Eq: Large Cap
(New York)
Investors are always looking for good yields. While bonds are seeing higher yields now, high paying stocks offer something special because of the chance of capital appreciation. Such investors might be tempted by financial stocks right now, which are sporting juicy yields. However, Goldman Sachs is warning that investors need to beware. JP Morgan and other banks have been beaten up over the last year and are sporting payouts of above 3% in some cases. However, the big risk that is financial stocks are highly rate sensitive and tend to lose value as rates fall because of their lower profitability in such times. This pushes up dividends, but moves prices lower.
FINSUM: If you think we are even close to heading into a recession, buying financials is not a good idea. If you think this is a false signal, then banks may be a great buying opportunity right now.
(New York)
We wanted to write an article about a new fund we discovered in our regular course of business, but that got us excited. One of our gripes with ETFs is that there always seems to be a dearth of ways to express short-term tactical opportunities, or own a fund that does so. That is why we were excited to find a fund in New York Life’s IndexIQ ETF lineup. The fund, the IQ Merger Arbitrage ETF (MNA), seeks to gain capital appreciation by buying companies that have had public takeover announcements. The fund also includes a short on global equities as a partial hedge. Merger arbitrage is a common hedge fund strategy.
FINSUM: This is one of those area where we often wish we had exposure, but don’t have the time to actually enact a strategy, so this IndexIQ fund is very useful. The fund has a 75 basis point expense ratio.
(New York)
Advisors tend to really like dividend stocks, and it makes sense why: clients need good income as they head into retirement. However, this desire leads some (especially retail investors) to overreach, choosing high paying, but ultimately fragile or unsustainable stocks. Right now is a good time to be looking for quality dividend payers, as their valuations relative to the market are the lowest in about 20 years. Some high quality names to look at include Macy’s (6.2%), General Motors (4.1%), Kellogg (4.1%), and Verizon (4.2%).
FINSUM: One of the best ways to judge the quality of dividend stocks is through focusing on free cash flow as that measure shows whether companies can really afford what they are paying out without hurting their underlying business.
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(New York)
Markets have moved so fast that investors are now once again braced with the question that plagued them for almost a decade—how to get some income in a low yield world. Ten-year Treasuries are now yielding a very weak 2.36%, way down from the 3.2% they reached in 2018. That means investors need a place to park money. High yield savings accounts are still looking like a strong option, while a plethora of dividend funds and dividend stocks now look much more appealing than just a couple of months ago. Yield-sensitive sectors like REITs and utilities also have good outlooks.
FINSUM: The good news for investors is that short-term yields are still high, so it is not nearly as hard to get good yielding, low duration, investments as it was a few years ago.
(New York)
Just three months after flashing a dreaded “death cross”, the Dow is now showing some very bullish indicators. The Dow is signaling a “golden cross”, or a strongly bullish sign. The last time the market showed this kind of technical sign was three years ago, a moment which was followed by a 30% rally. The “golden cross” is when the 50-day moving average passes the 200-day moving average, and is taken as a sign of when a rally becomes a longer-term uptrend.
FINSUM: We don’t give a lot of weight to technical analysis unless it is accompanied by some fundamental news. In this case the bullish signs seem to exist in isolation.
(New York)
It is time to get out high yield. The sector has been seeing heightened fears for months, and prices have performed so well in the first two months of the year, that there is little value left. High yields returned 6.4% in January and February after the market came to a virtual standstill at the end of 2018. Part of the reason for the outperformance is that investors are demanding less spread to Treasuries, a fact that has not carried over to the investment grade market.
FINSUM: The pendulum has swung too far, and investment grade bonds now appear a much better value than high yield.