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Has the Safety Trade Gotten Out of Control?


Investors' extended frenzied search for certainty seems to leave fewer and fewer "safe" options available.

I couldn't help but smile this week when I saw the Wall Street Journal headline "Dividend Stocks Become the Heroes."

Who would have imagined 12 years ago, when the world was clamoring for and Webvan, that we would reach the point that "old-fashioned" trust companies like Haverford would be putting up billboards next to the highway in Philadelphia that asked "Earned any dividends lately?"

But that is where we are today.

I can't say that I am terribly surprised, though. Just compare the chart on the right from the Wall Street Journal article with the chart below it -- the Bloomberg Comfort Index.

Click to enlarge

Maybe it's just me, but turned on its head, it sure looks like the Comfort Index correlates pretty well.

Thanks to deteriorating social mood, we want certainty. And we are happy, if not outright eager, to sacrifice growth for the perception of steady dividends.

Of late, though, I have been wondering if this "safety trade" has gotten ahead of itself. Maybe it's just me, but when I see companies that have paid dividends for at least 25 years labeled "aristocrats," it sure feels like certainty has set in. And then there is gold and, I suppose if you are a Russian billionaire, London real estate -- where I see someone paid $157 million this week for a flat -- and of course the Swiss franc.

What I love about all of these safety trades, though, are the strident comments that they just can't be bubbles. Peter Schiff and I had fun debating this topic relative to gold the night of Festivus, and lately it feels like the blogosphere is filled with enough views pro and con to fill the cloud.

Then again, history suggests that anything can be a bubble, even tulip bulbs.

I don't pretend to know whether the safety trade is a bubble or not, but charts of McDonald's (MCD) stock certainly make me wonder if we are all "love'n it" just a little too much.

This then raises two questions in my mind: Who buys safe dividend paying stocks when they no longer act like safe dividend paying stocks, and where will all those "widows and orphans" who have fled growth stocks for safe dividend stocks flee to next?

Maybe it's just me, but investors' extended frenzied search for certainty seems to leave fewer and fewer "safe" options available.

Admittedly some will suggest that the peaking of the safety bubble may represent the best "risk-on" indicator out there -- especially with a pancaked Treasury curve and the potential for more QE.

We'll all obviously soon see. Markets don't ring a bell at the top or the bottom.

Then again, after reading the Wall Street Journal article, markets, or at least market participants, may put up billboards.

Peter Atwater and Peter Schiff had an interesting debate at this year's Festivus, check it out: Fed vs. ECB: Debating the Impact of Central Banking (VIDEO).
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Position in SH and JPM
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