Following up on an earlier discussion, TLT which is the ETF that tracks the 20 yr Treasury is up 8.8% YTD according to yahee. Someone said that bond returns are limited to their coupon and here we have an example of bond returns exceeding the coupon by 4 times and beating the YTD return on the S&P. So I guess big money does not think that stocks are the only way to play this market.
When researching for 100 year charts, there's a nice website that provides several different charts on gold returns over the years. It looks like gold had a very good return following the 1966 period when stocks declined on an inflation-adjusted basis for 17 years. I could be wrong (because I can't find the specific chart, but it looked like gold went from something like $50 to over $1000). There was also a chart with the "efficient frontier" portfolio, which was a portfolio made up of a certain percentage in gold and a certain percentage in the S&P, which outpaced the historical returns on being invested in either sector by itself. Interesting.
Stagg, you did start the topic, so you can't complain if people ran with it and offered their 2 cents. If the topic was meant to be just on the opportunity to invest in food prices, you could have just said that and left out the part about Europe. Even mentioning the effect of weather on food prices would be ok if you didn't mention why you thought the weather had changed (so as to avoid the climate change argument.
BTW, I bought some FRO after they reported, so I am now aligned with you on that.
DH has been asserting this theme that bonds are in a bubble and stocks are not for some time, without any attempt to show the correlation between the two types of securities. Anyone can see that bond and stock prices have a close correlation especially over the last 30 or more years because stock prices are calculated in part by using the current interest rate to discount cashflows. Since the early 1980's, both bonds and stocks have been on a tear, with interest rates falling from near 20% to 1%. DH must assume that if rates go up, that would have no effect on companies and their stock prices and he must ignore that investment professionals use the discounted cashflow method to determine stock prices. Without even getting into securities portfolio analysis and sharp ratios and other metrics, one can easily understand that if interest rates go up, that is going to effect the borrowing costs of companies. Once again, DH has failed to study history because if he did, he would have seen that when rates did eventually rise in the late 1960's, stocks did crumble (after first managing to stay up while they attempted to pass the increased costs on).
Further, DH completely ignores that with Treasury bonds, you get your principal back. No mention of that concept with stocks, because stocks only go up according to DH. Unless he has never had a loss (and I know he has admitted to some), I don't know how you can speak on the topic without acknowledging that concept, or at least to use the risk metrics that are commonly used by investment professionals. How can you talk about the different types of risk, when with one instrument you get your principal back and the other, your principal is not guaranteed. Flipping from talking about return and risk on securites to talking about income, which are three different concepts. Wow, no wonder his students' eyes are glazed over.
I don't have the figures in front of me, but there were several muni bankruptcies: Detroit, Stockton, CA, Central Falls, RI, Harrisburg, PA, some city in Alabama due to some garbage plant, and a couple of others in California. The culprit usually was the pension and health costs which by the way, continue to get bad. I don't know if Whitney's prediction was total amount of muni bond defaults or the amount of the city default, since the default could involve obligations that were not represented by bonds. Puerto Rico is currently in default on some $70 billion with more to come, and that situation has yet to be dealt with. So yes, Whitney overstated the number of issues and the amounts, but at the time no one was talking about the problems of municipalities and their pension and health obligations. Now it is in the news all the time. The City of Chicago has big problems and so does Illinois and many other states. The SEC has brought charges against several states and cities for lying in their bond prospectuses. She highlighted an issue that almost no one was looking at and it continues to get worse, even if most muni bonds have performed well.
And while munis did not receive actual TARP funds, the Fed's ZIRP and QE policies kept interest rates low which allowed munis to continue to benefit from low rates. The Fed is also authorized to buy municipal bonds which puts a put under them. And let's not forget the implicit govt backing of the mortgage backed securities issued by Fannie and Freddie, which was reaffirmed, made sure that thousands of firms were not forced to liquidate those holdings which would have caused even more hundreds of banks to fail.
this is a good discussion. There are lots of charts and one of the 100 year Dow charts also shows the inflation adjusted performance. The Dow performance on an inflation adjusted basis in this period from 1966 to 1983 was not as harmless as DH makes it out to be. The decline was from 7333 to 1933, and it looks like there were at least 3 recessions during that time period (late 1969, 1973 and 1979). Of course, during the early 1960's, interest rates started out low. They didn't begin to climb until inflation from money printing finally made its way into the economy. Some have argued that the Fed's QE has not, and will not show up in inflation because it is trapped in the excess reserve accounts of banks and has not made its way into the real economy. The flip side is that that is one of the reasons why the economy has not fully recovered and only the stock market has recovered. It might be different if we get helicopter money.
Governments historically like inflation because it allows them to devalue their debt while they limit things that depend on inflation indices. Of course, the tax code is now indexed so gains from bracket inflation may not occur. I guess the real question is do you trust the govt to pursue the policies that will bring about low inflation and high productivity or will the govt go for inflation and what the historical effect has been on equities. Hope is not an investment strategy.
Keebon, part of the problem is that the statistics, however they are derived, may not be as useful as they once were. There's nothing that measures quality of employment in the employment numbers. And while some financial media may dive into the numbers and all the different subparts, the nonfinancial media doesn't have the time or the audience to question whether the unemployment rate is even a metric worth following anymore without also discussing the participation rate etc. It's similar to how they invented new baseball statistics to better measure a player's performance to supplement some of the other stats.
I looked at the chart from 04-08 to see if there were any similar patterns to today's chart action. There were some similarities and some differences. Currently, we have a had a period in which the market has gone sideways and appears to be on the brink of rolling over. Back in 08, we had a double top and then a break of the upward channel that had existed for the length of the advance, followed by a failure to regain that upward channel. It appears that we may have broken the upward channel that has existed since 09 (of course this depends on whether the chart settings give an accurate picture). We won't know if that break of the channel is significant until the market fails to regain that upward channel. I have been looking at the S&P so I haven't checked other indices to see if they confirm similar action or whether one index leads the others. I know some people don't believe in the predictive value of charts, but since the economic metrics and other stock metrics don't seem to be predicting a change in the market, I think it is worth looking at the charts to see if anything can be gathered. Some will say if you look hard enough you will see whatever it is that you want to see. That may be true in part, but is that any different from people saying that the market always goes up as it has during the last 100 years? What if the next 100 years are different than the first 100. No one will be around to say that the previous theory was later disproved in the next 100 years.
JK, I think most of us who follow the economy know that it has been weakening for some time. The problem is that the market has not declined during this time that the economy and corporate earnings have turned down, which makes people question whether the relationship between the economy and the market still exists. Some say that you can't have a market decline until the Fed raises rates (the old 3 steps and a stumble refrain) or that you can't have a decline until there is capitulation. Some even argue that this is a goldilocks environment in which stocks can still go up because there is no better alternative. Although the analogy may not fit perfectly, we heard similar arguments before the housing bubble burst. We even heard Bernanke said subprime was contained. Further, buying the dip has worked ever since we had the first dip after the first recovery from 666 in March 09. So even if we get a dip, it could be just another dip buying opportunity. I've read many articles that have reviewed all of the major market time periods since 1900. There are periods in which the stock market and economic metrics were similar to today's levels and stocks did decline. The one difference is the Fed and what they may do to try to keep the market up. QE did keep stocks up and we have seen other central banks try negative interest rates so there can be no doubt that the Fed would not give up at this stage even if they feel nostalgic for a return to how it used to be. There is talk that helicopter money would be one of the next steps to try to jumpstart the economy should we go into a recession.
More in next post.
There's been a fair amount of commentary about how the employment statistics are out of line with the tax withholding statistics being reported to the Treasury. Withholding amounts have been declining at the same time that jobs were supposedly increasing.
However, none of this seems to matter as long as the market stays up. The great question is can it stay up indefinitely or will some straw eventually break this camel's back. The longer it continues the harder it is going to believe that any straw could break the camel's back.
bob, the unemployment rate calculation includes the participation rate, so it is very possible for there to be less jobs created and still have the unemployment rate go down as long as the participation rate keeps shrinking like it has during this whole "expansion." Don't even get me started on the "birth-death" model that the Labor dept uses to estimate jobs created.
Stagg, we have seen several times how that did not work out. JF's purchase of SDRL shares and John Walker, CEO of EVEP are just two that I can think of off the top of my head. The dividend is set by the Board upon a recommendation by management. I'm not sure of NYMT's schedule for when they announce their next divy, but if he knew that it was going to be the same as last time and he bought on that basis, that would be insider trading, so I doubt he would want to risk that. There are very tight controls on the windows when insiders can purchase company stock and insiders often have to be cleared by the general counsel before they can purchase stock.
Just a point on NYMT and the insider purchase by the President. This is the new president who owned Riverbanc, the company that NYMT just purchased. I doubt it was part of the buyout that the president was required to purchase NYMT shares and NYMT does not seem to have a requirement that its officers own a certain % of stock. Also, I do not believe the acquisition of Riverbanc was a stock for stock deal, so this probably isn't a strategy to defer capital gains. More likely, the President got a huge windfall from selling his company to NYMT and he had to put the money somewhere so why not in his new employer.
What horse hockey! If big money is still buying, then why do all the stats show outflows from all the "big money" groups (pension funds, institutional and private). DH is just making up facts. He said the same thing in 2007, that there was no other place for money to be invested. The market averages have been kept up by corporate buybacks and by the central banks (it's no secret that the Japanese central bank has bought equities including REITs and ETFs and the Swiss National Bank owns millions of shares of Apple).
As for relative risk reward, again DH doesn't use any metrics to define what the risk reward is. But there are many legendary investors like Jeremy Grantham who use the expected return metric to define this risk reward. What they are saying is that with the S&P p/e ratio near all time highs over 20, the risk does not favor equities. There are plenty of articles that show the history of corporate earnings, p/e ratios, corporate margins, price to sales ratios, debt to GDP etc. all of which show that when these metrics get to the point where they currently are, that the market historically has had negative returns.
And it's just dumb to measure the return on Treasuries by the coupon which DH seems to do when he says the max return is 2%. Anyone can look up the recent returns on Treasuries, but it is elementary math that when rates fall, the return on Treasuries can be much greater than the coupon. On a 2% coupon, if rates fall to 1%, the gain is going to be much more than 2%. That is before you consider that most investments are levered up. How does DH think that mREITs can produce double digit returns while holding mortgages with 3% coupons? This guy was an accountant?
If DH was correct in his thinking, then there would never be any market declines in history because the argument can always be made that the market will bounce back after the selling is done, so no point in selling now. I think that's called a syllogism (william?).
I am also baffled by this market. On one hand, the big money has been selling for something like 17 or 18 weeks, but the averages have stayed up. The economy is still on the weak side, but probably not as weak as in Q1. If corporations can't increase revenues, then they will resort to cutting jobs in order to improve margins. Shopping over the weekend, I was amazed at how many sales I saw on summer clothes and it's just the beginning of the summer season. Usually, you don't see sales until mid-way thru. That can't be a sign of strength.
Despite money coming out of the market, that doesn't mean the market will go down because those flows could always reverse and money managers who are trailing the indices could always try to play catch up. I bought some Fidelity Biotech a few weeks back just in case the market moved up in a blow-off top like we had back in 2007. There are some parallels to that time. We are starting to see ads for 3% mortgages. Back then, "everyone" knew we were in a bubble, but the Fed was somehow keeping everything up, until it couldn't.
Gambler, with respect to CELP, there are times when the market does not understand a company or when it is too small to attract any attention. The market can be inefficient and that can create opportunities and all of us like to think that we are seeing the view correctly and it is the market that is wrong. This happens a lot with high dividend stocks because many times retail investors become too enamored chasing yield. Look how many times it has happened with stocks discussed on this board. I think the market is concerned with CELP's distribution and the fact that the parent is supporting the distribution by making concessions. There are also subordinated units and the market may be concerned that once those convert, the current distribution will be cut. I don't know the terms on when the subs convert so this could be overblown. When in doubt, the chart can offer some info on the stock. It looks like it is in a downtrend, meaning that it is going to need some catalyst to turn it up. Money can be made buying stocks in a downtrend that reach support and bounce, even if the bounce is only temporary. Sometimes there are just easier names to play. GL
Yes the gold miners index which NUGT is based on (symbol $GDM on stockcharts) is sitting right on the 50 dma after declining some 11%. There doesn't look to be any support until another 15% down, which would send NUGT off a cliff since it is a 3x ETF. GLD also looks like support is giving way, although the downside doesn't look as bad. Maybe DUST is the play for now.
Also read an article that said that excess reserves are down, as they were going into the Dec hike. Maybe Lucy won't pull the ball out this time.
Ed, I bought the preferred of another Zell company, EQC. It's an office REIT and Zell has been selling off some properties. I think they have some NOLs so they weren't paying common divies, so that's why I bought the preferred.
Also the GP announced they were buying shares. Technically, since the plunge on the dividend cut, the stock has been basing. MACD turning up. Might be worth a gamble, however before a 3 day weekend when the market is waiting with baited breathe on Yellen, it might be worth waiting till Tuesday.
For an accountant and long time investor, I am amazed at how DH doesn't seem to understand very simple finance topics. Banks are levered more than 10 times so a 25-50 bp increase in their yield on investments should raise their gross margins by 2.5 to 5%. Similarly, mREITs depend on making a spread between their cost of funds (which is tied to repo rates) and the yield on their investments, which they lever up 6-8 times. While they hedge their borrowing costs, those hedges have a spread (e.g. profit for the bank taking the other side of the hedge) and have to be continually added as they roll off over time. Anything that cuts into their spread, is going to hurt their earnings which hurts their divies.
If there actually is a rate hike (and that's still a very big if), I think the harm to mREITs is greater than the good for banks and BDCs because this will likely be the last rate hike for the year, and banks and BDCs need both strong loan growth and increasing rates to really get the momentum going. mREITs were already at thin margins -- this is not a case where their spreads were at 4% and will be cut to 3.5%.