Dividend Stocks Could Be Dangerous in 2015, Ketterer Says – Bloomberg 12-31-15

Salient to Investors:

Sarah Ketterer at at Causeway Capital Mgmt said:

  • Buying energy stocks very incrementally as oil prices eventually reach a floor and rise again but no idea when. Looks for companies with tremendous financial strength that can continue to pay dividends. Smart companies will use  their balance sheet strength to buy distressed company assets.
  • Do not be passive and just buy the S&P 500 or a world index in an ETF because markets are fully priced and the largest weighted stocks are the most fully priced.
  • Active management fees pay to identify stocks left behind and avoid those that won’t blow up the portfolio.
  • Owns some Russian stocks but not aggressively. If crude oil stays at current prices or slightly higher, there will be further economic strains in Russia over the next several quarters.
  • Underweight US-listed stocks in global funds at 45 percent versus the almost 60 percent benchmark. Some of the best-managed oil and gas companies are US-domiciled.
  • Outside the US there are few tech stocks and no managed care. Some of the best opportunities in financials are abroad.
  • Consumer staples, utilities and health care globally are overpriced so it will be hard for them to meet expectations.
  • Likes industrial stocks in Europe that have fallen because of concerns about growth in China and Europe because they will end up outlasting their competitors, taking market share and becoming even more efficient. If businesses are doing their job and constantly evolving they can succeed even in a stagnant environment.
  • Investors worst mistake is short-term thinking, by selling at just the wrong time.

Read the full article at http://www.bloomberg.com/news/2014-12-31/dividend-stocks-could-be-dangerous-in-2015-ketterer-says.html

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Dividend Stocks Fall on Rising Rate Forecast: EcoPulse – Bloomberg 03-14-14

Salient to Investors:

Shares of high-dividend-yielding companies are trading near the lowest level in almost 3 years relative to the market.

Jack Ablin at BMO Private Bank said the favorable investment backdrop of low interest rates is reversing and if the US economy stays on its current path, 10-yr Treasury rates could hit 4 percent in 2014 pushing high-yielding dividend stocks further out of favor.

William Dudley at the New York Fed said the harsh winter won’t harm the economy enough to prompt a fundamental change in the outlook for the Fed’s reduction in bond purchases.

The median economist expects the 10-yr Treasury yield to rise to 3.35 percent by the end of 2014, and GDP will grow 1.9 percent in Q1 and 3 percent by year-end.

Jeff Mortimer at BNY Mellon Wealth Mgmt said we are in a transition period to higher rates, indicated by the weakness in high-dividend-paying stocks – high dividend stocks track closely with 10-yr Treasuries, so over the next 12 months to 18 months stocks with a bond-like component will be weighed down by rising interest rates. Mortimer said rotation out of the group is underway, but recommends investors pair select high-dividend payers with high-growth stocks in industries such as technology, health care and biotechnology that don’t have as high a payout.

Jim Stellakis at Technical Alpha said the group has been trading in a series of declining peaks relative to the market, and indicates investors want progressively less exposure to high-dividend paying companies. Stellakis said the dividend index is trading near a big support level and if it trades below a March 2012 threshold in a decisive manner, would signal the appetite for these stocks has deteriorated much more.

Andrew Wilkinson at Interactive Brokers said 10-year Treasury rates could fall to 2.25 percent in 2014 because there is no sign of inflation and the consensus forecast calls for belief that the economic recovery will be sufficiently strong to withstand a rise in interest rates that won’t impact demand, particularly in housing.

William O’Donnell at RBS Securities forecasts the 10-yr T-yield will increase to 3.2 percent and Treasuries will become a better alternative to riskier assets like high-dividend-paying stocks – a larger portfolio adjustment won’t be triggered until interest rates breach at least this level.

Read the full article at http://www.bloomberg.com/news/2014-03-14/dividend-stocks-fall-on-rising-rate-forecast-ecopulse.html

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Dividend Tip Sheet: Where the Payouts Are Growing Fastest – Bloomberg 01-27-14

Salient to Investors:

  • Three banks top the list of companies expected to boost their dividends the most over the next three years.
  • 130 S&P companies expect to increase their dividends over 3 years.

Read the full article at http://www.bloomberg.com/slideshow/2014-01-27/dividend-tip-sheet-where-the-payouts-are-growing-fastest-.html

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U.S. Rate Rise Sends High-Dividend Stocks Lower: EcoPulse – Bloomberg 12-12-13

Salient to Investors:

Brad Kinkelaar at Pimco said:

  • The underperformance of many high-dividend stocks in the past 8 months shows a sentiment shift already is under way. If rates continue to rise through 2014, albeit gradually, telecom, utility and REITs should continue to underperform the market.
  • Look for stocks with attractive dividends, particularly that will benefit from global growth – half the companies in his funds are based outside the US.
  • Avoid the most expensive parts of the domestic market, including shares hardest hit by the increase in interest rates, like toll-road companies in China, Brazil and Italy and US retailers.
  • Money managers with dividend-paying strategies flocked into a scarce menu of attractive-yielding stocks in the US, causing their share prices to increase significantly, but the reverse is now happening.

34 percent of economists expect tapering in December. The median economist predicts the 10-yr T-yield will rise to 3.37 percent by the end of 2014.

Benjamin Brodsky at BlackRock said tapering is inevitable and very likely in 2014 so the key T-yield could rise to a fair value of 3.7 percent by the end of 2014, significantly surprise the market, and add volatility not only in Treasuries but to other asset classes. Brodsky said the Fed will be losing one of its essential tools to control the long end of the market amid signs the recovery is strengthening.

Rob Morgan at Fulcrum Securities said large-cap dividend-paying stocks will be hurt as yields on 10-yr Treasuries continue their rise since May, though swapping equities for fixed-income securities is not imminent.

Jim Stellakis at Technical Alpha said investors have become more aggressive about pulling money out of the dividend index, which is in a general downtrend relative to the S&P 500 total-return index, with lower peaks and troughs indicating people are becoming more impatient and selling sooner. Stellakis said the dividend index falling below the March 2012 trough will indicate further deterioration in investor sentiment.

Eric Teal at First Citizens BancShares said we are in a transition period as equity investors adjust to a rising-rate environment, and as the US economy moves into later stages of the expansion that began in June 2009, investors need to be more selective about the type of dividend-paying stocks they purchase, and differentiate between companies with high-dividend yields relative to the market and those whose payouts may be poised to increase. Teal seeks stocks with growing dividends that are leveraged to an economic recovery, especially on a global basis, like the industrials, which have expanded payouts in recent years. Teal said Treasuries approaching 4 percent will be a trigger for asset-allocation models.

James Bullard of the FRB St. Louis said any tapering should be modest to account for low inflation, and should inflation not return toward target, the Fed could pause tapering at subsequent meetings.

Read the full article at http://www.bloomberg.com/news/2013-12-13/u-s-rate-rise-sends-high-dividend-stocks-lower-ecopulse.html

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A lesson from the other ‘sage’ of investing – Tim Harford 08-24-13

Salient to Investors:

John Maynard Keynes wrote in 1934: “As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.” And: “It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.”  Both Buffett-style tenets.

David Chambers and Elroy Dimson of Cambridge’s Judge Business School tracked Keynes’ management of the King’s College Cambridge endowment.  By August 1929, the Discretionary Portfolio lagged behind the UK equity market by a cumulative 17.2 per cent. Keynes failed to see the 1929 stock market collapse coming.

Keynes changed from trying to anticipate macroeconomic trends to investing in, and holding onto to, undervalued stocks, particularly those with generous dividends and distressed companies with the prospect of recovery. The Discretionary Portfolio lifetime performance rose to a 16 per cent annual return, versus 10.4 percent for the market as a whole.

Keynes advanced the idea that equities were a fit investment for the likes of King’s College, at a time when any respectable investor would have stuck to property and bonds.

Keynes was very well connected, particularly in the mining sector, where he invested heavily and successfully. Insider trading back then was legal. E.g. in 1925, Keynes received advance notice that the Bank of England’s interest rate was to change.

Read the full article at  http://timharford.com/2013/08/a-lesson-from-the-other-sage-of-investing/

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UBS’s Friedman Favors U.S. Stocks, High-Yield Bonds – Bloomberg 06-28-13

Salient to Investors:

Alexander Friedman at UBS says:

  • What Fed has done is not unexpected and the market reacted because it was ahead of itself. All the Fed was saying was that the US is doing OK, that the data is trending as it should, and that it has confidence that in the future it will be able to unwind QE, which is a positive.
  • Some investors were caught overleveraged in fixed income so there is unwinding of the carry trade. In countries like Australia, India and some emerging markets, a lot of investors hold bonds in local currencies which is a risk so expect significant volatility on the emerging market side.
  • China less a risk than perceived because it is just trying to re-balance and is willing to sacrifice some short-term growth to get control over the credit situation and avoid bubbles.
  • Biggest risk to investors is in misinterpreting the Fed, which creates a buying opportunity.
  • Last week the market saw much of the repricing of the tapering risk and so we won’t see a repeat in September. Assuming we see the positive economic data for the next few months which is necessary for the Fed to begin tapering then the market will focus away from life support and more on underlying growth.
  • Buy where underlying monetary policy will match the underlying  requirement and where there is economic growth: meaning US equities, US high yield equities which are oversold and now offer 6 to 8 percent returns over the remainder of 2103.
  • Wary of gold, which was an emotional trade against currency debasement and so has room to decline further.
  • Wary of emerging markets, including Australia, neutral on Europe.
  • Not yet seen bond money switching to equities as most of the money into equities has come from cash and money markets. We will see a shift from bonds to equities for many reasons, not least the immutable force of  demographics such as the elderly selling fixed income savings over time and there is no yield in them.
  • US high yields with equity characteristics are attractive.
  • Expect tapering around December although market is pricing in September. When it happens, US economic data will be trending positively and rising rates will accelerate the housing recovery story as it will cause fence sitters to buy to avoid the mortgage rates increases. Tapering of $10 billion a month is priced into the market and do not expect to see rates rising until 2015.
  •  US financials and insurance companies are a bet that rising interest rates will help their profitability.
  • The Russell 2000 stocks are more attractive because they have more cyclical exposure and exposure to the recovering US story as opposed to the global story where there is still sub-trend growth. With dividends and share buybacks, stocks offer a 4.5%- 5%  yield in 2013 which is attractive.
  • Long the dollar against many alternative currencies because of recovering economy and the Fed slowly winding down QE.
  • Less optimistic about Eurozone, and short Australia.
  • China rebalancing a good thing as banks have been lending too aggressively and China wants to avoid a credit bubble since shadow banking is such a huge proportion of their credit market. Clamping down on lending means it will be more expensive for companies to borrow so GDP will suffer a little bit. China growth could slow to as low as 7 %  causing more volatility short-term but OK over the longer term. Less concerned about China, which has great foreign reserves and is less reliant on foreigners owning local bonds with risk of money exit, unlike Australia, South Africa and India
  • The emerging market is a decent to good place to have a strategic allocation and you want exposure there for the longer term but short-term there is a lot of volatility.  Most worried about countries who have financed deficits with foreign money so when that money leaves they end up in a scary spiral. Countries like South Africa, India, Brazil.
  • Before the end of the year expect to see re-escalations of crises in the Eurozone for many reasons. The Eurozone periphery is like the emerging market with the same concerns including the unwinding of leveraged positions and volatility. After the German election we won’t see a path to true fiscal integration and banking union but instead a recognition that France is very weak, Germany won’t act alone, and that France and Germany are not acting together. Europe needs true labor reform in countries that are not competitive and that is very difficult
  • France is a concern because it has poor underlying economics and Hollande is weak politically.
  • Biggest concern is Spain, which is too big and quite vulnerable and will enter a program with the troika that will be put off politically until the last-minute after volatility spikes over the next 4 to 6 months.

Watch the full video at  http://www.bloomberg.com/video/ubs-s-friedman-favors-u-s-stocks-high-yield-bonds-p2pzBodIRoqFJMPLPcixdg.html

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The Scary Risks of Safety Bubble Up – Bloomberg 04-09-13

Salient to Investors:

Seth Masters at Bernstein Global Wealth Mgmt says:

  • Bubbles today are driven by fear and investors’ desire for safety versus greed and recklessness in the past.
  • Supposed safe havens of gold, bonds and dividend-paying stocks are dangerously overpriced.
  • Over the past 5 years more than a trillion dollars have flowed out of stocks and into bonds in the US. Investors moved to index funds because they felt actively managed funds were risky – that strategies like growth or value were risky and dividend strategies were safer. Investors moved into precious metals.
  • Reaction to the 2008 financial crash is excessive. The broad-based flight to safety has polluted every sub-style of investing.
  • The two risks investors need to balance are the risk of near time loss of capital and the risk that you run out of money. If you invest 20 percent in stocks and 80 percent in bonds, your probability of suffering a 20 percent loss is less than 2 percent, while your probability of running out of money is 24 percent.
  • Many stocks with high dividends lack growth potential. Utility stocks were recently at a record 50 percent premium to their historical average valuation. And most utilities are heavily leveraged, strictly regulated and very sensitive to changing energy costs.
  • There are cheap stocks in every sector.
  • Indexes tend to be overweighted in whatever’s been hot. High-dividend stocks are 44 percent of the S&P 500 Index versus the historical average of 33 percent, so expect a significant correction.
  • The least efficient gold producers can produce an ounce of gold for $800, so the fact that gold trades for twice that shows people are buying it because they’re scared.
  • A company buying back stock is not automatically attractive.

Read the full article at http://www.bloomberg.com/news/2013-04-09/the-scary-risks-of-safety-bubble-up.html

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The Republican Dilemma And Its Implications For Investors – Seeking Alpha 01-23-13

Salient to Investors:

Phil Mause at Pacific Economics Group writes:

  • Investors should buy up dividend stocks, business development companies (BDCs), REITs and other investments yielding more than bonds.
  • A dividend stock led stock market could rise considerably – dips will be shallow as many investors will be waiting to get in.
  • There will not be meaningful reductions in federal spending; wasteful spending is almost always political.
  • We are not on the verge of a “grand bargain” or a stable solution to the federal spending issue. The party out of power always has made the national debt and the current deficit a big issue. Deficits will continue because there is really no acceptable alternative. Anxiety about spending cutbacks and tax increases that will never actually occur will continue, so  businesses and households will remain frugal and the economy will stumble along.
  • Battles over monetary policy will be largely rhetorical, with business telling Republicans to “back off” as soon as they blunder into specific legislation curbing the Fed.
  • Bond prices won’t rise or decline much. Over the next 5 years, interest rates will stay low except for a brief effort to raise them in 2015; the short rate may rise to 1% and the 10-yr to 3.5% but any sign of an adverse reaction will cause the Fed to halt, even reverse, tentative rate increases. The Fed will not want to raise rates immediately before the 2016 election so rates won’t exceed 1% until well into 2017. The US will fight competitive currency devaluations to make sure the dollar is not overvalued, providing another brake on efforts to raise short-term rates.

Read the full article at http://seekingalpha.com/article/1126891-the-republican-dilemma-and-its-implications-for-investors?source=email_macro_view&ifp=0

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