Friday, June 8, 2012

Con Ed Lights Up Wall Street

What sort of rally is it that is led by Con Ed (ED) and its electric peers, and natural gas suppliers such as Southwest Gas (SWX) and WGL Holdings (WGL)? 

A strange one.  One that is playing catch-up with the massive decline in yields in Treasuries, munis and other debt instruments over the past months and even years.

If you suspect, as I do, that while said yields will bounce around including in an upward direction, but will stay "low" in general for some time, then you may also suspect as I do that while the ED's of the world look extended, they will trend higher in price simply as bond alternatives.

In other words, utilities of the local, regulated monopoly kind (as opposed to ones that emphasize competitive power situations or wind etc.) may be morphing into this year's mo-mo stocks. 

Very strange.

The Internet, after all, runs on electricity.  Batteries that power mobile devices are charged with electricity.  Who needs gasoline when you have the Internet at home or a short walk or bike ride away at a coffee shop?

There are other good things happening in the US of A investment-wise.  These fit with the theme I announced last summer or early fall after I tired of Europe and also saw TPTB in the US go for growth at the expense of fiscal prudence.  (Not that I necessarily "approve", but my view was not sought.)

MCD sales were weak in China but strong in the US, they revealed today; that's backward from what we were told to expect.  WMT is surging, and it's still largely a US company.  Small local bank stocks are strong, though they don't trade much.  And of course utilities are all US or almost all domestic.

Expect much angst over the upcoming "fiscal cliff".  If interest rates are low and the economy remains challenged, I would note there is an election coming.  If anyone would like to buy utility stocks and is afraid to because of the scheduled rise in tax rates on dividends for high earners, or would like to buy into munis but are afraid of the talk of taxing some portion of that income, I would simply point out that the markets don't appear to share your concerns.  IMHO they are usually right.  Not always, just usually.

I don't have a strong predictive sense here, but I'm just guessing that either the Federal deficit starts shrinking on its own due to an unexpected pick-up in tax receipts or else the economy stays subdued below official expectations; and that in either case, the response will be to defer the fiscal cliff for one year for either a re-elected lame duck President Obama or a President Romney with a "mandate" to take some "courageous" action.

The single main worry sign I see domestically is that ECRI's Weekly Leading Index has been moving down fairly sharply the past few weeks, and has a close correlation with stocks.  Perhaps it's bottoming, or is irrelevant; we shall see.  Here's a link to a 1, 3 or 5 year view of this indicator.  When at that screen click on the + WLIW button.  I suggest looking at the 3-year view.  This shows a series of post-GFC lower highs.  Will this year see a lower low?  If so, some stocks will probably take a hit as recession worries go mainstream.  If this is the bottom of this indicator, it could be a hot summer on the Street.

Current-ly, I'm all charged up for Fast Eddie to shoot out all the lights on the way to ? $70 and beyond.

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