Over the past few days a few not very surprising things have happened. From Der Spiegel (as reported in the FT) German Chancellor Merkel has concluded that Greece must stay in the Euro and is now focused on ensuring this happens. Although many people (including apparently a majority of German voters) believe Greece should be kicked out (a satisfying and totally justified result of their profligacy) policymakers no doubt recognize that shoring up Spain and Italy (whose bond markets would undoubtedly be under enormous pressure in the event of a “Grexit”) would require sums beyond their current resources (perhaps 1 Trillion Euros). There really is no other choice.
Meanwhile the ECB announced its own version of QE last week over the objections of the Bundesbank. And another month of weak U.S. employment data on Friday made QE3 ever more likely. So Greece is staying in, and government buying of bonds is being broadened. None of this was much of a surprise, but equities have been rallying nevertheless, driven in part by the ever-decreasing attractiveness of fixed income. Mitt Romney even noted on Meet the Press yesterday that equities were higher because where else can you earn a decent return.
Interestingly though, GDP forecasts are not being revised higher. JPMorgan for example notes that consensus forecasts for GDP continue to be subject to modest downward revisions, and many corporations reporting earnings in recent weeks have provided cautious guidance on the near term outlook. It’s also interesting to note the divergence between stable, dividend yielding stocks and the S&P 500. On Friday they actually moved in opposite directions – the iShares Dow Jones Select Dividend Index (DVY) was -0.3% while the S&P 500 was +0.40%. In aggregate this all looks rather as if active equity managers are scrambling to keep up with their benchmarks while the market’s rising – higher beta names are performing well and the market is climbing its wall of worry.
For our part, our largest overall exposure in Deep Value Equities remains the Gold Miners ETF (GDX) since real assets have central bank support through reflation if they fail to improve through stronger economic activity. Our next largest is Corrections Corp (CXW) as we await further developments on their conversion to a REIT. Hedged Dividend Capture has lost around 2% over the past few weeks consistent with its proclivity to underperform a strong equity market. MLPs remain attractive – it’s interesting to note the growing number of unconventional MLP IPOs in recent weeks. A number of private equity firms have been taking public as MLPs businesses that have far more volatile earnings than is normal for the sector. An example is Petrologistics lp (PDH), whose S-1 registration statement includes the warning that, “We may not have sufficient cash available to pay any quarterly distribution on our common units.” Their units offer an 8% distribution yield but that yield could move violently in response to the profitability of polypropylene production rom their single facility. It’s not a name we would own, but developments such as these may begin to alter the make-up of the Alerian MLP Index.