If you dislike bonds these days, you have to absolutely despise utility stocks (XLU), the producers of Americaís electricity supply.
And if you are one of millions of Americans who tried to boost flagging yields on their 401ks, IRAs, and Deferred Compensation Plans, I have some REALLY bad news for you.
You are about to be severely punished.
The largest holding of the Utilities Select Sector SPDR Fund (XLU) are mainstream public utilities companies, like NextEra Energy (NEE), Duke Energy (DUK), Southern Company (SO), Dominion Resources (D), and other publicly traded mainstream utilities companies.
Utilities stocks are indirect bond investments in that they always have such high dividend yields, and because utility companies are such heavy borrowers in the capital markets.
Take a look at NextEra Energy alone, which carries a backbreaking $65.65 billion in liabilities on its balance sheet, including $27.81 billion in long term debt.
If interest rates rise, utilities uniformly get killed. They also get killed by inflation, which finally seems to be entering a prolonged uptrend as well.
That is what you get when you stimulate a full employment economy. Or at least promise to.
So selling short the XLU is, in effect, shorting the bond market which I am more than happy to do so for the long term. It is an indirect bet that interest rates are rising.
This is consistent with my own view that we are now seven months into a new bear market in bonds that could last 20-30 years.
The principal reason that utility stocks have rallied since the election is that the utilities industry would substantially benefit from a deregulation trend from the US government, as promised by the new administration.
Since local consumer electric power and gas rates are such a political hot potato, utilities are one of the most heavily regulated industries in the United States.
If you donít believe me, try going to your local public utilities commission hearing sometime, as I have done on several occasions. It is usually a circus.
The problem is, deregulation ainít happening.
By focusing on the repeal of Obamacare first, the administration is putting at the back of the queue tax cuts, infrastructure spending, and yes, deregulation.
This is terrible news for utilities stocks.
The scary part about selling short the utilities index is that it has a 3.26% dividend yield, which you become liable for with a short position.
So the idea here is to do a quick 24-day or shorter trade and then bug out of there before any dividends become due.
The ETF just went ex-dividend on Friday, March 17th, so we have a free run here on the short side for three months. Short sellers have noticed this.
Click here for the website to learn the components of this ETF at http://www.sectorspdr.com/sectorspdr/sector/xlu .
As another partial trade for this hedge, I am keeping my long position in US treasury bonds (TLT) for a few more days. This second position was intended to catch a short-term short covering rally in the bond market, which we are now well into.
And, if you still own utilities stocks, you better take advantage of the recent unexpected windfall and get rid of them ASAP.
There are many more reasons to worry about them beyond just interest rates, inflation, and the lack of deregulation.
With alternatives becoming an ever-growing share of Americaís energy mix they are going to have to remake their entire business models from scratch.
The are going to have to shift from energy producers to energy middlemen. They must morph from volume sellers to spread takers.
And if deregulation actually occurs, they are going to have to run double time to keep it from driving them out of business.
The history of technological revolution always shows that some companies are better at this than others. There are always winners and losers.
Remember, when President Carter first deregulated the airline industry in 1978, most legacy airlines went broke within a decade.
Are utilities the next airline industry?
Buy more technology stocks instead, which look to keep outgrowing every other industry, no matter who is president.