Last fall, it was all about the “FANG” stocks. Now, yield leaders (and gold) are having their day in the sun.
Market Roundup
Just look at a stock like Verizon Communications (VZ). The megacap landline and mobile telecommunications company sports an indicated dividend yield of 4.3%, and it’s vastly outperforming the market, up more than 12% so far this year. Competitor AT&T (T) yields 5.1%, and it’s showing year-to-date gains of more than 9%.
How about the Utilities Select Sector SPDR Fund (XLU)? The $7.8 billion ETF is packed with the largest power and water companies in the U.S. It yields around 3.9%, and it’s up roughly 7%.
Meanwhile, you have ETFs like the Market Vectors Gold Miners ETF (GDX) that are ripping higher. The $6.1 billion ETF owns 37 leading mining stocks, and it’s already up a whopping 39% in 2016!
Of course, we’re also seeing many of the beaten down, junky ne’er do wells in sectors like materials and energy rising from the dead. But many of them are highly speculative names, and not what I’d refer to as market leaders.
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| With interest rates so low, where can you get yield? |
You typically wouldn’t expect a sector that’s supposedly sensitive to inflation (gold) to rise in value at the same time sectors that are supposedly sensitive to interest rates (telecom, utilities, consumer staples, etc.) do. So what gives? Is there a sound theory behind this action, and how can you profit from it?
I’m glad you asked, because I have one. It all goes back to out-of-control central bank policy. These men and women have been slashing interest rates to the bone, printing up trillions of dollars in QE funny money, and otherwise trying to promote borrowing and risk-taking by savers.
For the first several years, when the global economy was relatively sound, that prompted investors to dog-pile into the lowest-quality, highest-yielding garbage they could find. Junk bonds. Emerging market debt. Risky real estate. Stocks paying double-digit dividend yields (but without the sound earnings and balance-sheet strength to back those yields up).
When the credit cycle started turning last year, that game was up. Those crappy, higher-yielding investments started tanking. But rather than admit failure and try something new or more effective, central banks doubled down. They cut interest rates into NEGATIVE territory, and launched even more QE.
| “But 0% is better than negative-0.2% … or negative-0.5% …” |
So what are investors doing now? They’re searching for investments that can provide safer, more reliable, but still relatively generous yields. The sectors I highlighted earlier provide all of that.
How does gold fit in? Well, one of the historical knocks on gold is that it doesn’t yield anything. It just sits there looking shiny on a shelf or in a safe or around your spouse’s neck or wrist.
But 0% is better than negative-0.2% … or negative-0.5% … or anything lower, right? Especially when a side effect of negative yields is currency depreciation, something that erodes the wealth of average citizens? Plus, gold is great “chaos insurance” when central bank activity is actually helping create more market volatility rather than suppressing it – as we’ve seen in the last few months.
Add it all up and you can see why investors are flocking to sectors that offer both relatively attractive yields in a low- or negative-rate environment, but also safety and stability. They also happen to be the only kinds of stocks and sectors I’ve been hanging on to and/or overweighting in my Safe Money Report since the credit cycle started turning last year.
Not ready to take that step? Then just be sure you take both safety and yield in comparison here, rather than just chase the latter. This is a different part of the economic and credit cycle, and you need to make sure any investment you buy for income can actually maintain or increase that yield over time.
What do you think about the shifting market sands? Are you invested in sectors like utilities, telecom, or consumer staples? If so (or if not), why? What about gold? Do you think this is a good time to own the yellow metal? Share any comments you have on this topic when you get a minute.
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While we wait for the official jobs figures from the Labor Department tomorrow, it’s a good time to review some of the comments you had about the health of the banking system.
Reader F151 said: “I think that your concerns about pending bank failures are well founded. If you think you are covered by FDIC, think again. There is enough insurance money in the FDIC to cover ONE major bank collapse (with borrowing). ONE. After that, you will probably be on your own.
“They can borrow $500 Billion (from us taxpayers, of course) if needed. But when WaMu went down a few years back, the potential losses were in excess of $300 billion. The great hope of the FDIC is that other banks can and will take over the failed banks. That has happened in the past. But if the crash is big enough, no other bank is going to want to part with the reserves needed to buy those banks when everything is on fire.”
Reader Chuck B. mentioned concentration risk as a potential problem in the event of another banking crisis: “One reason fewer banks failed in the last few years is that there are less of them. The Feds force failing banks to sell out to larger, more solvent banks. That is how big banks get bigger and small banks get fewer.”
Reader Tim also pointed to the difference between various institutions, and how you have to know who you’re banking with or investing in. His take: “One problem is confusing investment banking firms like Goldman Sachs (GS), etc. with ‘real’ banks. They were only anointed as banks as a result of the 2008 financial crisis so the Feds could regulate them more closely.
“Then you have money center banks, which lend to governments (so you have ‘country’ risks) and to large corporations (typically through syndications with other money center banks) and to ‘regular’ banks. You also have regional banks and community banks. They all have some similarities, but many differences and many different risk profiles.”
Thanks for weighing in. Like I said in the column, we’re not facing the imminent collapse of multiple large institutions. But we are seeing a lot of fraying around the edges, And the stage is being set for failures a few quarters down the road. Since investors anticipate these kinds of things and since that impacts bank stocks well in advance of actual failures, we should all keep a close eye on this worsening trend.
That’s my take, anyway. If you want to add yours, the comment section below is a great outlet for you.
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The former CEO of troubled natural gas producer Chesapeake Energy (CHK) died Wednesday after crashing his car into a bridge at high speed outside Oklahoma City. Aubrey McClendon had lost untold amounts of money in the oil and gas bust, and had recently been indicted on federal charges that he rigged auctions for energy exploration leases.
Was the G-20’s pledge to avoid competitive currency devaluations just talk? Or more of a concrete commitment? The U.S. reportedly believes it’s something more, but next week’s European Central Bank meeting will likely test that thesis.
The euro has been sinking steadily against the dollar for the past week and a half on the expectation that Mario Draghi will launch even more currency-crushing QE. That won’t please U.S. policymakers, who don’t want to see the dollar soar in value again.
Speaking of the ECB, policymakers are trying to figure out a way to lower interest rates deeper into negative territory without further crushing bank profitability and igniting another bank stock run, according to Bloomberg. They may enact a tiered system that only subjects a portion of bank reserves to the more-negative rates, but that would blunt any economic impact. If they raise QE beyond its 60-billion-euro monthly pace, it too could hurt bank profitability by creating even more excess reserves that would have to be “invested” at negative rates.
Of course, all this monetary hocus-pocus clearly isn’t working in the long term, judging from figures on economic growth and inflation. So once the short-term sugar high from some kind of announcement wears off, Europe will be back in the same lackluster growth environment it’s been mired in for years.
Samsonite International may be close to buying Tumi Holdings (TUMI) for around $2 billion. The deal would unite two luggage retailers in an industry that has been hit by concerns about slowing global economies and slumping sales growth.
So what do you think of the rise and fall of Chesapeake’s CEO? The potential for a merger in the travel sector? Or the ECB meeting next week, and potential options for more so-called easing that really shouldn’t be called easing at all since it isn’t working? Hit up the comment section below and let me hear about these and any other issues that are on your mind.
Until next time,
Mike Larson
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Recommended Articles by Mike Larson:
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 23 comments }
Just where oh where have all the bears gone. Are we still in a bear market.
Mike
Why are the rich getting richer and the poor getting poorer??? It could be useful to look at Washington as a business and this presidential election based upon all Washington’s previous results. The leaders (congressmen and senators) should have been sacked long ago for complete incompetence. With many years of increasing debt, there are no dividends, due to heavy losses recorded over past decades. Our workers are in desperate need of a minimum wage increase to $15 hour, however with a succession of free trade agreements since WW2, most of our manufacturing has been transferred overseas. With free trade, we allow these products to come back into our markets, having made no contribution to our society or our countries bottom line. This is because we run the world’s largest dependency and entitlement programs with massive support for food stamp distributions to help all our workers who have lost their jobs. Our Washington Company also allows foreign workers in to compete on lower wages with our unemployed. The hidden side of our poor performance is the high number of insiders, lobbyists and special interest groups. Huge numbers of bureaucrats with copious amounts of red tape stand in the way of real progress. None of them really care about us as the other stockholders at large. This underperformance is completely due to unsound policy, however our board is filled with admiration for their own success, with continuous speeches on their own pet projects. Not all, is as bad as it seems though, as our leaders (congressmen and senators) are well paid with several of them wanting the top job of the retiring president. With many years of poor budgeting, almost $20 trillion in debt, the possibility of going broke and no dividend likely for many decades to come, we are facing a stock holder’s revolt. The worth of all our stocks has gone south, with the debasement of our paper currency, forcing some stock holders to move offshore. Some buy gold cheaply while they still can. We also have the prospect of an established, successful outsider, who understands what it is like to be great; battling for change against many in the old guard wanting to protect the mess that past administrations have created. We are being lied with statistics showing how great things are, when what we need is reform and change. Some want to go on blindly with more free stuff and free trade, not realizing the perilous state our company is in. I am not an isolationist or a protectionist either, however to lose our jobs, our businesses, our tax income, our hopes for self-determination and the futures for our kids; this upcoming vacancy needs to be reconsidered. But let’s open up the meeting and see what the other stock holders think? Would you like to buy additional stock in this company as it is, or would you like a change in direction?
It’s so bad at my house Angelina Jolie just offered to adopt one of my children. Jim
Hi Jim,ask her to adopt the whole crowd
My uncle has always relied on me for investment advice. Because he is very conservative I I have never recommended anything but telecom and utilities. He thinks I’m a genius! Jim
if you would have told him about consumer staples, he’d amire you even more.
Better spread the neew @ Weiss re: GDX
Your call on a gold bottom some time back may very well have been a shiny call. It did not go unnoticed. Respectively.
I’m no longer a republican or democrat. I just vote for anyone who’s not in office. Throw all the bums out. I hope Trump makes a commercial with the wife of one killed in Benghazi who says the Secretary of State Hillary looked me straight in the eye over the body of my dead husband and lied to me about some video when she absolutely knew the truth. And I’ve never heard the real question about her e-mails. If she traveled a million miles all over the world, how did she get top classified information. She has 2 choices, either she’s a blatant liar, or she’s ignorant, inept and incompetent. I think the Trump/Hillary debate should be on pay per view. We might be able to pay back the national debt.
I vote for the person who I think is least going to hurt me. Not the one that promises me everything….pretty basic to understand
Gold has always stood the test of time since civilizations ascribed value to it, and it will continue to maintain that perceived value as long as civilizations keep ascribing that value! In this tumultuous environment the only true logical investment is in gold!! As for traders, many opportunities are abounding in this volatile season.
Gold moved significantly above the upper line of it’s 2 1/2 year down channel today, ending the channel. It could go higher before coming back to retest that line. Gold and the gold stocks could be ready to boom, as they likely would in a time of financial trouble such as Mike is talking about. After the recent run-up, though, a bit of retracement wouldn’t be out of the question first.
GDX, The Gold Vectors Miners Index, is 30% above it’s 200 day line, which normally shows a probability of a pull-back, possibly to that level.
The business cycle is alive and well.
It is AWAYS a good time to own gold, because ALL governments are made up of nothing but sicopaths and this includes central bankers. By the way, the term “central” is very revealing indeed. It refers to “central planning”!
You are totally corect to call all government policy makers “INSANE”!
Speaking of gold, which someone always seems to do these days (good on them), the signs look like there could be a price correction to the downside soon. My outlook is still very bullish, at least so long as the gold price remains entrenched above twelve hundred, which I expect it to do. Too many headaches remain out there, keeping gold bullish. If someone has not yet recognized that these are trying times, they are in trouble. If someone has not yet recognized the role of gold in trying times, they are in deeper trouble.
Will
Gold is trying to breakout after years of being held in check by phony paper gold and certificates phony London precious metals market and outright manipulation. Gold is the black sheep of the financial family getting hammered by everyone that deals in Monopoly money. It is fighting an uphill battle but people are finally realizing that negative interest rates and governments depreciating their currencies works in golds favor. The yo-yoing stock market is also helping along with a glimpse into history. The “gold is a legacy from the past” argument is growing hollow indeed.
I prefer the “poor man’s gold”. Silver. Jim
You nailed it when you mentioned that gold does well when interests rates are low. As a none-yielding asset, the cost to carry being at zero makes it very attractive, not to mention the s#*t-hits-the-fan hedge value
The leaders of Europeans big economies should be trying to help the people of Syria rather than trying to flatten the country to the floor.
When the economy went south foreclosures and pensions lost real wealth in peoples savings. The money the Federal Reserve and Treasury put into the marketplace [printed paper] went into the big banks and stock markets. Hence the money only backed by the word and faith of the federal government helped those investors in the market place. The profits made did not go into creating jobs and investment . And that’s why the increasing division between top, middle, and bottom. Other laws, rules and regulations such as 30 hour work week, cost of health insurance is causing a lot of hurt also. That’s how I see it. Bill
I believe Aubrey McClendon committed suicide. All the trouble he was in, probably just couldn’t handle it and did not want to go to jail.