Tag Archives: Ed Keon

Hennessy Affirms Negative Outlook

I recently discussed the state of the economy and stock market with Neil Hennessy, head of the Hennessy Funds. Hennessy doesn’t run any ETFs, but follows a dividend strategy in most of his mutual funds.

Hennessy agrees with Ed Keon, the portfolio manager at Quantitative Management Associates, that there continues to be a high level of caution and pessimism in the country. (Cautious Forecast for Next 6 Months)

“American investors have absolutely no faith that their government can correct the problems,” says Hennessy, adding that companies are not hiring because they don’t know what the health care and regulation costs will be. “If I don’t know the cost of an employee, why would I hire one?”

He says most people have moved pass the financial crisis to focus on three contentious issues that currently dominate the media: the new health care system, immigration and the poor job the government did about cleaning up the oil spill in the Gulf of Mexico.

“There’s no leadership coming out of Washington,” says Hennessy, and “no confidence in leaders, leads to no confidence in the stock market.”

However he predicts that companies will focus on dividends to make the stock market go higher. Currently companies are hoarding historical levels of cash. Hennessy says the 30 companies in the Dow Jones Industrial Average have $500 billion in cash and short-term investments on which they are currently earning barely anything. He believes “more and more companies will raised dividends” to attract investors by offering higher yields than bonds. Holding to the dividend philosophy, he says put your money into something that will earn something in a down market.

The Hennessy Total Return Fund seeks both capital appreciation and income by following the well-known dividend investing style of the Dogs of the Dow. This strategy holds the ten highest-yielding stocks in the Dow industrials. A stock with a high yield is typically one whose price has fallen, hence these are the “dogs.” The fund puts 75% of its money into the Dog stocks and the remaining 25% in short-term Treasury notes.

Year-to-date, the Total Return Fund is beating the S&P 500 return by 3.3% to 0.96%. For the past twelve months, the fund topped the index by 0.23%. However, for calendar year 2009, the index outdid the fund 26.5% to 16.9%. The fund currently yields 1.7%, but most of that is eaten up by the 1.27% expense ratio.

A good dividend ETF is the iShares S&P US Preferred Stock Index (PFF). When Hennessy talks about increasing dividends, he means the dividends paid by common stock, which can be increased whenever the companies chooses to do so. Preferred shares are more like bonds in that their payments rarely change, so this fund won’t get the upside from increasing dividends. Since preferred payouts won’t increase if the companies boost their dividends, preferred shares typically pay a higher yield. The iShares S&P US Preferred Stock Index is up 7.3% year-to-date, with a 6.9% yield and expense ratio of 0.48%

Cautious Forecast for Next 6 Months

Pardon the obvious, Wall Street is a pretty bullish place. So, it’s refreshing to hear someone down there actually say things don’t look so good.

Ed Keon is one of the few.

“There remains a high level of caution and pessimism in the country among the average consumer and business executive,” said Keon, managing director and portfolio manager for Quantitative Management Associates. He spoke Tuesday at Prudential’s 2010 Midyear Market Outlook panel, the one with the tantalizing title: “Will the economy double-dip?” He added, “There’s plenty of money to invest, but people are reluctant to do so.”

He says the stock pullback is a symbol of not just the economic activity, but also a malaise among the American people. But he believes stocks represent a good value, compared to the long-term bond. The dividend yield for the S&P 500 Index is 2%. Considering that a quarter of the index doesn’t pay dividends, many of the stocks in the index are paying 3% to 6%, compared to the 10-year bond’s yield of 2.9%. When you can get a better return from risky large-cap stocks than Treasury’s you know stocks are cheap. Remember, prices move inversely to yield. So as prices move lower, yields rise.

For a full explanation of the relationship of yields to prices and dividends, check out Dividends Stocks for Dummies.

Not only are stocks cheap, but earnings are strong and will come in above expectations, said Keon. Still he cautions again the expectation that stocks will see a sudden resurgence of confidence. Until we address the structural problems in the economy, Keon said we won’t be able to get moving until we deal with the giant levels of debt. He says he’s currently holding allocations near benchmark weights, but is underweight TIPS bonds.

Top ETFs holding TIPS in alphabetical order:

  • Barclays Capital TIPS Bond Fund (TIPS)
  • PIMCO 1-5 Year U.S. TIPS Index Fund (STPZ)
  • SPDR Barclays Capital TIPS ETF (IPE)
  • SPDR DB International Government Inflation-Protected Bond ETF (WIP)