bonds
Written by Dani, April 10th, 2012
(This is a podcast summary. Please tune into Doug’s podcast this week for even more details on these topics, and feel free to share this information with others who might benefit from our perspective.)
There has been some market weakness lately, and three recent news items can help us make sense of this:
- Jobs report – 120,000 jobs created in March, 200,000 expected
- Negative debt crisis news from Europe (Spain and Italy, mostly)
- Earnings season begins this week
In the last week, we’ve seen a market high and several dips. As we often say here at Fabian Wealth Strategies: the stock market falls 3-5 times faster than it goes up, and today we are seeing that come true. Yet another reason to be suspicious of any rallies in this fragile global economy.
Remember that bonds and stocks have an inverse relationship. If we get bad economic news, bonds will do well and stocks will do poorly, just the opposite during good news.
If you’d like an opportunity to hear Doug’s take on your questions or opinions, please send an email to askdoug(at)dougfabian(dot)com
Also, if you want to see and hear our perspective in person, hear some other great speakers and enjoy a getaway in Las Vegas, sign up for the Money Show, May 14-17 2012. Doug will have six different opportunities to present and it’s always a great event, so please check out moneyshow.com to register.
As always, if you have questions about your personal portfolio, please call us at 888-300-3684 and one of our advisors will be glad to help.
Written by Dani, March 28th, 2012
Bonds around the world should be approached selectively, understanding where the bonds are coming from and what challenges your investment may face. We just read about the new 100-year bonds in the UK, a vote for stability that stands in stark contrast to the bond market troubles in the rest of Europe. Here in the U.S., bonds are still in a bull market and we expect them to continue to do well this year. However, we think that municipal bonds need to be monitored very closely, as there are some local governments which are having serious financial troubles.
Because the political landscape in the U.S. is so polarized, there is a couple of misconceptions about our current financial situation.
Here’s two reasons why American investors should not panic or assume that the U.S. is the next Greece:
- We have the largest economy in the world, which means we can grow our way out of debt.
- We have the largest navy and military in the world, so we control the world’s oceans, causing our bonds to be a safe haven when global financial stress hits.
The big question is, is any politician going to address the issues of deficit spending? If you’ve read this blog for any length of time, you know that we don’t have much faith in politicians, but this is an issue that will have to be addressed, hopefully by 2013.
In short, we are approaching the bond market selectively. We do believe in the bond bull market, and we think that bonds will continue to be a safe haven this year. If you have any questions about what bonds we are investing in and why, please give us a call at 800-391-1118
(If you read this blog and enjoyed it, listen to Doug’s podcast this week for even more details on this topic, and please share this information with others who might benefit from our perspective.)
Written by Dani, March 14th, 2012
Watching the European debt crisis right now seems to illustrate that deficits do matter, and that countries can’t spend money they don’t have, at least not indefinitely. In this post we want to talk about the United States, however.
In February, the U.S. set a deficit record of $229 Billion. To put this in perspective, only five years ago we had a deficit of $500 Billion in an entire year. So right now, we are deficit spending at 10% of the U.S. economy, (compared to 3-4% in the past) and this is uncharted territory. We have also gone 41 months without a positive month in terms of revenue vs. spending, and we are borrowing 42 cents on every dollar spent. Of course, President Bush, President Obama and the Congress is all to blame for this, and so far there haven’t been any consequences on our elected officials.
As long as a country’s economy is growing, borrowing is OK. But when things are slowing down and contracting (or growing too slowly, as the U.S. is now), borrowing starts to be a problem. No elected official wants to touch the sacred cows of the budget (Social Security, Medicare, etc.) and so we just keep spending to keep up the status quo.
However, we think the markets will solve this problem for us, because it will become much more expensive for us to borrow money in the near future. This is why Greece defaulted on its bonds last week, and it’s what is causing so much pain in Europe right now.
No matter what administration gets voted in this November, budget cuts will have to made. In our opinion, Social Security, Medicare and Defense are the three major items which need the politicians and our attention in order to move forward, and we believe that deficits do matter in the long run.
This is a podcast summary. For more complete details, please listen to the full podcast here.
Doug Fabian’s next live public speaking event will be in Las Vegas at the Money Show, where we’ll have about six different opportunities to present. Please check out moneyshow.com to register or for more information. Also, if you’re not already receiving it, be sure to sign up for our free e-newsletter, the Making Money Alert, here.
Written by Dani, March 13th, 2012
Stocks appear to be topping, and may have already peaked. There was a relief rally last week which we believe had much to do with the appearance of everything being OK (activity from the Federal Reserve, the controlled default in Greece, etc.), and not with the fundamentals.
One reason for continued investor confidence is that Apple Computer (AAPL) stock has been soaring. Also, American investors especially seem to be excited that it appears that America is decoupling from the rest of the world and they hope this means that we won’t be as affected by adverse global trends. However, we still believe that there is reason to be concerned, because of what we’re calling the triple threat.
The triple threat is:
- Europe is in recession
- China’s economy is slowing down
- U.S. profit growth prospects are slowing as well
Also, equities are going up, along with oil and bonds going up as well, so this is a very unusual circumstance. Bonds rising in value are usually associated with depression and deflation, but the stock market is soaring. Something strange is happening here, and John Hussman wrote last week that is a bad time to invest too heavily, based on historical similarities, and we agree. We encourage all of our readers to check out his piece on the market trends, here.
This is a podcast summary. For complete details on the items discussed today, please listen to the full audio here.
Written by David, February 29th, 2012
There’s no denying that the stock market is flashing bullish signs, but what about the bond market? Shouldn’t bond prices fall and bond yields rise in a bullish equity environment?
Historically, when stock prices surge bond prices fall and bond yields rise. This time around, however, stock prices are rising along with bond prices. Put another way, stock prices are surging while bond yields are falling.
In the chart below we see the price action in the S&P 500 vs. 10-year Treasury bond yields.
As you can see, since Nov. 2011, stocks have been in an uptrend while bond yields have fallen. The divergence here tells us a couple of important things. First, it shows us that money is flowing into both stocks and bonds in search of something more than the yield offered by cash. Thank Mr. Benanke and crew for the fact that cash is paying virtually nothing, as his near-zero interest rate policy is partly responsible for pushing investors into riskier assets in the quest for a decent return on their money.
The second thing it tells us is that while stocks are screaming bull, bonds are screaming bear. That’s because when things get dicey, money usually flows away from equities and into the relative safety of Treasury bonds, and that bond buying pushes yields lower.
Something has to give here, as stock investors and bond investors aren’t likely to continue betting on a divergent path for much longer. Which way will things go? Well, I think you know which camp I’ve got my tent pitched.
Written by Dani, February 15th, 2012
We’ve been blogging and podcasting for some time about the uncertainties in the market right now, and so we thought we’d expand on fixed-income strategies today.
We advise three broad investment categories for income:
- Fixed income (bonds)
- Dividend equities
- High-yield alternatives
We think that asset allocation is what makes or breaks an investment strategy, and we are advising our clients to put a high allocation of their portfolio into fixed income at this time. We have several vehicles for this and can advise you in more detail if you call our office. Please call us at 800-391-1118 for a free portfolio review.
We also believe that now is a bad time to get into dividend equities, and we are advising our clients against saddling their portfolios with over priced investment vehicles at this time. Instead of the either-or choice of safety vs. yield, we’ve developed a strategy designed to maximize income while at the same time managing the various risks inherent whenever you put money to work in the market.
Check out our special report for more information on how to invest wisely, here.
Written by Dani, February 07th, 2012
Thanks for reading our podcast summary. If you want more details on what is discussed on the blog, please listen to the full podcast here.
A suspect power rally in the financial markets
Stocks vs. Bonds: The bond market is being artificially manipulated by the Federal Reserve, as they sell short-term bonds and buy long-term bonds. Rates on CDs are ridiculously low, and is forcing people to make other financial decisions, which often ends badly. When people think they need to be getting a return on their investment at all times, they often move their money from a safe place into a risky one. It’s a good idea to be educated about your investment options, but remember that we are advising low-risk investments right now. Don’t be too eager to move your money in such turbulent times.
The stock market rallied this week, but we are still suspicious of this change, because, as you all remember from 2008, we have seen these kinds of bubbles before. We think that the problems in Europe will seriously effect the stock market (check back on the blog tomorrow for more details on the European crisis). For this reason we advise keeping a high volume of cash in your portfolio.
Despite a good jobs report this week here in the U.S., the situation in Europe has not changed for the better. We predict that economic growth will slow in response to these fiscal problems in the rest of the world, particularly in Europe. It’s crucial to understand the risks and continue to face these problems with a defensive posture.
For more information on the economic situation in Europe, please listen to the podcast and check back tomorrow for more info on the blog.
Written by David, July 20th, 2011
The action in the equity and bond markets so far in 2011 can be characterized by what I call a sort of “nervous uncertainty.” Let’s face it, we’ve had a lot of cause for worry, and we’ve had a lot of reasons to be encouraged. On the bond front, that nervous uncertainty has translated into a big surge in cash holdings among bond mutual funds. Apparently, bond fund managers aren’t in any hurry to purchase new debt, and that comes despite the fact that bond fund inflows are on the rise.
According to mutual fund research firm Morningstar, the average cash stake in the 1,623 funds that the company tracks rose to 9.8% at the end of June from 9.1% at the end of 2010. In dollar terms, that’s about $243 billion. The average bond fund’s cash position was at 10.2% at the end of 2007, and 10.1% at the end of 2008, according to the data.
Meanwhile, investors have been funneling money into bond funds in 2011, adding some $92.8 billion through June 30. That’s the biggest inflow seen in any of the fund categories that Morningstar tracks. In other words, bond fund managers are raking in the cash, and essentially hoarding it.
So, the logical question here is why aren’t bond fund managers investing in new debt right now?
Well, for starters, we can blame that debt-ceiling debate for at least some of the uncertainty. Although I am not sure how to quantify this, I suspect that no bond fund manager wants to get caught with his guard down if the unthinkable does happen, and if the powers that be in Washington drive the nation into default.
Another reason why bond fund managers aren’t gobbling up new debt is the possibility of a credit rating downgrade. Such a downgrade has been threatened by both Moody’s and Standard & Poor’s. Although I suspect that we are in no danger of a downgrade here, the mere discussion of such a negative turn of events for the bond market is understandably spooking bond fund managers.
Then there’s the issue of the Federal Reserve’s follow-up policy to quantitative easing, part 2, or QE2. Will we see another round of money creation in some form or another and, if so, what will be the impact on the U.S. dollar and U.S. Treasury bonds? Nobody knows for certain, and this uncertainty is keeping cash on bond fund books.
Written by David, August 04th, 2010
Over the course of the last several years, I’ve been telling you about the threat that deflation (as opposed to inflation) may pose to your serious money. Well, it seems as though now I am not the only money manager concerned with the threat of inflation.
According to an article in The Wall Street Journal aptly titled, “Big Investors Fear Deflation,” many prominent investors now are becoming concerned over the prospect of deflation and how it could take a bite out of investor wealth. The article specifically calls out PIMCO bond-fund manager Bill Gross, investment manager Jeremy Grantham and hedge-fund managers David Tepper and Alan Fournier as among the best-known investors preparing for a potential deflationary wave.
The article also points out that these investors are growing increasingly concerned that relatively weak economic data, along with a general consensus that global policy makers are unable to take further steps to stimulate their respective economies, will bring about a new deflationary future.
“Deflation isn’t just a topic of intellectual curiosity, it’s happening,” Bill Gross told The Wall Street Journal. I respect Mr. Gross’ opinion on just about every economic issue, even when I don’t agree with him. On the deflation issue, however, I find myself unable to object to his logic. That logic includes the citing of an annualized 0.1% decline over the past two years in the U.S. consumer-price index. This kind of aggregate price decline may not seem like much, but as Gross points out, “It’s an uncertain world that’s tipping toward deflation.”
Now, you may remember that after the 2008 financial crisis, many people feared a deflationary spiral would take hold of the global economy. That didn’t happen, of course, and part of the reason why is because governments around the globe infused the financial system with hordes of new capital. But like these investors in the article point out, how long are governments going to be able to prop up their respective economies before the whole house of cards come crashing down?
Before we go any further, I must say that I do not think we are on the precipice of disaster or on the verge of a deflationary meltdown in the global economy. If I truly thought that, then I wouldn’t own any stocks in any of my investment advisory services.
What I am saying is that there is a growing chorus of some very smart minds out there that have now become aware that deflation is no pie-in-the-sky abstraction or fear-mongering rant designed to scare you into a bunker. Rather, deflation is a potentially dangerous scenario, not just for global policymakers but for anyone who is trying to manage their serious money.
I know I am going to continue monitoring economic conditions so that I can identify any warning signs of a pending deflationary wave.
Written by David, February 24th, 2010
Join me on Saturday, March 6, at 12:00 p.m. (noon) Pacific Standard Time, for a FREE update on the financial markets in 2010. In this teleseminar, titled “Return of the Bear Market,” I will be offering my opinion on how you should be managing your assets as we navigate these choppy market waters.
Let’s face it, the last two years have been a wild ride for both stock and bond investors. What I call Phase One began in 2008 with the biggest decline in stocks since the Great Depression. Phase Two saw a recovery of more than 50% for the S&P 500 Index. Most investors now have been pacified by Wall Street and Washington, and many think the worst is behind us.
I believe that we are close to entering Phase Three of this investment cycle, and that could mean another devastating wave of wealth destruction. The good news, however, is that there is time to prepare, as well as clear signals on the road ahead that will give us time to adjust before any real damage is done.
Four key points you’ll learn in this seminar are:
- Why stocks and bonds have the potential to enter a new bear market
- What are the warning signs to look for in the markets
- Where investors can seek safety during the next 12 months
- How you can profit from the crisis
This FREE, one-hour teleconference will be held exclusively for the first 800 registrants, and judging by the participation in our last teleconference, we will reach capacity quickly. We urge you to take advantage of this opportunity and reserve your spot today.
