It’s a classic contrary signpost for the downtrodden oil and gas equity sector
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Aug 26, 2020 • • 5 minute read
The removal of Exxon Mobil Corp. from the Dow Jones Industrial Average may be a classic contrary signpost for the downtrodden oil and gas equity sector.
The only energy company left in the index is Chevron Corp., with a 2.1 per cent share. That about matches the 2.5 per cent share in the S&P 500 (from 12 per cent less than a decade ago). Last I saw, energy goods and services accounted for 6.2 per cent of the consumption bucket, 7.8 per cent of manufacturing shipments and about 10 per cent of profits.
But as we re-enter a period of ‘ZIRP’ (zero interest rate policy) from the U.S. Federal Reserve — with no intentions of raising rates, or thinking about thinking about raising rates (as Fed chairman Jerome Powell put it) — investors are yet again forced to identify where they can get an income stream. In the period following the Great Financial Crisis, the answer has been in the stock market with the dividend yield exceeding the yield on the 10-year Treasury note on multiple occasions.
Take a look at the chart below, which is a combination of the value, rate-sensitive and defensive areas of the market that are seeing more opportunity in the stocks, i.e. larger dividend yields.
Indeed, at a whopping 400 basis point difference, energy stocks provide the greater income stream (though we should mention that screening for dividend stability and coverage is very important given the current commodity backdrop) followed by utilities (+148 basis points), financials (+89 basis points) and consumer staples (+88 basis points).
Rounding out the bottom half are consumer discretionary (-118 basis points), communication services (-109 basis points; skewed by the recent guaranteed investment certificates shuffle to include digital media companies as the tradition telecom group still offers a dividend yield premium) and technology (-61 basis points). For income investors, they would be better off in the bonds rather than the stocks.
Finally, materials (-16 basis points), health care (-10 basis points) and industrials (-1 basis point) essentially all have no difference between the yield on equities or credit.
Ultimately, it is the first group that dividend investors should focus on in the equity market given their relative yield attributes. The fact that utilities and consumer staples also add a defensive tilt to the equity portfolio is an added plus — not only will this group offer a great hedge, but based on our screen they currently can be purchased at very attractive valuations for those looking for income.
INVESTORS THINK THEY NEED TRUMP
What equity investors like is the declining case count in the U.S. and how the “second wave” we saw in some of the “hot spot” states in July was handled. Who isn’t celebrating the fact that the Metropolitan Museum of Art is re-opening to the general public this Saturday?
Investors love the corporate earnings data, with the latest coming out of Toll Brothers Inc., the home construction company, with a 26 per cent surge in order books to new highs.
So far, the July data flow did beat expectations, too. The kumbaya news on the “Phase One” trade deal has eased concerns over the recent increase in U.S.-China tensions (a ruse if there ever was one).
And the Fed is sounding increasingly dovish and households are sitting on a 19 per cent savings rate, so nobody got too worked up over the lack of further fiscal stimulus.
Increasingly now a sense is building, for whatever reason, that U.S. President Donald Trump will win the election — and the stock market desperately needs that to happen for its continued success.
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Famed American statistician Nate Silver gives the President just about the same odds, at 26 per cent, as he did heading into the 2016 vote. The Wall Street Journal’s lead editorial also did its best to bolster the President’s campaign with ‘Remember the Trump Economy?’ — which is a bit of a joke, actually, because I would give Trump as much credit as I would Presidents Barack Obama or Bill Clinton which is negligible. The U.S. economy is a $20-trillion sophisticated machine and presidents actually take a lot of credit for things way beyond their influence.
Let’s face it, all Trump did was accentuate the rapid expansion of debt to create the illusion of durable economic growth — deregulation and debt-financed tax cuts literally added basis points and not much more. And vaccine hopes are running higher today than at any other time in the past six months.
I get asked all the time about how it is that the U.S. economy is doing so well with 28 million people in a de facto soup line collecting jobless benefits. Well, when you add up the monetary and fiscal stimulus, the government assistance exceeds US$5 trillion to combat a loss of GDP of US$2.4 trillion. The medication has outstripped the pain by nearly a two-to-one ratio. That’s how.
Wages and salaries may be down 8 per cent this year, but Uncle Sam’s deep pockets have ensured that total personal income soar 12 per cent, which is double the pace had the pandemic not reared its ugly head.
If you think this is incredible, look at the U.K. The government there is paying the cost of half the food that people spend on certain meals eaten in restaurants, pubs or cafes.
It is called the “Eat Out to Help Out” program and in its initial three weeks, 64 million meals have been consumed, which is almost equal to the entire British population. The tally so far is close to a half-billion dollars. In the 1930s, it was all about bridges, dams, roads and waterways. Today, it’s about — eating out.
In any event, somebody is going to be paying for all this. Either that, or we have a Grand Global Debt Jubilee — i.e. I forgive thee and thy sins. Or the government plays the role of Robin Hood, with New Jersey Governor Gov. Phil Murphy pressing for millionaires tax or Bloomberg reporting on Prime Minister Justin Trudeau sharp turn left in economic policy since the 1980s.
Is it well known that the Prime Minister said his goal is “to get through this pandemic in a way that gives everyone a real and fair chance at success, not just the wealthiest 1 per cent”? I guess free education and free health care isn’t enough — the entire field has to be level for this gang of free-wheeling spenders and tax collecting fanatics.
The next bull market isn’t just in precautionary savings balances alone, but also in tax planning. Make sure your financial advisor doubles as an accountant.
David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. You can sign up for a free, one-month trial on his website.
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