Monday, April 22, 2013

Stocks Continue on Thin Ice, Bonds Continue to Get Little Respect

Today's market action continues the pretense that stocks provide any security of receiving one's nominal money back, valued in US dollars or gold.  CAT is an example.  Disastrous quarterly results and similarly disastrous projections can't drop the stock again. It already is exactly where is was in October 2010.  It no longer matters that it was over $100.  CAT sells well above book value and has made poor acquisitions of Bucyrus (as it now appears) and the Chinese company that it now claims had fraudulent accounting.  Meanwhile the nonsense of KO and PEP "beating expectations" but with yoy sales growth trailing price increases, leading to sharp markups of the share price is indicative of distribution of stock to anxious retail clients searching for the magic bullet.  This "bullet" is supposed to triangulate triumphantly between the Scylla of low bond yields and the Charybdis of inflation.  This will work until it doesn't.  I "like" a couple of special situations such as YHOO and BLK, but my stock allocation is near record lows, i.e. close to zero.  I'm not at zero as I think that gradually stocks are becoming more attractive than bonds, even on a risk-adjusted basis-- but the history of the US post-Depression and of Japan post-ZIRP suggests that relative valuations of stock dividends vs. bond yields has more to go before stocks really bottom.

Meanwhile, on another front, about last June I penned a post on TDC about the Fed(s) blowing Housing Bubble 2.0; yet I was skeptical about the housing stocks.  And indeed, the housing stocks promptly correct 5+% and then surged.  Yet they are sinking due to vast over-valuation.  The cream of the crop, NVR, is down big on a "miss" today.  TOL is wildly overvalued based on analyst's EPS projections for 2013 and 2014.

I continue to believe that most retail money is best off in tax-exempts of quality, duration, character to suit.  The closed-end funds such as Nuveen (where I shop for CEFs) are where my more aggressive and "for sale" tax-exempts are allocated, but individually-owned bonds, while much less liquid, are much safer.  After all, they expire, possibly when stocks will be cheap again (could that actually occur?), and possibly when interest rates will appear more attractive.

Finally, it's unclear how unattractive bonds actually are now.  The stock GCC tracks an overall commodities index.  It is sinking.  It parallels realized inflation.  Between China and the euro mess, another period of "deflation" might just be occurring, vs. disinflation.  The bond market may be the current equivalent of the NAZ in the late '90s:  over-valued but with prices amazingly just moving on up.

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