Roger Conrad, in a leading expert on utility stocks; the editor of Conrad's Utility Forecaster is al...
Energy and Munis Looking Good
01/18/2013 7:30 am EST
The start of the new has seen a lot of money looking for solid income in two sectors that were neglected before the fiscal cliff was resolved, notes Bryan Perry of Cash Machine.
Both the Conservative and Aggressive High-Yield Portfolios have greatly benefited from the first two weeks of the January rally. Looking across the 39 recommended securities that make up both portfolios, I'm hard-pressed to find more than a handful of names that aren't in technically overbought territory in the short term.
It's a nice problem to have-and I hope we endure this "problem" all year. It just tells me that a good portion of those fresh new billions of dollars flowing into equities is being dedicated to high yield.
The inflows into equities have been met with the equal and opposite outflow from long-term bond-related assets, causing a rise in yields. From a technical standpoint, the yield on the ten-year and 30-year Treasuries have breached their respective 200-day moving averages, which pretty much confirms that the rotation out of bonds and into equities has some legs.
Being that our bond exposure to the long end is limited to two investment-grade tax-free municipal bond funds, Dreyfus Strategic Municipals (LEO) and Nuveen Municipal Opportunity (NIO), I'm going to maintain those positions in light of the higher income taxes levied on the class of investors that buy munis.
I'm not of the view that interest rates are going to spike any time soon. With the change in the tax laws this month, the appetite for tax-free income by wealthy individuals only got bigger.
Our corporate- and convertible-bond exposure lies in my recommended holdings of the Credit Suisse High Yield Bond Fund (DHY), Western Asset High Income Fund II (HIX), and the AGIC Convertible & Income Fund (NCV). All three of these closed-end funds have portfolios with average maturities of less than six years. From my point of view, this is the sweet spot on the bond curve, and is why money that remains in the bond market will gravitate aggressively to the shorter end of the curve.
It seems that almost out of nowhere, oil prices are again front and center in terms of attracting money to energy-related assets. After spending half of the third quarter in the mid-$80 range, the price of crude is now holding above $93-primarily in response to the rebound in the Chinese economy and what that implies for higher future demand. And last week's surprise drawdown in natural gas supplies here in the United States sparked a big reversal in the price of natural gas from the $3.15 level to today's price of $3.40 per mcf.
The rally in oil prices prompted me to highlight energy laggards
Chesapeake Granite Wash Trust (CHKR)
and SandRidge Permian Trust (PER),
both of which have turned up and should rally further into their pending
ex-distribution dates, slated for early February.
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