Some activist shareholders wanted Yahoo to sell its Alibaba stake and pass the proceeds on to shareholders (because they felt the value of the Alibaba shares was obscuring what they think is the value of Yahoo as an operating company). Yahoo would have incurred a huge tax liability by following that strategy, though. By spinning the shares off into a new holding company (shares of which will be distributed to Yahoo shareholders on a pro-rated basis), Yahoo avoids the tax hit, and the activist investors who wanted Yahoo to sell Alibaba shares can achieve the same result by selling shares of the spinoff company (and they will be the ones who incur a tax on the sale). It sounds like it's a win-win for everyone.
I've got a suggestion for both of you geniuses. Go load up on TMV, the triple inverse bond fund. You'll lose your money three times as fast that way!
In words and deeds, the Fed seems to care about only one thing – the threat of deflation. Quantitative easing is their preferred weapon to fight it. (QE ultimately fails at creating sustainable inflation, but it does appear to increase inflation expectations.) If you’ve been paying attention the past 5 years, you know that long-term rates actually rose during every iteration of quantitative easing (QE1, QE2, and QE3), and fell at their completion, in each instance by over 100 basis points. Later this year, when the Fed starts freaking out over the coming wave of deflation (partly caused by falling oil prices, but also other factors), they’ll announce or hint at QE4. And when that happens, it will finally time to sell or short long-term Treasurys.
So if a Yahoo shareholder decides to sell his SpinCo shares, will that in itself be a taxable event? Or only if it exceeds the investor's original investment in Yahoo? And I suppose those who are bullish on Alibaba's business can just hold on and it will essentially be like holding BABA shares?
I meant that it was a win for Yahoo shareholders who wanted to sell their Alibaba stake, and for those who wished to keep it. Now they have a choice. It's probably good for Alibaba, too, in that Yahoo will not be dumping a huge number of BABA shares on the market. The holding company will continue to hold those shares, and sellers will be selling SpinCo shares, not BABA shares.
I’ve been saying for several months here that the Fed wouldn’t raise rates this year, but why should you believe me? Instead I give you both Warren Buffett and Jack Welch, today lobbying hard against a rate hike:
Jack Welch said it would be “crazy” for the Federal Reserve to hike interest rates in the current economic environment. “I think it would be ludicrous to raise them right now with the situation we have. We’ve got oil problems…and we’ve got a strong dollar, which is killing exports,” said the former boss of General Electric in an appearance on CNBC. Higher interest rates would only cause the dollar to strengthen further and exports “would fall off the table even more,” said Welch.
And in an interview with the Fox Business Network, Warren Buffett said he didn’t think a rate increase would be “feasible.”
“I think it is going to be very tough to raise rates when you’ve got what is going on around the world,” Buffett said. A rate hike would “exacerbate” the problem with the stronger dollar and flows into the U.S., he added.
For the record, I think whether the Fed hikes or not is a nonissue for long-term rates anyway. In fact, I think we'd basically repeat the experience of 2004, when the Fed raised short term rates and long-term rates actually fell (Greenspan's "conundrum", google it). But some people around here seem to think it matters...
At least eight European countries now have negative sovereign bond yields for maturities of up to 4 years: Austria, Belgium, Denmark, Finland, France, Germany, Netherlands and Switzerland. German yields are negative out to 6 years, while Swiss yields are negative out to 10 years. As Albert Edwards (SocGen) has warned, there is a “tidal wave of deflation” headed from East to West. Both Japan and Europe are exporting their deflation to us. And as the deflation tide rises in the US, and the CPI soon goes negative, bond yields will continue to drop further than most investors believe possible.
It’s ridiculous to compare Spanish or Italian bonds to US bonds. Those two countries are basket cases: the unemployment rate in Spain is 24%, while the unemployment rate in Italy is over 13%. The government debt/GDP ratio in Spain is 98% (up from just 70% two years ago), and the debt/GDP ratio in Italy is 132%. There is genuine repayment risk with those countries, and investors should be receiving much higher yields there for the risk (and if Greece exits the Euro, watch those peripheral bond yields skyrocket). It’s absurd and unsustainable for US rates to be higher. The US Treasury market is the most liquid market in the world, and there is no repayment risk. An excellent pairs trade would be to short European periphery bonds and go long US Treasuries. In the December sale of $13 billion worth of 30-year Treasuries, indirect bids, a measure of foreign demand, took 50%! Investors who’ve been front-running the ECB bond purchases will now take their profits and rotate into US Treasuries.
The Atlanta Fed has a real-time model for estimating the current quarter’s GDP called GDPNow, which basically mimics the methodology used by the BEA to calculate GDP at the end of each quarter. Not sure why it doesn’t get more attention, perhaps because it’s still relatively new (and volatile). At any rate, their estimate for Q1 2015 has dropped from 2.3% just 5 weeks ago (in line with current Wall Street consensus) to 0.6% as of March 12th. The main culprit for the downward revisions has been a fall in CapEx spending, most of which can be traced to the oil and gas industry. But I thought the collapse in the price of oil was supposed to be a net positive for the economy, lol…
Thanks. My main influence over the past few years has been Lacy Hunt, the investment manager for Hoisington Management. A former chief economist for the Dallas Fed, he's both a superb economist and bond market historian. You can download his quarterly reports for free at the Hoisington website. Reading them is like a grad school refresher course in economics and money markets. Following his advice has made me a lot of money in this strange bond environment...
I understand the sentiment, but Gundlach knows that if the Fed raised short-term rates, it would likely result in lower long-term rates, as bond investors would anticipate lower inflation, a stronger dollar, and lower GDP growth. The long end of the curve is effectively beyond the Fed's control. By the way, I just got through listening to the webcast of Gundlach's 2015 forecast. Gundlach suggested that the Fed may raise rates slightly just to see what happens, but then quickly reverse course. He also predicted that US treasury yields would likely approach those of German bunds, which are currently paying 0.47% (10Y) and 1.19% (30Y). If that scenario plays out, there are still some phenomenal capital gains to be had from rising treasury bond prices.
That was the title of Michael Gayed's January 14th column, in which he zeroed in on one of the fundamental flaws in the bearish case for bonds: investors who have been trying to short the Treasury market are ignoring the rapidly declining inflation rate. An excerpt from the column:
"No crowd of traders and investors has been more wrong than those screaming about a rising-rate environment. Seemingly every year, every quarter, every month, every day there is someone on air saying rates are only going to go higher for bonds. Indeed, global yields are essentially at all-time lows almost everywhere, and anyone looking at Treasurys would think that we are in a "blow-off" phase for long-duration government debt.
My problem with this line of thinking is simple — Treasurys and government debt are only overvalued and yields are only low if inflation and inflation expectations are rising. Treasurys are only in a bubble if growth is robust, commodities are trending strongly, and retail sales are, on a secular basis, accelerating. I really do believe that few people understand the role of interest rates in an economy, and what they are reflective of, which is the demand for money. It should scare everyone to see Treasurys doing what they are doing as it suggests a severe slowdown in the usage of money is nearing..."
Gayed seems to think the growing disconnect between the Treasury market and stock market will have to resolve itself one way or the other (either stocks fall or Treasurys fall). I’m personally agnostic regarding stock market valuations, and focus only on the bond market. And over the near term, the bond market is telling us that a wave of deflation is headed our way. When the Fed finally feels threatened enough by it, they’ll announce QE4, at which time I will make my exit from US Treasurys.
For the last 6 months, YoY CPI has averaged 1.52% and is trending downwards: October (1.66%); November (1.32%); December (0.76%). This month it will be even lower, and will likely go negative soon. This is what the bond market has been telling us for the past year, and there's nothing the magical Fed can do about it.
You can't solve a debt problem with more debt, which is what the Fed has encouraged. Public and private debt combined in this country totals around 345% of GDP. Various academic studies from just the past three years have shown that when public and private debt combined exceed 275% of a nation's GDP, growth slows dramatically. We exceeded that debt level in the year 2000, and since then real GDP growth has averaged 1.8% annually (about half the level of the previous 130 years). The Euro-currency zone is in even worse shape, with a combined debt to GDP ratio of around 440%, while Japan's combined ratio is around 655% of GDP. The relationship is nonlinear, by the way, meaning the adverse growth consequences accelerate as debt rises.
I'd have to know more specifics to play around with the math, but in 2012 the yield on the 10Y bottomed at around 1.40% (on 7/25/12), and the 30Y bottomed at 2.45% (same date). We still have a ways to go on the 10Y to match that low, although we're getting close with the yield on the 30Y.
There’s a difference. The equity rally is based on blind hope and optimism regarding the US economy. The Treasury rally is based on extreme pessimism regarding both the US and global economy. My money is betting on extreme pessimism.
The “normal” rates that you’re thinking of occurred during a time of higher inflation. Would you be happier with a 5% yield on 30Y bonds, but with a 3% inflation rate? It’s not that different from today, where we have a 2.43% yield on the 30Y and a 0.76% annual inflation rate (based on December's CPI print). Inflation for this month will likely be even lower, and soon may be negative. This is the fundamental flaw in the bearish bond thesis – it doesn’t take into account the rapidly declining inflation rate.
I’ve decided you’d rather hear a pleasant fantasy than deal with the reality we’re stuck with, so here goes. Soon, when Grandma Yellen rides her unicorn across the rainbow bridge, she’ll be bringing magic bonds that pay 6% interest to retirees. Unlike the poor saps vainly hoping to retire in Europe or Japan, American retirees will be able to live out their golden years in relative luxury and leisure.
There, does that make you feel better? ☺
The primary and most fundamental determinant of bond yields is attitudes towards current and future inflation. For the past 140 years, the inflation rate has averaged 2.1%, and the yield on 30Y treasuries has averaged 4.1%. (It doesn’t matter if you don’t believe the government’s CPI data – that’s been the mathematical relationship.) Since the 1950’s, there’s been an 80% correlation between the inflation rate and bond yields.
With the 30Y now yielding around 2.5%, the bond market is telling us that inflation is headed to the .50% level or lower. (Last month's annual CPI increase was 1.32% and dropping like a lead weight.) Investors who keep wishing the Fed would “normalize” rates to the levels of a decade ago are forgetting that we had higher inflation then, and that it’s the “real” rate of interest (the nominal rate minus the inflation rate) that matters. The low rates we're seeing are exactly what one would expect in a deflationary environment.