Fin - Breakout - US

With Stocks Near the Top, It’s Time to Worry About Bonds

Breakout

Remember the archery contest in Robin Hood where they are shooting arrows and each time they hit the bullseye, they move the target 10 paces further away and shoot again, with the fair Maid Marian watching all the while? I kind of get the feeling that's how money manager Chip Cobb of BMT Asset Management feels right now. He's happy to have reached his full year target of 1350 on the S&P 500, but woeful that it happened only one week into the second-half of the year.

How do you play a market that you think is going nowhere for the next 25 weeks? Answer: you worry about bonds.

"My biggest concern is with the fixed income markets" Cobb says, explaining that he thinks a lot of people are going to get hurt by rising market rates long before the Fed actually lifts its own. "So much money flood into the bond market...but unfortunately, these people who tried to do the right thing at the time and go away from risk assets are going to be greatly disappointed when rates start to rise," he says.

Cobb doesn't see the Fed raising rates for at least another year and says even when they do they won't be ''overly aggressive." And given the many headwinds we face, he says it makes sense for Treasury buyers to look at other asset classes, even ''higher paying dividend stocks, north of 3%, to get a better return for the next 12 months."

And maybe he's right. With the S&P 500 now up about 8% year-to-date and paying about 1.8% in dividends, it's right on target (to keep with the Robin Hood theme) with its long-term average of 10%.

When asked about the imminent start of 2nd quarter earnings season, Cobb flatly recites "the driver of markets has been, and will continue to be corporate earnings" before warning that record profit margins "have already started a very mild retreat."

Cobb adds, "If you're a worker, you might be disappointed with your job prospects, but if you're a shareholder, it doesn't get much better than this."

Extrapolate that to his call on the stock market, add in the fact that profitability is either at or very near the the top, and doggonit, you might consider pulling a different arrow from your quiver too.

Tell us what you think? Are stocks about done for 2011?

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