Tuesday, February 12, 2013

Thoughts On the Long Bond, and Other Comments

A post went up on Seeking Alpha suggesting that even equity-oriented investors should consider diversifying their portfolios with Treasury bonds, such as with the widely-traded ETF TLT.
This is the LINK.

The theme is familiar; there is updated information here and there, so it may be of interest.

The US markets continue to follow the Reinhart-Rogoff pattern.  Economic data is coming in OK, but adjusted for Federal deficits paid for by Fed money rather than by borrowing out of real savings, it would, I think, probably still be seen to be recessionary or at best troughing.

Bill McBride of Calculated Risk is looking at yoy sales data in depressed markets such as Sacramento and noting that aggregate "used" home sales are sharply down in volume yoy.  Now that Obama has been re-elected, there is less need to cheerlead the economy.  In fairness to him, a year ago he was more cautious on housing for the next couple of years than he got more recently.  (I use him because he links almost exclusively to Paul Krugman and his ilk on his featured blogs and columns.)  Also,  Robert Shiller came on CNBC and expressed a distinct lack of enthusiasm about housing prices for the next several years.

Meanwhile, over-bullish signs regarding not just sentiment but also bullish behavior by the "dumb money" are being documented not just by the short-seller's favored blog (ZH), but by the unbiased subscription-only publication SentimenTrader (behind a firewall).  One can never know how long this condition persists, and it can taper off with little damage to stock prices.  However, the Russell 2000 (R2K) is trading around 25X trailing earnings, and that P/E excludes the contribution from companies such as biotechs that have negative earnings.  This index is wildly overvalued.  The trailing 5-year growth rate
from the R2K is 5%.  Meanwhile you can buy CVS at about an 8% free cash flow yield (12.5X projected free cash flow for the next 12 months), with a 20% growth rate the past 5 years and unending projected growth ahead as it begins to expand internationally.  Thus I see this as an overvalued stock market but also, as it was in the 1998-2002 period, one in which some sectors are too cheap but the average stock is too expensive.

Futures positioning in the R2K is at its most bullish as far as I can find data easily (LINK).  The speculators are heavily long in copper as well.  The last time they went quickly from moderately bearish to heavily long was coming out of the Great Recession.  Copper was $3.50 a pound when they bulled the price up.  As of December 2012, the price was $.350.  Copper went nowhere for 3 years.
Should this pattern recur, Treasury yields are getting near or have already seen their peak.

With the Fed loose and the Federal government loose but less lose than in 2009, I do not foresee a collapse in stocks.  The lack of good competing alternatives leads me to cover the bases with recession-resistant securities that pay dividends.  Stocks in that category generally are shrinking or holding steady the share count.  This includes Blackrock (BLK) and IBM (IBM).  Stocks are risky; bonds with any "decent" yield are risky.  Pick your risk.  I choose some from column A and some from column B.

Finally, per the name of this blog, there are two posts up recently worth reading and thinking about:
LINK and LINK.  Please check them out.  The second one is a Seeking Alpha article that improves part-way into the body.  I have not even finished it.  Both linked articles are interesting.

Futures are, not unusually, bright green again.  The inflationary 'boom" that the Fed and the Feds are engineering is going on apace.  This could be 2011 again.  Please don't chase hot stuff unless it's with a well-defined profit goal.

1 comment:

  1. I'm glad you've continued on. Sad about Jeff closing up shop. I know it's very difficult to remain emotionally unattached from your investments. I see no way at this time that gold and silver can rally if stocks take a hit. The current choppy action feels like topping. Geo-political flack might help them.

    Seems like an astute observer such as yourself should be an angel investor.