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An Alternative To Money Market Funds

October 2014

October has once again proven to be a very difficult month for investors. Back on September 19, the Dow Jones Industrial Average “DJIA” and the S&P 500 “SPX” reached their all time highs. The widely followed IPO of Alibaba Group Holding also began trading that day. Since then, both of these indices have tumbled due to a variety of concerns including the Ebola threat, the ISIS incursion in the Middle East, and the continuing tensions between Russia and Ukraine.

Oil prices have also declined noticeably. Both West Texas Intermediate crude oil and Brent crude oil have experienced price declines of more than 20% since June as reported by Reuters, October 17. The price drop is due to the economic slowdowns in Europe and China.

There may be other reasons for the decline in crude oil prices. On October 14, New York Times columnist Thomas Friedman wrote “Is it just my imagination or is there a global oil war underway pitting the United States and Saudi Arabia on one side against Russia and Iran on the other?” Mr. Friedman pointed out in this story that oil export revenues account for about 60 percent of Iran’s government revenues and more than half of Russia’s.

As a result of the declining oil prices, Moody’s downgraded Russian sovereign debt to Baa2, the second lowest investment grade. Russia’s currency, the ruble, has also suffered in foreign exchange trading. As Bloomberg.com reported on its website October 18, “The ruble has lost 13 percent against the dollar in the past three months, more than any other currency tracked by Bloomberg, extending its drop this year to 19 percent.”

With all of this turmoil around the globe, interest rates have also declined as investors sought out safe havens. The 10 year US Treasury note has seen its yield decline from above 2.60% earlier this Summer to below 1.90% on October 15. Meanwhile, the German 10 year note reached an all time low yield of .715% as reported by Bloomberg.com October 16.

Takeover stocks have also suffered price declines. Three companies of note are Time Warner Cable “TWC”, Directv “DTV” and Lorillard ”LO”.  Each firm is a member of the S&P 500. Even though the acquisition of these three companies are now subject to long regulatory reviews, the acquisition of each of these firms is expected to be finalized during the first half of 2015.

TWC and LO both pay quarterly dividends. TWC yields above 2% while LO yields above 4%. Based on their prior dividend history, both TWC and LO are expected to trade exdividend during the week of Thanksgiving, about one month away. All three of these companies offer an attractive rate of return assuming the deals are completed. The potential share price appreciation, along with the dividends (in the case of TWC and LO) is something conservative investors should consider given the low interest rate environment.

If you are unhappy with the returns offered by money market funds, feel free to contact us.

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