Why Investors Persist Hanging on to Long Treasuries at Such Low Yields

Monday, July 2nd, 2012

Some readers have asked if other fixed income asset classes could be just as effective as long term treasuries for an equities portfolio in hedging an equities book (discussed here). Here the comparison is made to municipal bonds, investment grade corporate bonds, and HY corporate bonds. Long term treasuries are still superior in reducing the portfolio volatility – at least based on the last couple of years. That’s because muni and corporate spreads tend to be inversely correlated to equities, reducing the hedge effectiveness of these instruments.

Again, the x-axis is the percent of the portfolio invested in the S&P500, with the rest of the portfolio being in one of the fixed income asset classes. The y-axis is the combined portfolio daily volatility over the past two years.

That is the reason investors are willing to take asymmetric risk and dismal current yield to hold long term treasuries. Whether this relationship holds going forward remains unclear. A scenario in which both treasuries and equities sell off some time in the future is not unrealistic.

SoberLook.com

Tags: Amp, Asset Classes, Axis, Bonds Investment, Corporate Bonds, Current Yield, Fixed Income, Investors, Municipal Bonds, P500, Portfolio, Reason, Relationship, risk, Treasuries, Volatility
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More Than Half of the S&P500 Yields More Than 10-Yr Treasury

Tuesday, May 22nd, 2012

by Bespoke Investment Group

With the 10-Year US Treasury now yielding 1.74%, it is now paying a coupon that is less than the dividend yield of more than half of the stocks in the S&P 500.  As of today’s close, there are now 271 stocks in the S&P 500 that have a greater yield than the 10-Year US Treasury.  Of the remaining 229 stocks in the index, 126 have a dividend yield that is less than the 10-Year US Treasury, while 103 pay no dividend at all.

Tags: 10 Year Treasury, Amp, Dividend Yield, Investment Group, Nbsp, P500, Stocks, Us Treasury
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S&P500: At Major Resistance

Tuesday, April 3rd, 2012

by Guy Lerner, The Technical Take

March 30, 2012

Prices have risen rather dramatically over the past 6 months, and many an analyst have extrapolated the recent price gains into the future suggesting that the bull market train is about to leave the station.  And oh if you don’t jump on now….well you will regret it.

But I say not so fast.  There is no great hurry to jump on that equity train.  Why?  Prices are at resistance levels, which means there should be some selling.  There will also be some buying as the those late to the party will want to get on that bull market express.  But I don’t see any great urgency.

Figure 1 is a monthly chart of the S&P 500 (symbol: $INX).  The orange trend line is drawn from the March, 2009 lows .  The break of that trend line (red down arrow) occurred back in August, 2011.  Prices rebounded and have managed to retrace those losses, but currently prices are stymied by that rising trend line (black down arrow).  This rising trend line (the orange one) will continue to be a bigger and bigger hurdle as it is likely to rise faster than prices, which have definitely flattened out over the past couple of months.  The rising purple trend line is likely to come into play sometime in the future, and maybe it and price will meet up around 1225 SP500.

Figure 1. SP500/ monthly

Figure 2 is a weekly chart of the S&P Depository Receipts (symbol: SPY).  A nice trend channel is drawn and prices are at the top of that trend channel.  Of course, how prices got to this point is noteworthy in that they have gone up for the entire quarter on poor volume and breadth.  In other words, with prices at resistance and a poor foundation underneath, I can easily see that this is not a launching pad for a new bull market.  I suspect we will get a pull back to at least the middle channel line somewhere between SP500 1300 to 1350.

Figure 2. SPY/ weekly

Tags: Amp, Arrow, Breadth, Depository Receipts, Figure 1, Guy Lerner, Hurdle, Hurry, Launching Pad, Losses, Lows, Market Express, Nbsp, P500, Poor Foundation, Poor Volume, Resistance Levels, Trend Channel, Trend Line, Urgency
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Dividends Make Comeback, Equity Valuations Below Historical Normal (ING)

Friday, March 23rd, 2012

Dividends Make a Comeback

by Douglas Coté, Chief Market Strategist, ING Investment Management

Returning wealth to shareholders is as American as apple pie. Unfortunately, in the last few weeks American companies have been denied this right by the Federal Reserve, in a sign that the financial system still is not fully healed despite an enormous bull market that launched in earnest at the end of the third quarter 2011 as the S&P 500 crosses the 1400 threshold. Dividends though, are making a comeback across sectors and an important part of an investor’s return. Please see “Dividend Yields” on page 13 of ING Global Perspectives for a view of the attractiveness of stocks on this measure.

Equity valuations below historic normal

It is not too late. That is, it is not too late to join in on this bull market. Sure, the first quarter was the best since 1998, and for the last six months U.S. global equity markets are up near 30%, and still there is plenty of upside potential. Let’s look at it. The forward price-to-earnings ratio (P/E) is a meager 13.25 based on our forecast of $105 per share for 2012. The historic normal P/E is 15, and based on this the market, the S&P500 could increase another 13% through year end. Compare that to a near zero return on CDs, money market, and other savings vehicles. Please see “Stock vs. Bond Valuation” on page 12 of ING Global Perspectives.

You can also scan ING’s Global Perspectives Monthly Book below in the slidedeck:

039458

Tags: American As Apple Pie, Amp, Attractiveness, Bond Valuation, Chief Market Strategist, Dividend Yields, Dividends, Federal Reserve, First Quarter, Forward Price, Global Equity Markets, Global Perspectives, Ing Investment Management, Investor, Money Market, Nbsp, P500, Price To Earnings Ratio, Sectors, Shareholders, Stocks, Threshold, Valuations, Year End, Zero Return
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An Inside Day after an Outside Day? Not a Likely Occurrence – But it Happened Yesterday

Friday, March 2nd, 2012

(Warning technical mumbo jumbo ahead)

Wednesday the S&P 500 had what is termed an outside day; that is a day where the index had a higher high than the previous day and then a lower low.  It also closed out the day near the lows of the day.  Generally this is short term bearish.  Someone who follows technical analysis would therefore position themselves for a short term pullback…. in normal markets.  But we are currently in a global central bank liquidity flood so ‘typical’ things are not happening.  Instead we have an outside day followed by an inside day…

Some interesting data from Global Macro Monitor blog:

• An inside day following an outside day is a relatively rare three-day pattern and has initially happened only six times since the current bull market began on March 6, 2009.

What happens next?

• In every case, the post 5-day return on the S&P500 was positive, averaging 2.08 percent.

So we’ll see what the next 5 days bring…

Tags: Amp, Bank Liquidity, Blog, Flood, Global Macro, Lows, Mumbo Jumbo, Occurrence, P500, Pullback, Six Times
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Bob Janjuah (Nomura): Still Overreacting?

Monday, October 3rd, 2011

Nomura Bob is back with another hotly anticipated if, unfortunately, grammatically flawless, market strategy piece. Short and sweet, Bob as usual cuts right to the point.

Bob’s World – Still overreacting?

Summary

Most commentators now seem to accept that what is happening is not an overreaction, rather the markets are at last on the way to fully pricing in the sad state of the global economy and global markets. I remain firmly convinced that we are in a secular bear market where stage 1 was the late 2007 to early 2009 sell-off, stage 2 was the countertrend rally from early 2009 to April 2011, and stage 3 is the current phase, where I expect the sell-off to last at least until late 2012.

The key basic problems remain weak trend growth in the DM world, which we think will continue for another three to five years, the policy errors (in our view) of the current set of policymakers, and the existing set of inadequate ‘old world’ policy institutions.

My secular view remains bearish. In or within a year from now I expect global equities to be 25% to 30% lower. My S&P500 target for the low in 2012 remains 800/900, and I think an ‘undershoot’ into the 700s is entirely possible. In this bearish outcome I would expect 10-year bund yields at 1% to 1.25%, 10 year UST yields at 1.25% to 1.5%, and 10-year gilts below 2%. The USD should do well, credit and commodities should not.

My view over the next month also remains unchanged. I expect stocks to reach their lows for 2011 in this time frame. I still expect the S&P 500 to bottom in the low 1000s in October. And I expect to see 10-year bund yields below 1.5%, 10-year UST yields below 1.75%, and 10-year gilts close to 2%. Beyond October 2011, on a two- to three-month basis into year-end/early 2012, I still see a possibility of a decent counter-trend risk rally. Should this materialise, the S&P500 could move from a low in October of around 1000, up to/towards 1200 by end-December 2011/January 2012.

On a secular basis, investors should remain cautious, and focus on strong balance sheets and strong/robust business models. I expect the next year to be about capital and job preservation. Any counter-trend rally should be tradable but short lived – it should be viewed opportunistically.

And the Full report

My last report (Bob’s World: It’s only just begun) was published on 23 August. A month on I have little to add as markets and data are evolving almost exactly as expected. Most commentators now seem to accept that what is happening is not an overreaction, rather the markets are at last on the way to fully pricing in the sad state of the global economy and global markets. It may sound repetitive, but I remain firmly convinced that we are in a secular bear market where stage 1 was the late 2007 to early 2009 sell-off, stage 2 was the countertrend rally from early 2009 to April 2011, and stage 3 is the current phase, where I expect the sell-off to last at least until late 2012.

Basic problems

The key basic problems remain weak trend growth in the DM world, which we think will continue for another three to five years, the shocking policy choices of the current set of policymakers, and the existing set of woefully inadequate ‘old world’ policy
institutions.

Growth

The consensus now appears to be moving towards the kind of weak trend growth outcome Kevin and I have been highlighting for some time, with trend DM growth expected to be around 1%pa over the next 3 to 5 years. For now, however, EM and thus global growth outlooks remain 100-200bp too high on a three- to five-year trend basis. Expect these to also be revised lower over the next few months. Decoupling may come one day, but we doubt it will happen in the foreseeable future.

Policy errors

More and more people seem to be coming around to our view that policymakers (globally, not just in the euro zone) have made some major errors in terms of diagnosis and treatment of the crisis. And they now seem to judge that responsibility for these policy errors lies not just with politicians, but also with central bankers. The policy errors are continuing, in our view, and look likely to do so until 2013. Even the consensus now sees the limits to credible policy, and can see that those limits either have or will very soon be exceeded. In 2012 I fully expect current policymakers to be revealed as „emperors with no clothes.?

Still bearish

It is for these reasons that my secular view remains bearish. In or within a year from now I expect global equities to be 25% to 30% lower. My S&P500 target for the low in 2012 remains 800/900, and I think an ‘undershoot’ into the 700s is entirely possible.

For the valuation-focused, assume S&P 500 EPS in 2012 of $90/$100, and P/Es in the 8 to 9 area – I see this kind of P/E as the new norm in the kind of world we are in. In this bearish outcome I would expect 10-year bund yields at 1% to 1.25%, 10 year UST yields at 1.25% to 1.5%, and 10-year gilts below 2%. The USD should do well, credit and commodities should not.

Here I have to insert an important caveat regarding Germany and bunds. My core assumption remains that in the euro zone policymakers DO NOT attempt to fix an excess leverage and low growth problem with MORE leverage! This type of plan obviously appeals to Tim Geithner, but the core euro zone should be extremely concerned by the suggestion that leveraging the EFSF is a supposed „solution?. And of course Germany should also be deeply concerned about de facto attempts to force the ECB to follow the Fed into unsterilized monetisation. Germany/the core euro zone are simply NOT the same as the US and should not attempt to follow a policy which, frankly, has in any case failed in the US!

Short-term view

My view over the next month also remains unchanged. I expect stocks to reach their lows for 2011 in this time frame. I still expect the S&P 500 to bottom in the low 1000s in October. And I expect to see 10-year bund yields below 1.5%, 10-year UST  yields below 1.75%, and 10-year gilts close to 2%.

A counter-trend risk rally

Beyond October 2011, on a two- to three-month basis into year-end/early 2012, I still see a possibility of a decent counter-trend risk rally. Should this materialise, the S&P500 could move from a low in October of around 1000, up to/towards 1200 by end-December 2011/January 2012. I see many possible drivers of this risk squeeze: Greece could be bailed out through to early 2012, which is when I would expect it to default and the restructuring of the euro zone to begin in earnest; Kevin expects a two- to three-month patch of „better? data in Q4 2011; QE2 in the UK; ECB rate cuts; positive EFSF headlines or progress; positive PSI headlines or progress. At least part of President Obama?s fiscal ‘boost’ should happen, and something is better than nothing. Additionally, should the S&P 500 hit the low 1000s (over the next month or so, as I expect) and the unemployment rate exceeds 10%, I believe the Fed will be unable to resist another dose of QE, whereby QE3 will be a rehash of QE2. Finally, I think positioning and sentiment by late October 2011 will be such that markets are ripe for a decent squeeze.

Of course, we may not see all or even any of these drivers, but in terms of the squeeze better in risk into year-end, only some would need to materialise. In terms of the bigger picture, however, I am sure that even if all of these drivers were to occur together over Q4, the net result would be nothing more than a short-term boost primarily to the paper value of risk assets in markets, and a boost to commodity prices. In the long run I would see QE3 (which is a redux of QE2) as an even bigger mistake than QE2, and in the context of the euro zone, I fully expect policymakers to remain badly behind the curve on substantive matters (mere word, hope and unfulfilled promises are very counterproductive).

Stay cautious

On a secular basis, investors should remain cautious, and focus on strong balance sheets and strong/robust business models. I expect the next year to be about capital and job preservation. Any counter-trend rally should be tradable but short lived – it should be viewed opportunistically. My core message is bearish. Over the past month Kevin and I have looked closely for anything that could change our view and have come up with nothing. Even the hope that EM or China can go on a multi-trillion USD investment binge to re-ignite global growth seems pretty forlorn, as China?s last fiscal and credit binge in 2008 is proving very costly to clean up. The euro zone may positively surprise us with a clear and credible plan for the region, involving major debt and economic restructuring for Greece, Portugal and Ireland, a major recapitalisation of the euro zone financial system, and the formation of a neue-eurozone with a hard-money ECB at the core. We can but hope. The only alternatives are immediate full fiscal union, or full on unlimited unsteralised monetisation by the ECB. Both „options? are I think extremely unlikely.

The Geithner plan

Finally, a quick comment on the Geithner plan for the euro zone, which proposes leveraging up of the EFSF and which ultimately relies on (not so) stealth unsterilized monetisation, without any control, by the ECB. The aim of this plan seems to be to extend the global debt “ponzi” for as long as possible, through financial alchemy by essentially boot-strapping a highly levered CDO onto the euro zone?s debt burden. We see major execution risks associated with this plan, and there is significant opposition to it already in key parts of the euro zone. Importantly, if this plan were ever implemented, then, when it inevitably fails – I feel this plan would be even more negative for private sector growth in the euro zone than is the case currently, and this growth weakness would totally undermine this plan – the eventual damage done to both the system and the real economy would dwarf the current burden that needs to be borne in order to put the euro zone onto a stable path again. And bearing in mind the highly problematic debt, deficit and economic situation in the US, which will take centre stage as the market worry in 2012, then a proverb about glass houses and stones springs to mind.

Tags: Commodities, Dm World, Gilts, Global Economy, Global Equities, Global Markets, Lows, Market Strategy, Nomura, Outlook, Overreaction, P500, Point Bob, Policy Institutions, Policymakers, Sad State, Secular Bear Market, Secular View, Stage 1, Stage 2, Stage 3, Target
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Hewison: S&P500 – 1,250 is The Line in the Sand (July 14 Update)

Friday, July 15th, 2011

Seasoned trader Adam Hewison discusses this week’s market behaviour, pointing out that if the S&P should drop below the 1,250 the market’s support would be broken, and the rally that has defined the market since March 2009 would be over.

These updates can be seen in the right hand column on a daily basis as of 1 p.m. everyday.

Tags: Broadcast, Daily Basis, Hand Column, July 14, Line In The Sand, Market Behaviour, Marketclub, P500, Rally, S Market
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Stock Markets on a Razor’s Edge

Wednesday, January 19th, 2011

The post below is a quest contribution by Alexander Elder, trader and author of many books, including “Trading for a living” and “Come into my trading room”.

The market keeps going up, unstoppable like an Energizer bunny. As you may know, I consider the New High-New Low Index to be one of the best if not the best leading indicator of the stock market. January is a good time to review what this indicator is saying right now.

Whenever I look at a chart, I like to begin at its left edge and trace market developments through time – eventually arriving at the hard right edge where we must make our trading decisions.

Looking at this weekly chart of the S&P500 with a 26-week EMA and weekly NH-NL, we can easily recognize several superb signals:

• In 2007 the market broke out to a new high, while NH-NL traced a lower peak. When the market fell back below its breakout line, that breakout was marked as a false breakout. That, plus the NH-NL divergence, gave a strong sell signal.
• The 2008 – 2009 stock market bottom is the one for the history books. The powerful bullish divergence, coupled with a false downside breakout gave a screaming buy signal to anyone whose ears were open.
• In October 2009 the weekly NH-NL rose above 2,500. It exceeds this level only during bull markets. This crossover called for a bull market of several years’ duration.

Of course, no bull market rises in a straight line. At the right edge of this chart we see a bearish divergence of weekly NH-NL. It shows that the bullish leadership of the current rally is growing weaker – a danger sign. Let us now look at the daily chart …

The daily chart of NH-NL shows several troubling developments:

• While the S&P is some 70 points higher today than it was in October 2010, the NH-NL is almost 70% below its October peak.
• There is a severe bearish divergence of daily NH-NL, with three lower peaks
• Last week saw a sudden expansion of New Lows. Up until now the New Lows remained rather flat, the action was in the New Highs, but now the New Lows are coming to life – a sign of downside leadership.

In summary, the US stock market appears poised on a razor’s edge. While the trend is clearly up, both on weekly and daily charts, the NH-NL is flashing red warning signs. It reminds us that bull markets do not move in straight lines, and this uptrend is ready for a pause.

What is a trader or investor to do? The most important step in this situation is to protect your profits on long positions. Every long position you have requires a hard stop (a real order, not a mental stop). The only exception – those stocks that you plan to hold for a lifetime. More adventurous traders may begin scanning the short side of the market.

Source: Alexander Elder, elder.com, January 18, 2010.

Tags: Alexander Elder, Bull Markets, Crossover, Danger Sign, Divergence, Downside, Ema, Energizer Bunny, False Breakout, History Books, Leading Indicator, Left Edge, Lows, Market Bottom, Market Developments, P500, Stock Market, Stock Markets, Straight Line, Sudden Expansion
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Does QE = Quantitative Exuberance?

Monday, October 25th, 2010

Does QE = Quantitative Exuberance?

David Andrews CFA, Private Client Strategist, Richardson GMP

Unless you have been living in a bunker deep underground for the past month or so, you are likely aware of the Federal Reserve’s well advertized intention to become a large buyer of U.S. assets in the near future. Quantitative Easing has put a floor under riskier assets (like stocks and commodities) and QE expectations have supported the upward price surge of the past six weeks.

What you may be less certain about is how much ‘buying’ the Fed will do and what has already been ‘priced in’ to riskier assets like stocks, commodities, and precious metals? The Fed’s intentions to boost asset prices and increase the pace of re-employment are well known but how much stimulus will be required to achieve these goals? The common thinking is somewhere between $800 million and $1 trillion will be spent over the coming twelve months. Japan’s tepid QE in the 90s brought about poor results suggesting the Fed will be rather aggressive when it does start buying.

How much has the stock market priced in? Credit Suisse recently estimated that for every $100 million of QE, the S&P500 goes up by 9 points which would suggest 70-90 points of the current S&P500 level (1 ,1 83) can be attributed to anticipation of large scale asset purchases by the Federal Reserve. As perverse as it sounds a self-recovering economy could effectively weigh on a stock market already hooked on the notion of stimulus.

September U.S. economic data was again mixed with September housing starts and the weekly jobless claims better than expected, but fewer building permits were issued and industrial production weakened in September. The “U.S. dollar up, risk asset prices down” trade was popular in what turned out to be a choppy trading week. The commodities-heavy S&P/TSX was volatile but finished higher, largely taking its cues from gyrations of the U.S. dollar. The S&P500 finished this week slightly higher but rode a seesaw range of 1 ,1 59-1 ,1 89 to get there. Perhaps another bright sign for stock market investors was that both the NASDAQ and the S&P500 went through a Golden Cross; where the 50 day moving average crosses above the 200 day moving average. Historically, the market performs better for 3-6 months following a Golden Cross.

G7 Shrinkage

The ‘Group of Seven’ will see its share of the world economy fall below 50% by 2012 confirming the shift of economic power and potential investment market returns to the developing world. MSCI Emerging is up 1 2% year to date; almost twice the return of the S&P500. Getting coordinated action among the G7 was a challenge, but the G20 is the new forum for global cooperation. G20 Lite takes place this weekend where currency manipulation and trade deficits will be discussed.

Looking Forward

The last week of October will again be a busy one. Over the weekend, the G20 will be meeting in South Korea to discuss trade and currency imbalances that could jeopardize the global economic recovery. Countries from China to the U.S. are accused of relying on artificially weak exchange rates to spur growth. Participants have so far balked at the idea of capping trade surpluses and deficits so it is unlikely to result in any significant policy changes. At least they are talking…

Earnings Season continues to roll with many bellwether Canadian companies reporting their quarterly results. Last week, saw a flurry of companies report mostly better than expected results. Key notables included strong results by Apple, IBM, Citigroup, and Goldman Sachs. Earnings Season to this point has been better than expected with 85% of companies beating expectations. We look for that to continue in the week ahead with several consumer and energy companies due to report.

Investors will get an updated look at the state of the U.S. housing market with existing and new home sales as well as CaseShiller price data early in the week. Uncertainty over the Foreclosure uncertainty, overhang of inventory, and little Consumer confidence (an offshoot of housing and employment) does not bode well for U.S. real estate.

Copyright (c) Richardson GMP

Tags: Asset Prices, Asset Purchases, Building Permits, Canadian Market, China, Commodities, Credit Suisse, Cues, Deep Underground, Economic Data, Exuberance, Federal Reserve, Gyrations, P500, precious metals, Price Surge, Private Client, Qe, Stimulus, Stock Market, Stocks And Commodities, Strategist, Weekly Jobless Claims
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David Einhorn: “We Have Avoided The Volatility Of The Schizophrenic Market”

Monday, July 19th, 2010

From Greenlight’s Q2 Letter, courtesy of Dealbreaker.

“The S&P500 fell about 7% by early February. Then, it went straight up, rising about 16% by late April only to give back all those gains and a bit more by the end of June. Just after the economy finally appeared to be recovering earlier this year, a series of weak economic data have put the recovery into question. What will happen next? We have no idea. We have maintained a conservative and defensive portfolio, with a small net long position throughout and have almost entirely avoided the volatility of the schizophrenic market…We made some gains on our macro positions (most notably gold, which appreciated from $1,113 to $1,244 per ounce during the quarter).” – David Einhorn

Full letter:

Greenlight Einhorn

Tags: Data Recovery, David Einhorn, Economic Data, Economy, Gold, Greenlight, Ounce, P500, Q2, Schizophrenic Market, Volatility
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