Monday, June 11, 2012

Turnaround Monday- Didn't Wait for Tuesday

As was strongly suggested on yesterday's post, today the European and U.S. stock markets staged what looks to be a major intra-day reversal, both in Europe and here.  Spanish and Italian govvies were clobbered.  The SPY closed below its 150 day sma once again, and has a 10 week pattern now of lower highs since the April 2 high.  Lower lows coming soon to a stock market near you would be highly unsurprising.

I am long a variety of utilities because of my favorite reason to buy/own stocks:  income in a world starved for seemingly secure income; and technicals.  These include ED, AVA, SWX, WGL, XLU.  Note these have replaced my zero-coupon Treasuries, on which I took profits the week before last, and now I am increasingly ramping into the utilities as a preferred income and price appreciation play.  Today's drop in interest rates is perfect for this thesis.  My expectation is that utilities will suffer profit-taking on days like today but then go up a nice amount when we have days as we did last week when stocks rebound and rates go up.  I'm banking on some resumption of the historical relationship between the 10 year T-note and utility yields.  Some utes could go up 50%++ if that occurred near today's record-low T-yields.  (Not counting on that!)

I also own a few of the small community S&Ls/bank stocks I have mentioned for quite some time on The Daily Capitalist.  I prefer not to name them b/c they are so illiquid.  Finally, I own a very modest amount of stocks with varying charts that are "normal" operating companies, are ultra-high quality, have the leading position in essential growth industries, and have TTM P/Es of 7-14.  In general, they all are GARP stocks that are well off their highs but with record earnings, and all pay dividends and have substantial tangible book value.

I am also long a significant amount of some of the leveraged closed end tax-exempt bond funds, the largest holdings being NIO and NVG.

I see investors turning away from the SPY until it yields double the 10-year Treasury.  This process takes time.  That's how it ended up in Japan, with a 1% 10-year JGB and a 2% Nikkei yield.  In the US in the 1940s, the market had periods where the highest-quality stocks yielded 7-9% with T-bond yields marginally higher than today's.

Once people really start worrying about stocks, a 2% SPY yield is trivial.  They can go out for lunch and come back to find the SPY down that much, just like that.  Thus we saw the psychology to get high dividends- and note back in the '40s, stocks often traded close to tangible book value, which as the decade drew to an end got to be understated due to inflation.  I expect the lust for high dividend income is likely to return.  For now, utilities with seemingly secure dividends are the best way I see to make investment lemonade out of today's ZIRP-era lemons.

I also took very small trading profits on GTU, having bought it late last week at a zero premium to NAV, selling it today with bullion a little below where it was when I purchased GTU but the premium to NAV had rised to 3+%.  Every little bit helps.  GTU does not fit the income theme!  With oil turning to the downside today, I don't want more than a core gold holding, the trend being your friend and all that.


  1. This investor might not return to SPY until the yield is 5% (1981 levels). Maybe I'll have to wait a long time, but then again, maybe not.

    I switched to dividend investing in the early 00's to ride out the dip, but my best idea was to buy oil MLPs back when it was under $20 in the 90s. I have never sold them. Rode them to $140 oil and way back down, then up again. They just keep paying out.

    Total return has been about par with gold except I actually have cash to show for it. Ok, debased cash, which is why I have gold.

    Nice play on GTU. I did something like that with SGOL/SIVR/CEF last year when silver crashed and CEF's premium went deeply negative (for CEF). I was holding SGOL and SIVR, sold them, and bought equivalent amounts in CEF, then rode the premium back up.

  2. DTO, awaits your capital...

  3. (for CEF). I was holding SGOL and SIVR, sold them, and bought equivalent amounts in CEF, then rode the premium back up. Stock Market