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.
|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.
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.
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,
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