On the heels of creditors of Greek debt getting a raw deal, the March 10 WSJ issue disucssed how Dynegy Holdings' creditors also got the short shrift. the parent company Dynegy transferred itssubsidiary Dynegy Holdings' coal powered plants assets to the parent company in September, just ahead of the holding company's bankruptcy filings. The $4B owed to the holding company's bondholders were left without any assets to lay claim on!Once the parent co. put the holding co. in bankruptcy court, it hurt the bondholders, while enriched the parent company's shareholders, who suddenly were owners of the holding company's assets! These shareholders include Carl Icahn and hendge fund Seeneca Capital, both coinceidentally on the parent company's board, withIcahn having two seats! Surprise, surprise that this upside down move was done in the shareholders' favor. In normal bankruptcy, the bondholders get paid first, and any left over money goes to shareholders. Not here!
Mr. Susheel Kirpalani, a bankruptcy court examiner, found the board breached its fiduciary duty. Now this asset transfet may be reversed. The surprises keep on coming.
Sunsay Wealthtrack (Consuelo Mack host) guest was Robert Kessler. He is a US Treasury bull.
Develeraging going on everywhere. When deleveraging occurs, assets are sold - keeps lid on price - so low inflation. Treasuries are good in low inflation environment. Treasury returns inversely corrleate dwith other assets. Hence folks should have a fixed portion of their assets in Treasuries. China, Japan and UK all own US Treasuries. Why? because
1) liquid
2) have been making money
3) know value all the time
We are in deflationary environment. So if you buy a 10-yr US Treasury bond at 2% yield, it could go to 1% and you get an annualized return of 9% (over 10 years?). And the worst it will do is 2% return (simple interest I think - treasury yield does not compound).
Why large cap stocks wont go up - They have lots of cash. Their earnings have gone up. But unemployment is high. Private investers have not yet deleveraged. So huge disparity - cpmpanies have money, people dont. So who will buy the goods? Margin will go down if people stop buying goods.
China has excess amt of capacity - so demand down everywhere, supply up everywhere.
Buy the longest Treasury possible, and sit back and wait for yield to go down.
All of above was Kessler's opinion. My 2 paisa:
World economy is slowly picking up. Greek debt issue being resolved - creditors receiving 52% of money back. The bond ship has sailed. Bonds have spanked stocks over last 12 years. Too late to get in now. Just plain cash is safer.
^ In his enthusiasm to paint a bearish case for stocks, Mr. Kessler added:
Japan has not recovered to its ~ 1984 high in 28 years - so from 2008, we have a long way to go before we recover.
My 2 paisa - wrong anaolgy - Japan P/E was ~ 120 in 1985! and US market is below 2000 levels - so at least he should have used 12 years rather than 3.5 years.
Then he adds - US market has gone nowehere in 12 years - so stocks are risky.
Mu 2 paisa - 12 years ago, US P/e was ~ 40-50 - so of course it was dangerous then.
He criticized Buffett for saying he would buy IBM at ny price. That good stocks can be bought at any price and held for the long term.
Buffett said no such thing. in fact, he has stated that good businesses somethimes can be good stocks if available at right price. And that he can wait as long as it takes for the stock price to reach fair levels for him to pick it up.
Statying on the theme that stocks are dangerous, Monday March 12 WSJ states - over last 30 yearperiod, bonds have beaten stocks. (yes they have 11.5 vs 10.8% - a narrow margin).
Since 1861, in other 30 year periods, stocks have always beaten bonds. But the Journal pooh poohs it - saying sample size too small! Only 4 other 30 year period. Which is kind of ridiculous, IMO. You can actually have 150 rolling 30 year periods, and the case can be made strongly for stocks vs bonds.
As Nasdaq approcahes 3000, WSJ March 12 compared it with Nasdaq of year 2000. Now Nasdaq companies have lots more cash, issue more bonds (10 times more), have P/E of 15.5 (vs 100 in 2000!), more of them pay dividends.
Which essentially reinforces the ultimate truth in investing - valuations matter. In the long term, as someone said, the market is a weighing machine (short term it is speculation).
US bamks for the most part passed the Stress tests. No banks forced to raise capital. 15 out of 19 banks allowed to give dividends. On average, the Tier1 ratio, a measure of balance sheet strength, have risen by 81% since 2009.
Update on Greek bonds - the haircut for bondholders was 75%, not 51%
March 14 WSJ
The "Operation Twist" bond buying program by theFed has left long term rates very low. With ecnoomy gathering steam, this might trigger inflation. But anks are encouraged to hold on to more govt bonds - thus this brings borrowing costs down for everyone. Take from savers and give to thise who take on debt. Bond traders call this financial repression. This means bond investors will have to live with the "idea of return free risj".
March 13, 2012.
This is in start contrast to Mr. Kessler (post 22) who predicts long term US treasury is the place to be, with rates projected to go from 2% to 1%.
Just happened to look at an old issue (Sep 11 2010) of WSJ - Jaso Zweig. Very good column.
Either Uncle Sam's borrowing binge fill flood system with money - so 1970s style inflation. Or
The debt with accompanying asset liquidation (to pay off debt) will paralyze economy and cause Japan like deflation.
Jason's wise advice - do not overhaul your portfolio based on your guess of the outcome. Why? Extremely difficult to predict outome of inflation or deflation. In 1979, as US inflation peaked, people thought it will last for years - they were wrong. In 1989, folks thought Japanese stocks and real estate would continue to boom. They were wrong.
Bottom line - which of this is more damaging to you - inflation or deflation. He cooins this term "meflation" -
^ the impact of change in cost of living on you based on your circumstance.
If you are young (30 yrs) with good future, good job, and a fixed mortgage rate for house, with stock-heavy portfolio, moderate inflation is good for you! Your salary will rise with inflation, you pay off mortgage with cheaper dollars (Rupees), your home value increases, your stocks rise with inflation. Deflation is worse for you - could lose your job, home value down, pay mortgage with more expensive dollars.
If you are a retiree with fixed Soc security, you want dflation.
So he is saying, stop wasting your time in guessing economic outcomes, plan per your circumstances. Only you know which "-flation you should fear".
^ UK debt approaching 90% of GDP - so they are trying all sorts of stunts. Apparently, this is not the longest maturity bonds. In 1853, the oldest gilt outstanding, a 2.5% perpetual bond was issued! (What is with the 2.5%?) Mexico, Coca-Cola and Walt Disney all have issued 100-yr bonds!
As mentioned in post 27, the idea of "return free risk" is becoming a reality. US 10-yr Treasury yields jumped from 2.03% to 2.276% (Sorry Mr. Kessler - yield going other way). The fact that the banks passed the stress tests was the catalyst, plus the economy looking better than 4 months ago. The economic data and stock market were saying one thing, and the bond market (with low yields) were saying the opposite. My addition - looks like this time, for a change, the bond market was wrong.)
Talking of stress tests, apparantly, the Tier 1 ratio used "Risk weighted measures of assets" in the denominator, thus making the number higher. If the total assets is used in denominator, the equity to asset ratio is around 2.9% for Citigroup and 3.4% for Morgan Stanley. In other words, the leverage for Citi is 34, or its assets/equity is 34 (so debt is 33, equity is 1). Now that is still dangerous territory, apparently similar to pre-crisis levels.
OK - it is that time of the week that the multitude of financial junkies at Gupshup have been eagerly awaiting - I can literally hear the heart beat faster - so here we go - highlights from Sat Mar 17 issue
Jason Zweig: ~ 15% of money into all stock/bond funds has gone into junk bond funds (junk is another name for high yield - which are riskier issues). Junk bond prices have ben driven up by investors chasing yield - up 5% this year. While junk as a class may be getting riskier, within junk, there are two classes of high yield bonds- one riskier than the other.
Bonds that are in the indexes that high yield ETFs use have risen more than those outside these benchmarks. Last year, these bonds in the index beat those outside by 1% (even though no difference in quality). Why? Because junk was up last year. But in summer, when money flow out of these ETFs, these same bonds underperformed their cousins by 3%. Also, it was found that when these bonds traded at a premium to those outside the index, the bond ETFs that owned them also taded at a premium to the value of these bonds. So you end up paying double premium! Add to that 0.5% expense ratio, and you are behind by 2% before the game starts.
The corollary is if the ETFs are trading at a discount to their underlying assets, the underlying assets themselves are trading at a discount to their cousins.
So buy these ETFs when they are trading at a tdiscount to their underlying assets. How do you find out if this is the case? Go to Yahoo Finance and enter "-IV" after the ETF's ticket symbol.
My 2 paisa - this is not a recomendation for people to go out and buy or sell junk ETFs. Just a pointer that if you are interested in this asset class, check the above metric first. As always, buyer beware.
While I was going to stop with one post, my inbox has been inundated with fictitious requests for additional nuggets. So here we go.
In January, and apple's price was up 6.7% year over year, while the Apple computer price was down 11.8% (normalized on its capabilities). Friday Mar 16 CPI numbers expected at only 2.9%, while core inflation ex-food and energy is expected to be 2.2%.
(As mentioned earier) In recent days, th eyirled on US treasury has risen - in anticipation of either inflation or that the Fed may not aggressively buy bonds (and stoke inflation). If food and energy prices remain high, the yirled on 10-yr bonds, now -0.8% when adjusted for inflation, could spike.
Mr. Kessler appears to be off track on his 1% yield prediction.
It is that time again - Saturday - when ardent followers of this column wait eagerly for the Saturday WSJ "nuggets". Unfortunatlely, away from home this weekend. But I do have some very interesting piece by Burton Malkiel (Author Random Walk down wall street" to appease the crowd. So here goes:
What should a prudent investor do now? Nonfarm payrolls have increased by 250000 per month over last quarter. US banks have passed stress test. Consumer confidence is up. But Euro zone getting worse, housing sector has noot yet turned for the better, economy growing at 2% rather than 3-4%. So what to do? From worst to best :
1) Bonds expensive - 10 yr US treasury at 2.25% - barely keeps pace with inflation. Could lose money if you have to sell in next couple of years. From 1940s to 1980, bonds were a terible place to be - dont forget that. (my 2 paisa - interest rates probably rose in that period, bringing pprice down - so buying in 1980 would have been good).
Equities - still attractive - 2% yield + 5% growth of earnings = 7% expected. P/E based on Schiller 10-yr earnings is expensice, but last 10 yr earnings does not reflect earnning potential going forward.
For power point generation, split this in 2 slides.
Emerging market equities 20% cheaper on P/E basies, normally are 20% more expensive. Younger (Shafid Afridi is only 32 years old), faster growth, better balance sheet.
Real estate - housing affordability never been more attractive based on price and rates. It willl be "one of the best investments over next decade).
If you are in stock market, buy low cost index funds - especially in the 7% retrun anticipated, cost becomes big factor.
In response to the multitudes who protested, went out and got the Sat WSJ issue (OK no one needs to know the hotel had a WSJ issue at their restaurant during breakfast). So here we go.
Next year, the top rate on dividens is expeced to rise to 39.6%. Add 3.8% tax as part of 2009 health care overhaul, the top tax rate jumps to 43.4%! This may result in drop of those divident paying stocks in anticipation. So should investors sell those stocks? No, according to March 24 issue (Jack Hough). Too risky - instead, buy stocks with growing dividend rather than hgh yields. Also this top rate only applies to the very rich - so most investors wont have to pay this rate. Plus 401K pension funds not affected.
Also studies have shown dividend paying stock performance not really tied to tax situation. Buy a dividend growth fund and maybe a total mkt index fund - keep it simple.
interesting..