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An Alternative To Money Market Funds

October 2016

September is behind us and the interest rate picture is now clear. On September 21, the Federal Reserve elected to stand pat, following the lead of other major central banks around the world who also stood pat at their meetings in September. The Fed next meets November 1-2 and there really is no chance the Fed will raise rates just prior to election day (November 8). The final Fed meeting for 2016 will be held December 13-14 and there is a chance the Fed will make a move at this meeting.

The US Dollar weakened after the Fed’s announcement, triggering a rally for major commodities as the weaker dollar enables foreigners to purchase commodities less expensively with their newly strengthened currency. Keep in mind that the major commodities are priced in US Dollars, which continues to be the world’s reserve currency.

Microsoft again increased its quarterly dividend and has done so each year since 2010. There was no dividend increase in 2009 as the market was slowly recovering from the financial crisis in 2007-08. This year’s increase of 8% is the smallest increase in the dividend by Microsoft in five years and was made in tandem with its decision to launch a new $40 billion buyback plan.

As history shows, there are several companies that did not prudently time their share buybacks and this resulted in a poor use of cash. These buybacks were made rather than paying out a more generous dividend to the shareholders. There is no guarantee that Microsoft’s buyback will be made at the optimal time going forward. The shares still yield less than 3% and there has been recent chatter about Microsoft making a major acquisition with its abundant cash on its balance sheet.

Some significant deals were announced last month in Mergers & Acquisitions. Spectra Energy agreed to be acquired by Canada’s Enbridge Inc. in an all stock deal valuing Spectra @ $40.33 per share. Spectra is one of our core holdings. I am happy to report that we purchased our shares @ $29 earlier this year. More upside is possible should another bidder emerge. Spectra generates enormous cash flow. It now pays out over $1.1 billion in dividends annually with after tax cash. The breakup fee is $1.36 billion but this could easily be covered by Spectra’s current assets which were reported @ $1.64 billion at the end of the second quarter.

Meanwhile, Bayer finally convinced Monsanto to combine after a long pursuit. Bayer will pay $128 per share in cash for all Monsanto shares. Monsanto’s shares continue to trade at a big discount to the $128 takeover price on worries regulatory approval will be hard to obtain.

My weekly radio show on WWPR 1490 AM airs at 12.30pm 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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