Tuesday, December 7, 2010

Just how important are dividends?


For many years I have been telling clients and prospects that I want to be paid while I wait so that dividends and interest help reduce volatility. In the Fed Chairman interview last Sunday he said that it could take perhaps up to 5 years to work our way out of this problem. He pointed out that we need the economy to grow by 2.5% just to keep the unemployment at its current level. For those readers who are my client’s you know how dividends protected your income and were the basis for the price recovery. I ran across the following quotes yesterday and I think it makes my point about the importance of dividends and interest.

BlackRock’s Richard Turnill and Stuart Reeve, who head the global equity team for the world’s largest money manager said that “Some may be surprised to learn that 90 percent of U.S. equity returns over the last century have been delivered by dividends and dividend growth,” In a report to their clients they are advocating investment in dividend stocks. Congress is reportedly close to a bipartisan agreement on the Bush tax cuts, including the dividend tax. The agreement would extend them for all income brackets for at least 2 years. President Obama said in a press conference that he doesn’t want taxes to go up next year for “ordinary Americans.”

The potential compromise couldn’t come at a more crucial time for stock investors. The total return for equities is determined by price appreciation and dividend income. Following a decade of zero total price appreciation and a rejection in the boardrooms of dividends as an effective allocation of capital, the BlackRock strategists say the time is right. They cited the low-yielding investment alternatives out there, an aging baby boomer population that will crave that dividend income, and an economic outlook for slow growth.

Dan Perkins

Tuesday, November 23, 2010

Deflation or Inflation: Energy is the key


The price of energy is the key to what the future holds for inflation or as some writers want to say disinflation. The charts above show what has happened to the price of crude oil and natural gas since their peaks of 2008. As you can see the recovery in crude oil has been much better than the recovery or lack there of in natural gas. The latest report from the Department of Energy shows that we are now importing 63% of all the crude oil used in the United States. Because we do not produce enough we have to buy from countries that may or may not be our friend.  The price of crude is a function of supply and demand; we demand it and other nations supply it at their price.

As you can see from the chart above, the high in the price of crude oil in the Spring of 2008 when it was about $157 a barrel. As of this blog it was around $81 which is up from the low of $46 in February of 2009.  We are up about 100% from the bottom and still down about 50% from the top.

Natural gas is a different story. The most recent high in natural gas futures was during the summer of 2008 at around $56 and hit its low on November 2, 2010 at $3.83 and currently is around $4.13. Why has the price of natural gas not kept up with the recovery in crude oil? The answer is simple, supply and demand. We have a vast supply of natural gas and we are finding more every day. The inventory is growing faster than we are using natural gas.

I believe there is a significant long-term investment opportunity in natural gas both in the ground and in the transportation of it. There is an energy efficiency factor that tells how much natural gas is necessary to produce the same amount of energy as a barrel of crude oil. Right now, based on the current price of natural gas, you would have to spend $22 on natural gas to produce the same amount of energy as an $81 barrel of crude oil. Using natural gas in the production of electricity is cheaper than coal, or nuclear power.

Could legislation before the lame duck session of Congress change the demand side of the equation? According to T. Boon Pickens a bill is before Congress that would provide tax incentives to switch to natural gas for trucks and transportation equipment and encourage natural gas as a replacement for crude oil. In many big cities in America you will see signs on buses that say, “running on clean burning natural gas fuel.” You may have read that GE will be purchasing 1,200 Chevy Volts as company cars. Peterbuilt, the big truck building company says they are ready to make the changeover to natural gas powered trucks. In fact, they have an order for 120 alternative energy trucks.

If natural gas is going to become an important source of clean energy in the future, in turn increasing demand for natural gas, how do we make money?

My clients already own natural gas in the ground through the investment in natural gas royalty trusts. We own the reserves and as the price of natural gas increases our income will increase. The second way to participate is through natural gas pipeline companies. Again, my clients already have positions in some of the pipeline companies that are master limited partnerships. In both cases, the natural gas in the ground or the pipelines, we are earning dividends in the 6% to 7% range and as the price of natural gas increases our income will increase. I will be adding to these positions as I see opportunities in the market.  

I do not know if the low in natural gas prices in early November was the bottom or not, I do know that 6% to 7% yield at these levels is very attractive and there is not a lot of downside risk. If you do not have Master Limited Partnerships or Royalty Trusts in your portfolio you need to take a closer look at them.

I want to wish you and your families a Happy Thanksgiving and to make time for family.
Dan Perkins      

Wednesday, November 3, 2010

History doesn’t make mistakes; people do by not remembering the past.

In the Saturday, October 30, 2010 edition of the New York Times there was an article titled, “US Hears Echo of Japan’s Woes,” by  Martin Fackler and Steve Lohr. The subtitle for the article was “The Great Deflation, Studying Past Blunders." The initial focus in the article was Hiroshi Kato who now is the President of Kaetsu University in Tokyo. In 1997 he was head of the government advisory committee that blundered in deciding that his country's economy had recovered enough that it could withstand an increase in taxes and continue to grow. He and his committee recommended an increase in the national consumption tax from 3% to 5%. This hike in taxes lead to an unprecedented period of no growth and deflation that still is affecting Japan today, thirteen years later.

In the article Mr. Kato says, “Our sins are large.” He goes on to say, “I hope the rest of the world can learn from this mistake.” Many times over the last few years I have been telling my clients and readers that I felt that the recovery in the United States when it came would look like the recovery in Japan. The Japanese central bank has had interest rates close to zero for almost 10 years. We have seen interest rates near zero for 2 years in the United States what if we have 8 more years at near zero interest rates and an under performing economy, with very high unemployment?

I don’t know what will happen in the lame duck session of Congress, but I hope they take seriously the words of the man who is credited with leading the biggest economic blunder in Japanese history about raising taxes. The mid-term election is only part of the history making process that our leaders will be facing over the next 6 to 12 months. The lines have been drawn over more government, more debt and higher taxes vs. the concept of smaller government, lower taxes and debt reduction.

The concern I have at both the federal and state levels is how you say to people we will have to cut your health care, your retirement benefits and reduce services in order to bring spending under control. The private sector has had to make these same decisions which affected millions of people. Will our government leaders have the courage to truly think about our children and grand children?
Dan Perkins

Thursday, October 28, 2010

It is time to talk about expectations.

As we approach the mid term election next week I think it is time to talk about expectation for returns going forward. The day after the election the Chairman of the Federal Reserve will be meeting with the members of the Open Market committee to discuss QE2, not the boat, but Quantitative Easing Part 2 of monetary policy. The president, on the other hand, is leaving for Pakistan two days after the election. My guess is that it is better to be out of the country when you know what will hit the fan on Tuesday.

The Fed is concerned that the economy, jobs and the price of housing are not moving fast enough in the upward direction. The Fed is thinking about spending more money to buy longer date Treasury bonds in hopes of driving interest rates down. They already have the short end of the yield curve close to zero and they feel that if they can bring down longer term interest rates they can spur the economy.  Part of the logic is that lower interest rates will force people to buy stocks, houses and inspire companies to hire more people and therefore, in turn, make the economy grow. People who need fixed income investments to supplement their social security and pension will find their total income decline. With interest rates low at the short end of the yield curve people were forced to go out further on the duration curve to try and get yield. If the Fed is successful, through its purchases, in driving longer-term interest rates down then people will find their income dropping even further.

As one client pointed out to me recently, the money I have for him in growth mutual funds has gone up and of course has gone down, but in the interim they have not paid a lot in dividends. He said to me “I guess I’m not getting paid enough to take the risk in common stock.” We spent some time talking about what are reasonable expectations for returns going forward.

Before I talk about future expected returns I want to apprise you of two things that could happen in the next 30 days that could have significant impact on future investments. The trustees of the Social Security Trust fund have given indications that there will be no cost of living adjustment for beneficiaries in 2011. That would mean that beneficiaries will have had no adjustment for the last 2 years. Secondly, the Presidential Commission on Tax Policy which is charged with reducing the deficit is due to release it’s report with recommendations to the President by December 1, 2010. The commission has sent up three trial balloons. 
The first is the elimination of the mortgage interest tax deduction. This elimination would grandfather existing mortgages but going forward all new mortgages would lose the interest deduction. Our children would  not be able to buy a house and deduct the interest on the loan, which would make the expense of owning a home more of a drain on household income. I could do a whole blog on this issue and just may if it comes to be. The second deduction they propose to eliminate is the personal exemption for children. As grandparents we don’t take that deduction but as the children were growing up the tax benefit helped to offset the significant cost to raise a child. Again the impact would be to put a further drain on household income to pay the expenses and not be able to claim any of the money spent as a personal exemption. If you don’t own a home and have a mortgage you are safe with the first two items, but nobody, and I mean nobody, would escape the third test balloon; that of the VAT (value added tax). Everything we buy would have an additional tax all the way through the building and distribution process to you the consumer. A VAT, in my mind, is a progressive tax in that once it is in place the Congress can increase the percentage without asking us. If any of these three items are enacted then more money will be spent in direct and indirect taxes and all of us will have less to spend.

In the past I have told clients that I expect, over a 5-year period of time, to earn between 6% and 8% after fees and expenses. Based on what I see at the moment I have to ratchet down the expected returns to 4% to 6% return. Public and private pension funds will have to reduce their expected returns from 8% perhaps to 6% or less. Lower expected returns will strain the balance sheets and I see the only possibilities are reduction of existing benefits and retirees paying a larger share of post retirement healthcare. PIMCO the largest bond manager in the world has created a new phrase called the, “New Normal”. They believe “New Normal” will be lower growth, higher unemployment and low inflation.

I have said many times before in this Blog that I believe we are in for a Japanese type of recovery much like what PIMCO is projecting. If we are correct then return expectations have to come down. The real question is how low is low enough?

Dan Perkins

Sunday, October 17, 2010

Just when you thought the all clear had been sounded--doubt creeps back into the banking system.

 The bond markets are telling us that they are concerned about the problems with foreclosures. All of the major bank stocks have taken a hit over the last few days. Just one example of the decline is Bank of America. On October 5th the stock was priced at $13.56 a share. As of October 15 the share price is down to a low of $11.74 for a decline of $1.82. The percentage decline is just under 13% in 10 days. A recent article stated that Bank of America might have to buy back $70 billion in foreclosed mortgage loans.
The problem in the foreclosure market place is, in simple terms, fraudulent foreclosure documents. I saw an article that shows three different signatures on various foreclosure documents and perhaps none was the signature of the real borrower. So, as Ronald Reagan once said, “there you go again.” The mortgage and housing problems are still significant trouble in our financial system.
Doubt will start creeping back into the banking system if it hasn’t already and bankers will be asking themselves, “Do I want to deal with this bank when I don’t know their exposure to the foreclosure problem”? The chief financial officers of both public and private corporations will again be asking the same question about their money on deposit at banks.
There are risks in keeping large sums of money in the bank. Regardless of the amount of money you have in a bank the maximum FDIC insurance on deposits is $250,000 per tax ID number per institution (bank). If you have more than $250,000 on deposit, regardless of the type of the account, the amount in excess of that $250,000 makes you a general creditor of the bank. As a general creditor you have no real way of knowing what the bank is doing with your money.  In the accounts I manage for my clients I have no more than $250,000 in all accounts per tax ID number on deposit at any one bank. I do not need to take the risk.
So how bad is the foreclosure problem? If the banks are forced to stop all foreclosure proceedings until the regulators can figure what to do about the problem it could take to well into 2011 before we see some resolution and the housing market will shrink dramatically. As more and more information starts to come out I will watch several indicators that you can watch with me. Please keep in mind that a house that is in foreclosure in Florida may have a mortgage owned by an investor in Europe or the Far East so this problem may have international implications.
What to watch:
The yield on the 10 year T-Bond
The yield on 30-day and 90-day LIBOR
The PJB which is an ETF of the major banks
If the credit markets fear another major problem with foreclosures it will show up in these three areas. I do not think we can get out of the foreclosure problem regardless of the forged documents, until we get millions of people back to work.
The election in two weeks is about jobs and only jobs. If you don’t have a job nothing else matters.
Dan Perkins

Friday, October 1, 2010

30 Days to Change?

One month from Tuesday you will be going to the polls to what some have called the most significant midterm election in recent history. Since I will be in Florida I have already voted. 

If the Republicans gain control of the house they might be able to stymie the rest of the plans of the Obama administration and the liberal Democrats. There are suggestions that perhaps a Republican majority in the house might try to repeal some of the passed legislation.
Based on recent polls it appears that the Republicans may have a chance at taking control of the House. I saw a projection today from Dick Morris. He is saying that he thinks the Democrats will lose 100 seats in November. Prior to today the highest prediction I saw was 75 seats.  I think the most difficult thing to predict is how mad the electorate is. If they go into the voting booth in November really mad then it could be a blood bath for Democrats and some Republicans.  One thing that could keep them mad is the jobs number next week. If the unemployment rate inches closer to 10% a greater number of people will react to a bad number. On the other hand should the number be a surprise to the downside perhaps some of the steam will come out of the tea pot. So, people have been saying that the government has postponed the jobs number because it is a bad number I'm not a believer that the administration is playing with the jobs number.

If the Republicans do gain the majority then the leadership will change in the House. We could have a split Congress and I believe the tension between the two parties will be ramped up looking forward to the Presidential election in 2012.  

While I can’t call the outcome of the election I can give you my best guess about what I think would happen in the markets with different outcomes. Then I will give you a twist that perhaps you have not thought about.

Scenario # 1 The Republicans gain control of the House and the Democrats retain the control of the Senate.
I think the S&P 500 would rally by as much as 100 points within a 3-week period of the election; in essence a Santa Clause year-end rally. Once the euphoria wore off I would expect the markets to focus on the tax bill, how much more all of us would pay, and the problems of jobs and housing.

Scenario # 2 The Republicans gain control of both the House and Senate.

I think the market would rally initially by 100 points, take a breather, and go up almost 150 points by year-end. The Republican control of both houses would create the feeling that the newly elected have a mandate to fix the problems and undo what has been done. I think it might well be like the time when Reagan took over from Carter and the whole tone of the country changed for the positive. We would still have problems, but we should have the resolve to fix the problems. The Bush tax cuts would be made permanent.

Scenario # 3  The Republicans get control of the House and the Democrats retain control of the Senate by one vote.
In his 19 months in office President Obama has issued 64 executive orders. By contrast, in the eight years George W Bush was in office he only issued a total of 279 executive orders. We know that the president issued an executive order to halt deep water drilling in the Gulf of Mexico and even though the court over turned the ban the administration will not lift the ban.

What if the President decides that congress can’t function, i.e. give him what he wants towards his agenda? Is it possible that for the first time in the history of the United States the executive branch of the government takes over the responsibility of the legislative branch (Congress) and uses the executive order power to get what it wants?

Is he willing to become a one term president to make the changes he wants regardless of the Congress or the wants of the people? With two years to go in his first term would the new Congress (Democrats) want to support impeachment proceedings against him for his flagrant violation of the Constitution because they see him as unelectable in 2012?

I realize that this last Scenario may seem a bit off the wall but as they say “Politics makes for strange bedfellows.” The last two months of 2010 could be very volatile in both the markets and the emotions in the country.

What if there is a Scenario #4 The Democrats retain both houses?

If that were to happen look for the market to sell off big time and we would have to look at a whole new approach to how we are investing money. If that were to happen I would expect another flash crash in the equity markets, but no quick recovery. The dollar would come under tremendous selling pressure and we could see September 2008 all over again but with one major difference; there aren’t many bullets left in the arsenal of the Fed. We could be in for serious panic. I saw what happened in October of 1987 and September 2008, and I think if Scenario #4 were to play out then November of 2010 could be very scary.

You are asking yourself how could this happen? There are two reasons; jobs and housing. The unemployment rate is close to 10% and people may be so scared that they vote to keep the Democrats in control because they are scared about what the Republicans might do to their unemployment and health care benefits. Fear is a powerful motivating force.

I hope I’m wrong. However, if I’m right, you’ll know were you heard it first.

Dan Perkins
Don’t forget to exercise your responsibility to vote

Thursday, September 9, 2010

Stocks Stuck in 15 to 25 year ranges

Interest rates may be stuck but so may stocks

On many occasions I have said that I felt that the Federal Reserve was on hold till at least 2013. Recently I came across some research that suggests that stocks may be in a similar holding period.

The periods of flat returns can run as long as 15 to 25 years. We started our correction in 1999 with the Dot Com bubble burst. If we take that shorter view of 15 years then we are 11 years into the holding period.The chart to the left shows what has happened when we have had many years of flat returns on common stock. As the text to the left shows, these periods can run to as much as 25 years. These periods are not without opportunity but timing has to be perfect to trade for profits. 

Just about the time I think the Fed might start increasing interest rates might be the time to buy stocks. That is not to say that opportunity does not exist to make money in stocks. You will just have to be quicker about your buy and sell decisions.

We have talked in the past that the last 10 years has been the lost decade for common stocks as measured by the S&P 500. The average annual return for the last 10 years on the S&P500 is minus 2.9%. If we are in store for a minimum of 4 more years of stocks being stuck then dividends are very important. If the investment capital is going nowhere in terms of price then the dividends have to carry the load.

Being paid while you wait will be an important strategy.

Dan Perkins

Friday, September 3, 2010

The Yield Curve is Steepening.

I warned in a previous  blog that people who were extending their maturities in order to get a higher yield may be in store for some loss of principal as interest rates rebound. I used the rebound instead of rise for a specific reason. The yield on the 10-year T-Bond has come down dramatically, at one point the yield was 2.42% intraday. As of this publishing the yield on the 10-year is now 2.70% or up 30 basis points from its most recent low. Some forecasters think we could go back to 3% yield on the 10-year.    

Recently I published a note from Merrill Lynch that was projecting the yield on the 10-year at year end to be around 2.5% which was lowered from their previous target of 3.25%. The Investment Company Institute (ICI) reports that for the year a significantly greater amount of money is flowing into bond funds vs. common stock funds.    

As people have moved out of low yielding cash money market mutual funds and into bonds they are taking more credit and duration risk with their money. The credit risk is not knowing for sure that the company issuing the IOU will be able to make the interest and principal payment. The duration risk is the longer term you invest your money the more it can fluctuate on a day-to-day basis with market conditions. If you had to sell you may or may not get what you paid for the investment.  

I still believe that we will be in a Japan-type of recovery until we can make significant improvement in the jobs area. High unemployment and depressed housing will keep the breaks on the US economy for years to come. Interest rates will fluctuate but I still think the bias is for rates to continue to fall. The declines in interest rates will be slow and somewhat volatile,   

While longer term interest rates are moving higher, shorter-term interest rates are falling again. Over the last three months 90-day LIBOR has declines from 54 basis points to 29 basis points. The downward movement in 30-day LIBOR is less dramatic but 30-day LIBOR interest rates have fallen from 35 basis points to 29 basis points.   

On the Treasury side 90-day T-Bills have fallen from 19 basis points to 12 basis points over the same period. So, we have a steeping of the yield curve in that short interest rates are falling while long-term interest rates are rising.   I have been thinking again and some may say, don’t hurt yourself. I have been thinking about the sacred prime interest rate. The prime rate is the benchmark for many different financial products, like credit cards, mortgages and business loans. The prime rate has not moved in almost 2 years so what would have to happen to break the back on the prime rate?   

People have different opinions on the outlook for the economy and some feel that the Fed will be forced into some type of Quantitative Easing later this year after the election. It would not surprise me that the new office of Consumer Protection starts talking up a reduction in the prime rate. Remember you heard it hear first, the idea that deleveraging of the balance sheet of the consumer and small business need to get the same interest rate benefit of big business, that of a lower cost of funds.   

Dan Perkins          

Tuesday, August 24, 2010


Really Bad Number

Released on 8/24/2010 10:00:00 AM For Jul, 2010
Consensus Consensus Range Actual
Existing Home Sales - Level - SAAR 4.650 M 3.960 M to 5.200 M 3.83 M
Existing Home Sales - M/M Change -27.2 %
Existing Home Sales - Yr/Yr Change -25.5 %

It doesn't get worse than this. Existing home sales fell 27.2 percent in July to a 3.83 million annual rate for the lowest level in 15 years. The 3.83 million rate compares with expectations for 4.65 million. Supply at the current sales rate ballooned from June's already swollen 8.9 months to 12.5 months for the worst reading in 11 years.

Yet prices showed little effect, down only 0.2 percent to a median $182,600 and reflecting relative strength for higher priced homes. The year-on-year median price edged lower but was still positive at 0.7 percent. Yet "was" is the word to note as extremely heavy supply, together with heavy foreclosures and distressed sales, point squarely at price pressures ahead.

There's nothing to explain away July's collapse. Single-family and condo sales show nearly the same deterioration. Regional data show no substantial variation. Stocks are moving lower and money is moving to safety in immediate reaction to this report, one that marks a new bottom for the run of disappointing economic data. The street was looking for an improvement in tomorrow's new home sales report but that's definitely now an outdated consensus.

Dan Perkins

Wednesday, August 11, 2010


Is Ben The Alpha Male in the Wolf Pack?
On June 29 I warned of the power of the Wolf Pack and its impact on the markets. I suggested that I believed that they would come out in mid summer and feed again. On July 17 I wrote about the Wolf Pack feeding again and suggested to my readers that if we didn’t close above the 1110 level on the S&P 500 then the downside could be 850 or so on the S&P 500.  If we did close above the 1110 level then it was most likely that the low would be 950 to 975. We closed about 15 points above 1110 so I’m not sure if that 1125 level is good enough to hold the 950 low. 

Over the last week we have tried three times to break above the 1127 level on the S&P 500 and each time we fell back. Yesterday the Federal Reserve Open Market Committee told the market their view on the economy and in essence they said, O Sh!! We are in trouble; The markets reacted with a significant sell off in stocks around the world on Wednesday. The demand for US Treasuries, the flight to quality, drove the yield on the 10-year to as low as 2.62% inter day.

I expect that the summer rally is over and we are in the correction I have been looking for. I do not expect panic selling, but a movement down and up into mid September when I think we will hit the 950 to 975 level. We will have to watch and see what happens over the next two weeks to see if the 950 level can hold,  

Dan Perkins

Monday, August 9, 2010

Just how bad are the problems is California

El Centro, California
Population: 41,241

Lose your job in El Centro and it may be quite some time before you find another one. One in four people here are out of work and the city holds the not-so distinguished honor of having the highest unemployment rate -- 27.5% -- in the country (close behind is Yuma, Ariz., with 27.2% unemployment).

The desert city, which is located in Imperial County just across the border from Mexicali, has a jobless rate triple the national average of 9.5% thanks to the seasonal fluctuations of field laborers. Field work is the county's third-largest employment sector after government, transportation and utilities, according to AOL News.

"Its location across the border from a much larger Mexican city means that there is a large floating labor force," Jim Gerber, an economics professor and director of the international business program at San Diego State University, told AOL News. "The data for Imperial County is skewed by this, such that the layoffs and out-of-work laborers are not actually counted correctly."

Even with the ebb and flow of its working population, things are still pretty bleak in El Centro. Last year, the city's cemetery went into foreclosure. 

I thought the above was very insightful as to the problems not only in California but other parts of the country. Go to the following link to see the rest of the top ten worst places to live in the US. 


Dan Perkins