September 18, 2015
Rates & Debates
Half way through the month now and the markets are thankfully quite a bit calmer than last month. After todays drop the S&P 500 and our accounts are down slightly for the month, on average approximately 1%. Year-to-date, however, the markets and our accounts continue to be negative.
While disappointed with the returns, we are still very comfortable at these levels and continue to hunt for deals while we wait for a better market. As mentioned previously, Cheniere Energy LNG, the nation’s first ever natural gas exporter appears to be a bargain again. We sold this position months ago for a small gain hoping we could buy it back at a lower price. The stock has now come down 30% and is a probable buy by the end of the month.
Interest Rate News
Big news this week was Janet Yellen and The Federal Reserve holding interest rates steady. The decision to raise rates will now be pushed out until October, December, or possibly after the first of the year.
This means companies that need to borrow a lot of money – think big utility companies, telecom companies and real estate – will keep their borrowing costs low for some time into the future. This will help their stocks in the short run.
What kind of impact will rising interest rates have on our positions? Josh Peters, CFA of Morningstar has a long-term interest rate estimate close to double what interest rates are today. With this Peters believes he’s already factored in these higher rates into his fair value of these companies and is confident they will weather the storm and continue to pay and grow their dividends after rates are increased.
One company in the portfolio less affected by higher rates is Spectra Energy SEP. Peters believes this pipeline company to be one of the strongest in that industry. He recently profiled the company and believes the unit distribution (dividend) will grow 7% – 9% per year over the next 4 years. As you can see in the graph below, an increase in dividend has resulted in an increase in share price as well.
I hope some of you caught the presidential debate the other night. What a show! While the childish insults don’t affect the accounts, the limited discussions of government shutdowns, tax reform, debt, and entitlements could certainly impact the economy. However, we feel we’re still so far from the election that these won’t have much impact for some time. We’re paying attention though and anxious to see how far the D.C. outsiders will make it.
As always, please call if you’d like to discuss further.
-Bruce & Tim