Don’t buy stocks, buy yield
Stock indices may illustrate the average fortunes of an economy or market, but they don’t show the whole corporate picture. A FTSE 350 investor is sitting on returns of just over 6% so far this year - but more than half of these come from dividends, as opposed to capital growth. And positive returns hide a multitude of sins: take the 23% plunge in Thus Group’s shares on Friday, for example. Thus doesn’t pay dividends, so shareholders make 100% of their gain (or, more likely, loss) from movements in the share price. Suffice to say it isn’t going up.
Another sector that has showered believers in ordure throughout 2004 has been airlines. Delta has delivered shareholders a loss of 72% of their capital so far this year. But not all of the bad news has been generated Stateside. The UK and Ireland have managed some impressive disasters of their own. Ryanair has served up a loss to shareholders of 38% so far this year, while EasyJet has lost 60% of its value. Neither company pays dividends, so there has been no partial relief through income (see below). There is a message here: owning stocks that don’t distribute is a little like playing the lottery. You may get lucky, but - particularly in a primary bear market such as this one - the odds are against you. Airline stocks have, of course, been savaged, thanks in part to trends in the oil market. Crude prices rose to another record this week amid concerns that Hurricane Ivan-related damage will put pressure on stockpiles.
But the weather is not the issue. What is is the fact that, as the World Tribune would have it, Opec has lost control over oil prices. Spare production capacity of 1.5 million barrels a day no longer cuts much ice in a world that is guzzling the stuff. That spare production capacity within Opec is less than what China imports per day. Chinese crude imports rose by more than 37% in August to 70 million barrels. Crude oil imports by Japan rose by more than 9% in August - which at least suggests Japan’s economic recovery is real. Analysing the situation seems eerily simple. As technical analyst Michael Kahn writes in this week’s Barron’s: “Low supply, high demand? If oil prices fall here, then everything we learned in economics 101 was bunk.”
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Kahn also publishes charts for the Dow and Nasdaq. His view (which we share) is that major US indices are eroding away. Nasdaq especially remains in a declining trend. Or put the technicals to one side and focus on fundamentals. Of the S&P 500’s ten biggest fallers (in percentage terms) on Friday, five were technology firms (Teradyne, Xilinx, Altera, PMC-Sierra and National Semiconductor). The three worst-performing sectors from the S&P 500 this year are all tech: semiconductor equipment (down 30.1%), semiconductors (down 31%) and IT consulting and services (down 32%). Plenty of those firms don’t pay dividends either. As famous former equity analyst Johnny Rotten once asked, “ever get the feeling you’ve been cheated?”
Tim Price is senior investment strategist at Ansbacher & Co Ltd.
