | 73 | 56% | 0.8% | HOLD | 1/2 |
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.5% | 184 | 126% | 1.5% | HOLD | 1/3 |
| Spectrum Brands Holdings, Inc. (SPB) | 08-11-21 | 81 | Qtr. | 1.68 | 1.6% | 99 | 19% | 1.7% | HOLD | 1 |
| U.S. Bancorp (USB) | 12-09-20 | 45 | Qtr. | 1.68 | 3.2% | 57 | 29% | 3.2% | HOLD | 1 |
| Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 5.7% | 68 | -8 | 5.7% | HOLD | 1/2 |
| Current Dividend Growth Tier Totals: | 3.0% | 40.3% | 2.9% | |||||||
| Safe Income Tier | ||||||||||
| Invesco Preferred (PGX) | 04-01-14 | 14 | Monthly | 0.74 | 4.9% | 15 | 58% | 4.9% | HOLD | 1/2 |
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.7% | 91 | 118% | 1.7% | BUY | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 69 | 175% | 2.7% | BUY | 2/3 |
| Current Safe Income Tier Totals: | 3.1% | 117.0% | 3.1% | |||||||
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