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The Uncertainty Around The Fed’s Liftoff Keeps GLD From Falling

Summary The uncertainty around the possibility of a rate hike in the coming months benefits GLD. Nonetheless, a September rate hike is still on the table. Short-term treasury yields are adjusting for higher rates in the coming years. The non-farm payroll report came a bit short of market estimates with a gain of 215,000 jobs. Nevertheless, the SPDR Gold Trust ETF (NYSEARCA: GLD ) bounced back over the weekend and kept slowly rising at the beginning of the week. GLD could resume its descent, however, if the FOMC were to raise rates next month. But the market is still on the fence about the timing of the historic lift off. So September is still on the table? The market still seems confused about the Fed’s timing of the first rate decision. And the mixed signals we have received in recent weeks – from FOMC participating members such as James Bullard and Dennis Lockhart , who keep suggesting that a lift off is imminent, through the economic data, which for the most part, keep showing the U.S. economy is growing but not much faster than earlier this year, and the previous FOMC meeting , which had a dovish sentiment – haven’t made things any easier for the market’s estimates. Case in point, the implied probabilities for a September rate hike, which were nullified a few days ago, have gone back up to 54%. For December, the odds are 75%. Nonetheless, any delay in the first rate hike is likely to keep GLD from falling to a new low. Short-term rates are picking up Besides the implied probabilities derived from the bond market, the rates of short- and long-term rates also provide an interesting account of the changes in the demand for treasury bills. Specifically, the long-term yields (say for 10 years and higher) have actually come down in the past few weeks while short-term rates for 6 months to 3 years have risen. It seems that even though the market is slowly adjusting to the fact that low cash rates aren’t here to stay, the long-term rates, which are mostly driven by, besides the Fed’s short-term rates, inflation expectations and risks haven’t gone up. (click to enlarge) Source: U.S. Department of Treasury and Bloomberg This could be because the market considers lower inflation in the long run than it did in the past or that the risk in investing in U.S. treasury bills could rise while over the short run, the rise in yields is mostly related to cash rate hikes. When it comes to inflation expectations, they have gone up in the past few months, as you can see in the chart below: (click to enlarge) Source: Federal Reserve Bank of Cleveland Nonetheless, the 5-year and 10-year expectations are still below the Federal Reserve’s inflation target of 2%. Even Federal Reserve Vice Chairman Stanley Fischer recently pointed out that the current U.S. inflation is very low, mainly due to low commodities prices and that global deflationary trend “bothers” the Fed, even though it’s only one among several factors that impact the FOMC’s decisions about policy. Conversely, Lockhart suggested in a recent press conference that the first rate hike won’t depend on U.S. inflation – so even if inflation doesn’t reach the 2% mark anytime soon, which is a very fair assessment, liftoff is still a viable possibility next month. And who said there isn’t confusion in the markets about the Fed’s policy? For GLD, lower long-term yields could actually benefit its price, as it did in the past when yields plummeted to historic low levels. But this hasn’t been the case. Even though for gold, long-term yields are more likely to impact the direction of gold prices, the recent rally of short-term yields may have also contributed to the weakness in the gold market. (click to enlarge) Source: U.S. Department of Treasury and Bloomberg Moreover, the correlations among GLD and the U.S. treasury yields aren’t too strong with the strongest correlations for the short-term yields – 2-year bonds. In the past, the long-term treasury yields had a much stronger and significant correlation with GLD. Thus, the uncertainty around the Fed’s policy over the short term is a strong factor in moving both short-term yields and GLD. The JOLTS report will be released this week and will provide another indicator about the U.S. labor market – last month’s report showed a modest fall to 5.36 million job openings. Next week, the FOMC will release the minutes of the July meeting, which could provide a bit more guidance about the last rate decision and what’s up ahead especially considering it’s the last piece of information from the FOMC before the September meeting. The labor market showed another solid growth in jobs but didn’t beat expectations. The FOMC keeps the rate hike decision uncertain, which for now actually benefits GLD. As long as there remains a possibility of a rate hike later rather than sooner, GLD could, at best, slowly rise and at worse remain range bound. But as the U.S. labor continues to improve, the odds of a rate hike in September will rise – a scenario that could bring back down GLD. For more please see: ” Gold and Inflation – Is there a relation? ” Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

UIL’s Updated Connecticut Merger Filing

In late June the Public Utility Regulatory Authority of Connecticut issued a draft decision denying UIL’s merger with Iberdrola USA. UIL withdrew their application and filed a new application on July 31. The new application substantially addresses PURA’s concerns and increases the likelihood that this value creating merger will be approved. UIL Holdings (NYSE: UIL ) and Iberdrola USA ( IUSA ) (a subsidiary of Spanish utility Iberdrola (OTCPK: IBDSF )) are making their second attempt to get their merger through the notoriously difficult Connecticut Public Utility Regulatory Authority ( OTCPK:PURA ). As discussed in my earlier post , this is a merger that will create substantial value for the participants, so there was no way they would give up easily after PURA’s initial rejection. The new filing really lays out the benefits for the state of Connecticut, and should be enough to get the deal approved in that jurisdiction. PURA’s issues with the original application are summarized in this excerpt from the draft decision : The Applicants have not provided any measurable or quantifiable commitments that unequivocally assure the Authority that the public interest of the ratepayers will not be harmed. In response, the applicants have increased a number of the benefits Connecticut customers will receive, and presented them in a quantifiable way that easily allows PURA to see the advantages for customers. The draft decision also listed a number of items that had been included in recent Connecticut merger agreements. Many of the updates to the application are related to this list. A discussion of these items follows. Rate credit allocated to retail customer classes UIL and IUSA have increased the rate credits for customers from about $5M in the original application, to approximately $20M in the new one. The applicants have actually proposed three different methods to distribute the credit to customers. The first option would apply a $20M credit customers in the first year after the closing. Another proposal is for UIL to provide $26M of credits spread over ten years. The last option is essentially giving a $1.5M annual credit over thirty years. The present value of all three options is essentially the same, and the applicants are giving PURA a choice based on feedback they received from their earlier application. Commitment to accelerate the pole inspection cycle. This is basically a reliability commitment. For those unfamiliar with the issue, utility poles, like any other piece of the electric system, can wear out as they age. The end of a pole’s life can lead to a power outage or damage to property. Increasing the frequency of these inspections can reduce the number of surprise failures, resulting in fewer outages. Subsidiary United Illuminating (UI) is the custodian of 87,000 poles. In 2005 they pledged to improve their pole inspection process, and they have $700,000 budgeted for pole inspections in 2015. With an already strong commitment to inspecting utility poles, no further enhancements were made in this application. However, while UI will not address poles, they are making some quantifiable reliability commitments. In the first application UIL had only said there would be benefits from sharing best practices and better storm response, and that there would be no deterioration in service after the transaction. Now the applicants have pledged to increase investment in electric distribution system resiliency with a reduced recovery of the first $50M of this spending over a two year period. They are also making some reliability commitments at their Southern Connecticut Gas (SCG) subsidiary. UIL is promising to double the annual spending on the replacement of cast iron/bare steel pipe (from $11M to $22M per year) over the next three years without seeking recovery until the next SCG rate case. There are substantial reliability issues with these older pipes, and increasing the rate of replacement should have an impact on safety and dependability. UIL estimates the gas commitment will create a $1.6M benefit, and the commitment at UI will create a $5M benefit. Commitment to improve non-storm and storm related service quality performance at a minimum of the 10-year historical average UIL stated that they would improve a number of different service metrics by 5% by the end of the third year after the closing of the deal. These metrics were: average answering times, % abandoned calls, % appointments met. UIL also promised to maintain the high level of reliability at UI as measured by SAIDI and SAIFI. (SAIDI is the System Average Interruption Duration Index, essentially the average number of minutes a customer is out during a year; and SAIFI is the System Average Interruption Frequency Index, essentially the average number of times a customer has an outage in a year.) You can see how well they have been doing on these metrics by looking at this information from UIL’s 2015 Reliability Report . SAIFI SAIDI 2010 0.65 85 2011 0.81 102 2012 0.60 58 2013 0.58 51 Four-Year Average (’10 – ’13) 0.66 74 2014 0.56 53 2014’s SAIFI number was actually the company’s best in the past eighteen years. The 2014 SAIDI number was better than all but two of the previous eighteen years. Also, UI’s SAIDI and SAIFI numbers are better than neighboring utility CL&P. In 2014 CL&P’s SAIDI was 88.9 minutes, and their SAIFI was 0.77. It seems that UI maintaining current reliability numbers should be acceptable to PURA. Commitment to open space land UIL has not specifically addressed open space land, but they appear to be working on an issue that is related in spirit. This is regarding English Station, a retired power plant on a nine acre site that UIL sold over fifteen years ago. This property has substantial environmental issues, and there is a big dispute over who should pay the cleanup costs. The applicants have stated that if the merger is approved they will end the legal wrangling, and agree to pay for the cleanup of the site. This cost is currently estimated at $30M. (More information on the English Station dispute can be found here .) Seven year commitment to not move headquarters out of Connecticut The applicants have proposed to create a new management position entitled the President of Connecticut Operations. The President of Connecticut Operations will be headquartered in Connecticut, and the applicants state that the headquarters will remain in Connecticut for at least seven years. (I’m pretty sure we know where they came up with that length of time.) One issue that was not in PURA’s bullet list, because this is the first time it has come up in a Connecticut utility merger case, is ring-fencing. UIL has dramatically increased the robustness of their proposed ring-fencing provisions. The applicants have proposed creating a special purpose entity (SPE) adding another layer of separation between UIL and IUSA. 100% of UIL will be owned by the SPE, and IUSA will own the SPE. The SPE will have at least one independent director, and a “Golden Share” provision. This Golden Share has a non-economic interest in the SPE and will be owned by an administration company in the business of protecting special purpose entities. The Golden Share has the right to vote on certain matters, primarily with respect to the filing of bankruptcy. (More information can be found in Attachment 2 of the merger application.) UIL and IUSA have made a dramatic improvement in their merger application. The benefits Connecticut customers will receive have been increased and quantified, so it is easier to see the advantages of the deal for the state’s citizens. The applicants have specifically addressed many of the items PURA brought up in their earlier draft decision. In particular they have substantially beefed up the ring-fencing provisions, so a problem elsewhere in Iberdrola’s operations does not hurt any of UIL’s subsidiaries. Based on these changes it seems like the merger should have a very good chance of getting PURA approval. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Best S&P 500 Utility Stocks According To A Winning Ranking System: A Look At Exelon

Summary Ranking the top twenty S&P 500 utility stocks according to a winning ranking system. Explanation and back-testing of the “ValueSheet” ranking system. Description and a buy recommendation for the first-ranked stock of the system: Exelon Corporation (EXC). S&P 500 utility stocks have given, on average, a similar return to that of the S&P 500 index over the last year. The average return of the 29 S&P 500 utility stocks that are included in the S&P 500 index (included dividends) in the last 52 weeks has been 10.51%, while the S&P 500 index has returned 9.77%. The table below shows all S&P 500 utility companies, ranked according to their 52 weeks return. A Ranking system sorts stocks from best to worst based on a set of weighted factors. Portfolio123 has a ranking system which allows the user to create complex formulas according to many different criteria. They also have highly useful several groups of pre-built ranking systems, I used one of them the “ValueSheet” in this article. The “ValueSheet” ranking system is quite complex, and it is taking into account many factors like; valuation ratios, growth rates, profitability ratios, financial strength, asset utilization, technical rank, industry rank, and industry leadership, as shown in Portfolio123’s chart below. In order to find out how such a ranking formula would have performed during the last 16 years, I ran a back-test, which is available by the Portfolio123’s screener. For the back-test, I took all the 6,651 stocks in the Portfolio123’s database. The back-test results are shown in the chart below. For the back-test, I divided the 6,651 companies into twenty groups according to their ranking. The chart clearly shows that the average annual return has a very significant positive correlation to the “ValueSheet” rank. The highest ranked group with the ranking score of 95-100, which is shown by the light blue column in the chart, has given by far the best return, an average annual return of about 18%, while the average annual return of the S&P 500 index during the same period was about 3.5% (the red column at the left part of the chart). Also, the second and the third group (scored: 90-95 and 85-90) have given superior returns. This brings me to the conclusion that the ranking system is very useful. After running the “ValueSheet” ranking system on all S&P 500 utility stocks on August 09, I discovered the twenty best stocks, which are shown in the table below. In this article, I will focus on the first-ranked stock; Exelon Corporation (NYSE: EXC ). (click to enlarge) On July 29, Exelon reported its second quarter 2015 results and narrowed its full-year operating earnings guidance to $2.35 to $2.55 per share. Exelon achieved earnings above its guidance range in the quarter, led by a strong financial performance at Constellation. The company beat EPS expectations in the last quarter by $0.05 (9.3%). The major drivers for the beat were reduced outages at ExGen’s nuclear plants and lower uncollectibles at Baltimore Gas & Electric. Revenue grew 5.1% to $6.51 billion in the period. Exelon showed earnings per share surprise in its last two-quarters after missing estimates in the previous quarter, as shown in the table below. Source: Yahoo Finance Despite low power prices and challenging market conditions in the wholesale power markets, I see healthy growth prospects for the company. The proposed all-cash acquisition, pending approvals, of Pepco (NYSE: POM ), will help to boost Exelon’s earnings growth rate. The merger continues to be conditioned upon approval by the Public Service Commission of the District of Columbia. Exelon expects the merger to be completed in the third quarter of 2015. On the regulated side, the forthcoming Pepco merger should bring opportunities for investment and operational improvement, as well as an additional regulated earnings stream to support the dividend. Also, the coming industry coal plant retirements will lower future reserve margins and would lead to higher electricity prices. In another development, the company plans, in September, to decide what nuclear plant will be retired due to uneconomic operational conditions. Exelon continues to evaluate the viability of three of its nuclear plants in Illinois (Byron, Quad Cities, and Clinton) given that the Illinois legislative session ended without a resolution on the low carbon portfolio. Valuation EXC’s stock has underperformed the market in the last few years. The stock is down 12.5% year-to-date while the S&P 500 index has increased 0.9%, and the Nasdaq Composite Index has gained 6.5%. Moreover, since the beginning of 2013, EXC’s stock has gained only 9.1% while the S&P 500 index has increased 45.7%, and the Nasdaq Composite Index has risen 67%. However, In my opinion, EXC’s stock is a clear value with the stock having faded more than its fundamentals and key catalysts. (click to enlarge) Chart: TradeStation Group, Inc. Exelon’s valuation metrics are excellent, the trailing P/E is very low at 11.97, the forward P/E is low at 13.40, and its price-to-sales ratio is also very low at 0.95. Furthermore, its Enterprise Value/EBITDA ratio is very low at 6.76, the lowest among all S&P 500 utility stocks. Source: Portfolio123 Exelon is paying a generous dividend. The forward annual dividend yield is pretty high at 3.82% and the payout ratio is at 45.8%. However, the annual rate of dividend growth over the past five years was negative at -10%. Summary Exelon delivered better than expected second quarter results and narrowed its full-year operating earnings guidance to $2.35 to $2.55 per share. Exelon achieved earnings above its guidance range in the quarter, led by a strong financial performance at Constellation. Despite low power prices and challenging market conditions in the wholesale power markets, I see healthy growth prospects for the company. The proposed all-cash acquisition, pending approvals, of Pepco, will help to boost Exelon’s earnings growth rate. Exelon has compelling valuation; its EV/EBITDA ratio of 6.76 is the lowest among all S&P 500 utility stocks. In my view, the recent retreat in its price offers an excellent opportunity to buy the stock at a cheap price. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.