An Alternative To Money Market Funds
April is behind us and what a month it was!! The yield on the 10 Year US Treasury topped the 3% level for the first time since 2014. The sizable gap in yield between the 10 Year US Treasury and other widely followed sovereign debt issues has continued into 2018. At the end of April, the yield premium over the 10 Year German Bund was over 230 basis points, over 150 basis points above the yield on the 10 Year British Gilt and over 290 basis points above the yield on the 10 Year Japanese JGB. Economists now question why the Federal Reserve is normalizing interest rates after the European Central Bank left rates unchanged at its April 26 meeting.
A number of large Merger & Acquisition transactions announced back in 2016 are nearing completion. Germany’s Bayer is expected to complete its acquisition of Monsanto this month. AT&T is optimistic it will win its antitrust case with the Justice Department and finalize its buy of Time Warner. Qualcomm awaits Chinese regulatory approval for its $44 billion deal to purchase NXP Semiconductor.
In other M&A news, Wyndham’s acquisition of La Quinta nears completion after La Quinta’s shareholders approved the hotel firm’s acquisition last month. Vectren is being acquired by CenterPoint Energy for $6 billion in cash. Sprint and T-Mobile seek to combine in a $26 billion transaction certain to receive extensive regulatory scrutiny for the wireless carriers.
Last month, several large stock buybacks were announced. Broadcom announced a $12 billion stock buyback after its failure to acquire Qualcomm. Both Norwegian Cruise Line Holdings and Whirlpool announced $1 billion stock buyback plans in April as well. These are enormous sums of money that could be used to grow each company’s operations or be paid out via an increased quarterly dividend or as a special dividend.
Many fund managers have criticized stock buybacks as a use of cash for a variety of reasons. There is no guarantee that the share repurchases will be made at the most optimal time. Over the years, companies such as GE, IBM, Eastman Kodak and Xerox purchased millions of their own shares with little to show for it today. Stock buybacks can be halted or reduced at any time. A company is under no legal obligation to complete a buyback after receiving Board approval. Stock buybacks have been used as a means of financial engineering. For a profitable company, reducing the share count via buybacks will help increase the reported earnings per share.
Venezuela’s ongoing problems have been credited with fueling the rally in oil prices. Venezuela reportedly has the world’s largest oil reserves. But, it is now importing millions of barrels each month since the government cannot afford to pay its oil service workers.
My weekly radio show on WWPR 1490 AM airs at 12.30pm each Friday. My prior radio shows and newspaper columns are available on our website (www.amescapmgmt.com).
If you are unhappy with the returns now offered by money market funds feel free to contact us.
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