An Alternative To Money Market Funds
September is behind us and both the Dow Jones Industrial Average and S&P 500 continued their struggles during the second quarter. China and Brazil, along with the economies of other emerging market countries continued to deteriorate. Last month, the China Manufacturing PMI sank to a 78 month low, demonstrating how its economy continues to contract.
Brazil is now in focus after its debt rating was cut to junk status last month by Standard & Poor's. Its currency, the Real, hit an all time low against the US Dollar since being introduced in 1994. In addition, its state controlled oil and gas company Petrobras also saw its debt rating cut to junk status last month.
At its peak in 2009, Petrobras had a market capitalization of $310 billion making it at one point the fifth largest company in the world based on market capitalization. At the end of September, Petrobras market capitalization was less than $25 billion. Petrobras has more than $120 billion in debt. Several of its debt issues now yield more than 10%, a clear sign of its weakened state. Nevertheless, back in June Petrobras was able to issue $2.5 billion of 100 year bonds with a yield at issuance of 8.45%.
Interest rates in the US and Europe remain low as the Federal Reserve decided to keep rates at zero at its meeting in September. Barclays, the highly regarded international investment bank, now forecasts the Fed will not begin raising rates until early next year. The Fed’s final two meetings of 2015 are set for October 27-28 and December 15-16.
Several firms announced significant cost cutting and job reduction plans last month. Caterpillar expects to cut its annual expenses by $1.5 billion and trim its payroll by up to 10,000 jobs by 2018. Hewlett Packard plans to cut another 25,000 to 30,000 jobs as it prepares to split the company into two publicly traded firms, HP Inc. and HP Enterprise. The split is expected to occur in early November with HP Enterprise trading under the ticker HPE.
Maintaining a defensive stance continues to be our focus as we employ our conservative dividend capture strategy. Please avoid investing in the emerging markets, especially the BRICS (Brazil, Russia, India and China). Two of these countries are Communist and all four of these nations are riddled with corruption. Even though sectors such as the major telecoms, utilities, the major oils and the oil and gas pipelines have fallen out of favor, 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.