Some hedge funds are using leverage to boost returns. They’re doing it with bonds. With bond yields so low, it’s one way to meet the demands of their clients. But I wonder whether their clients understand the risk that they’re taking. After all, a lot of the beneficiaries are retired teachers who can’t afford to lose money to reckless investment decisions. I read one strategy that uses two-to-one leverage with the bond side of the portfolio. That’s great when interest rates go down. Remember, bond prices move in the opposite direction from interest rates. But it will be ugly when interest … [Read more...]
Archives for January 2013
King Krugman: If Paul Were King
King Paul the I of New York lays out his dream that government revenues should be 40% of GDP. For a historical perspective, take a gander at the chart below. You'll see in blue the historic percentage of GDP received as revenue by the federal government (Source: WhiteHouse.gov) and in red you'll see King Krugman's new baseline. … [Read more...]
What We’re Reading 1-25-13
Fed’s Bond Buying Pushes Assets to Record $3 Trillion, Joshua Zumbrun, Bloomberg Want Better Roads? Kill the Gas Tax, Rohit T. Aggarwala, Bloomberg How Fed Learned to Stop Worrying and Love Zero, Caroline Baum, Bloomberg Rising House Prices, Not Stocks, Make People Feel Wealthy, Michael S. Derby, Wall Street Journal Obama May Help Democrats’ Future in Shift to FDR, Amity Shlaes, Bloomberg … [Read more...]
S&P Ripe for a Correction
After rocketing upward by 4.8% already in the new year, the S&P 500 is entering extreme overbought territory. On the chart below you can see the ratio of the S&P 500 price index to its 50 day moving average. The ratio is nearing 1.05, traditionally a turning point. What’s driving equity prices higher? It’s not earnings. Trailing P/E ratios of the S&P are increasing quickly. Is the market expecting faster growth in the future? Forward P/E ratios are increasing too, so that’s not the root cause. More likely, the cause is that the massive amounts of high powered money … [Read more...]
Municipal Bond Trap
Quite a few people have asked me about investing in municipal bonds lately. Now that the fiscal cliff is in the rearview mirror and the debt ceiling is dead ahead, more tax increases can’t be too far off. But either way, I don’t like municipal bonds. The downside risk you’re taking for the yield isn’t enough for me. The few municipal bonds that I might consider would be in states that don’t have any state income tax, so buying them defeats the purpose of tax-free investing at the state level. Then, there are the states that really need the money. They are not what I’d consider a good … [Read more...]
Election Year Buzz Turns into Hangover
Surprise, surprise, consumer sentiment in America reached its post-recession high in November, just as politicians were sending Americans to bed each night with dreams of jobs and prosperity on the horizon. Meanwhile, Americans supporting incumbents in 2012 told themselves everything was OK to justify voting for their candidates. That false positive sentiment bled through to surveys as expressed deluded hope. Now that those heady days are over, sentiment is based deeper in the reality that taxes have gone up on 77% of Americans, job growth remains anemic, gas prices remain elevated, and … [Read more...]
Ready, Fire, Aim!
When asked about the effectiveness of quantitative easing at a University of Michigan forum recently, Federal Reserve Chairman Ben Bernanke gave a curious and terrifying answer. It was curious for how forthright it was. It was terrifying because if the Fed already knows the answer, then their actions seem all the more unjustified. When asked about the program’s effectiveness Bernanke said “So far, we think we are getting some effect, it is kind of early. We are going to continue to assess how effective [the program is] because it is possible that as you move through time and the situation … [Read more...]
What We’re Reading 1-18-13
Gold, Greenbacks and Inflation: A History and a Warning, Paul Moreno, Wall Street Journal German economy slows sharply, Michael Steen, Financial Times ObamaCare's Health-Insurance Sticker Shock, Matthews and Litow, Wall Street Journal Deficits, Debt and the Fate of the Dollar, George Melloan, Wall Street Journal Why a Debt-Ceiling Fight Is Good for the Country, Ramesh Ponnuru, Bloomberg If We Can't Kill Farm Subsidies, What Can We Kill?, Robert Samuelson, Real Clear Politics Beware the ‘central bank put’, Mohamed El-Erian, Financial Times Good news about real estate: Home … [Read more...]
Stocks Soar: Don’t Miss the Boat
It seems Mr. Bernanke’s bludgeoning of individual investors is finally starting to pay dividends. Four years of pinning short-term interest rates at zero with a promise to hold them at zero for another two years and a commitment to buy massive quantities of long-term Treasuries and mortgage backed securities ad infinitum has put stocks back in favor with individual investors, for all of the wrong reasons of course. Nonetheless individuals are buying stocks at the fastest pace in years. The Investment Company Institute reported net equity mutual fund inflows of almost $15 billion for the … [Read more...]
Fiscal Cliff Winners and Losers
It’s nice to have options. Before knowing the fiscal cliff outcome and before taking a trip to North Korea, Google Chairman Eric Schmidt sold 153,000 shares of company stock for $108 million, according to a Wall Street Journal review of securities filings. Starbucks Chairman Howard Schultz exercised two million stock options for $107 million. Robert Kauffman, co-founder of hedge fund Fortress Investment Group, sold $180 million in stock back to the firm partly because of concerns about higher tax rates, saying, “It was more that the current certainty, with rates relatively attractive, was a … [Read more...]