Eq: Large Cap
Dividends hold an interesting place in the current market environment. On the one hand, their yields are looking more attractive after the big fall in bond yields. However, some think the bond rally is very fragile and that it will either fall in a big way or at least stall, in which case the outlook for dividend stocks is bleak. So how to handle the environment? One tip is to buy dividend stocks with the fastest dividend growth, not the highest yield, as they have been fairing the best and will likely be the most resistant to rate fluctuations. One research analyst in the space summarized the situation this way, saying “Companies exhibiting stronger earnings growth to support regular dividend hikes have been in greater demand than those more value-oriented ones offering higher income streams”.
FINSUM: Those with the best trending yields will likely be more defensible than those with higher but more stagnant yields.
In what we see as an encouraging sign with some good logic behind it, Credit Suisse has announced that it is going overweight equities despite the cautiousness of all the other big banks. Specifically, Credit Suisse’s wealth management division is going overweight stocks as it sees increased prospects of a US-China trade deal, diminishing political risk in the UK and Europe, and additional stimulus efforts by global central banks. Taken as a combined force, these are quite bullish considerations, says the bank. Credit Suisse had previously been neutral on equities, but the announcement came from the banks’ global Chief Investment Officer.
FINSUM: We are starting to agree with Credit Suisse on the bullishness. The whole market and economy seem to be re-entering the post-Crisis goldilocks phase where the economy was just weak enough for central banks to stimulate (boosting asset prices, but not weak enough to cause any real problems.
Over the last few weeks, value stocks have been seeing a comeback. The Russell 1000 Value is up 4.15% this month versus just 1% for the corresponding growth index. This has proved a big boost to dividend paying stocks as they tend to be the most undervalued. That means investors are not only seeing good payout, but also nice capital appreciation. According to Evercore ISI, “The rebound in Value represents a buying opportunity [for income investors] following the rout in August”. Interestingly, the stocks with the lowest dividends have been outperforming higher payers.
FINSUM: If you think rates are headed lower than it is definitely a good time to buy dividend payers, as they will offer nice relative yields and good capital appreciation.
You may not know the name Michael Burry off hand, but you probably should. He was one of the investors who made a fortune as part of the “big short” during the Financial Crisis. Well, he has come back into the limelight this week with an eye-opening warning. He argues that ETFs, and indexing generally, are essentially the same as CDOs were before the crisis. He explains that the massive capital inflows into ETFs have eliminated any realistic pricing mechanism for underlying stocks, just like huge demand for structured credit inflated all asset prices before 2008. Additionally, the daily liquidity underlying many of the stocks in index funds is vastly lower than the index funds themselves (again, just like CDOs). Burry uses a theater metaphor, saying that the theater has grown much more crowded, but the exits are still the same size.
FINSUM: This is a great argument, and one that seems to have fundamental truth to it. However, even Burry admits that he has no idea when this “bubble” might actually burst.
It is a rough time to find income. The big move downward in yields has crimped payouts to a significant extent. So where can investors find good yield without taking excess risk? Treasury yields are paltry, most stocks aren’t offering much, and high yield bonds look vulnerable in the context of a possible recession. So where can investors look? The answer might be RMBS, or residential mortgage backed securities, especially those unbacked by federal agencies. These are offered by a number of high profile funds, such as the Pimco Mortgage Opportunities and Bond Fund (PMZIX), or the Metropolitan West Unconstrained Bond fund (MWCIX). Yields are typically between 3% to 5%, and critically, the underlying return is linked to the health of the US consumer, a group that has been doing very well despite broader macroeconomic headwinds.
FINSUM: We like this call given the housing market is not broadly feeling bubbly and consumers seem to be in quite good shape.
Despite the seeming progress in the trade war this week, markets took a negative turn today. The reason why? The August jobs report. The US economy only added 130,000 new jobs in August, fewer than expected. Economists thought the economy would add 173,000 jobs. The August figure is also down substantially from July’s 159,000 figure.
FINSUM: The irony of the market falling on this jobs report is that it will likely support Fed rate cuts, which everyone seems to want. We think of this as a sort of goldilocks report—not too weak to make you worry, but weak enough to support loose monetary policy.