Quantitative Wheezing

January 31, 2012

Central bank balance sheets are being rapidly expanded all over the world.  Jim Bianco has a nice piece at The Big Picture, replete with amazing graphics.  For the record, I’ve known Jim for 20 years and he does some of the most intriguing fixed income research you will ever see.  He writes:

The degree to which central banks around the world are printing money is unprecedented.

He proceeds to show the balance sheets for each of the large central banks, converted back into dollars.  Your eyes will bug out when you see the original article.  For the sake of brevity, all I show here is his graphic of the composite of eight large central banks.

Source: Bianco Research/The Big Picture  (click on image for a sharper version)

Jim points out that:

The combined size of  these eight central banks’ balance sheets has almost tripled in the last  six years from $5.42 trillion to more than $15 trillion and is still on  the rise!

I have no idea if this is a good or bad thing.  How you interpret it probably depends on which group of economists you put your faith in.  My guess—and this is only a guess—is that huge increases in the money supply will eventually result in some inflation.  Commodities generally respond fairly well to inflation, while fixed income may be gasping for air.  (This sort of fits the ”retail investor is always wrong” template, given the huge amounts poured into bonds over the last couple of years.)  Inflation might be a good thing from the Federal government’s point of view, as it will make paying off debt a lot less expensive in real terms.  It might not be so good for investors, depending on how their portfolio is constructed.

The one thing I don’t have to guess at is that quantitative easing, whether it continues to accelerate to ever-giddier heights or starts to wind down, will lead to trends of some kind.  When that happens, relative strength will be a useful guide to sort out where the investment opportunities lie.

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Posted by Mike Moody

A Winner In The “War On Savers”

January 31, 2012

Jim Jubak on why dividend-paying stocks are one of the winners in a low interest rate environment:

The Federal Reserve’s low interest-rate policy has been called a war on savers. That seems pretty accurate to me. Currently you can earn a whopping 0.248% (national average) on a three-month certificate of deposit (with a $10,000 minimum). Want to make a decent return — say, something as magnificent as 1%? Forget a 12-month CD. The yield is just 0.556%. Willing to go out two years? The national average for a two-year CD is just 0.875%. To add insult to injury, the headline inflation rate for 2011 was 3%; the core rate (which excludes increases in the prices of food and fuel) was up 2% for the year. No matter which inflation rate you use, all of those CDs lost value in 2011.

No wonder, then, that dividend stocks paying more than 3% (so an investor at least stays even with inflation) are among the hottest stocks on the market. In a year when the Standard & Poor’s 500 Index managed a return of just over 2%, a not-especially-stellar drug company like Merck returned 8.9% — because it paid a dividend of better than 4%. Verizon Communications, in not a particularly good year for phone companies, managed a 17.6% total return — because it paid more than 5%. Pipeline master limited partnerships such as Oneok Partners, with a dividend yield of 6%, returned 51% for the year. Another master limited partnership, Magellan Midstream Partners, returned 27%.

I don’t see any reason that dividend stocks with yields above 3% won’t turn in another stellar performance in 2012. After all, the Federal Reserve just guaranteed that savers won’t be able to make 2% even if they buy seven-year Treasury notes. And, looking at the number of financial advisers and gurus that I see praising dividend stocks, I think 2012 could be even better for anything with a pulse and a yield.

Dorsey Wright currently owns Verizon and Oneok Partners.  A list of all holdings for the previous 12 months is available upon request.  Past performance is no guarantee of future returns.

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Posted by Andy Hyer

Relative Strength Spread

January 31, 2012

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 1/30/2012:

Over the past two and a half years, relative strength leaders have had similar performance to the relative strength laggards.  Using history as a guide, we expect this spread to eventually resume its upward trend.

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Posted by Andy Hyer