Interest Rate Question:
“I have noticed the comments in your weekly report are showing bond percentage yields going higher. This, as you know, suggests the underlying value of bonds—and I would think especially in a bond fund–going a great deal lower. Could this also impact ‘dividend’ stocks as well? Is this is one of those ‘sit back and suffer’ things? Or, what proactive steps should be taken and when?
Mark W., Michigan
Answer: Dear Mark
The risk to bonds and bond funds is significant. It’s the reason we advise staying as far away from such investments as possible. The Genetski stock market report http://bit.ly/12M8MQR from earlier this year suggests using dividend stocks instead of bonds for the fixed-income portion of a portfolio. We see these as a better hedge against rising interest rates than bonds since companies have the potential to raise prices in an inflationary setting. There is no such protection with bonds.
You also are correct in suggesting dividend stocks could suffer from a sharp rise in interest rates. Since we hold and advise others to hold such stocks, we would stress the importance of continuing to assess the yield versus the risk. One reason we recommended closed-end dividend funds with relatively high yields is our belief that they offer more protection from an increase in interest rates than bonds. Even so, when the blow off comes and interest rates soar, it will be important to either avoid holding such funds or purchase protection against a sharp decline in value. We do not believe we’re at this point yet. However, we monitor developments closely and will do our best to provide advance warning as the risks of sharply higher interest rates become more likely.
Dollar v. Yuan Question:
Last year China announced it would use its currency as an alternative to the dollar for buying and selling oil. Should we have concern over possible negative implications for the US currency? If so, which stocks will be impacted? Positively or, Negatively?
Paul V., Indiana and Bob R., Illinois
Answer: Dear Paul and Bob
It really should not have any impact. Here’s why. Ergo, the currency issue should not impact individual stocks. China’s increasing imports is another matter.
Currency. Every country’s currency has one use—it provides the means to purchase the goods and services the country produces. The demand for any country’s currency depends on the demand for its goods and services. The US produces roughly 25% of the world’s goods and services. The only way for anyone to purchase these goods and services is with US dollars.
When the US was the world’s single dominant producer of goods and services, the dollar became the logical source for global transactions. Over the past two decades things have changed. The Eurozone and China have emerged as rough equals to the US in global trade. This creates a natural shift from dollars to Euros and Yuan.
Until recently, the main barrier to using Yuan for international transactions has been China’s currency controls. These controls made it more difficult to exchange the Yuan for other currencies. A progressive easing in such controls has made the Yuan somewhat more attractive for international transactions than it had been.
The future of the dollar as a major source for international payments depends primarily on US policies. Moves toward a powerful and intrusive federal government have seriously limited this country’s growth. Limiting the creation of goods and services reduces foreign demand for US output. Such policies represent the main threat, not just to the future of the dollar, but to our entire economy.
Greatest potential. Over the past 10 years, the US has experienced a tremendous surge in production of energy related products and technologies. Our natural gas, oil shale and coal as raw materials and their related advanced technologies are in high demand throughout the world. The biggest threat we have here are regulations that oppress/restrict industry, without impacting our ecology in a positive fashion. When the regulations become the vehicle for a political agenda, rather than a practical purpose, we put ourselves at a serious economic and trade disadvantage.
Stock picks. Anything in the energy sector that is well capitalized and organized, despite EPA resistance.
