Daily Market Wrap: February 1, 2012

The markets made some impressive gains, as investors remain hopeful that a Greek deal can be reached. The ADP national Employment Report showed that private employers added 170,000 jobs in January, meeting expectations.

Daily Dividend Report: BRCM, AFL, COF, HSY, HVB

Broadcom Corporation (BRCM) announced its quarterly dividend of 10 cents per share, an increase of about 11% over its prior dividend in November of 9 cents. The company announced earnings that beat analyst estimates, though revenue fell, and issued positive guidance for the first quarter.

Fed’s Near-Zero Interest Rate Policy a Failure?

The world’s largest central banks continue to follow a low interest rate policy first implemented to deal with the 2008 recession. The argument for adopting the record-low rate was that deep cuts to the lending rate would help ensure sufficient liquidity within the financial system and encourage spending and growth promotion.

In this regard, the U.S. Federal Reserve was the most aggressive of the major central banks. After a quick succession of rate cuts, the Fed took less than a year to chop the benchmark lending rate from 5.25 percent, to a maximum of 0.25 percent as of December, 2008. Now, more than three years later, the lending rate remains zero bound; a fact that has some critics suggesting the Fed’s policy has failed to accomplish its stated goals.

One of the most vocal opponent’s of the Fed’s approach is himself a Federal Reserve Bank President. Thomas Hoenig, President of the Federal Reserve Bank of Kansas City has, on several occasions now, spoken out against the continuation of near-zero interest rates.

Referring to the current Federal Funds rate as a “subsidy” for the banking industry, it is Hoenig’s assertion that while banks are indeed taking advantage of the “cheap” money available from the Fed, funds are not being made available for commercial and retail lending. The banks are instead simply investing the cash directly into higher yielding bonds including U.S. government treasuries. As of Wednesday morning, the benchmark 10-year yield on U.S. debt was 1.82 percent.

Using money from the Fed to buy higher yielding securities may make it possible for institutions to profit on the positive interest rate carry, but does little to help businesses acquire capital to expand and help get Americans back to work. It can also be argued that this policy has actually reduced liquidity.

With the ability to profit on higher-yielding bonds as described, banks have become even more selective to whom they provide loans. Banks can simply shun all but the top-tier ventures representing the least amount of risk. The result, according to Hoenig, is that rather than encourage lending to support growth, the Fed’s policy has actually made it more difficult for smaller companies and private individuals to gain access to the Fed’s liquidity.

Scott Boyd is a currency analyst and a regular contributor to the OANDA MarketPulse FX blog

Eurozone Debt Crisis Infographic

The recent downgrade to sovereign credit ratings for several of the Eurozone countries is just the latest challenge to befall the 17-member group of countries sharing the Euro. A total of nine countries were included in the downgrade and while none of the changes were overly surprising, the reclassification casts doubt on the likelihood that some of the weaker countries can remain viable.

With the reclassification, Germany, Finland, and the Netherlands are the only countries to retain triple-A rated status. When expanding to all of Europe, only two more countries – the UK and Switzerland – can claim top status, and the UK’s hold on triple-A is tenuous.

The following graphic compares the debt for most of the European economies together with their current credit rating. The 10-year bond yield is represented by the anchor dragging behind each economy – the bigger the anchor, the greater the drag on the economy.

At a Glance: European Debt and Credit Ratings

Sovereign income, debt, and credit by region

Sovereign income, debt, and credit by region

Created by OANDA

Bank of Uganda Cuts Interest Rate 100bps to 22.00%

The Bank of Uganda cut its new monetary policy interest rate (the central bank rate [CBR]) 100 basis points to 22.00% from 23.00% previously.  The rediscount rate and Bank rate were also reduced by 100 basis points to 26% and 27% respectively.  Bank of Uganda Governor, Emmanuel Tumusiime-Mutebile, said: “Compared to the previous month, the BOU now believes that the prospects for a fall in inflation during the course of 2012 have strengthened.  The BOU is now confident that inflation will be reduced to single digit levels by the end of 2012,”

Previously the Ugandan central bank last increased its interest rate by 300 basis points in November, and 400bps to 20% in October, after hiking 200bps in September, and 100bps at its August meeting, and previously setting the new central bank rate at 13.00% at its June meeting.  The Bank only recently began using the 7-day interbank rate to influence inflation, also commencing official targeting inflation; the Bank previously announced an inflation target of 7%, and noted it has a 5% core inflation target in its September press release.  

Uganda reported annual headline inflation of 27% in December, down from 29% in November, and 30.5% in October, compared to previous readings of 28.3% in September, 21.4% in August, 18.8% in July, 18.7% in June, 16% in May, and 14.1% in April, while core inflation was 29% in December.  
Uganda reported annual GDP growth of 6.3% in the fiscal year to June, compared to 5.5% in the same period last year.  

The Ugandan shilling (UGX) has depreciated by about 3% against the US dollar over the past year; while the USDUGX exchange rate last traded around 2,335, off from the highest (2,885) on record (against a low of 1570 in 2008).

Central Bank of The Gambia Cut Rate 100bps to 13.00%

The Central Bank of The Gambia cut its rediscount rate by 100 basis points to 13.00% from 14.00% previously, and left the reserve requirement ratio unchanged at 12%.  The Bank said: “Taking the above factors into consideration, including the inflation outlook and the lack of demand pressures from the slowing of the domestic economy, the MPC has decided to reduce the policy rate by 1.0 percentage point to 13 percent. The expectation is that other interest rates, particularly lending rates, would be reduced.”

Gambia reported headline inflation of 4.4% in December, and 4.1% in September 2011, compared to 5.8% in December and 6.2% in September 2010.  The Bank said “Inflation is expected to remain in single digit in 2012 predicated on prudent implementation of monetary and fiscal policies as well as the easing of global food prices.”  The Gambian economy grew at a pace of 5.4% in 2011, compared to 6.1% in 2010.  The Gambia’s currency, the Gambian Dalasi (GMD), last traded around 30.30 against the US dollar.

Are Dividend Stocks Overvalued?

What we saw at the end of 2011 was an environment where an investor’s sound strategy began to win out over the masses…

Market players began to disregard all the premature “good news” coming from Europe and started making better investment decisions.

At the beginning, they were bullish on any positive news, and then funneled all their money into Treasuries – with a return of around 2% – when that “good news” turned out to be less than credible.

As we have said here many times, “Save yourself the heart attack of this rollercoaster ride. This is a time when trusted strategies can deliver peace of mind.”

And so with all the volatility, the clear strategy was to reduce risk while gaining the best possible return. For this reason, dividend-paying stocks have been attracting investors of all types for their high yields and market-trumping returns. The yields of dividend-payers have dwarfed those of 10-year Treasuries.

But when everyone is preaching the same game plan, there can be some drawbacks. So we must ask: With all their newfound popularity, have dividend paying stocks become too pricey?

Here are three important factors to look at:

  1. Investors poured $31.3 billion into mutual funds and exchange-traded funds that invest in dividend payers last year, nearly five times the amount in 2010, according to researcher Lipper Inc.
  2. All equity funds and ETFs lost around $33.5 billion.
  3. Stocks, in the Standard & Poor’s 500 Index, that pay dividends posted a 1.4% total return in 2011, while non-payers fell 7.6%.

The flood of funds into dividend payers is making their stocks more expensive.

Here’s how it usually happened over the years; dividend stocks trade at lower price-to-earnings ratios, with the expectation that they’ll grow less quickly than other stocks.

This still remains true. However, the gap between payers and non-payers is shrinking. If you look at the end of 2010, the average price-to-earnings ratio of non-payers in the S&P 500 was 37% higher than the average P/E for payers; presently it’s at 33%.

This recent phenomena has been caused by the introduction of the short-term investor into the dividend market and the drawback of the higher prices could mean that they may not be able to duplicate last year’s strong performance. The fact that the sector is “en vogue” has also seen some yields push down.

Don’t Fret Long-Term Investors

If you’re investing or thinking about investing in dividend-payers, you have to keep this a long-term strategy because that will be the most beneficial play.

Because they tend to be less volatile than non-payers, they tend to lag in a bull market, but hold up better when markets falter, says Howard Silverblatt, the senior index analyst at Standard & Poor’s. “Basically, the dividend acts as an anchor holding the stock in place,” he says.

And because many companies increased their dividends over the course of 2011, dividend investors will be getting more income through 2012. “Unless companies cut [their dividends], you almost have to get a double-digit increase this year,” Silverblatt says.

Don’t Overpay

Investors should focus on companies that are still growing their dividends and not chase yields. “Dividend growers are great inflation protection because that yield is increasing every year,” says Steven Roge, a portfolio manager at R.W. Roge & Company. And if the yield is rising, he says the underlying fundamentals of the company are likely improving, too.

Great things to keep in mind…

For more information on dividend stocks, take a look at our dividend investing site map.

Good Investing,

Jason Jenkins

Article by Investment U

Now is the Time to Buy Healthcare Stocks

I’ve been talking a lot lately about the $4 trillion that’s about to fall into the laps of businesses in the healthcare sector due to the number of Baby Boomers who are now turning 65.

And we know that the older we get, the more we spend on healthcare.


  • The average senior takes between two and seven prescription medications.
  • Two out of three seniors will suffer a physical or mental impairment.
  • One out of three seniors will spend time in a nursing home.

All of those things cost money – not to mention, chemotherapy, insulin, rehab stays, regular doctor appointments, weight loss programs and nutritional supplements.

That’s why it’s a great time to put money to work in the sector. Revenue and earnings are going to explode higher in the coming year, particularly in the two most innovative groups – biotech and medical technology.

But the time to get in is now. Here’s why.

On the chart below, over the last six months, starting right before the market sell-off over the summer, biotech and med tech have underperformed the S&P 500.

Six Months:

  • S&P 500: -3%
  • Medical Equipment: -7%
  • Biotech: – 11%

Healthcare Stocks: 6 month chart

However, that underperformance isn’t the norm.

As you can see on the following charts, biotech and medical technology strongly outperform the S&P 500 over five- and 10-year periods.

Five years:

  • S&P 500: -7%
  • Medical Equipment: +20%
  • Biotech: +71%

Healthcare Stocks: 5 year chart

Ten Years:

  • S&P 500: +16%
  • Medical Equipment: +117%
  • Biotech: +163%

Healthcare Stocks: 10 year chart

So, history tells us that medical technology stocks like Intuitive Surgical (Nasdaq: ISRG) and biotech stocks like Celgene (Nasdaq: CELG) blow away the market averages. Yet right now, the group is underperforming.

I don’t expect that to last. Not when the fundamentals are lining up to create a boom in healthcare that some experts are saying will be similar to the beginning of the internet.

If any sector is going to dominate the news, politics and your finances in the coming decade, it’s going to be healthcare.

And because of the near-term underperformance, the sector is giving you a great opportunity to get in while the getting’s good.

This is a trend that’s going to have legs for a long time. But if you can start scooping up some of the best small- and mid-cap biotech and medical technology stocks now, imagine what they’ll be worth five and 10 years from now.

Anyone who bought Celgene 10 years ago is sitting on a 1,000% profit. Investors in Intuitive Surgical have made nearly 25 times their money. A $10,000 investment in 2002 is now worth $245,000.

With Baby Boomers aging and $4 trillion building up like flood waters against a levee, the underperformance of the sector isn’t going to last long. The market is giving us a rare opportunity to buy a group of stocks that are going to generate enormous profits for investors – and those stocks are currently on sale. It’s time to go shopping and fill up the cart.

Good Investing,

Marc Lichtenfeld

Article by Investment U