The Chinese, Thai, US Bond Markets, and the Equity Markets – Two Ships Passing in the Night? Thursday, Sep 30 2010 

Small investors have fled the stock market since the crash of 2008 seeking safer returns in fixed income despite yields on most US Treasuries below 1%. For the past 30 months investors have poured money in to fixed income investments seeking safety and stability after the 2008 market crash.1 This in turn has pushed yields down to unheard of levels and forced bond managers to chase yield.

Corporate investors have been coming to the market in size as well as signified by recent offerings by McDonalds, Oracle, and Microsoft.2 Corporations, whose balance sheets are already flush with cash are refinancing existing debt or looking to lever up with potential acquisitions on the horizon.

M&A activity is on the rise with corporate balance sheets flush with almost $3 trillion dollars in cash. Over the past few months, companies such as Intel and Unilever have made sizeable acquisitions while the commodity sector is heating up with BHP’s bid for Potash and Kinross’s takeover of Red Back. Even the healthcare sector is getting involved with Sanofi-Aventis pursuing Genzyme.

Even the Federal Reserve is jumping into the bond market by taking principal repayments and expiring mortgage paper and investing the proceeds in US Treasuries.

Overseas, China just issued 50 year bonds and Thailand is considering a 50 year issue as well. This is good news for their respective local bond markets as long dated bond issues increase market liquidity and signify investor confidence.

But as the tide of cash rolls into the market there are investors pulling out. Last week the Chinese government announced that over the past year they have decreased their holdings in US Treasuries by $100 billion dollars while being active purchasers of European and Japanese debt.3 The Chinese may be diversifying their bond holdings much in the same way the Federal Reserve is swapping mortgage debt for US Treasuries or they may be opting to sell before the yields begin to rise.

As a contrarian investor, this is one sign that the bond market is in process of making a top while the stock market may be putting in a bottom. With the stock market currently showing weakness, bond managers chasing yield, and stocks in large cap companies yielding sometimes twice their current bond offerings, investors should look for value rather than chase a trade.

Even with the 2003 tax cuts on capital gains and dividends for the highest tax brackets ready to expire the risk/return ratio is becoming heavily weighted on the side of equities. Small investors would be best served investing in high quality blue chip equities with solid dividend yields that can provide a decent income stream over the coming years.

Any pullbacks during the final quarter of 2010 should be met with buying by small investors looking to chase dividend rather than bond yield.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

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Bullish or Bearish? Wednesday, Sep 1 2010 

The market this year has had some rough times. The rally which started in March of 2009 topped out in April of 2010 and caused the market to trend lower for the last 5 months. But as mentioned in my last article the market is approaching a moment in time when a solid buying opportunity will emerge.

On the bearish side of the equation we have weak economic growth, stubbornly high unemployment, massive budget deficits, and a weak banking sector. There is also the issue with the Hindenburg Omen, for which a downside move of just a few more percent would make the signal a success.

On the bullish side we have an equities market that seems overvalued from a PE perspective is undervalued based on dividend yield when compared with similar yields on US Treasuries, AAII surveys showing that small investors are bearish, and favorable profit growth in the large cap sector.

The stock market has in many way mirrored the returns of the market in the 70’s where we had whipsawing action sideways for many years until inflation was dealt with by Paul Volker and set the stage for the great bull market in equities that ran until 2000.

Intel’s announcement guiding revenues and gross margins lower in the third quarter may be the harbinger of earnings warnings in the tech sector as companies move to get the bad news out early.

September is a month where earnings and economic worries are likely to provide some stormy weather for the markets but once we move into the fourth quarter the skies should clear for a nice rally into 2011 although we are likely to end the year on the downside.

As mentioned before, there are a number of high quality blue chip stocks with attractive dividend yields that can provided comfort to investors with a steady income stream. Once the weather clears these stocks should lead the market higher as investors look to dividends for safety in these turbulent times.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.