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ConEd Is A Great Trade

Summary

ConEd trades off of Fed policy.

As the chances of a rate hike increase, the stock sells off.

Since I think the rate hiking cycle is ending, I think ConEd should be bought.

ConEd (NYSE:ED) stock has become a trading vehicle for whether the Fed is going to raise rates. In a rising rate environment utility stocks, which are bought because of their dividend yields, become less attractive. I talked about the reason why ConEd's stock has gone up in my last article on the company. Investors are increasing their risk tolerance because central bankers are buying bonds. The Fed is buying government bonds, the ECB is going as far as buying corporate bonds, and the JCB is buying everything it can get its hands on. This artificial suppression of yields have caused $14 trillion in government bonds to reach negative interest rates, the lowest interest rates in human history.

These low yields cause pension funds to move into stocks. The best replacement for a bond is a utility stock as its dividend is very consistent. When yields rise, this situation will cause Con Ed stock to fall. This makes me bearish on the stock in the long run, but I am still bullish on the stock in the short run. This has been wrong since the last post, but I'm sticking with it. Utility stocks typically do well during economic weakness. If investors are looking at a rate hike are extrapolating that the economy is in great shape and are using that as an excuse to sell ConEd stock, then they wrong. I will prove this in congruence with my point on why the Fed's rate increase cycle is ending.

Based on my analysis the credit cycle is ending. Whether or not the Fed raises rates a quarter point is meaningless in comparison to the larger issue of where we are in the credit cycle. If you knew the economy was headed for a recession and if the Fed raises rates in September it is likely to be its last increase for the cycle, you would not sell ConEd on this small news event. Contextualizing this rate increase is possible, by looking at the last increase. It was a small quarter point hike that did nothing as the Fed's...


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