Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Venezuela’s Hyperinflation Drags On For A Near Record—36 Months - 18th Nov 19
Intellectual Property as the New Guild System - 18th Nov 19
Gold Mining Stocks Q3’ 2019 Fundamentals - 18th Nov 19
The Best Way To Play The Coming Gold Boom - 18th Nov 19
What ECB’s Tiering Means for Gold - 17th Nov 19
DOJ Asked to Examine New Systemic Risk in Gold & Silver Markets - 17th Nov 19
Dow Jones Stock Market Cycle Update and are we there yet? - 17th Nov 19
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19

Market Oracle FREE Newsletter

$4 Billion Golden Oppoerunity

Remain Calm! It's only a bunch of Bear Markets

Stock-Markets / US Bonds Jun 14, 2007 - 12:21 AM GMT

By: Brady_Willett

Stock-Markets “A measure of utility companies lost 1.5 percent for the second steepest decline among 10 industries in the S&P 500. Collectively the stocks have a dividend yield of 3.05 percent, the most in the index. Higher bond yields make their dividends less attractive.” Bloomberg

The guaranteed yield on the 1-year Treasury bond broke above 5% yesterday and – suddenly? – a risky dividend yield of 3.05% becomes ‘less attractive'? Why were the lowly yields on utilities, which are the highest of any S&P group, not ‘unattractive' a couple of months ago or even last year?


Don't get me wrong, after a period of widespread destruction and management changes in 2002-2003, many utilities have become more focused; balance sheets have generally been purged of debt as non-core business units have been shed.  Combine this with declining interest expenses and the expectation is that dividend payouts could grow at an above average clip should the growth fundamentals for utilities continue to be agreeable.

But alas, the one fundamental many market participants seem to have forgotten is that companies, utilities or other, have not discovered a secret formula to combat recessions and/or bear markets. Rather, those investors that believe 3.05% provides any degree of security during bad times are likely to prove, at the minimum, to be naïve. As for the ludicrous bull market analysis of equity/bond yields, it distracts from common sense: during the last bear market in stocks interest rates were crashing lower and dividend yields on stocks were rising , and on an absolute basis no one in their right mind is going to chase a 3.05% div stock during the next bear.

At the risk of rambling, allow one factoid to settle: other things being equal in order for the yield on utilities to equal the yield on the 10-year Treasury bond utilities would have to fall by 42% from current levels.

What About Those Rising Interest Rates?


With some ominous trends highlighted, here are a couple of different extreme scenarios to think about going forward:

#1.  Bond bear .  Under this scenario interest rates continue to rise as central bankers mindlessly print money at a faster clip than the destruction rising interest rates unleash in the financial markets.  Some gold bugs and bears are keying on this scenario (apparently because it brings back fond memories of the late 1970s). However, even with Helicopter Ben in charge it is difficult to believe that the Fed will accept lethal amounts of inflation instead of recession. Put simply, the destruction that would ensue if U.S. interest rates rise significantly higher from current levels, particular in the U.S. housing market, is almost unimaginable.

The question bond bears need to ask is whether or not U.S. interest rates have stopped being the rudder for the global economy. You have to believe that they have if you buy into the idea that a secular bond bear is in the making.

#2 Bond bull .  Rising interest rates will hit the global economy and/or continue undercut the financial markets (which would eventually impact the global economy), and when risky assets start falling guaranteed investments like U.S. Treasuries will attract money.  As a quick example of how this scenario plays out, remember that the last time - before yesterday – the yield on the 1-year Treasury bond was above 5% was on February 26, 2007.  On February 27 the equity markets got rocked and money started moving into bonds.

After a prolonged period of declining interest rates, and with central banks seemingly united in their pursuit to debase paper, calls for a ‘bond bull' may be wishful thinking.  How about bullish safe haven bursts from time to time into bonds with no lasting up/downtrend in interest rates?

Conclusions Without The Hyper

It is entirely possible that as quickly as the ‘bond bear' threat has reappeared an unexpected blow-up in the markets will transpire to make this threat disappear.  If such a change in investor focus can happen in a semi-orderly manner there is also the possibility that some of the excessively large piles of liquidity in the financial markets can be salvaged.  With that said, it is highly unlikely that all asset classes will exit the immediate inflation/interest rate threat unscathed. For a brief while - and on a global basis - stocks, bonds, real estate, and commodities all attended the same party, but it increasingly looks like this party has unceremonious come to an end. The only question is which partygoer(s) are about to leave the party...

Incidentally, with deflation the one threat not on the horizon, the other very extreme scenario to consider is that of hyperinflation.  While a deeply statistical journey into U.S. government finances are enough to give any historian nightmares, the reality is that the global economy must assert its independence from the United States before the possibility of hyperinflation comes into view.  And although this shift is indeed underway, the rest of the world is still not even close to being ready to run out the dollar.  For that matter, the most important in/stag/hyper-inflation monitor around – gold - isn't suggesting any hyperinflation threat (as for the contention that gold is (still) being manipulated by central banks, ironically this is akin to agreeing that fiat backed inflation is still under control).

In short, as painful as a bear market in some or all of the four assets classes listed above might seem, it is nothing compared to the hell that will be unleashed when the world finally kicks its dollar habit. On the plus side, even U.S. dollar denominated utility stocks would be worth the risk if prices decline by 42%.

By Brady Willett
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.

Brady Willett Archive

© 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