Monday, September 10, 2012

Utility Stocks Well-Positioned for the Short Term and Beyond; But Also Bullish on Cheap Inflation Hedge Plays in the Stock Market

A few months ago, I was (half-)joking that utility stocks were turning into the new mo-mo stocks.  Well, the NAZ stocks as usual have turned into what they so often are, and have out-performed the XLU and such stalwarts as Con Ed by a massive amount lately.  This tends to reverse.  Importantly, Treasury yields are stubbornly holding at very low levels.  The Treasury bond buyer is giving up quite a lot of yield versus utility stocks that both yield more and also, ultimately, provide a degree of inflation protection. 

Last year my Treasury holdings peaked at about 30% portfolio weighting, mostly in very long-term zero coupon bonds.  This has now gone to zero (as disclosed about 203 months ago), and I have been adding a bit more utilities to get to about a 15% weighting. 

There are also, though, a growing number of undervalued inflation hedges in the portfolio, as I think the ultra-ultra-low interest rate scenario in the U.S. is looking a bit bizarre.  But I think the simpler play is for a convergence of interest rates between Treasurys and high quality muni bonds and utilities, with the former yields moseying on up over time and the latter moving on down-- potentially explosively as occurred last summer with Treasury yields.  If you blinked, you missed the move.

Over time, I am increasingly bullish on inflation/value stocks such as HP and AGU.  AGU is of interest in that it is challenging a multi-year triple top with the catalyst of a New York-based hedge fund (Jana Partners) looking to force a restructuring.  At 10X earnings with strong finances and a global reach, this one looks very interesting.

Friday, September 7, 2012

Fading the Front-Running of the Fed

Today's to-be-revised at least twice employment numbers were mediocre but hardly disastrous.  In conjunction with yesterday's better-than-expected ADP employment numbers, which over time correlate with those of the BLS, and the modestly positive and better-than-expected ISM Services data also out yesterday, the macroeconomic picture in the US, and the action in economically-sensitive commodities, is better than a year ago.  What happened then?  Gold and silver were bid up, but the FOMC in both its August and September meetings refused to do another QE.  Oops!

Silver is now up about 20% in about 9 weeks.  Hedgies have been piling into the metals despite obviously depressed global demand.  Sorry, China planning to build a few more roads won't do it.  More junk FHA financing for a few more homes in the U.S. won't do it. 

The metals are, on a yearly chart, tracing out a series of declining tops. 

A massive QE is not priced in.  That would be too easy a trade.  However, the Fed is well aware that America still gets in its cars and shops, no matter the rise of the Amazon e-tailing economy.  Unless the Fed has more control over futures prices than I know, a QE now will lead to yet higher gasoline prices, further undermining consumer psychology and perhaps leading to less economic activity, not more.

Without a high degree of "confidence", I am not seeing the case for QE to be announced next week, though of course the usual statement about being ready to implement one will be made assuming a formal program is indeed not announced.

The Fed in this estimation of mine is having the best of both worlds.  It is getting asset prices up, thus making stockholders happy; but it knows there is already immense monetary tinder out there from the prior episodes of money-printing; and it believes that Operation Twist is doing more than half the "work" of QE already.  It is having its cake and eating it too.

Note I am not an have not been a deflationist.  There will be no "deflation" in the U.S. for the foreseeable future IMO.  Precious metals prices are thus likely to work higher.  We shall see what we shall see, but on a short-to-intermediate term trading basis I continue to see increasing downside to the precious metals if Europe 2012 continues to follow the U.S. 2008 pattern.