The stock market got a nasty surprise on Monday. The Chinese government allowed their currency, the yuan, to sink below seven to the dollar (meaning higher than seven). The Chinese Fed, known as the PBOC, had been defending that level vigilantly for a long time.
That’s over with, and it’s a big deal. Let me explain why:
This move was a direct response to President Trump’s announcement last week of more tariffs on Chinese exports. In other words, the PBOC is playing hardball.
They’re not playing around. The government also said it wouldn’t buy any more U.S. agricultural products. China used to be a significant buyer of U.S. soybeans. The U.S. government shot back by declaring China, a “currency manipulator.” Of course, everyone knows they are, but it’s a big deal to say it out loud. Only two months ago, the U.S. Treasury Department refused to label them a manipulator.
On Monday, the stock market responded by dropping almost 3%. Monday was the worst day for the market in several months. It wasn’t that bad of a day in absolute terms, but it was a shock because the market had been so happy and calm beforehand.
As ugly as the stock market was, the bond market was thrilled by the news. The yield on the 10-year Treasury dropped down to 1.735%. To add some perspective, the 10-year was yielding 3.2% just nine months ago. Put, bonds have been on fire lately.
The signs are clear that interest rates are going down, down, down. Thanks to the move from the PBOC, it now seems very likely that the Federal Reserve will cut interest rates again at their meeting next month. There are whispers that the Fed could cut prices by 0.5%, or even announce a surprise rate cut before the meeting.
Could we be moving to a negative-rate world? I don’t know, but it’s hard to rule it out. Recently, an analyst at JP Morgan said that U.S. Treasury yields could go negative. There are trillions of bonds around the world right now that carry negative yields.
Sounds crazy? Consider the fact that the entire German yield curve is currently negative. We might even come on the day when U.S. mortgage rates are negative!
What’s an investor to do? The most important thing to do is to take the Fed’s invitation and make sure you own stocks with generous dividend yields. They’re out there, but you need to do a little digging.
I’ll give you a great example. Occidental Petroleum (OXY), also known as Oxy Pete, currently sports a dividend yield on 6.4%. That’s close to four times the yield on a 10-year Treasury. Shares of OXY have taken a beating in recent months. The price of oil is down, but things could change soon.
For example, tensions have been rising in the Persian Gulf. At any moment, there could be an ugly incident between the United States or the U.K. and Iran. If that happens, the price of oil could quickly jump higher.
But here’s the thing about OXY: Even with the low price of oil, the company is still quite profitable. Just a few days ago, OXY reported Q2 earnings of 97 cents per share. That was four cents better than the consensus of Wall Street analysts.
The reason why OXY has been down so much is that it’s in the middle of a mega-merger. OXY is hooking up with Anadarko Petroleum in a $38 billion deal, and not everyone likes it. Billionaire Carl Icahn is a critic of the deal, and he’s trying to stop it, but I doubt it will work.
Circle your calendars for August 8. That’s when Anadarko shareholders will vote on the deal. I expect them to approve the agreement strongly.
Occidental avoided a shareholder vote because they raised the cash necessary thanks to Warren Buffett. Icahn thinks OXY is overpaying for Anadarko. In terms of dollars and cents, he has a point. OXY is paying a lot, but this is still a good move for OXY. Anadarko will help keep them competitive in a consolidating industry. Anadarko also owns a lot of valuable assets like a quarter-million acres in the Permian Basin. That will be nice to have.
A few weeks ago, Occidental announcement another dividend hike. The company will now pay out a dividend of 79 cents per share. OXY has increased its dividend every year for the last 17 years in a row. Over that time, the total dividend increase is more than 500%.
What I like about a high dividend yield is that it offers you protection even in a difficult market. Think of it this way: OXY’s current dividend is worth the equivalent of more than 1,600 Dow points. Investors get that just by adding the stock at the current share price.
If the Anadarko deal goes through, and it probably will, then I think shares of OXY could rise by more than 15% before the end of the year.
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