InvestMacro Forex News

By Central Bank News
The offshore market for China’s renminbi currency is likely to develop into a fully-fledged intermediary between non-Chinese borrowers and lenders, much like the eurodollar market, the Bank for International Settlements said.

    “The current role of the offshore renminbi market as a conduit of funds from the rest of the world to the mainland may not be its last role. Over time, the renminbi offshore market is likely to play above all the role of intermediary between non-mainland borrowers and lenders,” the BIS said in a special feature in its June quarterly review.

     BIS examined the 38-year history of the eurodollar market for clues to the future of the offshore renminbi market, with the study raising doubts over claims that international use of the renminbi requires China to run a current account deficit. It also suggests that one-way speculative positioning, taken by some critics as the main impetus for international use of the renminbi, will prove to be temporary.

    China is taking steps to internationalise the role of the renminbi, with London and Singapore attempting to compete with Hong Kong as the main offshore center for renminbi trading.

By The Sizemore Letter

“Buy low and sell high” is the standard advice of any value investor. It can also be remarkably hard to put into practice.

You see, we humans are herd animals, and we tend to think and act as groups, particularly during times of stress. Call it the primal human instinct to seek strength in numbers.

Unfortunately, while this instinct may ensure our survival during times of war or natural disaster, it handicaps us as investors. When we see others panicking we too sell in fear or stand paralyzed in indecision at exactly the time we should be buying with both fists.

All of this is a lengthy introduction to the subject of this article, Spanish telecom giant Telefonica (NYSE:TEF).

Telefonica has had a rough year. The price of its U.S.-listed ADR are down nearly 70% from their pre-2008 highs. The domestically-traded shares have fared slightly better do to the lack of currency movements, but results have been dismal nonetheless.

Spain’s crisis has become Telefonica’s crisis. As the most liquid stock in the Spanish stock market, Telefonica has become a proverbial punching bag and an outlet for traders wanting to short the embattled Eurozone country.

This article was published on GuruFocus.  To read the full article, please see “The Case for Telefonica.“

By Central Bank News
Most emerging market economies have successfully carried out countercyclical policies in the last decade, similar to advanced economies, contributing to the stability of the global economy, a study by the BIS said.

    In the past, monetary policy in many emerging economies was handcuffed by expansionary fiscal policy in economic upswings – known as fiscal dominance — leaving little scope for policy easing during downturns.

    “However, the era of fiscal dominance appears to have ended in most EMEs,” said the Bank for International Settlements in its June quarterly review, adding that emerging economies relied on both fiscal and monetary policy to lean more heavily against the business cycle.

    But the BIS also cautioned that the example of crises-hit euro area countries, which pursued countercyclical policies in the past decade, shows that authorities can never become complacent and policies must be monitored continuously.

    “Countercyclicality is a necessary but not a sufficient condition for sound macroeconomic policy,” the BIS said.

Article by Investment U

Play the upcoming rise in rare earth metals with rare earth stocks and ETFs. And don't forget your trailing stops.

I just published a 50-page special report on China aimed at institutional investors. An Inconvenient Truth About China: Severn Troubling Trends describes how its semi-market state capitalism model is in need of significant reform.

But no matter what happens with China’s economy, one truth will remain. The country has a lot of leverage over rare earth production and prices. It produces 90% and controls 95% of the export market for the 17 metals considered “rare earths.”

This is a big deal because many emerging industries rely on these rare earth metals and elements. A Toyota Prius contains about 10 pounds of lanthanum. Smartphones, tablets, night vision goggles, jet engines, giant wind turbines, GPS, fiber optics and missiles are just a few other examples.

China made headlines in late 2010 when it suspended exports to Japan as negotiating leverage during a territorial dispute with Japan. The tactics led to alarm and a surge in rare earth metals and stocks through the summer of 2011.

Since then, you may have noticed that rare earths have largely disappeared from headlines and stock prices have come back to earth. Meanwhile, the industrial uses of these elements has increased, while there are also indications that the high prices during 2011 led to a ramp-up of mining activity.

Take Advantage of the Pullback

Weighing all this, I believe it’s time to take advantage of this sharp pullback and make a value-driven move on rare earth stocks. My top pick is Denver-based Molycorp (NYSE: MCP), whose stock is down 66% in the last year.

Molycorp, founded in 1946, mines rare earth minerals and elements at its fully integrated mine in California and runs processing facilities in Arizona and Estonia. In addition to producing rare earth oxides at its rare earth mine and processing facility at Mountain Pass, California, the company produces rare earth metals, rare earth alloys (such as neodymium iron boron and samarium cobalt alloys) and rare metals such as niobium and tantalum.

In 2011, the company announced a partnership to produce high tech magnets in Japan. A bigger deal was the acquisition of rare earth producer Neo Material Technologies for $1.3 billion announced in March of 2012. This deal is significant because the 2011 results of the combined companies on a pro forma basis show a tripling of revenue and gross profits, while the holding of Molycorp shareholders will be diluted by only about 15%.

Looking forward, the combined Molycorp and Neo Materials is forecast to produce $1 billion of revenue and $3.80 per share of net income in 2013 when the merger is fully completed. If the combined enterprise gets into the ballpark of these projections, the impact on its share price should be sizable.

It was during 2011 that Molycorp’s rare earth business exploded with revenue, going from $35 million in 2010 to $362 million leading to an EPS of $1.27. The company also posted a solid first quarter in 2012, marginally beating consensus earnings per share estimates with quarterly revenue up 222.5% year over year.

The combination of the sharp pullback in share price, the acquisition of Neo Material Technologies and the recent reassuring earnings report are all catalysts pointing to a sharp rebound for Molycorp. I have also noticed an uptrend for the stock since the earnings were released.

If you prefer a broader shotgun approach, take a look at the Market Vectors Rare Earth/Strategic Metals (NYSE: REMX). It’s a basket of 30 companies from around the world that are engaged in mining, refining and manufacturing of rare earth strategic metals.

This ETF offers a 5.4% dividend yield, and roughly 60% of its holdings are small and mid-cap stocks from all over the world – but mainly concentrated in the United States and Australia. Surprisingly, only 10% are based in China. Launched in late October 2010, it caught some of the rare metal surge through the summer of 2011, but ended up down 39% for the year.

Though you should expect some volatility, I recommend pairing a small stake in MCP and REMX to take advantage of their out of favor status while you have the chance.

Good Investing,

Carl Delfeld

P.S. In today’s Investment U Plus edition, I tell readers about a company that is using rare earths to bring about huge productivity increases in Chinese factories. It’s a solid long-term investment, but not something I’d recommend to traders or short-term investors.

For more information on accessing today’s stock recommendation, click here.

Article by Investment U

Article by Investment U

GM, Ford (F), and Hertz (HTZ) are betting big on natural gas vehicles. Are CLNE and WPRT the best way to play natural gas in 2012?

Living in South Florida has its perks.

And my absolute favorite is that I’m just an hour away from basking in the Florida Keys.

In fact, just a couple of weeks ago, my wife and I drove down and spent the weekend at Bahia Honda State Park (approximately 35 miles north of Key West).

The weather, the water, the camping, almost everything about it was perfect.

But, even in paradise, there was one thing I had trouble getting over. Gas prices down there are truly outrageous.

We paid $4.25 per gallon to fill up our car in Marathon Key. I even overheard boaters complain how they paid over $5 per gallon at some of the local marinas.

I think it’s safe to say most Americans sense these prices are heading inland no matter how much we don’t want them to. History shows they’ve risen steadily since the mid-1970s.

Wouldn’t it be incredible, though, if there was a way to pay closer to $1 for a gallon of gas instead of the high prices we do today?

Of course it would. And we can. But we must get serious about taking advantage of alternative fuel sources like natural gas.

The Case for More Natural Gas Vehicles

According to Popular Mechanics, “Nationwide, natural gas ranges from 79 cents to $1.50 for a gasoline gallon equivalent (GGE) of fuel.”

Let’s say your car has a 15-gallon fuel tank. If you were to fill it up once a week at $1 per gallon with compressed natural gas (CNG), you would save over $2,000 per year with gas prices averaging $3.75 per gallon around the country.

Savings like these are getting impossible to ignore. And car companies are increasingly taking action.

GM (NYSE: GM) announced the 2013 GMC Sierra and Chevy Silverado will have a bi-fuel option that can switch between running on compressed natural gas (CNG) and gasoline.

Ford (NYSE: F) and Chrysler also said they’ll be ramping up production on their bi-fuel trucks over the coming years.

Even car rental company Hertz (NYSE: HTZ) just stated it will begin renting CNG Honda Civics and CNG GMC Yukons at its Will Rogers World Airport location in Oklahoma City early next month.

In Europe, with gas prices close to $10 per gallon, the trend is catching on even faster.

Just a few days ago, Fiat (Milan: F.MI), Italy’s largest auto manufacturer, emphasized it’s bypassing electric cars and will focus on CNG as its “go-to” alternative fuel for at least the rest of this decade.

A little over a week ago, Volvo Trucks unveiled plans to launch a 13-liter natural gas engine schedule to hit the North American market in 2014.

Of course, the biggest problem around the world for natural gas-powered vehicles is the lack of infrastructure.

Playing the Trend

In the United States, there are only 1,000 CNG refueling stations. And most of them aren’t even available to the public. In Europe, that number is closer to the 2,000 mark.

This is obviously where we’ll need to see the most growth in order to make natural gas-powered vehicles a viable alternative to cars that strictly run on gasoline.

That’s why, for investors, the best place to cash in on the natural gas vehicle market today isn’t in the car companies themselves. It’s in firms that are building refueling stations like Clean Energy Fuels Corp. (Nasdaq: CLNE) and cheaply converting gasoline engines to run on natural gas like Westport Innovations (Nasdaq: WPRT).

Earlier this year, Dave Fessler gave his Peak Energy Strategist subscribers the chance for a 77% gain on Westport. Since hitting its peak in April, the stock has been battered down heavily with the majority of natural gas stocks… (Thank goodness for trailing stops.)

Meanwhile, Clean Energy Fuels Corp. has been up as much as 174% in the past year.

This is proof that even though the natural gas market is currently hitting the skids, there are still ways to cash in on the low prices and poor sentiment. Just ask Alexander Green…

Good Investing,

Mike Kapsch

P.S. I mentioned the importance of trailing stops, and I strongly believe that it should be a crucial part of your investment strategy. Cutting your losses and letting your winners ride is of the utmost importance.

But it’s not enough. To build wealth consistently, you need the right asset allocation, position-sizing, and smart tax management.

To learn more about the fundamental principles of wealth building, I invite you to read our free white paper report, How to Build Wealth.

Article by Investment U

By Taro Hideyoshi

The expectations is one of the aspects traders should take into their consideration when trading. I have mentioned to expectations many in many of my articles. In this article, we will dig a bit deeper in order to paint clearer picture in this topic.

The question “How much do you expect to earn on each trade on average over the long run from your trading system or method?” is a good one to describe what the expectation is in trading.

Of course, no one expects to lose. Therefore, the first thing you have to make sure is the system you are using must have a positive expectation. If your system has the positive expectation, it will ultimately generate you profits if you keep trading by it over enough time.

The following equation is a mathematical equation for positive expectation. The higher result, the more positive expectation you have.

E = (1 + (W / L)) x P – 1

Where:
E = Expectation
W = How much you gain when you win
L = How much you loss when you lose
P = Probability of winning

According to the equation, you will see that it does not only depend on percentage of winning trades but also the amount you gain from winning trades.

For example, assume a trading system has 50% wining trades. Now, assume the average winning trade is $500 and the average losing trade is $350.

E = (1 + (500/350)) x 0.5 – 1 = 0.214

For comparison, let considers another trading system that has only 40% winning trades with an average winner of $1,000 and average loser of $350.

E = (1 + (1,000/350)) x 0.4 – 1 = 0.543

The second trading system’s positive expectation is 2.5 times that of the first although it has much lower percentage of winning trades.

Let’s take a look in another aspect. The following equation is a mathematics equation mentioned in the book “The Complete Turtle Trader” by “Michael W. Covel”.
The equation calculates the expected value from trades.

E = (PW x AW) – (PL x AL)

Where:
E = Expected value
PW = Winning percent
AW = Average winner
PL = Losing percent
AL = Average loser

From the above example, the expected value from the first trading system will be as follow.

E = (0.5 x 500) – (0.5 x 350) = $75 on average per gain per trade

Also for the comparison, the expected value from the second trading system will be as follow.

E = (0.4 x 1,000) – (0.6 x 350) = $190 on average per gain per trade

Do you get a clearer picture of the expectations in trading now? Hopefully, you do.

About the Author

Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.

If you would like to find more articles on MetaStock Tutorials, MetaStock Formulas, Trading Systems and Money Management. Please go to MetaStock Trading System.

You would also find the list of recommended books for trading & investing at The Investing Books.

By MoneyMorning.com.au

On the heels of the Facebook IPO fiasco, many investors are wondering how they can find the next best thing and avoid getting “facebooked” in the process.

Tall order? Not really.

First, look for companies with ideas that can be applied across a wide variety of industries.

If I had said this five years ago, you’d be looking for Internet- related start-ups or companies that can do “it” better, faster or cheaper.

Going forward however, I think the true innovation will be exponential progress that’s made linking living systems with their digital counterparts. Everything from synthetic biology to computational bioinformatics will grow a lot more rapidly than the broader markets.

So will key markets related to healing human illness, solving hunger and figuring out how to deliver potable water to broad swathes of the planet.

No doubt there will be tremendous ethical challenges along the way, but I believe we will see the line blur between what’s needed to live and how we actually live our lives.

Though it’s hard to imagine given the state of the world at the moment, I believe a fair number of the best up- and- coming investments will be outside the traditional first- tier markets of the United States, Europe and Japan.

In fact, I’d bet on it.

Second, don’t confuse the ability to organize or share information with the ability to generate revenue. One might lead to the other but they are not the same thing.

The way I see it, Facebook is a classic example of everything you don’t want in a business. It is 900 million users who spend an average of $1.32 a year. Compare that to Amazon.com, which clocks in at a much more valuable and consistent $36.52 per person.

Call me crazy, but I don’t think Facebook stock will see the bottom for a while. As I wrote, at best Facebook is worth $7.50 a share.

Revenue is slowing. Facebook doesn’t dominate the mobile markets that are becoming the preferred consumer channel for tens of millions of people. And, in what is perhaps the death knell, startups are already cannibalizing Facebook’s user base.

The ability to “like” somebody is really no different than signing their yearbook in high school — only you’re using a computer and the Internet to do it.

Third, hunt for fringe thinkers working in their garages.

It’s not enough to think differently. The next big things will come from those thinkers operating on the fringes of what the rest of us consider normal.

For example, there’s a self-taught school dropout mechanic in Wichita, KS, named Johnathan Goodwin who turned the automobile industry on its ear by figuring out how to convert gas- guzzling hummers into biodiesel trucks and 100 mpg hybrids.

Detroit said it couldn’t be done yet his company, H-Line Conversions, proved them wrong. Don’t forget that Bill Hewlett and Dave Packard started H-P in their Palo Alto garage. Incidentally, their first product was not a computer but an audio oscillator Walt Disney purchased to make the film Fantasia.

Then there’s eBay (Nasdaq: EBAY).

Now an institution, eBay has created several millionaires like Jordan Insley and Sarah Davis. Insley has sold more than $8 million worth of electronics via eBay, while Davis has moved more than $4 million worth of designer handbags online. Many eBayers operate from their garages quite literally.

Steve Jobs and Steve Wozniak also built the first Apple computers in Jobs’s parents’ garage. And the rest, as they say, is history.

Keith Fitz-Gerald
Contributing Editor, Money Morning

Publisher’s Note: This is an edited version of an article that originally appeared in Money Morning (USA)

From the Archives…

Free of the Dragon: Why the Energy Market Doesn’t Need China
2012-05-25 – Kris Sayce

China Stirs Up Troubled Waters in the South China Sea
2012-05-24 – Dan Denning

How Chinese Stocks Are Fading Fast
2012-05-23 – Lars Henriksson

LNG: Why Australia Will Be a New Global Gas Leader
2012-05-22 – Dr. Kent Moors

A Shocking Week for China’s Economy
2012-04-21 – Dr. Alex Cowie

Three Ways to Avoid the Next Facebook IPO Fiasco

By MoneyMorning.com.au

‘Sell in May and go away.’

It’s an old stock market saying. However, it’s mostly an American concept. The weather is warming up as summer approaches, and many traders in the Northern Hemisphere are winding up their portfolios so they can have a less stressful break.

However, this May was carnage…

Look at what happened in the global markets. The ASX 200 is down 8.5% in May, and the Dow Jones Industrial Average lost 6.3%. Not to be forgotten was the Aussie dollar, losing almost 6% and is now at 96.99 US cents. The economic indicator, copper, dropped 12% in the same time. And oil? Well, Brent Crude is down 15% since 1st May.

But there was one trader who prepared for it. Murray Dawes, editor of Slipstream Trader didn’t expect a small drop. He planned and positioned his subscribers for a drastic fall in the stock market…

On the 17^th April he told his readers to get ready:

‘The market is now sitting just above some very important technical levels. From here I can see a chain reaction taking the market hundreds of points lower in a short amount of time.’

That was the first time Murray tried to short the stock market. Only to be ‘stopped out’ the next day when the market rallied!

Yet, Dawesy was still sure the stock market was ready to fall. He was sure his strategy was right. Instead of sitting out, he took a small loss, and then got ready for his next attack on the market. Selecting his short sells carefully, he was ready for the next fall.

He wasn’t afraid to get back in. In fact he took another shot at it on the 30^th April…

Even after the market rallied when the Reserve Bank of Australia announced a 50 basis point cut, Slipstream Trader subscribers still held onto their short positions. And a good thing too. Since then, the ASX200 has fallen, and then fallen some more.

ASX200 – Down 379 Points Since 2 May 2012

The ASX200 is now at the same level as December last year. Five months of gains gone in 31 days. The index fell 8.5% in May.

But the thing is, investors should be more accustomed to these wild swings than ever before.

Check out the chart below.

13 times in the past five years, the Aussie index has lost more than 300 points in less than a month.

ASX200 – 13 x 300 point dives in five years

Click here to enlarge

And how many times did the same thing happen from 2000-2007? Once. September 11, 2001, the stock market was down 300 points in a day.

What does that tell you? Preparing for a severe downturn in the stock market is a necessity today. Sure, this makes investing difficult, but understanding that events like this happen regularly will help you position your portfolio.

Where do you start? Kris Sayce, editor of Australian Small-Cap Investigator has one strategy that he’s been suggesting to readers since last year.

Setting Up a Portfolio

The idea is simple. Allocate most of your portfolio to less risky investments. And keep a little ‘punting money’ aside. Using only a small amount of cash for speculative investments means you’re less likely to hit the panic button and sell exactly at the wrong time.

But sometimes, no matter what, investors panic. So even when you’ve set up a very selective portfolio, it’s hard not to chase the stock market down.

Kris recommends using small-caps for punting money. But if you can devote the time to it, you could allocate some of your punting money to trading…

Murray warned readers of Slipstream Trader not react to the market and dump stocks just because they were taking a beating.

Last week he wrote: ‘…the great bulk of traders are watching the stock market like a hawk now and feeling on edge. That situation usually leads to larger volatility and ultimately trading mistakes if you aren’t careful.’

Long and Wrong

Selling just because a market is falling will lead to bad investment decisions.

As Murray said of investors who sell in the chaos, ‘Plenty of traders will be long, wrong and sweating on every downtick that the market makes, hoping against hope that it turns back up soon and makes them whole.’

On the last day of April, just before the stock market took a turn for the worse, Murray saw the May market carnage coming:

‘We have a couple of short positions ready to take advantage of [the ASX200] falling back below 4300. Of course, once we fall below that, more selling will come out of the woodwork. But 4200 is the real line in the sand. Anything under there is where the market will get belted. I really do like the set up.’

And as of last night, all Murray’s short trades were ‘in the money’. That’s trader speak for profitable.

Does that mean the stock market looks cheap and you should snap up a few bargains? Not at all. Without any government or central bank interference the chance of a rally to push the index above 4500 is, Murray says, ‘remote’.

If anything, right now it’s better to sit out market and wait for the next opportunity.

Murray’s convinced the Aussie index is moving into a long term downtrend. Meaning he expects the index to move downwards more often than up.

Murray’s been in this game for twenty years. He doesn’t let the markets rattle him. Where other people see a downturn, Murray sees an opportunity.

If you’d like to know where Murray sees the stock market heading click here to learn more.

Shae Smith
Editor, Money Weekend

The Most Important Story This Week…

Money Morning resource expert Dr. Alex Cowie said a while ago that he thought the best opportunities for investors were no longer in the big commodity markets, such as copper and coal. He said the opportunity would be in more “strategic” metals and minerals. These small and largely unknown stories can deliver big gains to investors who get in early before they become widely known. These aren’t something you hear about a lot in the mainstream – until after they deliver percentage returns in the hundreds.

Rare earths are an example from a few years ago. Mineral sands were another one. The good doctor might have just nailed the next one. In his latest issue he recommended a small explorer to take advantage of what might be the big investment story of 2012 – all in a time when the broader market is falling. See what he says himself in The Market Has Crashed, But This Graphite Stock Has More Than Doubled.

Other Recent Highlights…

Keith Fitz-Gerald on What Facebook Stock is Worth (At Best): “The company is only worth about $7.50 a share. And, no. That’s not a typo. There is no missing zero or a placeholder. That’s reality. What is ludicrous is that Morgan Stanley and Facebook executives thought the company merited a $104 billion valuation at 100 times earnings… So what should the numbers be?”

Dr. Alex Cowie on Why the Saudi’s Are Making Me Eat My Words About the Oil Price: “Expensive oil has a habit of causing recessions – so cheaper oil takes the pressure off slightly. But it’s bad news for investors in oil companies, because in the last few months stock prices have come off the boil. So what’s behind the sharp pullback in the oil price? And is the price set to fall further? Read on…”

Kris Sayce on Europe’s Energy Resource Puzzle: “The big theme in the April issue of Australian Small-Cap Investigator was Europe. To be precise, that if Europe is ever to recover economically, it must develop its own energy resources… Europe’s energy position is dire. And as the EU points out, it’s getting worse.”

Dr. Kent Moors on The Global “Texas Standoff” Over Iran Oil: “I keep going back to this issue, but it’s for one very simple reason. The rising tension between Tehran, on the one hand, and Washington and Brussels, on the other, is still the single most serious geopolitical element impacting the global oil market today. And now the matter is finally reaching a head.”

Kris Sayce on The US Dollar – The “Strongest of the Weak”: “The idea of risk is a very personal thing. What we see as risky, you may not. And what you see as risky, we may see as completely safe. One trick to successful investing isn’t to just figure out what you see as risky, but to also figure out whether other investors see it as risky too. If you can pull off that trick it can help you stay one step ahead of the crowd. More below…”

This Top Trader Predicted the Month of Stock Market Carnage

By Central Bank News
The past week in monetary policy saw interest rate decisions announced by 8 central banks around the world.  Those that altered interest rates were: Brazil, cutting 50 basis points to a low of 8.50%; Denmark, trimming a further -15bps to 0.45%; and Uganda dropping -100bps to 20.00%.  Meanwhile the central banks that held interest rates unchanged were: Hungary 7.00%, Turkey 5.75%, Zambia 9.00%, Colombia 5.25%, and Israel 2.50%.  Elsewhere in monetary policy, the Central Bank of Egypt cut its RRR -200bps to 10 percent.

Looking at the central bank calendar, the week ahead is set to be a big one in terms of monetary policy meetings.  However the RBA is expected to hold fire at 3.75% this time, likewise the BOC is expected to hold at 1.00%, and the ECB and BoE are expected to hold at 1.00% and 0.50% respectively; and keep their asset purchase programs unchanged.  Of course this does not preclude them from taking action, as the economic and geopolitical backdrop arguably warrants action. Outside of the main central banks, the National Bank of Poland, Central Reserve Bank of Peru, and Banco de Mexico also meet to review monetary policy settings.

Source: www.CentralBankNews.info

Article source: http://www.centralbanknews.info/2012/06/monetary-policy-week-in-review-2-june.html

By The Sizemore Letter

Utilities are the proverbial red-headed stepchild of stock market sectors. During bull markets (so the thinking goes), utilities tend to underperform more aggressive sectors like technology or industrials. But during a good market rout, utilities take a beating along with the rest.

How unloved are utilities?

As I wrote in a recent article, they were by far the most shunned sector by the large money managers interviewed by Barron’s (see chart). Fully 30% of the “big money” managers picked utilities as the worst performer of 2012, and barely 3% thought it would be the best. (On the flip side, more than 30% of the managers chose financials and technology to be the best-performing sectors, and technology had not a single manager who voted it worst).

As a contrarian trade alone, utilities would be interesting. After all, the sector has been known to take investors by surprise; during the 2003-07 bull market, utilities were one of top-performing sectors on a price basis, and this did not include the high and rising dividends enjoyed by investors during the period.

And this brings me to my primary rationale for liking the sector: In a world where 2% is a “good” yield on a 10-year bond, the 3.9% paid by the Select Sector Utilities SPDR (NYSE:$XLU) is attractive. It’s roughly double the dividend yield paid by the S&P 500. And unlike the interest paid by a bond, the dividends of XLU constituent companies have a history of rising over time (more on that in a moment).

While portfolio growth is essential to meeting your retirement needs, growth ultimately doesn’t pay the bills; but income does. Yes, you can sell off appreciated shares to meet current expenses, but that doesn’t work particularly well when the market is trading flat or down. Just ask investors who needed to sell their shares during the pits of the 2007-09 bear market and panic.

The problem for most investors is that their traditional sources of stable income — bonds and CDs — simply do not pay enough in this interest rate environment. This means finding a respectable current income often means accepting stock market risk.

Frankly, I’m OK with that. An investor who is comfortable holding a 30-year bond to maturity should be equally comfortable holding a solid dividend-paying stock. If income is your objective, the bends and twists of the stock market can be safely ignored — so long as you are reasonably sure that the dividend is safe.

Let’s take a look at some of XLU’s largest holdings, starting with Southern Company (NYSE:$SO). Southern, as its name might imply, serves electricity to much of the Old South. It is a diversified power company that generates electricity through coal, nuclear, oil and gas, and hydroelectric assets.

Southern also is a prolific dividend raiser. The company recently raised its quarterly dividend to 49 cents per share, up from 40.3 cents at the onset of the crisis in 2008 — an increase of more than 21%. That’s not bad, given that many companies were forced to slash their dividends in those volatile years. Southern currently yields 4.3%, which is substantially higher than what you will find in the bond market outside of junk. And whether or not we have a eurozone meltdown, that dividend is unlikely to be affected.

Another of XLU’s holdings worth noting is Duke Energy (NYSE:$DUK). Like Southern, Duke is based in the American South. And also like Southern, Duke was able to continue growing its dividend throughout the crisis years of 2008 and 2009 and beyond. Duke currently yields 4.6%.

If we managed to get a breakthrough in the ongoing European debt crisis, I would expect more speculative sectors to outperform. It will be “risk-on” season again, and defensive sectors like utilities will lag behind. But if the European crisis continues to drag on, you can bet investors will flock to conservative income-producing sectors, and utilities could easily be the best-performing sector for the next quarter and beyond.

This article was originally published on InvestorPlace as part of the “My Favorite Sector for the Summer” series.   Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”