Archive for October, 2011

Is The Decline In Commodity Prices Over?

Posted in CRB Total Return Index (CRB) on October 10th, 2011 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

When looking at weekly charts of the Reuters/Jefferies CRB Total Return Index (CRB), two forms of key trend line support, both at the 292.39 level, appeared to “hold” on a test last week. Moreover, stochastic and RSI studies on the weekly time frame were and are in oversold conditions, which makes support at the 292.39 level more meaningful.

Support, or a reversal to the upside, on the CRB index, if it occurs, could be interpreted as a sign that worries over a renewed recession in the U.S.might be overblown. That being said, investors’ concern that a global contraction might be in the offing are really due to the on-going financial crisis in Europe. European sovereign debt woes and concerns over the solvency of their banking system had caused “position squaring” in many different markets, including equities and commodities in an attempt to reduce “risk”.

What remains troubling is that in October 2008 the CRB index did in fact break solidly below the very same “cross” trend line that just recently held as support …in response to the Lehman Brothers failure.

Although Secretary of the Treasury Timothy Geithner recently said on national television that there will be no Lehman-like collapse in Europe, worries over of such a situation have not gone away. Secretary Geithner said in the very same television interview that it requires a “clear, unequivocal, unified commitment to do whatever it takes to solve it (the financial crisis)” inEurope…and there’s the rub. To the global investment community, such a commitment, or the political will to do whatever it takes to solve the crisis is in doubt. A credible commitment to the world, on the other hand, would eventually calm fears, encourage investment and help stabilize the general price level of many things, including commodity prices.

The absence of such a unified commitment, however, would be troubling and could lead to another “leg” lower in both commodity prices and equity evaluations.

Dow Jones Utility Index Renews Its Upward Grind

Posted in Dow Jones Utility Index (DJU) on October 3rd, 2011 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

As the financial clouds grow darker, and with interest rates on U.S. Government Bonds shrinking to new post-war lows, the search for yield and for relative safety has intensified in recent weeks. Clearly, a more defensive “risk” posture is now evident in the equity markets. The stand out in this environment, however, is the utility sector. That has been evidenced by an 8.29% rise in the Dow Jones Utility Index (DJU) on a year-to-date basis …not including dividends which tend to be generous. Moreover, the DJU Index has risen by 9.54% (not including dividends) over the past 12 months ending with Friday’s quarter-end close.

From a technical point-of-view, a bullish reverse Head & Shoulders pattern continues to play out to the upside on the DJU …and its chart suggests that there is a lot more upside to go. While it has already broken above “neckline” resistance at 408, the target of this formation is for an eventual test of the 525 level, a 20.2% advance from Friday’s 438.56 close. This viewpoint appears to be consistent with the current chart pattern of U.S. Treasury 10-year note yields which targets a move down to the 1.50% area.

By contrast, dividend yields on most utility names far exceed anything that U.S. Treasury bills, notes, or bonds can offer. For example, the dividend yield on American Electric Power Co., (AEP) is at 4.80%; on Consolidated Edison (ED) is at 4.20%; Duke Energy (DUK) is at 5.00%; Exelon (EXC) is at 4.90%; FirstEnergy (FE) is at 4.90%; NiSource (NI) is at 4.30%; and Southern Company (SO) comes in at 4.50%.

Although worries about an economic slowdown suggest a lower demand for energy usage, and/or the inability for some to pay their utility bills, a decline in the cost of energy sources (crude oil, natural gas, coal or PV and thin-film solar panels) has become an offset.

Moreover, because balance sheets of most utility companies are typically laden with debt, the worry is always that in a rising interest rate environment their dividend yields become less advantaged as an investment vehicle; and their interest expenses become more costly as they routinely refinance their outstanding debt. The converse of this dilemma, however, appears to be playing out instead, enabling utility companies to refinance their operations on more favorable terms, thus helping them to widen their margins.