ARTICLES

An Alternative To Money Market Funds

January 2016

2015 is behind us. What a year it was! Some of the major stories during 2015 include: China’s economic slowdown, the rollout of the Apple watch, plunging commodity prices, the Volkswagen emission test scandal, the terrorist attacks in Paris and California, the Iran nuclear deal and the Federal Reserve’s decision last month to raise interest rates for the first time in several years.

The Fed will next meet Jan 26-27. Fed Chair Janet Yellen made clear last month that future rate increases would be both “gradual” and “data dependent” so it will be interesting to watch what happens when the Fed meets. Other scheduled Fed meetings for 2016 are Mar 15-16, Apr 26-27, June 14-15, July 26-27, Sept 20-21, Nov 1-2 and Dec 13-14.

Merger and Acquisition activity set a record in 2015 as nearly $5 trillion in deals were announced. Several of these high profile deals will face a long regulatory review by the Obama Administration. A few deals were blocked in 2015 including Comcast’s bid for Time Warner Cable, GE’s sale of its appliance business to Electrolux and Sysco’s buy of US Foods. And some are in doubt such as the Staples-Office Depot deal and the Halliburton-Baker Hughes deal.
As 2016 unfolds there are a few developments to keep an eye on. Russian President Vladimir Putin is unhappy with OPEC’s decision to allow its members to pump oil without limit. Russia is highly dependent on energy exports and needs a significantly higher oil price to fund its domestic programs. During 2015, Putin significantly expanded the Russian military presence in Syria to fight ISIS while bolstering his ally, Syrian President Bashar al Assad.
Puerto Rico now wants to file for bankruptcy. Many municipal bondholders worry that if Congress grants it permission to file, then a few US states may seek this ability as well. These states also face an enormous debt load. So if the bankruptcy law is changed, it could create turmoil in the municipal bond market. While saddling existing bondholders with big losses, major bond insurers could go under. Remember, Ambac went bankrupt a few years ago in the financial crisis due to its inability to pay insurance claims on the subprime debt it guaranteed.

For 2016, we continue to recommend that investors remain cautious and focus on S&P 500 firms with a history of growing their dividends. Companies such as AT&T, Verizon, McDonald’s, Exxon, Coca Cola et al. have a history of annually increasing their dividends. These companies offer both generous dividend yields and the potential for large capital gains over the next year. If an investor holds the shares for at least 61 days, all of the dividends will be taxed at the favorable 15-20% tax rate, depending on the investor’s tax bracket.

My weekly radio show on WWPR 1490 AM airs at 2pm each Friday. The show can also be heard live on the station’s website (www.1490wwpr.com). My prior radio shows and news columns are available on my firm’s website  (www.amescapmgmt.com).
If you are unhappy with the returns now offered by money market funds feel free to contact us.

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