Wyatt Research Week in Review: Oct. 11-17

Six down, two to go, and still no consensus on whether the Federal Reserve will (or should) raise interest rates in 2015.
On six prior occasions this year the Federal Open Market Committee met behind closed doors to discuss all things monetary. Each time the media prognosticators salivated like Vegas bookmakers before a heavyweight prizefight. And of course, on each occasion Fed Chairwoman Janet Yellen emerged from the swath of pored over economic data and delivered the news: no rate hike.
With the next FOMC policy meeting looming on Oct. 27-28, the talking heads have once again stirred up the rate hike chatter. This time, however, the world’s central bankers have joined the clamor.
At an International Monetary Fund meeting this past weekend in Lima, Peru, several economists from around the globe suggested that the Fed should stop shilly-shallying and just get an initial rate increase over with.
“It has been clear from conversations at this conference that many officials of emerging-market and other countries feel sufficiently forewarned and prepared for them to want us ‘to just do it,’” Fed Vice Chairman Stanley Fischer stated during a Sunday speech in Lima.
But economic data released mid-week, which revealed weaker-than-expected wholesale inflation and retail sales, suggests that such emerging-market sentiments might fall on deaf ears.
“Right now my expectation is, given where I think the economy would go, I wouldn’t expect it would be appropriate to raise rates,” Fed Governor Daniel Tarullo said Tuesday in response to a CNBC question about a 2015 rate hike.

Long Odds

Even the professional speculators have all but given up hope for an October increase of the current near-zero federal funds rate.
The CME Group FedWatch tool, which tracks fed funds futures prices, gives a 5% probability of a rate hike in October. The odds increase to 30% in December and 42% in January. It’s not until the March 2016 FOMC meeting that the smart money favors a fed funds rate raise, although at 53% it’s still scarcely better than a coin flip.
An even bolder suggestion came from Wyatt Research analyst Tony Daltorio in Thursday’s issue of Daily Profit: the potential for negative interest rate policy.
Though unconventional, European countries such as Sweden and Switzerland have adopted the NIRP monetary tool, which basically means that depositors must pay a fee to hold their money at a bank instead of receiving traditional interest payments.
While I personally doubt that NIRP is on the American horizon, at least one Fed official – Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis – has gone on record advocating for the exploration of negative interest rates.
“I would be open to the possibility of reducing the fed funds target funds range even further, as a way of producing better labor market outcomes,” Kocherlakota stated in an Oct. 8 speech.
Nothing’s a sure bet these days when it comes to the Fed, but with 95% of futures traders betting against an October rate hike, I’ll take those odds.
Here are some of my favorite Wyatt Investment Research articles from the week:
McDonald’s Trumps ‘Expert’ Opinion Once Again – McDonald’s (NYSE: MCD) has been the target of relentless analyst fire for all of 2015, yet McDonald’s shares are up 10% for the year and hit a new all-time high this week. And even more customers should be won over by Mickey D’s all-day breakfast initiative. Initial indicators point to full-time success for the former part-time menu choices.
The Only 2 MLPs to Buy Now – With oil prices in the tank, the former stability that master limited partnerships offered is all but gone and volatility could be commonplace for MLP investors. But lower commodity prices can actually be a tailwind for companies that are properly positioned. Lower oil and gas prices mean greater demand for refined products. That means more volume passing through the pipelines of these two midstream players, which have solid management teams that have been through the boom and bust cycles before.
Will a CEO Shakeup Spearhead a DuPont Split? – Ellen Kullman, a 27-year veteran of DuPont (NYSE: DD) who served as its CEO since 2009, retired from the Wilmington, Del.-based chemical company effective Friday. In hindsight, the lengthy proxy battle she won in May over activist investor Nelson Peltz – who had been seeking to break up the company – appears to have been a pyrrhic victory. Will the Peltz way prevail after all?
How Yum Brands Fooled the Market – Yum Brands (NYSE: YUM) is now down 23% for the last three months. It’s a heck of a move for any stock, but especially for a fast-food joint. Yet, Yum isn’t just any fast-food stock: It generates 40% of its operating income from China, which is in the midst of an economic slowdown. But much of the market misunderstands Yum, and on a forward earnings basis, Yum actually trades at a cheaper valuation than McDonald’s or Wendy’s (NASDAQ: WEN).
Boeing Shares Fall on Supply Overage Concerns – Shares of Boeing (NYSE: BA) nosedived in Wednesday’s trading action after Delta Air Lines’ (NYSE: DAL) earnings report was released. While that statement may seem a little odd on the surface, it was what Delta’s board said in the earnings call with analysts that sent Boeing shares south.
These 4 Dividend Stocks Can Quench Your Income Thirst – It goes without saying that life as we know it cannot exist without water. So the investment case for water utilities is fairly straightforward. The product is both essential and irreplaceable. The business model is easy to understand and is regulated, which results in steady earnings growth. And these four stocks have been around for several decades and have rewarded shareholders with steadily rising profits and dividends along the way.
New Ralph Lauren CEO Creates a Buying Opportunity – The apparel market was turned upside down recently when Ralph Lauren, the 76-year-old founder of the namesake Ralph Lauren Corp. (NYSE: RL), announced that he’s stepping down from his post as CEO. Stepping in to replace the iconic executive is Stefan Larsson, who was global president of The Gap’s (NYSE: GPS) Old Navy brand, the strongest division in The Gap’s portfolio. With Ralph Lauren shares down more than 30% for the year, is it time for investors to change their clothes?
The Most Hated Dividend Growth Stock Is Also the Best – The dividend growth stock perhaps most reviled by socially responsible investors outperformed every S&P 500 component from 1957 to 2003. Over that time, it generated a 19.75% average annual return. And with a major deal in the works, investors should expect to see a ramp up in share buybacks and dividend payouts.
Have a great weekend!