TUESDAY OCTOBER 13, 2009

Rate Fatigue

A year ago, the world was on the brink of financial collapse and investors flocked to super safe investments.  As we have noted many times, there is still over $3 trillion invested in money market instruments.  However, anecdotally, I have fielded quite a few calls in the last few weeks from customers, both individuals and institutions, asking how they can enhance the paltry yields on their cash investments.  Six months ago, receiving .25% on cash investments was acceptable because of the economic fear and uncertainty.  Today, with the economy modestly improving, investors seem to be experiencing what I call "rate fatigue."  Given the high demand for "guaranteed" cash investments, the price for that safety remains extremely high.  The usual response to this problem is to mover further out the maturity term of the yield curve.  But 2 year and 3 year Treasury notes are yielding .92% and 1.44%, a modest improvement at best.  In addition, given the horrible fiscal condition of the U.S. government, investors are rightfully concerned about buying longer dated Treasuries due to massive future supply, weak dollar and inflation concerns.

One area investors might want to consider is large cap, blue chip stock investments.  Yes, it goes without saying that these investments have downside principal risk.  But they also have a few very attractive qualities.  First, they generate relatively high income streams.  The yield on the S&P 500 stands at 2.33%, pretty attractive to money market rates and short-term bond yields.  Many high quality companies have dividend yields of 3% or more.  Second, these companies offer some protection from a weak dollar.  Since roughly 48% of the S&P 500 sales are generated in foreign markets, the earnings of these companies will be enhanced (at least in the short-term) by a weak dollar.  Finally, the S&P 500 has posted a 10 year return of roughly 0% compared to its long-term average return of 10%+.  If one believes in reversion to the mean, and it is pretty powerful in the world of investments, the next 10 years should generate attractive returns for stocks.  One has to have a pssimistic view of the world to suggest stocks will generate a 0% return for the next ten years!

This is not an "all in" bet.  Stocks have had a brilliant run and may experience a correction in the near-term.  However, for investors experiencing rate fatigue, moving some money into high quality stocks may be a good idea.  It will certainly enhance the income generated by their portfolios and provide some weak dollar/inflation protection.

POSTED AT 1899-12-30 10:10:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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