SPC Weekender: How to Avoid Rate-Cut Roulette
Plus Google's super-busy week ...
In this issue of Stock Picker’s Corner (SPC):
What to do instead of agonizing over rate cuts.
Data centers are still hungry for energy.
And the “quantum leap” for one member of the Magnificent 7.
🔵The Do’s and Don’ts of Rate-Cut Roulette
The November inflation reading on Wednesday was in-line with expectations, climbing 0.3% from October and tallying in at 2.7%.
Immediately after the news, the FOMC FedWatch Tool handicapped the odds of a rate cut at next week’s Federal Reserve meeting at a near-certain 96%:
Some folks are likely already skipping ahead to wonder: “How many rate cuts will there be in 2025?”
But you don’t have to worry, as Chief Stock Picker Bill Patalon has two quick tips for winning what he calls “Rate-Cut Roulette.”
No. 1: Don’t Use Options for Income
When rates are cut and yields drop, some investors seek out options trading to replace that lost yield. But the data overwhelmingly says options trading is a wealth-depleting behavior for the majority of retail investors.
Between January 2010 and February 2021, retail investors lost more than $3 billion, according to the aptly named study: “Losing is Optional: Retail Option Trading and Expected Announcement Volatility.”
And Bill says that “zero-day options” are inflicting new damage: A 2023 published study recently updated from Germany’s University of Muenster found the following:
“Retail losses from 0DTE options have grown over time, especially since the introduction of option expirations on every weekday. Average daily retail losses amount to $241,000 for the entire sample. This number has accelerated considerably in recent months. After May 16th, 2022, which marks the introduction of a daily expiration calendar by the Cboe, daily retail losses in 0DTE options have grown to $350,000.”
So instead of using options for income, check out Tip No. 2 below.
No. 2: Do Seek Real Income
Instead of options, seek companies that pay out consistent income in the form of dividends.
If you’re just starting with income investing, the important part is to just get started.
Consider the SPDR Portfolio S&P 500 High Dividend ETF (SPYD), which “measures performance of the Top 80 high dividend-yielding companies within the S&P,” as a good starting point.
The yield is a respectable 3.92%.
But after getting started, Bill says to start looking at what’s left over from those payouts after taxes, market rates and inflation so that you can keep more of what you get.
He has a list below of seven investments that all offer yields above 10%, which includes:
Angel Oak Financial Strategies Income Term Trust (FINS)
Income Play No. 2: The Carlyle Credit Income Fund (CCIF)
Income Play No. 3: AGNC Investment Corp. (AGNC)
Income Play No. 4: New Mountain Finance Corp. (NMFC)
Income Play No. 5: Ellington Financial Inc. (EFC)
Income Play No. 6: OFS Credit Co. Inc. (OCCI)
Income Play No. 7: Oxford Lane Capital Corp. (OXLC)
🔌$800 Million Power Needs
In our Sept. 23 issue, we said that some of the leaders during the Artificial Intelligence (AI) Era will be energy firms; after all, someone has to keep feeding those energy-hungry data centers.
And the latest proof point of AI’s vast energy demands comes from an $800 million funding round in Intersect Power from Alphabet/Google (GOOGL) and other investors.
Intersect Power provides low-carbon electricity. And the partnership with Google will help ease power grid constraints by developing specialized industrial parks that place data centers next to clean energy plants.
The first co-located project should be completed by 2027.
Intersect is a private company, so for the ways to play AI’s power needs, Bill says consider GE Vernova Inc. (GE) and The Southern Co. (SO); more insights are available here.
🖥️One Giant Quantum Leap
Sticking with Google, it had a busy week, also announcing a breakthrough with its quantum computing chip, Willow.
One of the advancements is Willow’s reduction in errors, which is a challenge founder and lead of Google Quantum AI Hartmut Neven said has existed for almost 30 years. Now, complex problems that would take the world’s fastest computers billions of years to figure out, Willow can solve in five minutes.
Ultimately, advancements in quantum computing can lead to:
Faster drug discovery and development.
Creating (and breaking) encryption methods.
Improving weather forecasting.
And more advanced AI use cases, just to name a few applications.
Valued at $1.1 billion for 2024, Fortune Business Insights expects the global quantum computing market size to reach $12.6 billion by 2032.
But as advancements ramp up, those numbers may prove to be conservative.
The Boston Consultant Group created a list that shows billions — and in some cases hundreds of billions — of dollars’ worth of use cases:
Bill has been following the developments in this realm for quite some time, making sure one company with a quantum computing connection was included in our Special-Situation Portfolio.
Over the next few weeks, we’ll also be putting together a free quantum computing guide for all our readers.
That’s it for this week from SPC.
Take care,
