Week by week, stock prices are confirming one of my biggest ideas…
For several years now, I’ve been telling you that things are slowly recovering in America. These days, this is a radical stance.
Most newsletter readers are constantly exposed to news and commentary about how bad things are. But as I’ve repeatedly shown you, most of the economic indicators I follow show things are getting better.
On August 3, for example, Wells Fargo (WFC) shares closed near their highest level in more than three years.
Wells Fargo is the largest home lender in America, outside of the U.S. government.
When folks take on and pay off mortgages, Wells Fargo prospers.
On August 6, Boston Properties (BXP) shares hit their highest level in more than a year.
Boston Properties is America’s largest office landlord. When businesses pay their bills and open new offices, Boston Properties prospers.
On August 8, Disney (DIS) shares hit their highest level ever. Disney is one of America’s largest media and entertainment companies. When folks have enough money to spend on cable TV, movies, and vacations, Disney prospers.
Wells Fargo, Boston Properties, and Disney aren’t the only major American businesses enjoying new price highs. Dozens of other stocks that are sensitive to the American economy are also surging.
And the driving force behind the resurgent stock market is the incredibly low cost of money…
You see, 10-year Treasury interest rates are around 1.6%. That’s a HUGE historical low. Take a look…
Here’s why record-low rates matter to the country’s best companies… and to us: The interest rates paid on savings accounts and CDs are based on U.S. Treasury interest rates. The interest rates companies pay to borrow is based on both their creditworthiness and the U.S. Treasury interest rates.
So low rates have been murder on investors who want a high return on their cash. But they give the country’s best companies – and their shareholders – a huge advantage. They can use low interest rates to amplify their long-term results.
Let me explain…
For many corporations, the “cost of money” comes from the interest rates they pay to borrow (for instance, by issuing corporate bonds). Thus, interest rates are an important part of their profitability. If a company pays 10% for the cash it needs to build a factory, that generates a profit of only 11%… That’s a thin margin. Compare that with the opportunity it has borrowing at 3% or 4% to build that same factory. That plant is going to be a lot more profitable.
That’s why now is an excellent time for creditworthy companies to borrow. When companies like Microsoft or Automatic Data Processing can borrow for 2% or 3%, their interest costs drop. And that means more money to the bottom line.
It’s why I like stocks that have stable revenues, deep cash flows, and pay shareholders the extra money. These companies’ interest costs are at record-lows, and that makes them that much more profitable.
Low interest rates also make companies with cash flows that much more valuable, too… The alternative investments pay little-to-no interest. Government bonds pay less than 2%. And the bonds that are being issued by strong companies pay less than 3%.
Owning companies that pay 3%, 4%, or 5% in dividends is an attractive alternative… especially when you consider that annual dividend payments can rise, while interest payments from bonds are fixed and cannot rise.
In short, “cheap money” makes this a great time to be a great American company… and a great time to invest in the same.
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig