Every week for the last several months, the electric company here in Baltimore has been sending your editor an email like this…
There’s additional detail breaking it down by day, and sometimes by hour. The information is interesting, occasionally even useful.
But it’s a bit strange, don’t you think? After all, isn’t it in a company’s interest for its customers to use more of their product?
Not always with utilities, it turns out. And that curious fact is a warning alarm for what’s supposed to be one of the “safest” areas of the stock market.
“The premise behind utility stocks is that they provide steady income with small increases over time,” explains our Chris Mayer.
That’s how it’s been for decades. Heck, utilities were the S&P 500’s best-performing sector last year.
“The usual way a utility makes money is it charges a rate for usage,” Chris goes on. “In theory, the more people use, the more the utility gets paid.”
But reality is diverging from theory in more than half of U.S. states… as environmentalists successfully push for measures encouraging less usage.
Enter a concept called “decoupling.” The nonprofit National Resources Defense Council describes it as a way to “adjust rates to ensure a utility collects the costs its regulator or governing board authorizes, no less and no more.”
Well, that makes the revenue stream predictable… but there’s not a lot of upside potential, is there?
Electric decoupling is the rule — or will be soon — in 19 states. Gas decoupling is reality, or will be soon, in 25 states.
“Decoupling changes the old rules,” says Chris… and most utility investors are oblivious.
Writes fund manager Murray Stahl, investors assume “that the utilities will produce the same magnitude and pattern of returns as they did in the past. The mechanisms, however, are such that this is just not possible.”
The highest-yielding utility stocks sport a price-earnings ratio around 18. “That’s high for companies that won’t grow,” says Chris. “They pay out most of their earnings in dividends, so there isn’t much cushion if earnings shrink.
“That is a powerful argument against utilities. And it has nothing to do with interest rates or the broader market. It has everything to do with a detail that the market seems to be overlooking.”
Sure, there will be exceptions, Chris concludes, but as a whole, “My sense is the utility sector is badly mispriced and there is a lot more risk than the stock prices let on. I’d avoid the sector.”
Major U.S. stock indexes are starting the week in the green, if barely. The S&P 500 is up barely a point, to 2,053.
“The S&P moved up a bit last week, but it’s still in the intermediate-term descending triangle pattern we talked about last week,” says Jonas Elmerraji of our trading desk.
“Overall, there isn’t anything super exciting or scary about the chart. The S&P is near the middle of its price channel, and there’s little reason to think that will change in the coming market sessions.”
Short term, Jonas likes consumer stocks. “They’re quietly killing it,” he says. “People haven’t stopped buying stuff. So while it hasn’t made the financial news, the consumer discretionary sector has been outperforming the S&P 500 for the last several months. Consumer staples aren’t far behind.”
To some extent, stocks are in suspended animation pending the every-six-weeks meeting of the Federal Reserve — which starts tomorrow and wraps up with a policy statement Wednesday afternoon.
On Friday, the Fed’s favorite conduit for authorized leaks — Wall Street Journal reporter Jon Hilsenrath — suggested the strong dollar of late “could slow both U.S. growth and inflation, giving the Fed some incentive to hold off on its plan to raise short-term interest rates later this year from near zero.”
Just as our Jim Rickards has said since November.
“The world is not cooperating with the Fed’s master plan,” Jim wrote Rickards’ Strategic Intelligence readers last week. In the tug of war between inflation and deflation, “I believe deflation is winning in the short run, while inflation will prevail in the long run.”
That is, the Fed has swelled its balance sheet $4 trillion since 2008, but so far, “its efforts have been blunted by a strong deflationary force, the strongest in 80 years. This deflationary force will not abate soon.”
Jim’s preferred deflationary play is the Wasatch-Hoisington U.S. Treasury Fund (WHOSX) — already up 15% since he recommended it to his readers in mid-November. As long as deflation has the upper hand, it’s a keeper.
The euro swooned overnight after the anti-bailout Syriza party won the Greek parliamentary elections… but it’s since recovered.
The Esperanto currency briefly dipped to $1.11 for the first time since 2003, but at last check, it’s back to $1.127.
Gold priced in dollars is getting no love from the Greek election results. After flirting with $1,300 last week, the bid is down to $1,279 as we write. Silver’s back below $18, at $17.94.
Silver Eagle sales are off to a strong start in 2015. With one week of January remaining, the U.S. Mint’s dealer network has snapped up 4,760,500 coins.
That’s nearly as many as exited the Mint’s doors during all of January last year. And the year 2014 set a sales record.
“Why the sudden demand for a metal that the market has pretty much disdained over the past three years?” asks our Byron King. “Farsighted folks who’ve gone ‘contrarian.’
“Gold and silver prices fell over the past couple of years because of a strong U.S. dollar. When the greenback is strong, prices for precious metals fall. The dollar, however, wasn’t getting stronger on its own accord — it strengthened due to increasing U.S. oil output and lower oil imports. A strong energy scene made for a strong economy and a strong dollar.
“But as you know, that’s all changing before our eyes. Oil prices have crashed, and the dollar is living on borrowed time. This is our inflection point — the point at which two or more events will drastically change the way people think and act.”
There’s nothing like physical silver in your possession, says Byron: “If you can’t drop it on your foot, then you don’t own it!” But once you’re comfortable with your metal position, he recommends Silver Wheaton (SLW) — the “silver streaming” company that doesn’t mine ore, but instead collects a royalty from companies that do. “Shares are just beginning to move upward off of a five-year low,” Byron notes, “apparently in sympathy with the silver revival.”
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From the talking-to-a-brick-wall department: Seems a brick wall has nothing on the IRS.
The IRS insists Siegfried Meinstein is dead. In reality, he is alive and reasonably well (for being 94) and living in Upper Arlington, Ohio.
Last April, he had an accountant file his taxes as usual. “The return was denied,” reports The Columbus Dispatch. “The Social Security Administration had listed the filer as dead, the IRS said.”
Meinstein and his son took their case to the Social Security Administration, which gave them a letter they took to the IRS in August.
Soon after, they got another IRS notice… still insisting the elder Meinstein had ceased to be. That was followed by two more notices. Even after contact with the IRS’ Taxpayer Advocate Service, another notice came in December.
So they’re trying with the tax advocate again, and awaiting a reply. “Meanwhile,” the Dispatch reports, “they just got another letter from the IRS. It wanted to know why Siegfried Meinstein has a credit balance of $14,000 in taxes he prepaid for 2014. And why the IRS can’t find his return.”
Don’t think Mr. Meinstein’s experience is a fluke. Indeed, it bodes very ill for the rest of us.
Not mentioned in the newspaper article is that the IRS is squealing about a $350 million cut to its $10.9 billion budget… and the agency is taking out its frustrations on you and me. The IRS’ internal watchdog unit is warning half of all phone calls to the agency will go unanswered this year – “the worst levels of taxpayer service since at least 2001.”
Nor is it possible any longer to leave a voicemail when you call the IRS and wind up on terminal hold. You can email, but that’s not much help to the 43% of older Americans who don’t use the Internet.
However, the IRS acknowledges the situation will also mean fewer audits.
Who said we were a bunch of doom-and-gloomers around here?
“Excuse me,” a reader writes after we poked fun at the “Davos set” that gathered last week in Switzerland for the World Economic Forum, “but aren’t the guys in Davos just doing what The 5 is — only on a much grander scale?
“Say I were to go to Davos as an invited participant. Wouldn’t my expectations of making some moolah mirror (in a grander way, of course) my expectations of subscribing to The 5 and related publications? Am I speaking of the way of capitalism… or am I way off base?”
The 5: You have to ask?
The difference between the Davos set and us is encapsulated in the slogan that appears under its logo each year…
Presumptuous, no?
Around here, we have no such commitment. The concept is so abstract as to be meaningless. But it’s great cover for all manner of schemes to “manage” society as if society is a machine whose knobs and dials can be twisted to achieve a desired effect. From this poisoned well spring ideas like carbon taxes.
Us? We don’t presume to “improve the state of the world,” whatever that means. We aim to improve the life of each customer, one by one. That’s a lot more concrete and achievable.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. One way we aim to improve your life is to show you how to pocket meaty chunks of income, two or three minutes at a time.
It takes a nest egg of about $25,000 to get started… and soon you’ll be pulling down hundreds of dollars in as little as 60 seconds. There’s visual proof when you follow this link.
