Equities With Dividends Over 10%
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Dividend paying stocks with yields above 10% are unusual. Fortunately, there are many Closed-End Funds (CEFs) trading at a discount to net asset value (NAV) with dividends exceeding 10%.
Below is a table of 30 CEFs with dividend payouts exceeding 10%, which trade at a discount, and have expense ratios below 2.0%…
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mihail @ September 16, 2011
Global X Permanent ETF: Equal Allocation To Precious Metals, Stocks, Long-Term Treasuries, Short-Term Treasuries
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Global X announced today the launch of the Permanent ETF (PERM), a new fund that will offer one stop exposure to a number of core asset classes. The new ETF will be linked to the Solactive Permanent Index, a benchmark that includes three major asset classes: stocks, Treasuries, and precious metals. Each of those broad categories includes multiple layers; the equity component includes both domestic and international stocks, while the Treasuries allocation is split evenly between long-term and short-term securities. The precious metals allocation includes both gold and silver.
At each rebalance, the underlying index will allocate 25% to each of stocks, short-term Treasuries, long-term Treasuries, and precious metals. The rough breakdown by asset class for PERM will be as follows:
AssetWeight - Physical Gold – 20%, Physical Silver – 5%, Long-Term Treasuries – 25%, Short-Term Treasuries – 25%, Large Cap U.S. Stocks – 9%, Small Cap U.S. Stocks – 3%, International Stocks – 3%, Natural Resources Equities – 5%, Real Estate Stocks – 5%.
PERM’s portfolio will consist of both exchange-traded products and individual holdings. Gold and silver are represented in the underlying index by ETPs offered by ETF Securities, while the bond allocation consists of individual Treasuries. In total, the underlying index has about 87 individual components.
Basics Of Permanent Investing
The concept of the “permanent” asset allocation strategy was highlighted in a 1998 book titled Fail-Safe Investing that was authored by Harry Browne. The strategy is based on the idea that the economy is always in one of four states: prosperity, inflation, recession, depression. Regardless of the environment, one component of the portfolio should be expected to deliver strong results–hopefully sufficient to offset any underperformance in the remaining allocations.
The Permanent Portfolio has been in existence in a mutual fund wrapper for nearly 30 years; PRPFX debuted in late 1982. Since then, that fund has accumulated almost $17 billion in assets according to Morningstar–which perhaps makes it surprising that PERM is the first exchange-traded product to implement this technique. The permanent mutual fund has delivered annual returns of about 5.9% annually (after taxes on distributions and sale of portfolio shares) since its launch. Over the last ten years the mutual fund has gained about 9.6% annually, compared to a gain of less than 3% per annum for the S&P 500.
Mutual Fund vs. ETF
It should be noted that the 30-year old mutual fund and the new ETF from Global X are not identical; PRPFX uses gold coins and gold bullion, while PERM uses physically-backed gold and silver ETFs to achieve its precious metals exposure. Moreover, the aforementioned mutual fund includes positions about 10% in Swiss Franc assets and a higher allocation (15%) to natural resource stocks.
PERM’s expense ratio of just 0.48% is quite a bit lower than the 0.78% charged by PRPFX. In addition, the new ETF features no minimum initial purchase ($1,000 for the mutual fund) and comes with the tax efficiency and intraday liquidity of the exchange-traded structure.
Like all Global X ETFs, PERM will be available for commission free trading on the E*TRADE and Interactive Brokers platforms.
mihail @ February 9, 2012
10 Cheap Stocks With Dependable Earnings
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Cheap stocks are suddenly abundant. The S&P Composite 1500 index of large, midsize and small U.S. companies has lost 12% in three months. More than 300 of its members now have price-to-earnings ratios in single digits, suggesting a discount of more than one-quarter to historical levels.
That alone doesn’t make these stocks bargains. If earnings in coming quarters prove much lower than expected, today’s P/E ratios will have misled. The task for investors is to figure out which companies are both modestly priced relative to forecasts and likely to meet or exceed those forecasts.
One tool professional investors use to predict that is past earnings volatility. Companies with relatively smooth earnings histories — a low standard deviation of quarterly earnings, in statistical parlance — are more likely than others to deliver the same in coming quarters.
But this tool is of limited use now, because the past five years have produced chaotic results for much of the market, and traditionally stable industries now face challenges. Food makers must deal with crop inflation, soap and toothpaste firms are battling a shift in shopper preference to discount brands and even some utilities are seeing a drop in electricity usage. Some companies in these industries will report stable earnings over the next year, but perhaps not all of them.
So here are two ways to tell which firms are reliable. The first is to look for a recent dividend increase. That puts more cash in shareholder pockets, but just as important, it signals that managers are confident about future results. After all, no company wants to raise its dividend only to find the new payments unaffordable in the coming year.
The second is another statistical clue: a tight clustering of the earnings estimates issued by different analysts. Three decades of research, including recent studies by Anna Scherbina, now at U. C. Davis, show two important things about estimate dispersion. First, tightly grouped estimates are more likely than scattered ones to precede an upside earnings surprise. Second, stocks with clustered earnings estimates tend to outperform those without.
One theory on why this is so has to do with the earnings guidance that companies provide to analysts. Firms with good news to report tend to be more forthcoming with details than firms that are struggling, the thinking goes.
The 10 stocks below have modest P-E ratios and healthy dividend yields. They’ve also raised payments over the past year and have earnings estimates that show relatively close agreement among analysts.
| Company | Ticker | Industry | Dividend Yield (%) |
Forward P/E* |
EPS Consensus, Next Quarter |
High/Low EPS Estimate, Next Quarter |
| Abbott Laboratories | ABT | Drugs | 3.8 | 11 | 1.44 | 1.49 / 1.39 |
| Altria Group | MO | Tobacco | 6.4 | 13 | 0.5 | 0.52 / 0.48 |
| Analog Devices | ADI | Semiconductors | 3.1 | 12 | 0.62 | 0.66 / 0.58 |
| Campbell Soup | CPB | Food | 3.8 | 13 | 0.66 | 0.71 / 0.62 |
| Darden Restaurants | DRI | Restaurants | 3.9 | 12 | 0.55 | 0.64 / 0.52 |
| General Dynamics | GD | Aerospace & Defense | 3.4 | 8 | 2 | 2.09 / 1.88 |
| Johnson & Johnson | JNJ | Drugs | 3.7 | 12 | 1.13 | 1.21 / 1.02 |
| Mattel | MAT | Toys | 3.5 | 12 | 1.02 | 1.10 / 0.94 |
| Microsoft | MSFT | Software | 3.2 | 9 | 0.84 | 0.88 / 0.77 |
| Raytheon | RTN | Aerospace & Defense | 4.4 | 8 | 1.39 | 1.48 / 1.34 |
mihail @ January 27, 2012
Europe Downgraded: Opportunties From High Yield French Blue Chips
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By Charles Sizemore
Standard & Poor’s dropped a bomb on Europe on Monday, downgrading the European Financial Stability Facility (EFSF). Also known as the “bailout fund,” the EFSF was put in place to make emergency loans to Europe’s troubled sovereign borrowers.
The downgrade, though newsworthy, came as little surprise. After Standard & Poor’s downgraded France and Austria late last week, it was all but inevitable. If the guarantors of the bailout fund are no longer rated AAA, it’s hard to see how the fund itself could be. Germany is now the only major European country to be rated AAA by all major bond ratings agencies, and given that the burden for saving the entire Eurozone now rests on Germany’s shoulders, it’s debatable whether even mighty Deutschland deserves such a rating.
For investors, what does all of this mean?
Frankly, not all that much. The markets were mildly roiled by the downgrade of France, but the downgrade of the EFSF barely made a ripple. To investors battle-scarred by a volatile year of sovereign debt crisis, a ratings downgrade isn’t as scary as it used to be.
It seems like an eternity ago, but it was just this past August when Standard & Poor’s downgraded the United States. It set off a firestorm of volatility, but once the dust settled investors realized that very little had changed. The sun still rose in the east the next morning, and the bond markets continued to function as if nothing had happened. Contrary to investment orthodoxy, yields actually fell after the U.S. downgrade.
In the case of Europe, the reaction was muted. France had a successful bond auction on Monday, and Europe’s leaders met the announcement with a collective shrug.
This is not to say that all is well in the world. It’s more a case of resigned acceptance. As Matthew Broderick succinctly put it in The Freshman, “There’s a kind of freedom in being completely screwed because you know things can’t get any worse.”
This is more or less the market expectation for Europe today. The market has stopped reacting to bad news because more than enough bad news is already factored into prices. Ratings agencies have a well-deserved reputation for closing the barn door after the horse has already bolted. Standard & Poor’s told bond investors what they already knew—that debt-laden Europe is suffering from a crisis of confidence.
If you believe, as I do, that market confidence in Europe has reached its low point (or, at the very least, that it is close to doing so), then it makes sense to start accumulating shares of high-quality European blue-chip multinationals. I’ve been wildly bullish on the prospects for German stocks in recent months (see “Buy Germany While It’s Down“) but France has its share of attractive companies as well. Investors may want to consider picking up shares of French oil major Total S.A. (TOT) on any weakness. Total trades for just 7 times earnings and yields and impressive 5 percent in dividends.
Investors seeking yield may be particularly interested in French telecom giant France Telecom S.A. (FTE). France Telecom trades for 10 times earnings and yields over 9 percent in dividends. In addition to its dominant position in France, France Telecom also has great exposure to Africa and other fast-growing emerging markets.
If you prefer a one-stop-shop for French stocks, the iShares MSCI France ETF (EWQ) would be a good bet. In addition to Total and France Telecom, EWQ counts luxury powerhouse Moet Hennessey Louis Vuitton and pharmaceutical giant Sanofi among its largest holdings.
mihail @ January 18, 2012
42 Dividend Contenders For Above-Average Total Return
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With interest rates hovering near all-time lows, investors needing income are faced with very limited choices. The traditional high yield available from bonds and other fixed income vehicles are no longer available to meet the needs of retirees needing income to live off. Moreover, it is almost a certainty that today’s low yields are not adequate enough to fight inflation. Consequently, there is a growing investor interest in dividend-paying common stocks, especially those that have a long record of increasing their dividend every year. This has led many lay, and even many professional investors, to assume that dividend-paying common stocks are becoming overvalued. In addition to being too general to be relevant, these assumptions do not stand up to closer scrutiny.
Our research indicates this to be a fallacy, because in truth we have discovered numerous dividend-paying enterprises that are trading at historically low valuations. But even more importantly, in addition to being historically low, we have identified numerous blue-chip companies that are trading below their intrinsic values based on fundamentals, primarily earnings and cash flows. Today’s growing interest has yet to compensate for the enormous aversion to equities that most investors have after being traumatized by the great recession of 2008 and the precipitous drop in stock prices that accompanied it.
On the other hand, not all dividend-paying common stocks are the same. Therefore, we believe that potential investors need to be very discerning regarding the type and quality of the dividend paying stocks they are willing to invest in. This is especially true for those investors seeking to either augment or replace their fixed income investments with common stocks. Since the major attractions and benefits of fixed income in addition to yield, are safety and low risk, it only makes logical sense that a dividend-paying strategy being considered to replace or supplant it should focus heavily on the same issues.
Dividend paying common stocks come in many different flavors and range from very aggressive to very conservative. When considering alternatives to fixed income because of today’s low yields, we would argue that the emphasis should be on the most conservative dividend paying common stocks possible. In this vein, the reliability and predictability of a given dividend payment should rank high in importance. With that said, a logical place to begin looking is at companies that have long histories of paying dividends, and even better, a long history of increasing them each year. Although there is no guarantee that this will continue, a long track record certainly instills confidence.
One of the best sources available for identifying companies with long histories of dividend excellence is with David Fish’s CCC lists of Dividend Champions, Contenders and Challengers. The Champions list is comprised of companies that have increased their dividend every year for at least 25 consecutive years, the Contenders list is comprised of companies that have raised their dividends for 10 to 24 years, and finally, the Challengers list is comprised of companies that have increased their dividends every year for between five to nine consecutive years.
It’s important to point out here that in theory at least, the Champions list is a more conservative group than the Contenders list which in turn is more conservative than the Challengers list. As a general statement, we believe this is true, but like most statements that are too general, the devil is in the details. Consequently, even though the Champions list is in theory the most conservative, we believe that there are names on the Contenders list that are even better quality, and therefore, more conservative than some of the names on the Champions list, and vice versa. Our last article dealt with the Dividend Champions that we believe are on sale. This is important because low prices and valuations are great attributes that mitigate risk in their own right. This article will look at 42 Dividend Contenders that we believe are reasonably priced, too in some cases, significantly undervalued.
42 Dividend Contenders on Sale
This list of Dividend Contenders, like the list of Dividend Champions before, is offered as a prescreened resource made available prior to engaging in a more comprehensive analysis. However, there is a difference between these lists and the traditional lists that are sorted by mere numbers or statistics. Currently, there are only 102 Dividend Champions and only 146 Dividend Contenders. Therefore, we were able to quickly and easily evaluate each company on the lists by running a F.A.S.T. Graphs™ on each company that provides essential fundamentals at a glance. Therefore, we feel that this screen is more comprehensive than one based simply on statistical analysis.
Instead of bothering you with a long iteration using words and numbers to articulate what we screened for, we let a few pictures tell a few thousand words instead. The premium version of F.A.S.T. Graphs™ has David Fish’s lists pre-loaded, with his permission of course. Therefore, it was a simple matter of scrolling through each company to determine whether or not it met our criteria of fair value, and whether or not it possessed the quality characteristics of predictability, reliability and consistency that we could be comfortable with. With our first run through, we took price out of the equation so as to only reveal the essential fundamentals of earnings and dividends on each company at a glance. Then we ran through the exercise again, only this time we added monthly closing stock prices to the graphs.
Remembering that we are coveting consistency and predictability with compiling our list of Dividend Contenders on sale, let’s review two graphs showing earnings (orange line with white triangles) and dividends (blue shaded area paid out of but stacked on top of earnings) exclusive of stock price.
Two Contenders Rejected because of a Lack of Consistency
Alterra Capital Holdings Ltd. (ALTE)
Our first example, Alterra Capital Holdings Ltd. (ALTE) is a Bermuda-based holding company created by the merger between Max Capital Group and Harbour Point Limited in May of 2010. Max was a holding company formed in 1999 that went public in May of 2001 and paid a dividend that increased every year since (see DIV listed at the bottom of the graph). Although this 11-year record of increasing dividends qualifies it as a Dividend Contender, it was excluded due to the enormous cyclicality and unpredictability of its earnings (see red box at bottom). Simply stated, we didn’t feel it was conservative enough to be considered as a potential fixed income replacement.
RenaissanceRe Holdings Ltd. (RNR)
Our second example, RenaissanceRe Holdings Ltd. (RNR) is a property catastrophic reinsurance company that has increased its dividend every year for 19 consecutive years (see DIV at bottom of the graph). Once again, the severe cyclicality and unpredictability of their earnings growth caused them to be excluded from our conservative list, even though their record of dividend increases has been long. This decision was made instantly by simply reviewing their earnings record (orange line).
In addition to highly cyclical names like the two examples above, we also excluded MLPs and REITs, as we consider these typically high-yield vehicles too risky to be considered as fixed income substitutes. However, there are many who would disagree with that position on these asset classes.
Two Quintessential Examples of What We Were Looking For
Stryker Corp. (SYK)
Stryker Corp. (SYK) has raised their dividend for 19 consecutive years in conjunction with an impeccable record of consistently increasing their earnings at the above-average rate of 18.4%. With very little debt on the balance sheet, this company represents the quintessential example of the type of predictable high-quality business we were seeking.
International Business Machines Corp. (IBM)
Affectionately known as Big Blue, IBM is arguably one of the bluest of all blue-chip technology stocks. The record of consistently increasing earnings at the above-average rate of 11% per annum since 1998 coincides with increasing their dividend for 16 consecutive years. Once again, IBM represents the classic earnings pattern and fundamental qualities that we were seeking.
Bringing It All Together
Some Contenders Are Fairly Valued
With our United Technologies Corp. (UTX) example below we put it all together by adding monthly closing stock prices (black line) to the earnings and dividend graphs. In order to make our list of Dividend Contenders on sale, the company’s stock price had to sit at or below its intrinsic value (the orange line) as United Technologies Corp.’s price clearly does.
In addition to just pure dividend income, this article is further focused on total return. Since, under normal circumstances, there is more risk owning equities than owning fixed income, it is important that our candidates offered the opportunity for an attractive total return to compensate for the risk. One of the most overlooked elements of risk is valuation (overvaluation). Even though United Technologies (UTX) is currently moderately undervalued based on our calculation of intrinsic value (the orange line), it nevertheless generated a very attractive long-term total return for shareholders because valuation was sound at the beginning of 1998, and therefore, valuation risk was reasonable.
Some Contenders Are Extremely Undervalued
Teva Pharmaceutical Industries (TEVA)
Teva Pharmaceutical Industries (TEVA), a leading global generic and branded pharmaceutical company headquartered in Israel represents a compelling valuation at today’s levels, in our opinion. Teva has grown earnings very consistently at a compounded rate exceeding 23% per annum, which we believe warrants a much higher PE ratio than the meager P/E of 9 that the market is valuing its shares at today.
With the consensus five-year earnings estimates ranging from the low of 9.6% from 20 analysts reporting to Capital IQ to as high as 17.5% by 17 analysts reporting to Zacks, we believe the minimum P/E of 15 to as much as a P/E of 20 is warranted for this high-quality pharmaceutical with only 16% debt on its balance sheet. Consequently, we see a high probability for outsized future returns based on low valuation and long-term growth potential.
Harris Corp. (HRS)
Harris Corp. (HRS) is a leading international communications and information technology company. Note that although earnings were a little inconsistent from 1998 into 2003, since that time they have consistently advanced. Harris Corp. can currently be bought at what we believe to be a ludicrous price earnings ratio of only 7.4. We believe a more appropriate price earnings ratio for this dividend contender that has raised its dividend every year for 10 consecutive years, and now offers a starting yield of 3%, should be awarded at least a 15 PE. This implies an intrinsic value that is more than double from where the company’s price currently rests. This is why Harris Corp. (HRS) sits at number two on the list for the highest five-year estimated total return.
Close Calls – Quality Rejected Because of Modest Overvaluation
There were several names that were rejected due to modest overvaluation. A few examples include T.J. Maxx (TJX), Ross Stores (ROST), Federal Express (FDX), Nike (NKE), T. Rowe Price (TROW), Casey’s Gen. Stores (CASY) and others. The following earnings and price correlated graph on Church & Dwight Inc. (CHD) represents overvaluation because stock price is higher than the orange earnings justified valuation line. We believe that each of these names listed in this paragraph are strong potential candidates if their stock prices came back into sound valuation levels. For example, we would consider Church & Dwight (CHD) a buy in the mid-$30 price range.
Obvious Overvaluation Rejected
The following two examples, Royal Gold Inc. (RGLD) and Fastenal (FAST) represent extreme and obvious overvaluation (orange line represents fair value). Although both of these names appear to be excellent businesses, the valuation risk of investing in these dividend contenders is heightened by an earnings yield that makes no economic sense; therefore, they were easily and summarily deleted from the master list because of extreme overvaluation.
42 Contenders That Made the Cut
After rejecting Dividend Contenders that revealed themselves as either being too risky, too inconsistent or too expensive, we ended up with the following 42 companies that have increased their dividend every year for a minimum of 10 to 24 consecutive years. Consequently, we offer them as a fertile source of potential candidates for both investors seeking an above-average and growing dividend yield, as well as investors looking for above-average total return at reasonable levels of risk.
In other words, we believe this list offers opportunities for further exploration for all dividend income oriented investors. Dividend yields range from as low as .8% to as high as 5.2%, with almost everything in between. Also, keep in mind that each of these selections has been screened for fair value or preferably undervaluation, and each has increased their dividend every year for at least 10 consecutive years.
A few words on the column headings are offered for clarification purposes. First, we compare each company’s current PE ratio to its historical normal 15-year P/E ratio. However, note that the five-year estimated total return is not based on each respective company returning to its normal PE ratio. Instead, the five-year estimated annual total return is a calculation based on the consensus estimated EPS growth (five-year) and then applying an appropriate P/E ratio to that growth. Historical EPS growth plus expected EPS growth are also side-by-side in order to provide a perspective of whether EPS growth will be higher or lower in the future than it was in the past. Market cap, the company’s level of debt and the sector it operates in round off the table, with our candidates listed in order of highest estimated total return to lowest.
Conclusions
There are several reasons why we are offering these articles on dividend-paying growth and income stocks, first and foremost is to illustrate that there are numerous extremely high-quality dividend paying stocks that are available for purchase today at very attractive levels. The opportunity to invest in extremely high-quality stocks at historically low valuations that offer both a growing dividend and capital appreciation is rare. Unfortunately, many investors remain traumatized and are currently eschewing quality dividend-paying common stocks in favor of fixed income, at precisely the time when they should be looking at quality equities with a strong dividend record. Don’t forget, each of the companies on this list raised their dividend right through the great recession.
Even though we have always embraced fixed income as a viable asset class that can, during normal economic times, appropriately be capable of meeting certain goals and objectives of many investors inclined towards safety and the highest yield possible, we are currently, and we believe temporarily, altering our stance. We believe that today’s artificially induced and extremely low interest rate levels represent uncommon dangers with owning fixed income instruments. Therefore, we believe that carefully chosen extremely high-quality dividend paying common stocks represent a viable alternative for safety conscious investors under today’s economic conditions. Yes, there may be more risk, but a potentially higher total rate of return and increasing dividend income stream compensate for this greater risk, in our opinion.
Finally, this article in particular is offered to illustrate that there are vast differences in the types and quality of various classes of dividend paying common stocks. We feel that there’s been way too much generalization with too little focus on the specifics that encompass the many differences and attributes that various kinds of dividend paying stocks possess. There are quality dividend paying stocks, there are risky dividend paying stocks and there are very expensive dividend paying stocks and in some cases there are very inexpensive dividend paying stocks, etc. To us, to investing is about making these distinctions one at a time, while avoiding the natural but erroneous temptation to over-generalize. In this vein, this article only scratches the surface of what could be discussed and evaluated regarding the desirability of investing in dividend paying stocks.
Disclosure: Long SYK, TEVA, UTX, AVP, CVX, MDP and UTX at the time of writing.
mihail @ January 12, 2012
2012 Dogs of the Dow
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“Dogs of the Dow” or “High Yield 10″ is a popular investment strategy that recommends buying the Dow stocks with the 10 highest dividend yields at the beginning of the year.
The basic strategy suggests putting an equal amount of money into each of the 10 stocks; although there have been variations that include proportionate investments in the Dogs weighted by share price.
Other permutations suggest dropping the lowest price / highest yielding Dog out of concern that the there may be a reason why the yield is so high.
In 2011, the Dogs of the Dow strategy worked. The 10 companies that made it to the list at the beginning of 2010 are up about 17 percent, adjusting for dividends, compared with a 1.7 percent loss for the non-dog stocks and a 5 percent increase for all 30 Dow components.
Ahead of 2012, here is a look at the highest yielding stocks in the Dow.
Procter & Gamble and General Electric, a minority stakeholder of NBC Universal / CNBC, are the new additions to the 2012′s dogs, replacing McDonald’s and Chevron.
mihail @ December 31, 2011
The Key Number For 2012: Oil Price
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There’s always a key number on which the market is based. Sometimes it’s an interest rate, as in Europe today. Sometimes it’s another number, like America’s unemployment rate. In the past it’s been housing starts; it’s been inflation; it’s been GDP. For 2012, the key number is the oil price.
It’s the oil price because decoupling growth from oil prices is the key to real prosperity. Throughout the last several years, growth and oil have grown closer together. It’s at the point where now a jump in the Dow Jones industrial average is nearly always matched by a rise in the price of West Texas Intermediate, and vice versa.
Most of what has been happening in the U.S. economy, below the surface, is aimed at this decoupling.
Before you jump on me for another rant against big oil, let me state first that what U.S. oil and gas companies are doing is part of the equation, at least in the near term. Fracking has already decoupled natural gas prices from growth. For the last two years, we’ve had real growth in the economy but falling natural gas prices. Oil can be the same.
Drillers have now had several years to accommodate themselves to spot prices of near $100/barrel. This has given them time to invest enough capital to produce large supplies, profitably, at that price. And once a well goes into production, the nominal cost of producing an additional barrel is usually quite low.
But the more important work is taking place on the demand side. The technologies of efficiency are growing, and have a ready market. Every barrel saved in industrial production, every KwH a commercial building owner can save, every gallon of gas a consumer doesn’t use while remaining productive at work, that’s money in the pocket. It’s an investment that pays for itself, whether you’re replacing bulbs with LEDs in your Christmas lights, buying a higher-mileage car, or insulating a building.
Renewable energy is what will maintain the gains. Yes, it’s small now, in the general mix. But it’s increasing, thanks in part to today’s prices, and in part to advancing technology. Even if solar installation doesn’t grow in 2012 from 2011, the supply of solar energy in the market will grow dramatically, because the base is low. The same is true for wind energy, for chemicals and other feed stocks produced from biomass, and for geothermal energy.
Over time it’s this harvest of the abundance all around us that will not only keep oil prices reasonable, but cause them to roll over in time. For 2012 let’s focus on WTI, the spot price for oil in our own country, less in relation to European “Brent” prices than in absolute terms. Keeping that price down as economic growth accelerates, as employment grows, is the key to nearly all other market prices for 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
mihail @ December 22, 2011
Three bullish funds for bearish times
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By Robert Powell
It’s one thing to be a pessimist. But it’s a whole ‘nother thing to make money in this market despite that outlook. Yet that’s exactly what three managers are doing these days, at least with some of their funds.
Jeremy Grantham, the chief investment strategist at GMO; Rob Arnott, the founder and chairman of Research Associates and manager of PIMCO’s All Asset All Authority; and the team at Sequoia are not the life of the party these days.
In fact, after reading their respective commentaries, you’re more likely to call your physician for a prescription for an antidepressant than to call your stockbroker with an order to buy something in this market.
Consider, for instance, just some of the pearls of despair in Grantham’s latest missive.
The euro zone, for instance, is a “terrifying situation” for which the only appropriate response is “surely to be more cautious that usual.” And, “the U.S., and to some extent the world, will not easily recover from the current level of debt overhang, the loss of perceived asset values, and the gross financial incompetence on a scale hitherto undreamed of.”
And then there’s this one: “…the U.S. in particular has rapidly acquired relative deficiencies over the last 20 years that will hamper the effective functioning and growth of its economy.” And this: “I despair that this country and its government have failed to take at all seriously the most important and the most dangerous issues: depleting resources, development of a comprehensive energy policy, and, yes, global warming.”
It goes on.
Despite that outlook, at least one of the funds in GMO’s family is doing quite well, thank you very much. The GMO Quality IV GQEFX +0.42% is up more than 10% year-to-date, while the Standard & Poor’s 500 SPX +0.32% stock index is down close to 1%.
How could that be possible, given Grantham’s outlook?
According to one analyst, it’s a matter of investing in the right stocks, mainly high-quality mega-cap companies with a history of paying and increasing dividends, at the right time. “Investors are flocking to these sort of companies because of the market volatility,” said Todd Rosenbluth, a mutual fund analyst at S&P Capital IQ Mutual Fund Reports.
And Grantham said this of GMO Quality’s performance: “We would normally count on winning in this strategy in a big down year, but in a nearly flat year this difference is a testimonial to how risk-averse investors have been at the U.S. stock level.”
What’s even better to note is that Grantham still considers U.S. high quality stocks to be relatively cheap.
Others, meanwhile, have a slightly different take on why Grantham, Arnott and the team at Sequoia are doing so well. It’s the best-offense-is-a-good-defense theory of investing. “By being defensive, you can stand out in this market,” said Kevin McDevitt, a CFA charterholder and a Morningstar analyst.
In Grantham’s case, that means investing, as Rosenbluth said, in mega-cap companies. For instance, the average market capitalization of a holding in the GMO Quality fund is $115 billion, which twice the average for large-cap blend funds, said McDevitt.
As for Bob Goldfarb and David Poppe, the managers of the Sequoia Fund SEQUX +0.58% , it might be hard to say just how bearish they might be. They’re bottom-up, not top-down managers according to McDevitt. But judging by the percent Sequoia has invested cash, the two managers are legitimate bears as well. Goldfarb and Poppe, who won Morningstar’s domestic-stock fund manager of the year in 2010, have 27% of the fund’s assets invested in cash and 73% invested in stocks.
Despite that composition, the fund is up nearly 11% year to date, a testament to the fund manager’s stock-picking ability.
McDevitt noted that Goldfarb and Poppe, in the style of Warren Buffett, have a knack for investing in companies that have a quality business and competitive advantage.
The top 10 holdings in the GMO Quality fund include Microsoft Corp. MSFT -0.04%, Johnson & Johnson JNJ +1.30% , Cisco Systems Inc. CSCO +0.17%, Philip Morris International Inc. PM +0.98%, The Coca-Cola Company KO +0.06% , Oracle Corp. ORCL +0.38%, Pfizer Inc. PFE +1.34%, Apple Inc. AAPL +0.20%, Wal-Mart Stores Inc. WMT +0.52% and Google Inc. GOOG +0.05% (GOOG).
Read more about Grantham in this related story, GMO’s Grantham: Risk doesn’t pay.
Also of note, Rosenbluth said, there are three other funds that have a similar investment style to the GMO Quality and that carry S&P’s highest rating, five stars. Those being the Dreyfus Appreciation Fund DGAGX +0.43%, Meridian Growth Fund MERDX -7.19% and the Yacktman Fund YACKX +0.47%.
The top 10 holdings include Valeant Pharmaceuticals International Inc. VRX -0.54% , Berkshire Hathaway Inc. A BRK.A -0.67% , TJX Companies TJX +0.19% , Fastenal Co. FAST +0.59% , IDEXX Laboratories Inc. IDXX -0.23% , Precision Castparts Corp. PCP -0.04% , Advance Auto Parts Inc. AAP +0.20% , Rolls-Royce Holdings PLC RYCEY +1.08% UK:RR +0.78% , Mohawk Industries Inc. MHK -0.35% , and O’Reilly Automotive Inc. ORLY +0.47% .
McDevitt said the Sequoia fund isn’t for investors looking to take advantage of bullish returns from what might seem to be bearish managers. Rather, it’s a fund for those who share Goldfarb and Poppe’s philosophy of investing for the long-term.
The fund own just 35 stocks and has a turnover ratio one-half its category, 23% to 50%. “This is not a fund to buy with the next two, six or 12 months in mind,” said McDevitt. By the way, McDevitt also said the fund’s allocation to cash is less a statement about the manager’s outlook for the market and more a statement about the absence of good values in the market.
Unlike Grantham, Goldfarb and Poppe, Arnott isn’t posting double-digit returns as manager of the PIMCO All Asset All Authority PAUDX 0.00% and the PIMCO All Asset PASDX 0.00% , both of which are funds of funds. But he is a bear and both those funds are in positive territory and outperforming the peer group. The former fund is up 1.4% year to date, while the latter is up nearly 1%. On average, funds in the category are down more than 2%.
Arnott didn’t deliver positive returns by investing only in high quality stocks or by investing heavily in a few dozen stocks. Instead, he’s got a broad mandate. He’s got the ability to invest all over the world in all kinds of stocks and bonds and in the case of the All Authority fund, the ability to go short as well as long.
In Arnott’s case, McDevitt said, his defensive posture has helped and his tactical moves have helped as well. For instance, the fund had just 6.8% of its assets invested in stocks in June. By September, Arnott increased the percent invested in stocks to 13%, taking advantage of the rise in the market at the time. “This could be a core fund for bearish investors who are risk averse,” said McDevitt.
mihail @ December 16, 2011
As Europe Wobbles, FX Options Signal Distress
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Europe’s never-ending debt saga has investors girding for volatile, unsteady currency markets for years to come.
This debt crisis has also boosted bullish bets on the world’s safe havens—the U.S. dollar and yen — well into the next 24 months in the options market, reflecting fears that problems in the euro zone could linger for years.
“There’s enough uncertainty surrounding Europe and the global economic picture that higher volatility will likely become a feature of this market for some time. And it’s more or less across the board,” said Aroop Chatterjee, senior currency strategist at Barclays Capital in New York.
This is the second time in four years that the options market has signaled such a high level of anxiety. Right after U.S. investment bank Lehman Brothers collapsed in September 2008, currency option prices options spiked as investors paid a high premium for protection against the market’s big moves.
Now the same scenario is playing out. And it’s anyone’s guess as to when it ends.
Implied volatility on one-month euro/dollar options surged to 18.35 percent on Monday—the highest in at least 2 1/2 years. That 18 percent figure is equivalent to expectations for a roughly 5.2 percent move in the euro over the next 30 days, options strategists said.
Implied volatility, or “vol,” is a measure of the options market’s expectations of price movements.
Tuesday’s speculation about plans to boost the euro-zone bailout fund did little to ease fears that the fiscal crisis could drag on, especially after Germany and Spain poured cold water on the idea.
Euro vols did retreat on Tuesday, but have generally traded above the 50-day moving average since early September.
One- to two-year euro/dollar vols were also elevated at nearly 17 percent, generally an indication of stress.
Heightened volatility in the one- to two-year time frame is unusual, analysts said. Normally, investors tend to sell long-term volatility even as short-term volatility spikes.
The fact that volatility is heightened down the road suggests worry that markets will remain unsettled.
“You have basically entered a period where front-end vols have really gone up and the long end has sort of tracked the front end, which is a function of risk aversion,” said Aditya Bagaria, FX options strategist at Credit Suisse in London.
Emerging Markets Also See Worry
In a clear sign that European contagion is spooking investors, option hedges against some of the best-performing emerging market currencies have soared as well.
The rise in volatility there underscores the vulnerability of these assets in times of stress despite their strong economic fundamentals. Already, these markets are experiencing capital outflows, similar to 2008.
Vols on one-month U.S. dollar/Mexican peso pair exploded to 28.4 percent on Friday, a roughly 2 1/2 year high from as low as 8 percent in July.
Traders said one-week Mexican vols had traded as high as 45 percent.
The peso’s one-month vols, though, slipped to 24.8 percent on Tuesday, but the increase in volatility is consistent with the peso’s 8 percent drop against the dollar this year.
Vols in the Brazilian real, the Turkish lira and the South African rand have also surged, just as they did three years ago.
“Investors have realized that, if more than half of the world is to have (stalling) growth, emerging markets will not likely have an easy time,” said Stephen Jen, managing partner at hedge fund SLJ Macro Partners in London.
“I think (emerging market weakness) will continue, even if large interventions slow down the pace of the prospective dollar rally. Too many long-term real money investors are still in these long-EM trades for the dollar rally to be over.”
Risk Reversal Skews
Further signs of stress are evident in risk reversals, a key indicator of risk sentiment in the options market. Risk reversals in major currencies are all showing a strong bias to hold U.S. dollars — still considered a bet on safety.
One-month Australian dollar/U.S. dollar risk reversals, for instance, showed a “put” bias of -7.60 vols on Monday, the most extreme skew since at least 2007, but slipped on Tuesday. In general, put options suggest more investors are betting on a decline in the Aussie than a rise. The higher the number, the more bearish investors are on the currency.
Risk reversal skews favoring the greenback are further supported by positioning among hedge funds, such as Quaesta Capital in Zurich, Switzerland, which has increased long U.S. dollar positions in the last week in its $3 billion currency fund of funds.
Extreme long positioning in the Australian dollar also contributed to the negative bias. Real money accounts, Japanese retail investors and speculators are still clinging to Aussie net longs, though short-term investors are paring positions.
Copyright 2011 Thomson Reuters.
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mihail @ September 28, 2011
EUR/USD Outlook – September 26-30
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Euro/dollar slid to a 7 month low. Greece continues to float between the next tranche of aid to the trenches. Will the fate of this debt hit country be known this week? Apart from Greece, the calendar is very busy and we will get hints on a possible rate cut by the ECB. Here is an outlook for the upcoming events, and an updated technical analysis for EUR/USD.
The big blow to the euro and to most currencies came from Ben Bernanke. The Fed announced “Operation Twist” but provided downbeat language on the economy and no further easing steps such as QE3. The impact of Bernanke on financial markets will likely accompany us for many months to come.
German Ifo Business Climate: Monday, 8:00. This survey from Europe’s No. 1 think tank always rocks the euro. It usually exceeds expectations and rises, but last month was different, with a drop to 108.7 points. This hurt the euro. Another slide to 107 points is expected now.
GfK German Consumer Climate: Tuesday, 6:00. This survey of 2000 consumers has been very stable in recent months, showing that German consumers are still doing well. A tick down from last month’s 5.2 points is expected now.
M3 Money Supply: Tuesday, 8:00. More money in circulation means more activity and more potential inflation. This is one of the factors that the ECB takes into consideration. The pace of expansion has slowed down to 2% last month. A similar number is likely now.
German CPI: Wednesday. This is the preliminary release, and is published separated for each German state. After remaining unchanged last month, this leading inflation indicator will likely show small drop in prices now, helping the ECB to lower the rates.
German Unemployment Change: Thursday, 7:55. This indicator is the best expression of the German strength. While it fell below expectations in recent months, this figure has still shown a steady drop in unemployment. A marginally bigger drop than last month’s -8K number is estimated now.
German Retail Sales: Friday, 6:00. After a big jump two months ago, no correction was seen, and retail sales continued rising, by 0.3%. Germany will likely see a small dip in volume now: 0.4%.
French Consumer Spending: Friday, 6:45. Europe’s second largest economy will publish consumer spending numbers for two months. After a few straight months of drops in spending, French consumers upped their spending two months ago by 1.2%. The figures that will be published now might offset each other, but the general direction will likely be more squeeze.
CPI Flash Estimate: Friday, 9:00. Inflation in the euro area has stabilized at a pace of 2.5%, lower than in previous months. Inflation is already less of a worry to the ECB, which changed its recent forecasts to balanced inflation and downside risks to growth. Lower inflation is expected now, but it will probably remain above the 2% target.
Unemployment Rate: Friday,9:00. The unemployment rate in the euro-zone has edged up to 10% after many months at 9.9%. The same depressing figure is expected now. Note that there is a big gap between countries like Spain, with more than 20% unemployment, and countries in the north with single digit figures.
* All times are GMT.
EUR/USD Technical Analysis
€/$ began the week with a big Sunday gap. When it finally closed the gap at around 1.3788 (discussed last week), the big plunge began. The pair fell as low as 1.3385 before consolidating.
Technical lines from top to bottom:
We start from a lower line this week. 1.3950 was a pivotal line when the pair traded in lower ranges. The pair got quite close to it a few weeks, and it remains strong resistance in the horizon. The swing low of 1.3838 held the pair and after EUR/USD fell to a six month low was a distinct line separating ranges during September.
1.3750 managed to cap the pair on a recovery attempt and is minor resistance. The round number of 1.37 is another minor resistance line at the moment. It served as resistance early in the year.
The low of 1.3630 seen in earlier is already more important resistance. 1.3550 provided support early in September and then switched to resistance after the fall.
The round number of 1.35 was a trough early in September remains a pivotal line. Very serious support is at 1.3430. This is a modification of the 1.3440 line, after the break. It separated ranges in a very clear way many times in the past, making it of very high importance.
The bottom at 1.3385 made just now is also of importance, as a break below this line will be a fresh 8 month low. Minor support is at 1.3322, which was a resistance line in the past.
More important resistance is at 1.3250 which held the pair early in the year. It’s followed by 1.3180 which worked as significant support in December 2010 and is now weak.
A key line before the round number of 1.30 is support at 1.3080. Towards the end of 2010, it prevented deeper falls.
The ultimate trough of 2011 at 1.2873.
I am bearish on EUR/USD.
mihail @ September 24, 2011
Forex Weekly Outlook – September 26-30
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This was a week to forget for stock markets, but certainly a week to remember for dollar bulls, as the dollar returned to strength last seen 7 months ago. German Ifo Business Climate, US housing data and Unemployment are the major events this week. Here is an outlook on the upcoming market-movers.
Last week Bernanke announced $400 Billion Twist to bail out the US economy from its bad condition by buying $400 billion long term securities of six to 30 years and sell them in three years. The Fed believes this would encourage mortgage refinancing drawing investors to the real estate market. Will this move help the struggling economy? It currently sent stocks, commodities and most currencies plunging against the dollar.
Let’s Start
Euro-Zone German Ifo Business Climate: Monday, 8:00. Things took a turn for the worse amid a slowdown in the US economy and the financial crisis in the Euro-zone, German business confidence plunged to 108.7 in August, the worst drop since 2008, following 112.9 in the previous month. This reading was well below analysts estimations of 111.2 indicating a serious slowdown in recovery. A further decrease to 107.3 is expected.
US New Home Sales: Monday, 14:00. Sales of newU.S. homes dropped more than expected in July reaching 298,000 following 300,000 in June. Chip existing homes nearly diminish the feasibility of building new homes. The figure is expected to drop to 297,000.
US CB Consumer Confidence: Tuesday, 14:30. Consumers’ confidence in August slid 15 points to the lowest level since April 2009 reaching 44.5 after 59.2 in July. This drastic fall reflects Americans concerns over the weak job market conditions and rising prices of food and clothing decreasing consumer spending. A small increase to 46.8 is predicted.
US Core Durable Goods Orders: Wednesday, 12:30. Orders for long-lastingU.S. products excluding transportation, increased by 0.7% in July while Durable goods orders increased by 4.0%. This rise came after 0.6% increase in Core orders and 1.3% decrease in Durable goods orders. A smaller increase of 0.3% is forecasted.
US Unemployment Claims: Thursday, 12:30. The number of Americans filing initial claims for unemployment dropped less than predicted to 423,000 while a decline to 419,000 was estimated. This is the fifth week of increases indicating a mounting number of dismissals in a slowing economy.
US Pending Home Sales: Thursday, 14:00. Sales of existingU.S. homes dropped in July by 1.3% from a 2.4% gain in June while 0.8% fall was expected. This signifies the slowdown in the housing sector. Nevertheless economists are optimistic claiming the market will offer favorable conditions for potential buyers. A decrease of -1.9% is forecasted.
Canadian GDP: Friday, 12:30. The Canadian economy contracted 0.4% in the second quarter after Japan’s earthquake and tsunami but on a monthly base GDP increased by 0.2% in June following a 0.3% drop in May. An increase of 0.3% is expected now.
*All times are GMT.
mihail @ September 24, 2011
