Despite Market Optimist, the Economy Will Face Consequences of Fed Action
Here's where I am allocating new money in my portfolio as the Fed seeks to pull off a nearly-impossible soft landing.
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I continue to be somewhat amazed by how quickly the market memory holes any negative events these days.
Just over two weeks ago, the BLS foisted a putrid July jobs number on the market. The Japanese markets were collapsing, and volatility spiked its highest level in over four years. All of which seems to have been quickly forgotten as the S&P 500 just had its best weekly performance of 2024 and is back within 2% of its all-time highs set in mid-July.
Goldman Sachs just lowered its probability of a recession back down to 20% after last week’s July retail sales report. However, I am still in Jamie DImon’s camp, who sees only a 35% to 40% chance of a "soft landing." Given that the Federal Reserve has only achieved one of these outcomes in three generations (in 1995), it just feels there is way too much optimism from the investment community that the Fed will be able to pull the rabbit out of their hat this time around.
This is especially true given how much debt has been layered across the economy in recent years. Or, as a quote in a recent ZeroHedge article put it:
“You simply can’t raise rates the most in recent history at the fastest pace in recent history on the most debt outstanding in history and not face consequences."
At some point, those "consequences" are going to come home to roost. However, thanks to last Friday’s option expiration date that saw many of my covered call holdings expired in the money, I have new "dry powder" to find a home for.
Approximately half of those proceeds will go into three-month treasury bills. Even as most of the rest of the yield curve has started to normalize, these instruments are paying around 5.2%. After failing to take advantage of a generational opportunity in 2021 to finance a good chunk of the federal debt at 30-year rates at under 2%, Treasury Secretary Yellen continues to finance most of the massive federal deficit spending via short-term debt.
The rest of the funds will be going toward new covered call holdings. One of these will be Corbus Pharmaceuticals CRBP which I highlighted last weekend. I will also likely add some exposure using this simple option strategy to my stake in drug giant Gilead Sciences, Inc. GILD. The stock of Gilead has been range bound for many years, but covered call trades on it have been consistently profitable for me. The company also finally seems to be gaining some traction after many years in the wilderness.
Gilead has had a fairly long history of making poor acquisitions, but they did get an FDA approval around the main asset picked up by its recent purchase of CymaBay Therapeutics last week. In an overbought market, GILD is a rare value stock trading at just over ten times FY2025E EPS. The stock also has an approximate 4.2% dividend yield and the options against the equity are extremely liquid.
And that is my game plan to start a new trading week in what I think is a more uncertain market than most.
At the time of publication, Jensen was long CRBP and GILD.
