November 25, 2009 This is a truly ghastly environment for yield-conscious investors. Three-month T-bills yield 0.03%, two-year T-notes 0.73%, five-year T-notes 2.09%, and ten-year T-notes a whopping 3.3%. Who is locking up money for ten years at a 3.3% yield? The Fed’s balance sheet is bloated with reserves, and the federal government is running massive budget deficits. Isn’t this inflationary? You betcha. But the combination of an extremely steep yield curve and the Federal Reserve’s promise to leave the fed funds rate near zero for an extended period of time has created a massive carry … [Read more...]
Archives for November 2009
Investment Success
November 20, 2009 In 1981, the Dow Jones Industrial Average ended at 875, 10% lower than its year-end value in 1965. During this wretched 16-year period, blue-chip stocks went nowhere. This was the ice age for stock prices. High and rising inflation and interest rates and big government were to blame. This sounds eerily similar to America’s prospects today. Savvy investors have successfully navigated long dry spells in the stock market for decades. What is their secret? Buy the high yielders. My chart compares the hypothetical growth of a $10,000 investment in the Dow Jones Industrial … [Read more...]
A Canary in the Coal Mine?
The Citigroup Economic Surprise Index (CESI) accurately forecasted a 60%-plus rally in the stock market in early 2009. The CESI is an indicator designed to measure whether economic data is coming in better or worse than the average analyst’s expectations. A rising index indicates that economic data is coming in better than expected, whereas a falling index indicates that economic data is coming in worse than expected. The theory is that the consensus expectations for economic data are priced into the market. So then, when new economic data turns out to be better than the market’s expectations, … [Read more...]
The Irrational Mr. Mishkin
November 13, 2009 In the November 9 Financial Times, Frederic Mishkin, a former Federal Reserve governor, proved that the Fed has learned absolutely nothing from its Greenspan-era forays into dangerously low interest rates. Mr. Mishkin claims in the title of his editorial that “Not all bubbles present a risk to the economy.” I’m not sure which word Mr. Mishkin is misunderstanding: “bubbles,” “risk,” or “economy.” Mishkin goes on to make a lame distinction between what he calls “credit boom bubbles,” like the one that led to the current worldwide recession, and a more benign variety that he … [Read more...]
Top 10 Mistakes #1
November 6, 2009 The #1 item on my list of the top 10 mistakes investors make is taking a casual go-it-alone approach to investing. Wall Street is dominated by PhDs, MBAs, CFAs, CPAs, attorneys, and other highly trained professionals who spend the vast majority of their waking hours looking for an edge. You have to recognize that the person on the other side of every trade you place may be more informed or knowledgeable than you. My staff and I spend our entire days reading about and analyzing companies, economies, and the financial markets. Individual investors allocating capital on a … [Read more...]
Blowing Asset Bubbles
At the Fed's last meeting, Bernanke and company decided to keep the monetary throttle pegged. Apparently, the massive real-estate bubble inflated by an ultra-loose monetary policy that almost caused a collapse of the global financial system hasn't changed the Fed's view on asset price inflation. The Fed continues to cite subdued inflation and low rates of resource utilization as reasons to maintain its ultra-loose monetary policy. Bernanke and company are, of course, completely ignoring asset prices. Gold is at a new all-time high, oil is up 155% from its low, the S&P 500 is up 57% from … [Read more...]
Class A American Fund Nightmare
My mother is always finding things because she pays attention. And she's passing that skill along to my kids. After a recent walk, they came back cheering about finding $2. It may as well have been $2,000. You too may be a person who knows how it pays to pay attention, and if so, you've probably taught that lesson to someone you love. Here's another lesson for you to teach, from a box titled "How the Largest Mutual Funds Did" in The WSJ's "Money and Investing" section. The box illustrates how most investors are sold what they own, how little attention they pay to fees, and how a ratings … [Read more...]