Risk/Reward Vol 171
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I can see clearly now/The rain is gone
I can see all obstacles/In my way
I think I can make it now/The pain is gone
All of the bad feelings have disappeared."---lyrics from "I Can See Clearly Now" sung by Johnny Nash
"This is the end
Hold your breath/And count to ten
Feel the earth/And then
Hear my heart burst again."---lyrics from "Skyfall" sung by Adele
"Live a simple life/In a quiet town
Steady as she goes/Steady as she goes."---lyrics from "Steady as She Goes" sung by Adele
Thanks to conflicting reports from the Federal Reserve, "I can see clearly now" what likely will happen once the Fed actually decides to taper quantitative easing. Wednesday morning, Fed Chair Ben Bernanke testified that it was too early to consider any tapering of the $85billion monthly asset purchase program known as QE3. Proving that the current market rally is driven largely by the Fed's monetary policy (read, QE3), the Dow Jones Industrial Average (DJIA) soared 151 points on Bernanke's confirmatory remarks. Later in the day, however, minutes of a Fed meeting held earlier this month were released. Those minutes indicated that some Fed members were in favor of tapering sooner than indicated by the Chair, even as early as June. On that news, the DJIA quickly plunged 258 points, ending down 80 points (0.6%) for the day. On Thursday, that drop in the DJIA coupled with disappointing news from China caused the Japanese market to crater 7%--- in just one day! Back home, Thursday traded down and Friday closed flat. Ouch, those three days hurt! But with the weekend upon us, "the pain is gone" and even "the rain is gone" (which is a miracle here in Michigan). "The bad feelings have disappeared." Indeed, with the weekend's calm has come some valuable insight.
Wednesday was an omen. Once the Fed signals that "This is the end" of QE3, the "Sky (will) fall" on any leveraged investment; that is, any investment that is highly dependent on QE3-induced inexpensive debt for profits. One need not "hold your breath and count to ten" to presage this. Indeed, I have known it all along. But nothing could serve as a better reminder than the dropkick I received on Wednesday. In my portfolio, the holdings most dependent on a continuation of inexpensive debt (and thus the ones most at risk come "the end" of QE3) are real estate investment trusts (particularly mortgage REITs), business development companies and leveraged closed end funds. Stocks that held their own on Wednesday were unlevered dividend plays like PGX and PGF and those stocks hedged against interest rate increases like floating rate loan funds. Oil was a mixed bag, although my recent purchase of GSTpA (thanks to loyal reader, WCJ) did very well in the storm.
If I don't want to " hear my heart burst again", how do I position the portfolio for the end of QE3? First, I find stocks that were "steady as she goes" during Wednesday's crash. And second, I acknowledge that the marginal gain available via leveraged investments is not worth the risk. If that translates into a portfolio that yields dividends that are 100-200 basis points (100 basis points =1%) lower than my current average, so be it. Year to date, I have profited sufficiently from principle appreciation to compensate for the difference. I can afford a "simple life in a quiet town" at least through 2013. Over the next few days, I will sell the leveraged positions on upticks and redeploy the proceeds into "steadier" fare.
And so the week ends with a lesson re-learned: because I hold a large number of leveraged assets my declines were greater than those of the broader market. This is not acceptable to me, Adele. I don't need to go "Rolling in the Deep" risk pool. "Rumor Has It" that is where I have been.
Saturday, May 25, 2013
Saturday, May 18, 2013
May 18, 2013 The Big Payback
Risk/Reward Vol. 170
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Now, you're pumped/You gotta get ready
For the big payback/That's where I am, the big payback."---lyrics from "The Payback" by James Brown
"Ben, the two of us need look no more
We both found what we were looking for"---lyrics from "Ben" sung by Michael Jackson
"I want a man with slow hands/I want a lover with an easy touch
I want somebody who will spend some time/Not come and go in a heated rush."---lyrics from "Slow Hands" sung by the Pointer Sisters
On Tuesday morning, billionaire hedge fund manager David Tepper advised those watching CNBC's "Squawk Box" that "you gotta get ready" for a continuation of the bull market. Tepper believes that the stock market will be "pumped" even higher by "the big payback" underway thanks to Sequestration and increased tax revenues. Those two drivers have shrunk the projected 2013 U.S. budget deficit from $850billion to $642billion which means that there will be at least $200 billion less in Treasury securities available to purchase. According to Tepper, this $200 billion can be a catalyst for continued stock investment. That money will be invested somewhere and according to Tepper there is no better alternative than U.S. equities. To put $200billion into perspective, the massive increase in the stock market in the first quarter of this year was fueled in large part by a net inflow of only $60 billion into equity mutual and exchange traded funds. Is Tepper right? It's not smart to bet against him. He has a real feel for the impact of macro economic developments on the stock market. (See discussion at Vol. 59 www.riskrewardblog.blogspot.com ) His fund has averaged a 30% return since its founding in 1993. Last year he made $2.2billion---personally.
Congratulations to "Ben" Stein and those who adhere to his belief that buying index funds such as DIA (the Dow Jones Industrial Average Exchanged Traded Fund) and SPY (the ETF for the Standard & Poor's 500 Index) is superior to buying individual stocks. And as for hiring an asset manager, according to Ben, one "need look no more." He asserts that unmanaged index funds are "what we should be looking for." He may be right. Year to date DIA and SPY are both up over 17%.
But index fund investing is not always "an easy touch". Despite their spectacular rise of late, both DIA and SPY lost half their value between March, 2008 and March, 2009, and SPY has only achieved a 5.15% compounded annual return (half of which is from reinvested dividends) over the past 5 years--- even less over the past 6 years. I, for one, have no appetite for investments that "come and go in such a heated rush," and, as loyal readers know, I will not tolerate such huge losses. Consequently, Sisters, I do not follow Ben's Pointers. Instead, I "am a man with slow hands." "I am somebody who will spend some time" locating and vetting investments that emphasize dividends and stability over capital appreciation---and shedding those that disappoint. If the market simply trades flat for the remainder of the year, I should see a total return in excess of 15%, well above my 6% benchmark (See Vol. 1 www.riskrewardblog.blogspot.com )---a benchmark I eclipsed weeks ago.
With the DJIA and the S&P 500 ending the week at record highs, perhaps David Tepper's prognostication is correct, and the bulls have more room to run. Nevertheless, I remain ever vigilant. As evidenced by Thursday's dip on the suggestion that the Federal Reserve may taper QE3 this fall, this market remains driven by monetary policy and not fundamentals. I like my year-to-date profits, and I do not intend to lose them At any confirmed sign of a significant downturn, I will make like Michael Jackson and "Beat It
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Now, you're pumped/You gotta get ready
For the big payback/That's where I am, the big payback."---lyrics from "The Payback" by James Brown
"Ben, the two of us need look no more
We both found what we were looking for"---lyrics from "Ben" sung by Michael Jackson
"I want a man with slow hands/I want a lover with an easy touch
I want somebody who will spend some time/Not come and go in a heated rush."---lyrics from "Slow Hands" sung by the Pointer Sisters
On Tuesday morning, billionaire hedge fund manager David Tepper advised those watching CNBC's "Squawk Box" that "you gotta get ready" for a continuation of the bull market. Tepper believes that the stock market will be "pumped" even higher by "the big payback" underway thanks to Sequestration and increased tax revenues. Those two drivers have shrunk the projected 2013 U.S. budget deficit from $850billion to $642billion which means that there will be at least $200 billion less in Treasury securities available to purchase. According to Tepper, this $200 billion can be a catalyst for continued stock investment. That money will be invested somewhere and according to Tepper there is no better alternative than U.S. equities. To put $200billion into perspective, the massive increase in the stock market in the first quarter of this year was fueled in large part by a net inflow of only $60 billion into equity mutual and exchange traded funds. Is Tepper right? It's not smart to bet against him. He has a real feel for the impact of macro economic developments on the stock market. (See discussion at Vol. 59 www.riskrewardblog.blogspot.com ) His fund has averaged a 30% return since its founding in 1993. Last year he made $2.2billion---personally.
Congratulations to "Ben" Stein and those who adhere to his belief that buying index funds such as DIA (the Dow Jones Industrial Average Exchanged Traded Fund) and SPY (the ETF for the Standard & Poor's 500 Index) is superior to buying individual stocks. And as for hiring an asset manager, according to Ben, one "need look no more." He asserts that unmanaged index funds are "what we should be looking for." He may be right. Year to date DIA and SPY are both up over 17%.
But index fund investing is not always "an easy touch". Despite their spectacular rise of late, both DIA and SPY lost half their value between March, 2008 and March, 2009, and SPY has only achieved a 5.15% compounded annual return (half of which is from reinvested dividends) over the past 5 years--- even less over the past 6 years. I, for one, have no appetite for investments that "come and go in such a heated rush," and, as loyal readers know, I will not tolerate such huge losses. Consequently, Sisters, I do not follow Ben's Pointers. Instead, I "am a man with slow hands." "I am somebody who will spend some time" locating and vetting investments that emphasize dividends and stability over capital appreciation---and shedding those that disappoint. If the market simply trades flat for the remainder of the year, I should see a total return in excess of 15%, well above my 6% benchmark (See Vol. 1 www.riskrewardblog.blogspot.com )---a benchmark I eclipsed weeks ago.
With the DJIA and the S&P 500 ending the week at record highs, perhaps David Tepper's prognostication is correct, and the bulls have more room to run. Nevertheless, I remain ever vigilant. As evidenced by Thursday's dip on the suggestion that the Federal Reserve may taper QE3 this fall, this market remains driven by monetary policy and not fundamentals. I like my year-to-date profits, and I do not intend to lose them At any confirmed sign of a significant downturn, I will make like Michael Jackson and "Beat It
Saturday, May 11, 2013
May 11, 2013 Sign, Sign
Risk/Reward Vol 169
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Sign, sign everywhere a sign
Blockin' out the scenery/Breakin' my mind
Do this/Don't do that
Can't you read the sign?"---lyrics from "Signs" sung by The Five Man Electrical Band
"My heart is telling me to be different/It's about time for me to move on
Swallow everything that I've heard/I'm at a point of no return."---lyrics from "No Return" by Eminem
"It's a narrow margin/Just room enough for regret
In the inch and a half between 'Hey, how ya been?'
And 'Can I kiss you yet?' "---lyrics from "Providence" by Ani Difranco
As the Dow Jones Industrial Average (DJIA) and the S&P500 (S&P) reached new highs again this week, I continued my search for a "sign, sign" that the bubble is about to burst. Market mavens are advising "do this/don't do that." Nevertheless, their noise is not "blockin' out the scenery" nor is it "breakin' my mind". If one cares to look, "everywhere there's a sign" that the market may be topping. "Can't you read the signs?"
What signs you ask? Consider the following:
1) Hedge funds, run by very savvy people who fixate, first and foremost, on managing risk, averaged a 4.6% year to date return through April 30, 2013. For the same time period, the DJIA and the S&P returned nearly 14%. Does this mean that I should "swallow everthing that I've learned" about the sagacity of hedge fund managers? No, to the contrary, "my heart is telling me different." It's telling me that the markets are very risky at present, and that although we are "not at a point of no return", perhaps "it's about time to move on."
2) On Monday, in a master stroke of British understatement, the Financial Times reported: "Demand for yield has become the main driver of investor behavior." In this regard, note that junk bonds rated CCC ("extremely speculative") now yield a record low 6.77%. Last year at this time, they yielded 10.13% In fact, the average yield across the entire junk bond spectrum (bonds rated BB+ through D) fell below 5% this week---a record low. Talk about a "narrow(ing) margin!" In addition, the yield on the sovereign debt of emerging market countries is near a record low: 5.5% Remember, lower yields mean higher bond prices. These record low yields are signs that risk is out pacing reward.
3) The New York Stock Exchange reported on Thursday that margin debt (the amount of money borrowed with brokerage accounts as collateral) is within an "inch and a half" of its all time high which was reached just weeks before the markets started to reverse in 2007. This is significant because it indicates exuberance in the market--perhaps even over confidence. Understand, that if the markets reverse, even temporarily, brokerage houses that have lent money on margin will demand more collateral and/or a repayment of loans---a situation that in the past has compounded losses and accelerated declines. Does this mean that there is "just enough room" to exit "before regret?" or can I continue to "kiss the market?"
4) A story ran in this morning's (Saturday's) Wall Street Journal reporting that the Federal Reserve has mapped an exit from its quantitative easing program (QE3). Rumors of this story caused a large intraday drop on Thursday. If the stock market's recent spectacular performance is truly just a QE3 induced bubble, this story could have a substantial negative impact come Monday. Keep a watchful eye open.
Hold or sell---this is a tough question for which there is no certain answer. For now, I remain invested. But, I will exit if I perceive that the market is turning. I am not "Just gonna stand there, and watch (my profits) burn/That's not alright/ Because I don't like the way it hurts."
P.S. This week, an unfavorable report from Barron's and an attack by short sellers caused me to exit LINE and LNCO. In the long run, I believe this family of oil producing companies will do well, but I don't need to fight the market---particularly when there are suitable alternatives available such as VNR.
P.S.S. With the exchange rate falling below 100 Yen/$1, I upped my exposure to the Japanese stock market via the dollar hedged exchange traded fund, DXJ ( see discussion at www.riskrewardblog.blogspot.com Vol. 152). DXJ has gained 33%
since I first bought it on January 9, 2013.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Sign, sign everywhere a sign
Blockin' out the scenery/Breakin' my mind
Do this/Don't do that
Can't you read the sign?"---lyrics from "Signs" sung by The Five Man Electrical Band
"My heart is telling me to be different/It's about time for me to move on
Swallow everything that I've heard/I'm at a point of no return."---lyrics from "No Return" by Eminem
"It's a narrow margin/Just room enough for regret
In the inch and a half between 'Hey, how ya been?'
And 'Can I kiss you yet?' "---lyrics from "Providence" by Ani Difranco
As the Dow Jones Industrial Average (DJIA) and the S&P500 (S&P) reached new highs again this week, I continued my search for a "sign, sign" that the bubble is about to burst. Market mavens are advising "do this/don't do that." Nevertheless, their noise is not "blockin' out the scenery" nor is it "breakin' my mind". If one cares to look, "everywhere there's a sign" that the market may be topping. "Can't you read the signs?"
What signs you ask? Consider the following:
1) Hedge funds, run by very savvy people who fixate, first and foremost, on managing risk, averaged a 4.6% year to date return through April 30, 2013. For the same time period, the DJIA and the S&P returned nearly 14%. Does this mean that I should "swallow everthing that I've learned" about the sagacity of hedge fund managers? No, to the contrary, "my heart is telling me different." It's telling me that the markets are very risky at present, and that although we are "not at a point of no return", perhaps "it's about time to move on."
2) On Monday, in a master stroke of British understatement, the Financial Times reported: "Demand for yield has become the main driver of investor behavior." In this regard, note that junk bonds rated CCC ("extremely speculative") now yield a record low 6.77%. Last year at this time, they yielded 10.13% In fact, the average yield across the entire junk bond spectrum (bonds rated BB+ through D) fell below 5% this week---a record low. Talk about a "narrow(ing) margin!" In addition, the yield on the sovereign debt of emerging market countries is near a record low: 5.5% Remember, lower yields mean higher bond prices. These record low yields are signs that risk is out pacing reward.
3) The New York Stock Exchange reported on Thursday that margin debt (the amount of money borrowed with brokerage accounts as collateral) is within an "inch and a half" of its all time high which was reached just weeks before the markets started to reverse in 2007. This is significant because it indicates exuberance in the market--perhaps even over confidence. Understand, that if the markets reverse, even temporarily, brokerage houses that have lent money on margin will demand more collateral and/or a repayment of loans---a situation that in the past has compounded losses and accelerated declines. Does this mean that there is "just enough room" to exit "before regret?" or can I continue to "kiss the market?"
4) A story ran in this morning's (Saturday's) Wall Street Journal reporting that the Federal Reserve has mapped an exit from its quantitative easing program (QE3). Rumors of this story caused a large intraday drop on Thursday. If the stock market's recent spectacular performance is truly just a QE3 induced bubble, this story could have a substantial negative impact come Monday. Keep a watchful eye open.
Hold or sell---this is a tough question for which there is no certain answer. For now, I remain invested. But, I will exit if I perceive that the market is turning. I am not "Just gonna stand there, and watch (my profits) burn/That's not alright/ Because I don't like the way it hurts."
P.S. This week, an unfavorable report from Barron's and an attack by short sellers caused me to exit LINE and LNCO. In the long run, I believe this family of oil producing companies will do well, but I don't need to fight the market---particularly when there are suitable alternatives available such as VNR.
P.S.S. With the exchange rate falling below 100 Yen/$1, I upped my exposure to the Japanese stock market via the dollar hedged exchange traded fund, DXJ ( see discussion at www.riskrewardblog.blogspot.com Vol. 152). DXJ has gained 33%
since I first bought it on January 9, 2013.
Saturday, May 4, 2013
May 4, 2013 Soros
Risk/Reward Vol. 168
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Cause you're fallible/Yeah, you're fallible
And we hold up a mirror/And we hate what we see."---lyrics from "Fallible" by Blues Traveler
"Oh the reflex, what a game/He's hiding all the cards
The reflex is in charge/Of finding treasure in the dark."---lyrics from "The Reflex" by Duran Duran
"Yeah, Rwanda, Rwanda
They said 'Many are called and few are chosen.'
But I wish some wasn't chosen."---lyrics from "A Million Voices" (from the "Hotel Rwanda" soundtrack) by Wyclef Jean
In conservative circles, it is an article of faith to believe that billionaire George Soros is a meddling, left wing crackpot and a failed philosopher. Conservatives "hate what they see.". Having recently read his book, "The Crash of 2008", I concur: 1) that Soros is a philosopher, but his success or failure has yet to be determined; 2) that he is a meddler who believes that because humans are "fallible", regulation is necessary; and 3) that he is most certainly a billionaire---many times over. But a crackpot, he is not. In his book (which is more a philosophical tract than a history), he asserts that "cause you're fallible", the application of scientific principles to human endeavors, especially economics, is fallacious. Accordingly, he rejects economic principles such as the efficient market hypothesis ("EMH"), equilibrium and market fundamentalism. Since each can be manipulated, he reasons, none can be a principle.
If one agrees, one should consider Soros' central thesis---reflexivity: the notion that since humans are fallible, human institutions like stock markets can be and often are "gamed" by those "in charge" who wittingly or otherwise "hide all the cards." Since they are reflexive, markets, contrary to conventional wisdom, are not inherently efficient. They are just as likely to create bubbles as they are to find equilibrium. As demonstrated by his own successes, Soros believes that one can reap rewards far in excess of the mean without accepting above average risk. He looks for asset bubbles, rides them for a while, exits them in time---and then, bets against them as they burst. Soros has made billions in doing so, most notably on his famous bet against the British pound and most recently on his bet against the yen.
Soros, along with a host of other market mavens (e.g. El-Erian, Druckenmiller, Dalio, Zell) believes that currently, the world is in the midst of a massive and unprecedented asset bubble created by central bankers who through quantitative easing (QE) have forced investors into progressively risky assets by keeping investment grade returns near zero. C'mon folks, does anyone reading this email doubt that today's stock and bond markets are bubbles? Do the past performances and future prospects of the underlying companies warrant all time high stock valuations? Has the risk profile of Spain with its record high 27% unemployment rate really improved so dramatically as to warrant its 10 year bonds yielding a mere 4% when just last summer they yielded over 7%? Absolutely not! Forget Lebron James, start collecting the bobbleheads (rather, bubbleheads) of Mario Draghi, Ben Bernanke and other central bankers..
Clearly QE and the search for yield have led many to make risky investments : ones they "will wish weren't chosen." A case in point is this week's sale of $400million worth of 10 year Rwanda bonds. "Yeah, Rwanda, Rwanda"---you remember, the genocidal nation featured in the movie "Hotel Rwanda". That bond issue was oversubscribed and the bidding drove the bonds down to a 6.625% interest rate---roughly the same yield one would get from the tax advantaged preferred shares of an A rated insurance company or of the Royal Bank of Scotland. But is this irrational? No. With central banks buying the lion's share of developed country bonds via QE, there are fewer bonds available and those that are pay a paltry yield. Bond funds (even ones you hold) and pension managers are awash in cash which they need to invest at some return. Literally there is a scarcity of product so when any new bonds are issued they are snapped up----even 10 year Rwanda bonds. You think not? Next quarter, check the SEC filings that list the holdings of any international bond fund you hold .
Recognition of this bubble notwithstanding, is it time to liquidate? I say no. With the rest of the world in even worse shape, U.S. debt and equities continue to be in demand. Indeed, it was reported on Tuesday that foreign investment in U.S. securities is at an all time high. This demand continues to drive prices higher in what PIMCO's CEO Mohamed El-Erian terms "the most unloved rally" of all time. Just look at what happened this week. Buoyed by Thursday's interest rate reduction in Europe and Friday's marginally improved U.S. job numbers report, both the Dow Jones Industrial Average and the S&P 500 set new records at the close on Friday. In addition, junk bonds are at historic high prices (and thus historic low yields). The bubble continues to inflate. So long as central banks keep printing money and keep inflating assets, I will continue to be in the market knowing full well that once these banks signal that the printing presses are slowing, the 'unloved rally" will end quickly---and badly. For now, that risk be damned. Yield hunters like Duran Duran and me are still
"Hungry, hungry like the wolf."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Cause you're fallible/Yeah, you're fallible
And we hold up a mirror/And we hate what we see."---lyrics from "Fallible" by Blues Traveler
"Oh the reflex, what a game/He's hiding all the cards
The reflex is in charge/Of finding treasure in the dark."---lyrics from "The Reflex" by Duran Duran
"Yeah, Rwanda, Rwanda
They said 'Many are called and few are chosen.'
But I wish some wasn't chosen."---lyrics from "A Million Voices" (from the "Hotel Rwanda" soundtrack) by Wyclef Jean
In conservative circles, it is an article of faith to believe that billionaire George Soros is a meddling, left wing crackpot and a failed philosopher. Conservatives "hate what they see.". Having recently read his book, "The Crash of 2008", I concur: 1) that Soros is a philosopher, but his success or failure has yet to be determined; 2) that he is a meddler who believes that because humans are "fallible", regulation is necessary; and 3) that he is most certainly a billionaire---many times over. But a crackpot, he is not. In his book (which is more a philosophical tract than a history), he asserts that "cause you're fallible", the application of scientific principles to human endeavors, especially economics, is fallacious. Accordingly, he rejects economic principles such as the efficient market hypothesis ("EMH"), equilibrium and market fundamentalism. Since each can be manipulated, he reasons, none can be a principle.
If one agrees, one should consider Soros' central thesis---reflexivity: the notion that since humans are fallible, human institutions like stock markets can be and often are "gamed" by those "in charge" who wittingly or otherwise "hide all the cards." Since they are reflexive, markets, contrary to conventional wisdom, are not inherently efficient. They are just as likely to create bubbles as they are to find equilibrium. As demonstrated by his own successes, Soros believes that one can reap rewards far in excess of the mean without accepting above average risk. He looks for asset bubbles, rides them for a while, exits them in time---and then, bets against them as they burst. Soros has made billions in doing so, most notably on his famous bet against the British pound and most recently on his bet against the yen.
Soros, along with a host of other market mavens (e.g. El-Erian, Druckenmiller, Dalio, Zell) believes that currently, the world is in the midst of a massive and unprecedented asset bubble created by central bankers who through quantitative easing (QE) have forced investors into progressively risky assets by keeping investment grade returns near zero. C'mon folks, does anyone reading this email doubt that today's stock and bond markets are bubbles? Do the past performances and future prospects of the underlying companies warrant all time high stock valuations? Has the risk profile of Spain with its record high 27% unemployment rate really improved so dramatically as to warrant its 10 year bonds yielding a mere 4% when just last summer they yielded over 7%? Absolutely not! Forget Lebron James, start collecting the bobbleheads (rather, bubbleheads) of Mario Draghi, Ben Bernanke and other central bankers..
Clearly QE and the search for yield have led many to make risky investments : ones they "will wish weren't chosen." A case in point is this week's sale of $400million worth of 10 year Rwanda bonds. "Yeah, Rwanda, Rwanda"---you remember, the genocidal nation featured in the movie "Hotel Rwanda". That bond issue was oversubscribed and the bidding drove the bonds down to a 6.625% interest rate---roughly the same yield one would get from the tax advantaged preferred shares of an A rated insurance company or of the Royal Bank of Scotland. But is this irrational? No. With central banks buying the lion's share of developed country bonds via QE, there are fewer bonds available and those that are pay a paltry yield. Bond funds (even ones you hold) and pension managers are awash in cash which they need to invest at some return. Literally there is a scarcity of product so when any new bonds are issued they are snapped up----even 10 year Rwanda bonds. You think not? Next quarter, check the SEC filings that list the holdings of any international bond fund you hold .
Recognition of this bubble notwithstanding, is it time to liquidate? I say no. With the rest of the world in even worse shape, U.S. debt and equities continue to be in demand. Indeed, it was reported on Tuesday that foreign investment in U.S. securities is at an all time high. This demand continues to drive prices higher in what PIMCO's CEO Mohamed El-Erian terms "the most unloved rally" of all time. Just look at what happened this week. Buoyed by Thursday's interest rate reduction in Europe and Friday's marginally improved U.S. job numbers report, both the Dow Jones Industrial Average and the S&P 500 set new records at the close on Friday. In addition, junk bonds are at historic high prices (and thus historic low yields). The bubble continues to inflate. So long as central banks keep printing money and keep inflating assets, I will continue to be in the market knowing full well that once these banks signal that the printing presses are slowing, the 'unloved rally" will end quickly---and badly. For now, that risk be damned. Yield hunters like Duran Duran and me are still
"Hungry, hungry like the wolf."
Subscribe to:
Posts (Atom)