Time to Move Back into Defensive Stocks Like Utilities?

If yesterday was the beginning of the end of one of the top-10 bear market rallies of all time, there are many that will point to Burlington Northern’s (BNI) disappointing outlook as the straw that broke the camel’s back.

I think instead that it was news released by the National Retail Federation which recently published the results of its annual Halloween Consumer Intentions and Actions Survey (they actually have one of these?) which found that the average consumer was planning to spend 15% less on Halloween items this year including: candy, decorations and costumes. That works out to $56.31 per family, down from $66.54 in 2008. “The economy has caught up to Halloween this year,” Tracey Mullin, CEO of the NRF said.

After yesterday it would also appear that the economy caught up with the bulls too as the market had resembled an inch-worm in its creep upward since July. It seems as if the little guy got to the end of whatever it is he was climbing and put his front legs down where there was no there, there. He hasn’t tumbled yet but those back legs have to be straining to make sure that puffy little green body doesn’t end up on the forest floor. With regard to the SPX that would probably translate into a break of the 10/2 close of 1025.21.

If it is all over is it time to move back to the traditional defensive names? Say, utilities? A recent profile in Barron’s of a number of names in the power business cited Warren Buffett as a fan of the sector. That he is a major shareholder in BNI, the pesky railroad that started this whole sell-off thing should not be held against him.

As you know the theme of this space is the CDS/equity relationship but borrowing from Andrew Bary who wrote the Barron’s piece I will relate some of the usual suspects when it comes to stock valuation before seeing how they stack up in my world.

As of a few weeks ago, according to AB:

“Based on 2010 earnings estimates, the utilities’ P/E multiple of 11.5 is beneath the broad market’s 14. Utility dividend yields average just over 5%, more than double the 2.1% of the S&P 500. [Which might be a touch higher after yesterday.] The yield spread between the utilities and the S&P 500 is near a five-year high. The utility dividend yield also stacks up well against 10-year Treasury bonds.” [The 3 5/8th’s of 2019 are yielding 3.42%.]

Interestingly after yesterday’s sell off the CEC Strategy is still long DUK and D, two of the names mentioned in the piece. Not mentioned in the article, but the third and only other long that made it through yesterday’s carnage was DTE Energy (DTE).

Additionally, while no utilities were sold short yesterday the CEC Strategy was short EXC, FPL, PEG, PGN and PPL. PEG was cited under the Integrated Utilities category in the Barron’s piece. (Just to refresh, if I am long CDS spreads are narrowing and if I’m short spreads are widening.)

If there is a macro line connecting the dots here and a way that this weaker than thought economy was already being signaled by the positions in the CEC Portfolio it would have come from the fact that there were almost twice as many shorts as longs in the utility sector which would make sense if customers weren’t using that much power and the fixed costs incurred by utilities were starting to each into the bottom line.

Little bites, like our puffy green friend munching on a leaf.

Comments

[bindlepete:]

I see utilities as a good defensive play but their dividends will surely lag the inflation figures. Truth is that the large central generating utilities should go out of business with their megga coal plants of moderate efficiency. The size= efficiency equation is history and a larger number of smaller local plants would encourage co-generation as well as get rid of the expensive, inefficient and fault prone transmission lines.

It would do great damage to the insurance co's , of course, who hold the paper on these antique generators but Hey, what's another bail out. The printing presses are now warmed up.

Non the less the utilities are a reasonable defense for the investor in US securities.

Oct 29 09:34 AM

[prairiedog555:]

I must consider the Obama factor. That is his penchant for over regulation. I have been looking at foreign utilities and a ETF from Wisdom Tree DBU

Oct 29 04:25 PM