Get scared, run to bonds
Just as the blowoff top crests
Will they ever learn?
Tuesday, July 14, 2009
Bond Market Blowoff Top, Part 2
In a sequel to my post yesterday, we see that terrified investors (no doubt pushed by their underperforming financial advisors eager to justify their annual 1% take) are flooding money into actively managed bond funds:
Never mind that a passive, laddered bond portfolio is more than adequate for almost all investors' fixed income allocation. People are ill-served by greed-driven salespeople who "advise" them that greed-driven portfolio managers can outguess the Fed and outmaneuver the yield curve.
Nota bene: Anthony J. Alfidi holds no positions in bonds at this time.
Bonds funds had net inflows of $81.2 billion in the second quarter, compared with $16.4 billion for stock funds, data compiled by the Chicago-based research firm show. It was the biggest quarter for bond-fund sales since Morningstar began tracking the figures in the first three months of 1998.
Never mind that a passive, laddered bond portfolio is more than adequate for almost all investors' fixed income allocation. People are ill-served by greed-driven salespeople who "advise" them that greed-driven portfolio managers can outguess the Fed and outmaneuver the yield curve.
Nota bene: Anthony J. Alfidi holds no positions in bonds at this time.
Monday, July 13, 2009
The Haiku of Finance for 07/13/09
Bond market blowoff
Suckers buy bonds for safety
Surprise! They default
Suckers buy bonds for safety
Surprise! They default
Bond Market Blowoff Top
Bonds are exploding as Homo investus demands safety:
The Fed's target funds rate can't go any lower than zero. Bond euphoria won't last forever, and the Fed can't possibly explain an exit strategy that won't devalue the dollar:
Good luck with that. I'm staying as far away from this oncoming train wreck as I possibly can.
Nota bene: Anthony J. Alfidi owns no Treasuries at this time due to the default risk posed by massive government borrowing combined with plunging tax revenue.
Bond investors across the country are snapping up 10-year Treasury notes as expectations for a U.S. economic recovery this year disappear.
The Fed's target funds rate can't go any lower than zero. Bond euphoria won't last forever, and the Fed can't possibly explain an exit strategy that won't devalue the dollar:
Federal Reserve Chairman Ben S. Bernanke probably will show how the central bank will exit the biggest monetary expansion in history when he reports to Congress next week, economists said.
Good luck with that. I'm staying as far away from this oncoming train wreck as I possibly can.
Nota bene: Anthony J. Alfidi owns no Treasuries at this time due to the default risk posed by massive government borrowing combined with plunging tax revenue.
Sunday, July 12, 2009
The Haiku of Finance for 07/12/09
The new normal comes
Not like the good times at all
Get used to sadness
Not like the good times at all
Get used to sadness
The New Normal Is For You, Me, and Everyone
The Sovereignty Crunch is going to change life as we know it in the United States. Most Wall Streeters are in denial because they want the good times to come back. Some financial professionals are able to make the appropriate psychological transition:
Of course, macroeconomic pessimism helps talk down equity prices, which is usually good for a bond book like PIMCO's. Nevertheless, the new normal will be a permanently lower standard of living for most Americans. People under 40 have very little idea of just how much they'll have to cut back. In a country with less well-developed democratic traditions such unpleasantness would be a pretext for civil unrest. We're Americans, so we're supposed to be better than that.
While unemployment will peak between 10.5 percent and 11 percent in the U.S., it will remain high and stay above 7 percent, said Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., manager of the world’s largest bond fund.
“The United States right now is in transition,” El-Erian said in an interview from Pimco headquarters in Newport Beach, California. “It’s coming out of one regime. It’s on this bumpy and painful journey to what we’ve called here the new normal.”
Of course, macroeconomic pessimism helps talk down equity prices, which is usually good for a bond book like PIMCO's. Nevertheless, the new normal will be a permanently lower standard of living for most Americans. People under 40 have very little idea of just how much they'll have to cut back. In a country with less well-developed democratic traditions such unpleasantness would be a pretext for civil unrest. We're Americans, so we're supposed to be better than that.
Friday, July 10, 2009
Thursday, July 09, 2009
China's Place in the Sun
China is surpassing the United States as the world's most powerful and dynamic economy, one milestone at a time. China's market for cars is now larger than America's. China's entry into Latin American markets is an insanely clever way to supplant America's Monroe Doctrine. Chinese firms are gaining ground in global rankings while U.S. firms are falling behind.
China's long term strategy is bearing fruit. The U.S. has no strategy, unless you consider increasing transfer payments from productive savers to politically favored union workers as a strategy.
Nota bene: Anthony J. Alfidi is long FXI with covered calls (and short puts covered with cash).
China's long term strategy is bearing fruit. The U.S. has no strategy, unless you consider increasing transfer payments from productive savers to politically favored union workers as a strategy.
Nota bene: Anthony J. Alfidi is long FXI with covered calls (and short puts covered with cash).
Wednesday, July 08, 2009
Buying Busted Banks for Nothing Down
Subprime loans helped get our economy into this mess. Creating subprime banks won't get us out:
Instead of equity cramdowns and bondholder writeoffs, our financial system regulators propose to continue abandoning all pretense of adult supervision of the banking system. See, private equity investors are some of the savviest dealmakers around, so they'd understandably balk at trying to buy troubled banks at the inflated prices regulators would need to maintain the fiction of a healthy system.
Any bank stock makes me nervous right now. I'm saying no thanks.
Nota bene: Anthony J. Alfidi holds no position in any bank stock at this time.
Regulators may ease a provision that would require private- equity investors to maintain Tier 1 capital ratios of at least 15 percent for lenders they purchase, said the people, who declined to be named because the talks are private. Tier 1 ratios, which measure a lender’s ability to withstand losses, currently must be at least 8 percent for new banks.
Instead of equity cramdowns and bondholder writeoffs, our financial system regulators propose to continue abandoning all pretense of adult supervision of the banking system. See, private equity investors are some of the savviest dealmakers around, so they'd understandably balk at trying to buy troubled banks at the inflated prices regulators would need to maintain the fiction of a healthy system.
Any bank stock makes me nervous right now. I'm saying no thanks.
Nota bene: Anthony J. Alfidi holds no position in any bank stock at this time.
Tuesday, July 07, 2009
Monday, July 06, 2009
Taking Risk at the Wrong Time
The small investor is jumping on the wrong bandwagon at the wrong time:
I don't need to go into the disadvantages of actively managed mutual funds here. Consider John Bogle's arguments against active management if you need reasons to know why mutual funds are a worse deal than index funds and ETFs. I also take issue with the article's assertion that high-quality corporate bonds (rated of course by the same credit rating agencies that completely misread MBS risk) are a "safe investment" in an era when public and private sector debt is over 300% of this country's GDP. Oh well. Some people are going to learn the hard way, over and over again. That lesson is coming soon as we head into earnings season for Q2 with some pessimistic estimates:
This is why I'm short the markets, folks, while uninformed investors are busy chasing past performance.
Nota bene: Anthony J. Alfidi is short uncovered calls on SPY and IWM.
Lately, however, as stock and bond markets have rebounded, mutual-fund investors have had a split personality.
They’re back to buying relatively safe investments like high-quality corporate bonds. But they’re also pouring money into the riskiest investments.
I don't need to go into the disadvantages of actively managed mutual funds here. Consider John Bogle's arguments against active management if you need reasons to know why mutual funds are a worse deal than index funds and ETFs. I also take issue with the article's assertion that high-quality corporate bonds (rated of course by the same credit rating agencies that completely misread MBS risk) are a "safe investment" in an era when public and private sector debt is over 300% of this country's GDP. Oh well. Some people are going to learn the hard way, over and over again. That lesson is coming soon as we head into earnings season for Q2 with some pessimistic estimates:
The year-over-year profit slide for Standard & Poor’s 500 Index members may narrow to 21 percent from July through September, after declines of an estimated 34 percent in the second quarter and about 60 percent in the year’s first three months, according to data compiled by S&P and Bloomberg. Earnings may rise by year-end based on comparisons to late 2008, which was roiled by the meltdown in financial markets.
This is why I'm short the markets, folks, while uninformed investors are busy chasing past performance.
Nota bene: Anthony J. Alfidi is short uncovered calls on SPY and IWM.
Sunday, July 05, 2009
Friday, July 03, 2009
Muni Bond Outlook: Crummy
Let's count the reasons why it's bad to own municipal bonds right now. First, many states are in dire financial straits:
This means that any state unable to balance its budget is in serious risk of a credit ratings downgrade. Higher repayment risk hurts bond values! Second, the sheer volume of Treasury debt being issued will eventually push interest rates up for any kind of debt. The crowding-out effect was only thought to affect corporate debt, but now we're seeing its effects on mortgages and other forms of debt:
You tell 'em, George. Rising interest rates lower the value of outstanding bonds and will blow an even bigger hole in state budgets as the cost of servicing new debt rises. Muni bond holders are set to get hit by a double whammy in the near future.
Nota bene: Anthony J. Alfidi does not own any muni bonds at this time.
"This downturn, even more so than previous downturns, really is affecting every state right now," said Brian Sigritz, a staff associate with the National Association of State Budget Officers.
The Washington-based organization says 42 states wrestled with budget deficits this spring, the most since it began tracking budgets 30 years ago.
This means that any state unable to balance its budget is in serious risk of a credit ratings downgrade. Higher repayment risk hurts bond values! Second, the sheer volume of Treasury debt being issued will eventually push interest rates up for any kind of debt. The crowding-out effect was only thought to affect corporate debt, but now we're seeing its effects on mortgages and other forms of debt:
Billionaire investor George Soros on Tuesday predicted a “stop-go” economy for the United States, saying fears of inflation will drive up interest rates and choke off growth, Reuters reported.
(snip)
Rising U.S. Treasury yields have driven mortgage rates back up, threatening a recovery in the housing market and a refinancing boom that has helped preserve the still-fragile health of recession-weary households and the banks that lend to them.
You tell 'em, George. Rising interest rates lower the value of outstanding bonds and will blow an even bigger hole in state budgets as the cost of servicing new debt rises. Muni bond holders are set to get hit by a double whammy in the near future.
Nota bene: Anthony J. Alfidi does not own any muni bonds at this time.
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