5.29.13: Utilities and Telco’s – The Bond Proxy Trade is Ending (No Surprise)

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Yesterday, we posted an ugly daily chart on the Dow Jones Utility Average.

Today, we look at the “monthly” Utility chart, and note when the Fed raised rates historically, i.e. 1994 and 1999 – 2000.

In 1994, the DJ Utility Average lost 33% of its value, as the Fed (under Greenspan then) caught the market off guard by raising rates 5 – 6 times after a very strong Q4, 1993 GDP report.

In mid to late, 1999 the Ute average lost 20% of its value as the Fed started raising rates in advance of Y2k and given the strong economy, technology market, and all around wonderful prosperity.

The other corrections in ’01 and ’02 and ’07 and ’08 were credit spread corrections, or periods when credit spreads widened dramatically, including high yield spreads.

In this market, the Utility correction will likely be more interest-rate driven than spread driven, as the trade becomes “return to global growth”, rather than a safety trade.

The first leg of the Utility correction is likely nearing an end, but this is likely the first leg of the correction for the sector. Ute’s and telco look broken, or as a friend of mine who runs a hedge fund in California said to me earlier today, “The dividend trade is unwinding big time”.

Some of the telco names like Verizon and AT&T look ugly too, i.e. their charts.

We sold our VZ in March of 2011 near $37 – not so smart. Think the stock is way overbought here.

These bond proxy sectors will continue to see money leave their names.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager



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