For the first time in its 84-year history, American Airlines was cleared for landing in the S&P 500 Index.
Joining rivals Southwest Airlines and Delta Air Lines, the once-beleaguered carrier is the newest member of the prestigious club for the nation’s largest companies by market capitalization.
Not bad for a company that, only four years ago, found itself in bankruptcy court.
But in a classic Cinderella-story transformation, American succeeded at charting a new course for itself. In 2013 it merged with U.S. Airways, making it the biggest airline group in the world. The company now has a market cap of nearly $37 billion and controls 627 active jets in its fleet.
American’s ascension is a perfect reflection of the now-robust airline industry as a whole. As recently as a decade ago, about 70 percent of U.S. carriers were operating under Chapter 11 bankruptcy protection. Fast forward to 2014, and the industry saw its most profitable year ever. To generate more revenue and save money, airlines have aggressively implemented new policies in the last few years, including adding additional seats on aircraft, streamlining operations and focusing on fuel-efficiency measures.
American Airlines stock is already up more than 51 percent for the 12-month period, compared to the S&P 500’s 14 percent, and is currently trading close to all-time highs. Its inclusion in the S&P 500 should further help its stock price climb higher, as many funds that track the index will now be compelled to purchase shares.
Low oil prices have benefited American more so than some of its competitors, as the carrier didn’t buy derivatives on fuel and was therefore not locked into higher prices before they began to tumble last summer.
Many analysts predict that the next airline to join the S&P could be United Continental.
Dollar Overbought, Gold Oversold
In a recent Frank Talk I revisited the relationship between the U.S. dollar and gold. For the ninth straight month, the greenback has strengthened, which has weighed heavily on the yellow metal. The inverse relationship between the two is key to understanding the Fear Trade.
As I discussed in the blog post, the dollar is extended—the greatest standard deviation in a decade—and it appears due for a correction.
Conversely, the gold selloff is overdone and looking for a rally.
Next week we’ll be looking out for the latest consumer price index (CPI), or inflationary number. It’s important to be aware of this number because the inflation rate has a large influence on gold prices.
The weekend before last I presented at the Investment U conference in St. Petersburg, Florida, where I had the pleasure of hearing Oxford Club’s natural resources strategist, Sean Brodrick, speak. He reminded his audience why so many investors see gold as a safe haven, saying that, unlike the dollar, “gold will never go to zero.”
As always, I advocate that 10 percent of your portfolio consist of gold: 5 percent in bullion and 5 percent in gold stocks, then rebalance every year.
Munis Still Make Sense
Safety is part of the reason why the municipal bond market is today worth $3.65 trillion. To determine just how safe munis have been for investors, Moody’s looked at more than 54,000 municipal bond issuers and 5,600 high-yield corporate bond issuers between 1970 and 2011. What they found is that only 71 muni issuers defaulted, whereas corporate bond defaults for the period rose to more than 1,800.
What’s more, even lower-rated munis have historically had better credit quality than high-rated corporate bonds. In a similar study, Moody’s reported that since 1970, “adequate” Baa-rated munis have had a default rate of 0.30 percent. But of the corporate bonds that received the highest, “extremely strong” rating, 0.50 percent failed to meet their obligations.
Munis had a stellar 2014, delivering positive returns all 12 months of the year. This helped the asset class outperform both corporate bonds and high-yield corporate bonds.
Rightfully so, many bond investors are concerned of what might happen to their holdings when the Federal Reserve decides to raise rates, which could happen sometime this year. When interest rates rise, bond prices drop. For this reason, the bond market reacted positively to Fed Chair Janet Yellen’s announcement last Wednesday that a rate hike wouldn’t occur just yet. Short-term munis are where investors want to be when rates inevitably increase.
Recently we’ve also seen a spike in bond yields. John Derrick, portfolio manager of our Near-Term Tax Free Fund (NEARX), has prudently put fund assets to work, using the following oscillator, among other tools, to determine the most opportune times to deploy capital.
Note that we’re using the two-year Treasury as a proxy for interest rate moves. Munis have tended to track these macro trends.
NEARX has delivered 20 straight years of positive growth in a variety of interest rate environments. Out of 25,000 equity and bond funds, only 30 have done this. Since 1999—the first year he began managing the fund—John has achieved this rare feat by picking only investment-grade munis with short-term maturities. Short-term bonds are less sensitive to rate increases than longer-term bonds that are locked into rates for greater periods of time.
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