We are Just 30 Basis Points from a Big Tumble

It is rather refreshing to observe how equities of all sorts have been reacting to the move up in interest rates–it has been pretty orderly (meaning no major daily tumbles).  We believed that rates would move higher, but as is normal one NEVER knows how stocks (whether it be preferreds, exchange traded debt, REITs or utilities) will react.

Now turning to our headline above ‘We are Just 30 Basis Points from a Big Tumble’ we are simply speculating that if we get some kind of jolt higher in rates–20-30 basis points in a day, all interest rate sensitive sectors will tumble very hard (remember the taper tantrum a couple years ago).  This could happen tomorrow, next month or next year–not a question of if, but when.  This should be viewed as a opportunity–we have been waiting for the opportunity to be able to lock down some returns that are above 3-4% in particular in some utilities.  Over our lifetime we have loved utilities–but we want to be paid to hold them and that opportunity hasn’t been around for a few years.  Scanning our Utility listing page (by yield) we note that there are now 29 issues paying above 4% and 9 issues yielding over 5% (although a number of these are very marginal from a quality prospective).  We observe that a very large share of utility issues are trading near their 52 week lows. The sector as a whole is 5% above a 52 week low and 15% below the high.  This has brought a couple of issues onto our radar screen–solid issues that pay good dividends.  The issues we will now be watching are  Centerpoint Energy (ticker:CNP) andTransCanada (ticker:TRP).  In addition we will be watching Southern Company (ticker:SO) which we sold a month ago at slightly higher prices.  We have not ‘vetted’ these issues completely–but we are watching.  It would seem reasonable, and possible, that a big setback in markets would bring the yields on these issues up around 5.5% (maybe more) and we haven’t seen these kind of yields on utilities for 4 years.

As always we are patient and watching.