December 5, 2013

December 5, 2013

What are Yieldcos?

Government support is providing powerful tailwinds for renewable energy projects.  Despite some public relations problems, the Obama administration’s clear policies still favor renewables over any type of hydrocarbons — even domestically produced oil and gas.  Until recently, investors wishing to invest in wind and solar projects have had relatively few vehicles to gain exposure to renewable power generation infrastructure assets.  In addition, investors generally prefer ‘pure plays’.  Pure plays on renewable energy generation offer the opportunity to invest in the growth of renewables… without exposure to the slower-growing, traditional fossil fuel generation assets along with it.

Are Yieldcos becoming an investment opportunity for investors?  Upgrade today to find out.  


Will Food Prices Increase in 2014?

After two years of drought, what has happened to corn and soybean prices?

Where is Chinese wealth going?

China’s extraordinary growth since the Deng Xiaoping’s opening has lifted hundreds of millions out of poverty.  At the same time, it has also seen the deepening and extension of corruption that was real in pre-reform China; but before liberalization, corruption had a smaller economic body on which to grow.  Just as rapid industrialization has created huge environmental problems for China, at the same time  it has raised living standards dramatically.  The explosive growth of the economy has generated wealth — but has also generated ever more profound disparities between China’s rich and poor.

U.S. Energy Production Helps Keep Inflation Under Fed Targets

Inflation in the U.S. has been ticking lower recently in large part to a decline in domestic U.S. energy prices.  October’s Consumer Price Index data from the Bureau of Labor Statistics showed a 1 percent increase in the prices of items in their basket.  The prices of basic, essential needs tracked in our Guild Basic Needs IndexTM — which includes certain food, clothing, shelter, and energy components — actually showed a year over year decline of 2.9 percent.  The low inflation has given the Federal Reserve a green light to continue to their extraordinary monetary stimulus of bond purchases and near zero percent interest rates.  It is no secret that the QE program will be scaled back, but thus far the signals from the central bank suggest that they prefer a 2 percent inflation rate and a 6.5 percent unemployment rate before they remove their QE accommodation.

Perhaps the Fed’s targets are not so far out into the future…

U.S. economic data continue to improve, and we expect GDP to keep rising throughout 2014.  It is GIM’s view that this is the stage of the economic cycle where corporate boards start to spend to expand their factories and to hire more employees.  Our view is increasingly supported by economic data on employment, capital spending, etc.  We expect to see an upward revision of Q3 U.S. GDP and expect good GDP growth over the next several quarters.

Of interest to investors, the bond market is already sending signals that interest rates will rise.  Interest rate increases are normal and expected when the economy grows.  Historically, interest rates on 10-year U.S. treasury bonds have usually been at least 3.3 percent above the 1-year bond rate.  One year bonds pay about 0.1 percent, so it would not be surprising to see 10-year bonds yielding 3.4 percent up from 2.8 percent today.

Today, bond yields are moving higher for two reasons:  first, a strengthening economy, and second, an eventual reduction in Federal Reserve bond buying.  Interestingly, all of this is taking place while inflation is relatively quiescent.

A stronger economy and taper talk has caused a change in direction for bond yields.  What will concerns about rising inflation do to this chart?

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Ten Year Treasury Yields (1984-2014)                      Source: Bloomberg

After decades of declining rates, we are confident in our view that interest rates are in the beginning stages of a long-term move higher.  The average yield for the 10-year treasury is much higher than the current 2.84 percent.  We see 3.75 percent as a reasonable target for 2014.  The pace of the rise — whether it is steady, volatile, or accelerating — is of particular importance to investors.  Slow and steady increases in interest rates that are combined with increases in economic activity can be supportive of the equity markets.  However, rapidly rising interest rates that exceed the pace of economic growth are not constructive for markets. 

Decades of experience watching markets tells us that the longer term driver of interest rates is not the Fed’s bond-buying program, but global expectations for economic growth and future inflation.  It is possible that the third quarter of 2013 was the low point for inflation data, and that prices of goods and commodities could begin to march higher.  We are watching these developments closely and will share our analysis it with you. .

Guild Basic Needs IndexTM

Sept 2013.JPG

Track our analysis in these letters at

Market Summary

Is a significant market correction looming in the future?  What have we done for our investment management clients?



In Last Week’s Global Market Commentary We Discussed:

  • What Is Driving Japan?

  • E-Commerce With Chinese Characteristics

  • Pressure off Iran.   What does it mean for oil?

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