by Steve McDonald, Bond Strategist, The Oxford Club
Friday, February 22, 2013
In focus this week; don’t short treasuries just yet, the upside of smoking cigarettes and the sitfa
Lower yields are coming! Not what you wanted to hear, I know.
You think 2% on the 10-year treasury is low? Hold on to your wallet and don’t short treasuries just yet. Many of the analysts I have been reading think rates could fall from here.
The driving force most are talking about is the upcoming spending cuts battle in Washington.
Matthew Duchs, the manager of the government fund and the bond portfolio at Calvert Funds, says the recent run up in the stock market, which was the catalyst for the recent drop in bond prices, was not based on any real improvement in the economy. He sees the yield on the 10-year dropping from here and he’s pulling money out of stocks and going back into bonds.
$85 billion in spending cuts are set to take effect on March 1 and no one sees any of the necessary give on either side to initiate a short or a long-term solution to our budget problems. Duchs says the run-up in prices he’s expecting before the debate will be a great opportunity before what most agree will be a long-term drop in treasury prices.
The expected fear driven rally in treasury prices looks to be the last push that can move up treasuries prices for a very long time, and it is a very reasonable expectation.
The unknowns are still the EU and an unexpected set back in our own economy. Either could change the whole rate picture and result in rates moving to new record lows.
Don’t short treasuries just yet!
Cigarette Stocks are Smoking
Next up, cigarettes do have a positive side, sort of…
Virtually no other industry has the dividend and growth history of tobacco. Lorillard (NYSE: LO), the oldest and number three producer of smokes in the U.S., recently upped their dividend by 6.5%, from $.51 a share to $.55. That works out to a 5.3% yield.
The other big names in US tobacco have high yields as well; number one Altria (NYSE: MO) 5.1%, number two Reynolds (NYSE: RAI), 5.4%.
But the Wall Street Journal reported that Lorillard, despite its number three ranking, is out-performing the industry. Shipments jumped 0.3% last quarter while the industry is expected to see a decline of 2.9%. Earnings were down 0.3% last quarter but far exceeded the street’s estimates and sales of electronic cigarettes, don’t ask, I don’t know what they are either, but they are selling like crazy.
For many years tobacco has been considered by many as the money maker no one wanted to own. But, in the current yield environment, if you can bend your standards just a bit, you can make a big return on what has turned out to be an incredibly resilient industry. Despite the best efforts of local, state and the federal governments for the past 40 years, it has flourished.
Can you imagine any industry turning in the numbers tobacco has with the pressure governments from around the globe have put on it?
It’s a deadly and stinky habit but from a business stand point it is impressive.
Take a look at Lorillard.
SITFA: Meat Head Edition
And last, the sitfa
I’m not sure how to classify this one. Maybe the folks struggling in this pathetic economic recovery are getting the smack in the ole kisser this week.
It’s a $25,000 per year gym membership. Yup, you heard me right, $25,000 a year, not for life.
What service, legal service, could anyone provide at a gym that would make it worth $25,000?
The club, it has two locations in Greenwich and New York City, says they have private showers, dressing cabanas and freshly laundered workout clothes.
OK, maybe we’re at $2000 a year, $2,500 at best, but nowhere near $25,000.
But wait, the club says, there’s more, there better be; a private entrance and a retina scanner for security.
Give me a break!
Have so many people in this country gotten so spoiled this actually seems reasonable?
I like my $800-a-year club. I bring my own towel and sweats, and change in the locker room and I keep $24,200 in my pocket.
These club members shouldn’t be allowed to have wallets!
P.S. Speaking of staying in shape, you’ll want to read Marc Lichtenfeld’s article from last week about the opportunity in health-related companies.