Starting with the good news, Visa’s earnings report looked robust. In it they shared that payment volume grew 17% in the quarter ending with September. All processed transactions were up 21% and a 29% year-over-year growth in revenue. This tells me that consumers are spending money into the economy. While Visa’s revenue grew $1.5B and beat expectations, their stock dropped like a rock this morning. As I type, it is down over 5%. This is because of the outlook and forward guidance that Visa expects in the year to come. It is much weaker than analysts expected.
From the earnings call:
"business has been on a recovery track for the past three to four quarters [it is] not back to normal yet globally. ... Assuming current trends are sustained through December, we would expect first-quarter net revenue growth in the high teens."
Growth in the “high teens” sounds great to me but Visa just recorded a 29% revenue growth. That means Visa’s own internals show that things may be slowing down and that they are trying to temper expectations. This is a big break-check from them on the future growth of consumer spending. If they anticipate the consumer to reduce their spending while inflation runs hot, this puts us in the perfect setup for stagflation.
This is the bad news.
In addition, John Kemp of Reuters, published an outlook on the oil price. In it he shows how OPEC+ is content with their current production output and the upward price trend the restrictive policies have caused. He goes into great detail on inventory levels, which are key.
“Global liquid fuels consumption was down by around 2.1 million bpd in September compared with the same month in 2019, as a result of the lingering impact of the pandemic and recession.
Global production was down by 2.8 million bpd over the same period, according to the U.S. Energy Information Administration ("Short-Term Energy Outlook", EIA, Oct. 13).
OECD commercial petroleum inventories jumped by 335 million barrels during the first wave of the pandemic and lockdowns between February and July 2020.
But commercial inventories have since shrunk by 425 million barrels as a result of the strong rebound in the economy and restrictions on output.
By September, OECD commercial inventories were 145 million barrels (5%) below the level two years ago, before the pandemic.”
While less fuel is being consumed when compared to the same time prior to the government shutdown, production is much further behind. This disparity has caused inventories to be heavily drawn down.
Needless to say, this is very bullish for oil prices.
Mr. Kemp pulls together a great conclusion for his piece.
Producers have revealed a preference for risking prices rising even further, rather than falling back, implying they are comfortable with a rising price trend, which is helping guide the market higher.
…In this instance, producers will continue to limit output and enjoy higher revenues, blaming higher prices on the pandemic, uncertain economic outlook, and investment decisions related to the transition to a future energy system.
Experience over the last two decades suggests prices will only come under pressure once the business cycle expansion starts to slow down, rather than because OPEC+ boosts output voluntarily to cool prices.
Good news for those who hold oil and oil producing companies, bad news for anyone else. As John states, only a recession is going to bring down the price of oil.
This is where it gets ugly.
With reduced consumer spending and OPEC+ happy with high oil prices, an economic contraction looks very likely. We’ll need to keep our eyes focused on the keys to the market but beware…
"As soon as you think you've got the key to the stock market, they change the lock."
-Joe Graville
Finally, I want to address a trading method that few know or utilize that has helped me pick up nickels and dimes along the way. That method is selling puts. Puts are option contracts, so they do have higher risk than other investment vehicles. By selling an option contract, your risk can be magnified or contained depending on your situation. For instance, by selling a naked call, you are opening yourself up to unlimited losses while only securing a small premium for the contract. This risk can be contained by holding 100 shares of the underlying stock. This is called a ‘covered call’. If the call contract that you sold is ‘in-the-money’ at expiration, your shares will be sold at the strike price of the contract. This means you would have collected a premium by selling your option contract and you would have sold your shares (hopefully above where you purchased them).
For call options, ‘in-the-money’ or ITM means the market price is above the strike price on the contract.
For put options, the opposite is true. ITM means the market price is below the strike price.
By selling a put, you are opening yourself up to purchasing the stock at the strike price at expiration. By selling the put contract, you collect a premium and agree to buy 100 shares of the underlying stock at expiration if the contract is in-the-money. Depending on your broker, you may need to have the cash on hand to complete the transaction should the contract expire ITM. However, if it doesn’t expire in-the-money, you’ve secured a premium and didn’t have to buy the shares. This works great when you anticipate the stock to move higher.
Recently I used this strategy with Cameco (CCJ). I sold a put contract with the January 21, 2022 expiration and a $22 strike price. This means that I collected a premium and will be expected to purchase 100 shares of CCJ on 1/21/22. That is unless Cameco is above $22 a share. If it is, the contract would expire worthless and I would have collected the maximum amount of premium on the sale of the contract.
Something to keep in mind is that you don’t have to hold onto the contract until expiration. You can sell it early, which is how the vast majority of option contracts are traded. Also if you are unfamiliar with options, I wrote a three piece series on them. I would also encourage you to do your homework. Understand how these contracts work. They can be extremely volatile especially if they have expiration dates less than 60 days. I recommend practicing with a paper trading account to get started. ThinkorSwim, the TDAmeritrade platform, is excellent for this.
Lastly, selling puts isn’t going to get you rich quick. It’s a slow process of picking up a fistful of dollars here and there. In addition, if your contract expires in the money, then you pick up shares for a price you thought was fair and got paid to do so (which reduces your cost basis).