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An Alternative To Money Market Funds

June 2016

May is behind us and now investors await the outcome of the US Federal Reserve meeting taking place June 14-15. Fed Chair Janet Yellen has signaled a rate increase may be on the way at some point this year. A rate increase will likely lead to a strengthened US dollar, thus reducing the competitiveness of many US multinationals. As May came to an end, the yield on the 10 Year US Treasury was again more than ten times the yield on the comparable 10 Year German Bund, further limiting the Fed’s ability to raise interest rates.

During 2016, firms such as Caterpillar, IBM and American Express cited the strong dollar as a reason for disappointing results when these companies reported earlier this year. Tiffany’s, the high end retailer, also cited the strong dollar as a reason for its dreary quarterly results when it reported in late May. In fact, May turned out to be a very difficult month for many US retailers with Walmart being a notable exception. Retailers such as Macy’s, Costco, Express, Nordstrom, Abercrombie & Fitch and Sears all provided weak results with Sears especially dismal.

Sears will now explore whether to allow products sold under its iconic brands such as Kenmore, Craftsman and Diehard brands, along with its Home Services repair business, to be sold by other retailers beyond Sears and Kmart. Sears and Kmart merged 11 years ago and both chains continue to lose money and shoppers.

Meanwhile, Macy’s has caught the eye of a number of value investors due to its recent plunge in share price. The shares now yield about 4.50% after the recent dividend increase. The shares will trade ex-dividend on June 13 and the 37.75c dividend will be paid July 1. So, there is still time to buy the shares and collect this dividend. Macy’s current market capitalization is about $10 billion. Its real estate holdings are said to be valued at a multiple of its current market cap, thus attracting value investors to its shares. It could also be a takeover candidate as Macy’s has little in the way of corporate protections should a suitor emerge.

Crude oil prices topped $50 per barrel in late May for the first time since 2015 amid signs the supply glut is easing. Exxon ended the month of May as the best performing member of the Dow Jones Industrial Average with its shares up over 15% year to date. In April, Exxon raised its dividend for the 34th straight year and it yields well over 3%. The recent rally in crude oil prices has benefited many of the major producers. The feared jump in bankruptcies in the energy patch has not occurred due to this rally.

My weekly radio show on WWPR 1490 AM is now on Summer holiday. The show will return at 2pm on Friday, September 9. 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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