Sunday, August 30, 2009

Stocks and Bonds

Nice, calm post from Zero Hedge titled Are the Bonds Smarter?, comparing the 10-year Treasury bond against the stock market. Here is some accompanying commentary from the post:
When in doubt always go with the bond market. Spreads between riskier bonds and Treasuries begun to notably narrow since December. Even though they widened some by March, they did not widen as much as they did last year. At one point earlier in the year we had narrowing junk bond spreads (the junkier the better) and a falling stock market. This is one of the reasons I did not believe that last leg of the selloff in stocks, although those last 200 SPX points to the downside did come pretty fast. This is what happens when you have to sell and there are not buyers.

Right now the situation seems irrational in the other direction—not complaining, I know markets are irrational by definition—and I believe we are setting up for a nasty disappointment after the inventory rebound in the economy is over. The bonds seem to be suggesting that... I don't think you will be able to rationalize a sub-3% 10-year yield as a green shoot.
DoctoRx here. Things were looking up from the growth-is-here-and-now camp based on Gallup's polling until today's. Unfortunately, self-reported consumer spending has plummeted very recently to $59/day, which is almost the lowest of the entire recession/depression. That metric was close to $120/day in the spring of last year. In addition, there was a brief surge upward in people reporting that their employer was hiring; that has receded; here is the link to the chart. We are back in the hiring/firing range that was first hit in December 2008.
By the above metrics, the stock market may be ahead of itself.
Also, certain market timers ranging from Doug Kass and Robert Prechter have recently tried to ring the bell at the top of this move. These two may deserve some real consideration, as they both got out of the market before the crash and aggressively called to buy around the March low. Past performance is no guarantee of future performance, however. The Kass topping call is a good read and can be accessed by clicking here. Kass and Prechter have very different approaches, it would appear; that they call at least a trading top now is interesting.
What would cause stock prices to decline would be little other than reversion to the mean that the stock market should both have some security of principal and provide income to the owners of the companies the stocks of which are available for public trading. Currently, even a 5-year Treasury note outyields the average S&P 500 stock. The more I think about matters and ponder the disaster that befell owners of a low-yielding stock felt to be safe, AIG, the more I believe that dividendless large, highly profitable companies such as Amgen and Cisco are abominations from the common shareholders standpoint. They are too big to be taken over and instead of keeping all their earnings within their companies, they should go out of their way to share their cash-flow success with their owners. The concept of not rewarding shareholders with current income is a modern contrivance and exemplifies much of what is wrong with modern finance. If at some point Cisco has a bad couple of years, fraud is found, etc., its owners will have had a disastrous multi-year waste of capital, whereas the insiders will have made fortunes via salary, bonuses and cashed-in stock options. In fact, in a statistical success, such an outcome is likely; when is of course unknowable.
If you fear inflation a lot, common stocks are the wrong vehicle to protect purchasing power over a 5-year time horizon. The classic vehicle is gold. Meanwhile, if the stock market is heading down, even if it proves to be a common correction in a cycle of rising prices that accompanies even "False Recoveries", it would appear likely that Treasuries would continue to attract buyers and rise in price (fall in yield). That's at least the trend that is in place now.
Copyright (C) Long Lake LLC 2009

1 comment:

  1. Corporate management has both the excuse not to deliver current income to shareholders - the difference in tax rates on long-term capital gains vs. income - and the motivation - the low marginal rate on high income earners - which has led to an entirely predictable result.

    This trend will not change until the tax code is changed.