Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19
The Exponential Stocks Bull Market Explained - Video - 13th Mar 19
TSP Recession Indicator - Criss-Cross, Flip-Flop and Remembering 1966 - 13th Mar 19
Stock Investors Beware The Signs Of Recession / Deflation - 13th Mar 19
Is the Stock Market Still in a Bear Market? - 13th Mar 19
Stock Market Trend Analysis 2019 - 13th Mar 19
Gold Up-to-Date' COT Report: A Maddening Déjà Vu - 12th Mar 19
Save Fintech? Ban Short Selling. It's Not That Simple - 12th Mar 19
Palladium Blowup Could Expose Scam of Gold & Silver Futures - 12th Mar 19
Next Recession: Concentrating Future Losses & Bringing Them Forward In Time As Profits - 12th Mar 19
The Shift of the Philippine Peso Regime - 12th Mar 19
Theresa May BrExit Back Stab Deal Counting Down to Resignation, Tory Leadership Election - 12th Mar 19

Market Oracle FREE Newsletter

Stock and Finanacial Markets Trading Analysis Worth

Utility Futility Suggests the Bear is Growling

Stock-Markets / US Utilities May 24, 2007 - 02:01 PM GMT

By: Brady_Willett

Stock-Markets With S&P 500 bank/financial stocks the worst performing sectors so far in 2007, it is becoming clear that the inverted yield curve has damaged investor confidence in the group. Conversely, with utility stocks the best performing sector this year, it is obvious that investors have continued their defensive hunt for yield. Suffice to say, given that financial stocks typically outperform early in the cycle and utilities tend to beat other sectors late (or in the down cycle), the action in 2007 would seem to suggest that the bear is growling.


The only problem with the above ‘cycle' logic is that it doesn't take into account actual performance numbers. To be sure, with utility stocks already up a whopping 16.2% year-to-date (as measured by the XLU index) and financial stocks also in the black, sector analysis has become vain in the face of one simple conclusion: bull! In other words, it doesn't matter that gains have been stronger in defensive yield plays, because these gains are not arriving at the expense of other groups. 

Incidentally, what has gone wrong for bearish forecasts thus far in 2007 isn't exactly a secret: corporate earnings have climbed faster than expected.  And although many bears are quick to warn of the growing disconnect between strong corporate earnings growth and sluggish U.S. economic growth, that nearly 50% of S&P 500 earnings was generated from abroad in 2006 is reason enough to give any prognosticator pause.  As silly as this may have sounded only a few months ago, U.S. economic activity could flatten and corporate earnings could still continue to rise, at least until the unstable moorings underpinning global growth are shaken…

When Will Confidence in Utilities Be Shaken?

As the timely and profitable Wish List position in Great Plains Energy highlighted, as recently as last year there were some opportunities in the utilities group. Moreover, with a long-term approach some potentially attractive opportunities can still be talked about today (for example, former Wish List stock, Hawaiian Electric, yields 4.9%, and given its regulatory successes could be a desirable covered call consideration).  Nevertheless, what cannot be ignored when studying the diverse utilities group is that the stocks, on average, yield less than cash does in some savings accounts, let alone a 1-year money market fund. Moreover, and as the recent activity in REITs can attest to, stretched fundamentals along with less than attractive yields can lead to a devastating fallout when the selling starts (REITs have been crashing on a relative basis in recent weeks ~ pg. 2 PDF ).

But when will the selling start? Last year around this time we released our top-30 utility takeover targets and – not including the one company that has been acquired - the average gain since has been 31.2%, or double the average gain in the utilities group.  Given that no set of fundamentals has backed this surge, these gains comment well on previous sentiments; that this has been a historic rally in anything with yield, and, apparently, any yield will do.

In short, exactly when the investor rush into utilities will reverse course is a difficult question to answer. Indeed, in a financial world keyed on the earnings mirror and nondescript liquidity dealings rather than actual business fundamentals and the myriad of ominous obstacles that may lurk ahead, there is no sundial to timely measure future changes in investor sentiment.  But make no mistake: utilities, as measured by annual appreciation in the XLU since 2003, have little chance of generating 25+% annual returns before dividends going forward, and the contrarian conclusion that a reckoning is near draws deeper tones with every move higher in the group.  The question is, how many utility enthusiasts have been fooled into believing that their dividends offer protection during a bear market?

Disclosure : No one at FallStreet.com has any investment position in the companies mentioned above.

 

By Brady Willett and Todd Alway
FallStreet.com

FallStreet.com was launched in January of 2000 with the mandate of providing an alternative opinion on the U.S. equity markets.  In the context of an uncritical herd euphoria that characterizes the mainstream media, Fallstreet strives to provide investors with the information they need to make informed investment decisions. To that end, we provide a clearinghouse for bearish and value-oriented investment information, independent research, and an investment newsletter containing specific company selections.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules