An Alternative To Money Market Funds
October is behind us and both the Dow Jones Industrial Average and S&P 500 rallied strongly after struggling during August and September. What has become clear is that the world is awash in stimulus.
In late October, China’s central bank cut interest rates for the sixth time since November and again lowered the amount of cash its banks must hold as reserves in another attempt to boost a slowing economy. The European Central Bank left rates unchanged at its meeting in late October while signaling additional steps will be taken to boost the Eurozone economy.
The enormous amount of US Treasury debt outstanding, nearly $20 Trillion, limits the ability of the Fed to increase interest rates. Another reason why the Fed will have difficulty raising rates is because it would trigger a rally in the US Dollar against other major currencies.
During October, a broad array of companies such as American Express, Coca Cola, IBM, Walmart and Caterpillar cited the strong greenback as the reason for reporting disappointing revenue. S&P 500 firms that generate a large amount of revenues overseas would be harmed even more should the Fed decide to push interest rates aggressively higher.
The economic picture in the US remains strong relative to the other major economies of the world. But problems remain. For example, cash strapped Illinois is now paying its lottery winners with IOUs for people holding tickets worth more than $600 in prizes. As a result, Illinois lottery officials have noticed that Illinois residents are increasingly purchasing lottery tickets across state lines so that winning ticketholders would get their cash immediately.
Meanwhile the situation in Puerto Rico continues to deteriorate. The Puerto Rican government has admitted it cannot fully repay its $72 billion in debt outstanding. Treasury Secretary Jack Lew is now seeking Congressional approval to allow Puerto Rico to be able to go bankrupt. It is now barred from doing so by current US Bankruptcy law. The problems in Illinois and Puerto Rico will likely be seen in other states as well. California, New York and New Jersey et al. face mounting financial pressures due to their unfunded pension obligations and other commitments.
For this reason we continue to recommend maintaining a defensive stance in our investment approach. The major telecoms, utilities, major oils and the oil and gas pipelines have fallen out of favor. But, these companies offer generous dividend yields with the opportunity for significant capital gains over the next year. And in most cases, their revenues are derived largely or entirely in North America.
My weekly radio show on WWPR 1490 AM airs at 2pm each Friday. The show can also be heard live on the station’s website (www.1490wwpr.com). My prior radio shows and news columns are available on my firm’s website (www.amescapmgmt.com).
If you are unhappy with the returns now offered by money market funds feel free to contact us.