3 High Yields with Emerging Market Growth

October 15th, 2010

3 High Yields with Emerging Market Growth

Emerging markets have certainly been the place to be. In the past 10 years, the iShares MSCI Emerging Markets Index (NYSE: EEM) has returned an astounding average of +21.5% a year, compared to +5.1% for the S&P 500.

However, this outperformance has been lost on many dividend investors who have likely considered emerging markets an exotic indulgence of growth investors. But emerging markets are an increasing force on the world stage that can't be ignored — even by income investors.

These nations represent 40% of the world's population and already control two thirds of its industrial output. And their influence is growing. The International Monetary Fund (IMF) says emerging markets accounted for nearly all of the world's growth last year, and they're forecasted to grow at nearly three times the pace of the rest of the world in 2010.

Investors don't normally associate dividends with emerging markets. Many companies in these fast growing economies have used excess cash to fund expansions rather than pay dividends in the past. But things are changing.

According to Citigroup, emerging market stocks will pay about 2.6% in dividends on average this year, compared to an average of about 2.7% from stocks of companies in the United States and Western Europe. One UBS strategist recently said that emerging market dividends could grow an average of +15.4% this year, and +17.7% in 2011.

Superior growth in emerging markets, combined with rising dividends, has led to a unique situation with emerging market dividend-paying stocks. Some of these stocks are poised to not only pay superior dividends to many U.S. stocks, but they also offer earnings growth and capital appreciation.

Here are a few stocks worth a look.

1. China Nepstar (NYSE: NPD), as the largest retail drugstore in China, is poised to profit from China's rapidly growing middle class. The company sells items you might expect a drug store to sell — prescription drugs, over-the-counter drugs, soap, razors and toilet paper. It operates more than 2,500 stores in 64 cities across China. The stores are generally located in the very heart of Chinese middle class growth — well established residential communities in major Chinese cities.

The size of this middle class was estimated to have grown to about 80 million people in the middle of this decade. Looking ahead, the IMF has estimated this number will expand to a mind-boggling 700 million by 2020. While the vast majority of this middle class is a long way away from affording fancy cars, they can buy soap and medicine.

The stock started paying dividends in 2008, and the last regular dividend, paid in May, was $0.28 per ADR. The company also paid a special $1.50 dividend in December. The combined dividends give the stock an astounding 40% trailing yield. However, the special dividend can't be counted on in the future, but the regular dividend still translates to a solid 6.4% yield.

2. Philippine Long Distance Telephone Co. (NYSE: PHI) is the largest telecom provider in the Philippines, serving more than 60% of the nation's fixed lines and about 55% of the cellular market. While telecom doesn't offer that much growth, the Philippines has been a hot market.

The Philippine economy grew at a whopping +7.9% in the second quarter, compared to +1.6% growth in the United States. Companies on the Philippine stock exchange have seen earnings growth of +23% this year, and corporate return on equity and dividends are at all-time highs. The Philippine market has soared +32% so far this year and has been the second best performing Asian market.

The stock pays two dividends a year that have totaled $4.80 per American Depository Share (ADS) — equating to a yield of about 7.5%. The company has a strong history of raising dividend payments — dividends per ADS have risen more than +600% since 2005. According to Thomson Reuters, analysts' consensus expectations are for the telecom to grow net income by +8% in 2010.

3. CPFL Energia SA (NYSE: CPL) is the largest private power utility in Brazil, with a 13% share of Brazil's power distribution market, and one of the largest companies in South America. The company primarily serves Brazil's wealthiest state, Sao Paulo.

Earnings growth for CPFL is tied to increases in overall energy usage resulting from a growing national economy, as well as acquisitions. And the Brazilian economy has been on fire. First quarter GDP grow an astounding +9%, and the IMF estimates that Brazilian GDP will grow an average +7.1% for 2010.

CPFL pays two dividends per year — in May and October. The May dividend was $2.30 per share. The October dividend has already been declared and is estimated to be (depending on currency exchange rates) $2.74 per share. Total 2010 dividends of about $5.04 will translate to a solid 6.4% yield.

Action to Take –>The world of dividend paying stocks is expanding. While emerging markets are still generally riskier places to invest, they are less so than they've been in the past. These and other companies represent a solid way for dividend investors to add more of a growth element to the portfolio. All three companies are selling at reasonable valuations and can be purchased at current prices.


– Tom Hutchinson

P.S. Investing in dividend-paying stocks is one of the most profitable ways to beat the market. For more on stable stocks that will grow your money with ever-increasing dividends, see Carla Pasternak's latest course, The 5 Rules Every Income Investor Has to Know.

Tom has a 15-year history as a financial advisor with UBS constructing investment portfolios. Tom's background includes a NASD Series 7 and 63 certifications.

Uncategorized

The Best Commodity Stock to Own

October 15th, 2010

The Best Commodity Stock to Own

In many races, the fabled tortoise always beats the hare. That's the lesson learned by diversified miner Rio Tinto (NYSE: RIO), which tried to race ahead, stumbled badly, and is now running the race at a more moderate and safer pace.

At the height of the commodities boom in 2007 and 2008, Rio's executives were enraptured by a stock price that had tripled and abandoned their historical moderate growth plans by making a $40 billion bet on Alcan to become a massive player in the aluminum market. The deal made strategic sense. The price did not. And when credit markets eventually swooned, Rio Tinto nearly choked on its massive debt load, sending shares down more than -85% from $140 in early 2008 to just $16 in early 2009. Shares have since rebounded to $66.

That stumble provided a valuable lesson. Rio has since pared debt and is more content to simply grow in line with the broader commodities market. The company now has a much better reputation on Wall Street, thanks to the relative youth of its mines and its low-cost operations. The company's main focus is iron ore mining (54% of revenue), aluminum (21%), copper (10%) and coal (10%). That kind of diversity means Rio is not as beholden to pure play miners such as copper producer Freeport McMoran (NYSE: FCX).

Right now, Rio appears to be firing on all cylinders, as commodity prices have rebounded from the 2009 lows. Just-released quarterly results came in slightly ahead of forecasts, pushing the stock to a fresh 52-week high. Yet shares remain at less than half of their early 2008 peak, and though it may be several years before Rio gets there, the rebounding global economy could propel results back to previous peaks.

That's not to suggest that commodity prices will again be in a bubble. They'll likely fall short of those 2008 peaks, but Rio's rising production is making up for lower prices. Rio's net income should rise from $6.3 billion in 2009 to more than $13 billion this year. And analysts think profits could top $16 billion next year, assuming commodity prices don't fall.

Judicious use of debt leverage
As noted above, Rio has been working off debt after getting carried away in 2008. Yet the company still employs enough debt to generate impressive returns on its equity base. The company is on track to generate a return on equity of more than +25% this year, thanks to EBITDA margins approaching 45%.
Yet management is more careful these days not to employ too much debt leverage, just in case the global economy slumps and commodity prices fall. Nevertheless, investors should know that shares would take a pretty serious hit if China's voracious appetite for commodities comes to a halt. That's not an expected scenario, but some investors such as well-known short-seller James Chanos think China is in a bubble and headed for a crash. He's in the minority with that view, but it's worth noting.

Action to Take –> Many investors try to focus on the best commodity play. Gold and copper have been the strong plays in recent quarters. [Read our recent takes on gold here and copper here]

But a broad-based approach to commodities is the best bet, and Rio Tinto offers almost all of the diversification you need in one place. Despite the recent run, shares look very reasonable at around eight times projected profits. That multiple is unlikely to expand too much further, perhaps to 10 or 11, representing +25% to +35% upside. To re-visit the stock's 2008 peak of around $140, we'd need to see a clear resumption of global economic growth, which would push commodity prices up. That's a possibility, but not something you should bet on. Instead, look at Rio as a great long-term holding to make sure your portfolio has exposure to commodities.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
The Best Commodity Stock to Own

Read more here:
The Best Commodity Stock to Own

Commodities, Uncategorized

The Best Commodity Stock to Own

October 15th, 2010

The Best Commodity Stock to Own

In many races, the fabled tortoise always beats the hare. That's the lesson learned by diversified miner Rio Tinto (NYSE: RIO), which tried to race ahead, stumbled badly, and is now running the race at a more moderate and safer pace.

At the height of the commodities boom in 2007 and 2008, Rio's executives were enraptured by a stock price that had tripled and abandoned their historical moderate growth plans by making a $40 billion bet on Alcan to become a massive player in the aluminum market. The deal made strategic sense. The price did not. And when credit markets eventually swooned, Rio Tinto nearly choked on its massive debt load, sending shares down more than -85% from $140 in early 2008 to just $16 in early 2009. Shares have since rebounded to $66.

That stumble provided a valuable lesson. Rio has since pared debt and is more content to simply grow in line with the broader commodities market. The company now has a much better reputation on Wall Street, thanks to the relative youth of its mines and its low-cost operations. The company's main focus is iron ore mining (54% of revenue), aluminum (21%), copper (10%) and coal (10%). That kind of diversity means Rio is not as beholden to pure play miners such as copper producer Freeport McMoran (NYSE: FCX).

Right now, Rio appears to be firing on all cylinders, as commodity prices have rebounded from the 2009 lows. Just-released quarterly results came in slightly ahead of forecasts, pushing the stock to a fresh 52-week high. Yet shares remain at less than half of their early 2008 peak, and though it may be several years before Rio gets there, the rebounding global economy could propel results back to previous peaks.

That's not to suggest that commodity prices will again be in a bubble. They'll likely fall short of those 2008 peaks, but Rio's rising production is making up for lower prices. Rio's net income should rise from $6.3 billion in 2009 to more than $13 billion this year. And analysts think profits could top $16 billion next year, assuming commodity prices don't fall.

Judicious use of debt leverage
As noted above, Rio has been working off debt after getting carried away in 2008. Yet the company still employs enough debt to generate impressive returns on its equity base. The company is on track to generate a return on equity of more than +25% this year, thanks to EBITDA margins approaching 45%.
Yet management is more careful these days not to employ too much debt leverage, just in case the global economy slumps and commodity prices fall. Nevertheless, investors should know that shares would take a pretty serious hit if China's voracious appetite for commodities comes to a halt. That's not an expected scenario, but some investors such as well-known short-seller James Chanos think China is in a bubble and headed for a crash. He's in the minority with that view, but it's worth noting.

Action to Take –> Many investors try to focus on the best commodity play. Gold and copper have been the strong plays in recent quarters. [Read our recent takes on gold here and copper here]

But a broad-based approach to commodities is the best bet, and Rio Tinto offers almost all of the diversification you need in one place. Despite the recent run, shares look very reasonable at around eight times projected profits. That multiple is unlikely to expand too much further, perhaps to 10 or 11, representing +25% to +35% upside. To re-visit the stock's 2008 peak of around $140, we'd need to see a clear resumption of global economic growth, which would push commodity prices up. That's a possibility, but not something you should bet on. Instead, look at Rio as a great long-term holding to make sure your portfolio has exposure to commodities.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
The Best Commodity Stock to Own

Read more here:
The Best Commodity Stock to Own

Commodities, Uncategorized

Why “Credible Programs” at the Fed are Anything But

October 14th, 2010

My stomach was hurting, so I decided to take a little time off and soothe the old midsection with a few medicinal brews and a dose of pizza. The reason that my stomach hurt was because I had just read the stupidest economic essay, which was, unbelievably, penned by another lackluster university professor, and surprisingly printed by The Financial Times newspaper.

The guy’s name is Michael Woodford, of Columbia University, and whose execrable and totally idiotic piece is titled “Bernanke Needs Inflation for QE2 to Sail.”

He writes, unbelievably, “The Fed should allow a one-time only inflation increase, with a plan to control it when the economy recovers.” Hahahaha!

Hahahaha! Why am I laughing so hard that I am doubled over and actually gagging up pieces of stomach lining? Why? I don’t know where to start! Hahaha!

Wiping the tears of laughter from my eyes, let’s just begin where he began: “The Fed should allow a one-time only inflation increase”! Hahaha! It is so ridiculous to think that the Fed can produce a “one-time” inflation, when the fact is that the Fed has already engineered 50 years of constant inflation, sometimes simmering and occasionally roaring inflation! A “one-time” inflation! Hahahaha!

I can hardly breathe from all this laughing, but He-Man Mogambo (HMM) gathers his strength and with a Herculean effort manages to control the laughing spasm that I know is coming when this dimwit says that the Fed can stoke inflation and then come up with “a plan to control it when the economy recovers”!!! Hahahahahahahahaha!

That last, long laugh is where I really lost it! A plan to “control inflation”! Hahahahahahaha!

Maybe he gets the idea for this stupidity from Allan Meltzer, a professor at Carnegie Mellon U. and a “visiting scholar” at the American Enterprise Institute, and who is regularly invited to attend Federal Reserve functions because he seems to kiss their butts a lot, and as such you don’t expect much, which is just what you get.

He does admit, to his credit, that inflation is the problem, and says that inflation is “another reason the Fed should give up this nonsense about more stimulus.”

If he had stopped there, I would’ve changed Mr. Meltzer’s category on the famous Mogambo Enemies List (MEL) from “Them” to “Us (probationary).”

Instead, he says, apparently anxious to show he has no idea what he is talking about and is ignorant of economics in general and the Austrian school of economics in particular, that instead of more stimulus, the Fed should “offer a credible, long term program to prevent the next inflation.” Hahaha! Another plan!

Hahaha! A “credible program!” Hahaha! It makes you want to scream out, “And just what in the hell would be a credible program to get out of a monstrous monetary inflation that has been raging exponentially for almost 50 years, which produced the economic disaster of constant, simmering inflation and the suicidal growth of a giant, bloated, twisted and disgusting government-centric economy supporting half the population and a bizarre economy based on the continual financing of grubby, childish, insatiable final consumption, so that all debt in the USA now totals somewhere around $60 trillion (with the federal government having accrued liabilities of at least five times as much), and where the entire freaking GDP is only $13.5 trillion? Exactly what in the hell is a ‘credible program’ to reverse that kind of horrible, end-stage metastasized cancer? Hahahaha!”

In case you were wondering, as apparently Bigshot Economic Blowhards (MEB) wonder, the only “credible program” in an economy that relies exclusively on creating more and more money out of more and more debt, with which people buy more and more things and the government gives more and more money to more and more people, is different after these kinds of things have gone on too long (two weeks max), like this one that has gone on for Fifty Freaking Years (FFY)!

If you stopped in the first few weeks of money creation and deficit-spending, you could just stop spending to let the Federal Reserve stop creating money. But now, after half a century, the only “credible program” available is to suffer a complete economic collapse, sort of like the collapse of critical thinking by neo-Keynesian econometric economists who got us into this mess by actually believing their own “consumption function” stupidities and then, to our ultimate regret, relying on them.

Of course, this seeming abandonment of common sense is akin to astonishingly believing, like trusting, gullible children, all kinds of silly crap, like believing that it is possible for the population to finance comfortable retirements by investing in the stock market over the long term, or the bond market for the long term, or houses for almost any term, or any combination of the above! Hahaha! And this is not to even mention the tragedy of derivatives! Hahaha! Idiots!

And the silliness doesn’t stop there! For example, Mr. Meltzer laughably says, “The most important restriction on investment today is not tight monetary policy, but uncertainty about administration policy. Businesses cannot know what their taxes, health-care, energy and regulatory costs will be, so they cannot know what return to expect on any new investment.”

Since I am already laughing, it is easy to laugh with Rude Mogambo Scorn (RMS) – Hahahaha! – because the “most important restriction on investment today” is certainly NOT “administration policy.”

Instead, the “most important restriction” is identifying where customers are going to get the money to buy anything!

I mean, if lots of customers show up with cash in their greedy, grubby little hands, and these customers are begging to buy, who cares about taxes, health-care, energy and regulatory costs? Nobody! Simply charge a high enough price, that the customers are obviously willing to pay, to cover all expenses, make a huge profit, give the executive staff large bonuses, buy up competitors, and donate lots of money to the corrupt politicians to make sure that the stupid government doesn’t make any new laws that might ruin the cozy racket!

So, if you see this Meltzer guy, you tell him that the Fab Fab Fabulous Mogambo (FFFM) says that “the most important restriction on investment spending” today is that all the customers are up to their freaking eyeballs in debt, staggering under the crushing weight of debt from two insane decades of the loathsome Alan Greenspan at the demonic Federal Reserve constantly creating more and more money to finance bubble economies in raw, naked consumption, insane speculative bubbles in stocks, bonds, houses, derivatives and the cancer-like growth of a treacherous, corrupt system of governments, from local to state to federal, as trillions and trillions of dollars were deficit-spent to add to the orgiastic deluge of tax revenues already pouring in, and then going right back out again as new spending, from the aforementioned bubble economies in stocks, bonds, houses and derivatives spawned by, at the root, the Federal Reserve creating the money necessary!

It’s too insane to continue, and so I will just pick up some more gold, silver and oil so that I can make a lot of money on the laughable economic foolishness rampant in the world and the universities, which makes it all so easy that one can only happily say, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

Why “Credible Programs” at the Fed are Anything But originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Why “Credible Programs” at the Fed are Anything But




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Why “Credible Programs” at the Fed are Anything But

October 14th, 2010

My stomach was hurting, so I decided to take a little time off and soothe the old midsection with a few medicinal brews and a dose of pizza. The reason that my stomach hurt was because I had just read the stupidest economic essay, which was, unbelievably, penned by another lackluster university professor, and surprisingly printed by The Financial Times newspaper.

The guy’s name is Michael Woodford, of Columbia University, and whose execrable and totally idiotic piece is titled “Bernanke Needs Inflation for QE2 to Sail.”

He writes, unbelievably, “The Fed should allow a one-time only inflation increase, with a plan to control it when the economy recovers.” Hahahaha!

Hahahaha! Why am I laughing so hard that I am doubled over and actually gagging up pieces of stomach lining? Why? I don’t know where to start! Hahaha!

Wiping the tears of laughter from my eyes, let’s just begin where he began: “The Fed should allow a one-time only inflation increase”! Hahaha! It is so ridiculous to think that the Fed can produce a “one-time” inflation, when the fact is that the Fed has already engineered 50 years of constant inflation, sometimes simmering and occasionally roaring inflation! A “one-time” inflation! Hahahaha!

I can hardly breathe from all this laughing, but He-Man Mogambo (HMM) gathers his strength and with a Herculean effort manages to control the laughing spasm that I know is coming when this dimwit says that the Fed can stoke inflation and then come up with “a plan to control it when the economy recovers”!!! Hahahahahahahahaha!

That last, long laugh is where I really lost it! A plan to “control inflation”! Hahahahahahaha!

Maybe he gets the idea for this stupidity from Allan Meltzer, a professor at Carnegie Mellon U. and a “visiting scholar” at the American Enterprise Institute, and who is regularly invited to attend Federal Reserve functions because he seems to kiss their butts a lot, and as such you don’t expect much, which is just what you get.

He does admit, to his credit, that inflation is the problem, and says that inflation is “another reason the Fed should give up this nonsense about more stimulus.”

If he had stopped there, I would’ve changed Mr. Meltzer’s category on the famous Mogambo Enemies List (MEL) from “Them” to “Us (probationary).”

Instead, he says, apparently anxious to show he has no idea what he is talking about and is ignorant of economics in general and the Austrian school of economics in particular, that instead of more stimulus, the Fed should “offer a credible, long term program to prevent the next inflation.” Hahaha! Another plan!

Hahaha! A “credible program!” Hahaha! It makes you want to scream out, “And just what in the hell would be a credible program to get out of a monstrous monetary inflation that has been raging exponentially for almost 50 years, which produced the economic disaster of constant, simmering inflation and the suicidal growth of a giant, bloated, twisted and disgusting government-centric economy supporting half the population and a bizarre economy based on the continual financing of grubby, childish, insatiable final consumption, so that all debt in the USA now totals somewhere around $60 trillion (with the federal government having accrued liabilities of at least five times as much), and where the entire freaking GDP is only $13.5 trillion? Exactly what in the hell is a ‘credible program’ to reverse that kind of horrible, end-stage metastasized cancer? Hahahaha!”

In case you were wondering, as apparently Bigshot Economic Blowhards (MEB) wonder, the only “credible program” in an economy that relies exclusively on creating more and more money out of more and more debt, with which people buy more and more things and the government gives more and more money to more and more people, is different after these kinds of things have gone on too long (two weeks max), like this one that has gone on for Fifty Freaking Years (FFY)!

If you stopped in the first few weeks of money creation and deficit-spending, you could just stop spending to let the Federal Reserve stop creating money. But now, after half a century, the only “credible program” available is to suffer a complete economic collapse, sort of like the collapse of critical thinking by neo-Keynesian econometric economists who got us into this mess by actually believing their own “consumption function” stupidities and then, to our ultimate regret, relying on them.

Of course, this seeming abandonment of common sense is akin to astonishingly believing, like trusting, gullible children, all kinds of silly crap, like believing that it is possible for the population to finance comfortable retirements by investing in the stock market over the long term, or the bond market for the long term, or houses for almost any term, or any combination of the above! Hahaha! And this is not to even mention the tragedy of derivatives! Hahaha! Idiots!

And the silliness doesn’t stop there! For example, Mr. Meltzer laughably says, “The most important restriction on investment today is not tight monetary policy, but uncertainty about administration policy. Businesses cannot know what their taxes, health-care, energy and regulatory costs will be, so they cannot know what return to expect on any new investment.”

Since I am already laughing, it is easy to laugh with Rude Mogambo Scorn (RMS) – Hahahaha! – because the “most important restriction on investment today” is certainly NOT “administration policy.”

Instead, the “most important restriction” is identifying where customers are going to get the money to buy anything!

I mean, if lots of customers show up with cash in their greedy, grubby little hands, and these customers are begging to buy, who cares about taxes, health-care, energy and regulatory costs? Nobody! Simply charge a high enough price, that the customers are obviously willing to pay, to cover all expenses, make a huge profit, give the executive staff large bonuses, buy up competitors, and donate lots of money to the corrupt politicians to make sure that the stupid government doesn’t make any new laws that might ruin the cozy racket!

So, if you see this Meltzer guy, you tell him that the Fab Fab Fabulous Mogambo (FFFM) says that “the most important restriction on investment spending” today is that all the customers are up to their freaking eyeballs in debt, staggering under the crushing weight of debt from two insane decades of the loathsome Alan Greenspan at the demonic Federal Reserve constantly creating more and more money to finance bubble economies in raw, naked consumption, insane speculative bubbles in stocks, bonds, houses, derivatives and the cancer-like growth of a treacherous, corrupt system of governments, from local to state to federal, as trillions and trillions of dollars were deficit-spent to add to the orgiastic deluge of tax revenues already pouring in, and then going right back out again as new spending, from the aforementioned bubble economies in stocks, bonds, houses and derivatives spawned by, at the root, the Federal Reserve creating the money necessary!

It’s too insane to continue, and so I will just pick up some more gold, silver and oil so that I can make a lot of money on the laughable economic foolishness rampant in the world and the universities, which makes it all so easy that one can only happily say, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

Why “Credible Programs” at the Fed are Anything But originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Why “Credible Programs” at the Fed are Anything But




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

The Case for VQT

October 14th, 2010

Many investors, present company included, are sitting on sizeable gains from long positions going back as far as March 2009. With the S&P 500 up 16% from its recent July 1st low of 1010 and looking like it may take anoter run at 1200 sometime soon, longs are torn between the desire to lock in some profits on the one hand and have the potential to benefit from further upside on the other hand.

While there are a number of ways to approach this problem, a new off-the-shelf strategy became available with the launch of Barclays ETN+ S&P VEQTOR ETN (VQT) on September 1st.

To briefly recap, VQT is essentially a portfolio with two components: a long SPY component and a long VXX component. At the end of each day, the ETN evaluates volatility risk and based upon rules which incorporate realized volatility and implied volatility, determines how much the SPY positions should be hedged with VXX. The result is a dynamically hedged long position that is hedged with volatility. The SPY component of VQT is set to vary in a range of 60-97.5%, with the VXX component comprising the balance of the VQT at anywhere from 2.5-40%.

The chart below shows that VQT is structured not only to limit losses in an environment of increased volatility, but also profit in some high volatility scenarios.

Since VQT is perhaps the most complex actively managed ETN that is traded, I highly recommend that readers study the pricing supplement for VQT, the highlights of which I sketched out in Barclays VEQTOR ETN (VQT) Begins Trading.

Finally, I feel obliged to mention that to date VQT has only managed to trade about 5,000 shares per day, on average. While market depth is not great, the spread is consistently in the area of about 0.06 – which is not bad considering that VQT is trading over 105 as I type this. As is the case with any exotic ETN, there is no guarantee VQT will attract sufficient interest to become a permanent fixture on the investing landscape, which would be a shame, because I believe this ETN has considerable potential.

For those who think they might have an interest in this product further on down the line, I have one thought: use it or lose it!

Related posts:

[source: Barclays]
Disclosure(s): long VQT and short VXX at time of writing



Read more here:
The Case for VQT

ETF, Uncategorized

The Case for VQT

October 14th, 2010

Many investors, present company included, are sitting on sizeable gains from long positions going back as far as March 2009. With the S&P 500 up 16% from its recent July 1st low of 1010 and looking like it may take anoter run at 1200 sometime soon, longs are torn between the desire to lock in some profits on the one hand and have the potential to benefit from further upside on the other hand.

While there are a number of ways to approach this problem, a new off-the-shelf strategy became available with the launch of Barclays ETN+ S&P VEQTOR ETN (VQT) on September 1st.

To briefly recap, VQT is essentially a portfolio with two components: a long SPY component and a long VXX component. At the end of each day, the ETN evaluates volatility risk and based upon rules which incorporate realized volatility and implied volatility, determines how much the SPY positions should be hedged with VXX. The result is a dynamically hedged long position that is hedged with volatility. The SPY component of VQT is set to vary in a range of 60-97.5%, with the VXX component comprising the balance of the VQT at anywhere from 2.5-40%.

The chart below shows that VQT is structured not only to limit losses in an environment of increased volatility, but also profit in some high volatility scenarios.

Since VQT is perhaps the most complex actively managed ETN that is traded, I highly recommend that readers study the pricing supplement for VQT, the highlights of which I sketched out in Barclays VEQTOR ETN (VQT) Begins Trading.

Finally, I feel obliged to mention that to date VQT has only managed to trade about 5,000 shares per day, on average. While market depth is not great, the spread is consistently in the area of about 0.06 – which is not bad considering that VQT is trading over 105 as I type this. As is the case with any exotic ETN, there is no guarantee VQT will attract sufficient interest to become a permanent fixture on the investing landscape, which would be a shame, because I believe this ETN has considerable potential.

For those who think they might have an interest in this product further on down the line, I have one thought: use it or lose it!

Related posts:

[source: Barclays]
Disclosure(s): long VQT and short VXX at time of writing



Read more here:
The Case for VQT

ETF, Uncategorized

Concrete Market-Based Evidence That the US’ AAA-Debt Rating is Unraveling

October 14th, 2010

Traders in the credit default swaps market are no longer showing the same faith in the USA that major credit rating agencies show. This past quarter, the price paid to insure against a US sovereign debt default recently jumped up nearly 30 percent. That spike in cost made the US the third worst performing nation in the derivatives market, after only Ireland and Portugal. Not exactly good company to be in.

According to Fortune:

“The cost of insuring against a default on U.S. government bonds via so-called credit default swaps rose 28% in the quarter ended Sept. 30, the firm [CMA] said.

“That puts the United States’ third-quarter performance behind only two other nations, both of which are struggling with the early stages of sovereign debt crises: Ireland, whose CDS prices rocketed 72% to a record amid growing questions about the costs of a massive bank bailout, and Portugal, whose costs jumped 30%.

“What’s more, the decline leaves U.S. debt trading at an implied rating of double-A-plus for the first time in memory.

“Despite building worries about its financial outlook, the U.S. had traded in recent quarters in line with its triple-A rating from S&P and Moody’s. But some skeptics have been arguing the U.S. is overrated, and that argument now seems to be gaining steam [...] The rising price of insuring against a default on U.S. government debt is of a piece with these moves and suggests the full tab for the profligacy of the past decade has yet to be presented.”

On the other hand, the article goes on to highlight that the absolute cost of insuring US debt is still much lower than Ireland, a tenth of that price, and Portugal, an eighth. So, the run up in percent increase isn’t the entire story. Yet, the trend line still looks ugly. Ireland and Portugal are at least implementing austerity measures, while the US, on the other end of the spectrum, is on the verge of quantitative easing round two. It’s hard to say how long Moody’s and S&P can ignore the reality of the situation… they’ll have to consider what the CDS market is saying — that the US currently has an “implied rating of double-A-plus” — during their next rounds of debt rating deliberation.

You can more details in Fortune’s coverage of how the debt market has stripped the US of its triple-A rating.

Best,

Rocky Vega,
The Daily Reckoning

Concrete Market-Based Evidence That the US’ AAA-Debt Rating is Unraveling originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Concrete Market-Based Evidence That the US’ AAA-Debt Rating is Unraveling




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Concrete Market-Based Evidence That the US’ AAA-Debt Rating is Unraveling

October 14th, 2010

Traders in the credit default swaps market are no longer showing the same faith in the USA that major credit rating agencies show. This past quarter, the price paid to insure against a US sovereign debt default recently jumped up nearly 30 percent. That spike in cost made the US the third worst performing nation in the derivatives market, after only Ireland and Portugal. Not exactly good company to be in.

According to Fortune:

“The cost of insuring against a default on U.S. government bonds via so-called credit default swaps rose 28% in the quarter ended Sept. 30, the firm [CMA] said.

“That puts the United States’ third-quarter performance behind only two other nations, both of which are struggling with the early stages of sovereign debt crises: Ireland, whose CDS prices rocketed 72% to a record amid growing questions about the costs of a massive bank bailout, and Portugal, whose costs jumped 30%.

“What’s more, the decline leaves U.S. debt trading at an implied rating of double-A-plus for the first time in memory.

“Despite building worries about its financial outlook, the U.S. had traded in recent quarters in line with its triple-A rating from S&P and Moody’s. But some skeptics have been arguing the U.S. is overrated, and that argument now seems to be gaining steam [...] The rising price of insuring against a default on U.S. government debt is of a piece with these moves and suggests the full tab for the profligacy of the past decade has yet to be presented.”

On the other hand, the article goes on to highlight that the absolute cost of insuring US debt is still much lower than Ireland, a tenth of that price, and Portugal, an eighth. So, the run up in percent increase isn’t the entire story. Yet, the trend line still looks ugly. Ireland and Portugal are at least implementing austerity measures, while the US, on the other end of the spectrum, is on the verge of quantitative easing round two. It’s hard to say how long Moody’s and S&P can ignore the reality of the situation… they’ll have to consider what the CDS market is saying — that the US currently has an “implied rating of double-A-plus” — during their next rounds of debt rating deliberation.

You can more details in Fortune’s coverage of how the debt market has stripped the US of its triple-A rating.

Best,

Rocky Vega,
The Daily Reckoning

Concrete Market-Based Evidence That the US’ AAA-Debt Rating is Unraveling originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Concrete Market-Based Evidence That the US’ AAA-Debt Rating is Unraveling




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Charting the Recent Bond Funds IEF and TLT

October 14th, 2010

How have the leading bond funds been holding up lately?

The prior trend had been a strong up one, but is that starting to change right now?  Let’s look at the key reference support levels to clue us in to whether to expect further upside potential… or a downside reversal that could start soon.

First, the shorter-term 7 to 10 year Treasury fund IEF:

The big trend strength has been in the IEF fund, starting with an initial price breakout just prior to May’s now famous “Flash Crash”

See my prior posts:

More Breakouts in Bond Funds IEF and TLT

Bond Funds IEF and TLT Nearing Key Breakout

Want Clues to a Likely Stock Market Reversal?  Watch TLT and IEF

As always, trend structure is #1, and that remains true now.

The key thing to watch right now is the 20 day EMA in conjunction with the 50 day EMA (moving averages).  I highlighted each time IEF bounced upwards in a retracement move off these averages.

Right now, price sits directly on the 20 EMA at the confluence support at $99.  Further price deterioration – meaning a deeper price pullback – would be bearish and would lead to a short-term play to test the $98 level (50d EMA), and any further deterioration under the rising 50 EMA could signal an early trend reversal opportunity.

So in short, watch closely what happens here at $99, then what happens on a test of $98.

The picture is slightly more bearish in the longer term – 20+ year – Treasury fund TLT:

During the up-move, TLT also supported strongly off the rising 20 EMA , though lately the trend has flattened considerably.

The key development is that price is now under the rising 50 day EMA at the $103 price level – that’s a bearish sign.

This happened recently for one day in mid-September, only to serve as a bear trap that resulted in a rally back to the $106 level.

There is price support (from the prior swing low) at the “round number” reference level of $100.

So, to be quick, watch what develops at the $100 level.

In summary, what happens to one fund is likely to happen to the other, so if IEF breaks under its support at $98, TLT is likely to break under its $100 key support which would signal a potential early trend reversal.

And of course the opposite is true – should they both bounce off their support levels – though the negative divergences are a factor to watch – then the trend could reassert itself and higher prices would be favored.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Charting the Recent Bond Funds IEF and TLT

Uncategorized

Charting the Recent Bond Funds IEF and TLT

October 14th, 2010

How have the leading bond funds been holding up lately?

The prior trend had been a strong up one, but is that starting to change right now?  Let’s look at the key reference support levels to clue us in to whether to expect further upside potential… or a downside reversal that could start soon.

First, the shorter-term 7 to 10 year Treasury fund IEF:

The big trend strength has been in the IEF fund, starting with an initial price breakout just prior to May’s now famous “Flash Crash”

See my prior posts:

More Breakouts in Bond Funds IEF and TLT

Bond Funds IEF and TLT Nearing Key Breakout

Want Clues to a Likely Stock Market Reversal?  Watch TLT and IEF

As always, trend structure is #1, and that remains true now.

The key thing to watch right now is the 20 day EMA in conjunction with the 50 day EMA (moving averages).  I highlighted each time IEF bounced upwards in a retracement move off these averages.

Right now, price sits directly on the 20 EMA at the confluence support at $99.  Further price deterioration – meaning a deeper price pullback – would be bearish and would lead to a short-term play to test the $98 level (50d EMA), and any further deterioration under the rising 50 EMA could signal an early trend reversal opportunity.

So in short, watch closely what happens here at $99, then what happens on a test of $98.

The picture is slightly more bearish in the longer term – 20+ year – Treasury fund TLT:

During the up-move, TLT also supported strongly off the rising 20 EMA , though lately the trend has flattened considerably.

The key development is that price is now under the rising 50 day EMA at the $103 price level – that’s a bearish sign.

This happened recently for one day in mid-September, only to serve as a bear trap that resulted in a rally back to the $106 level.

There is price support (from the prior swing low) at the “round number” reference level of $100.

So, to be quick, watch what develops at the $100 level.

In summary, what happens to one fund is likely to happen to the other, so if IEF breaks under its support at $98, TLT is likely to break under its $100 key support which would signal a potential early trend reversal.

And of course the opposite is true – should they both bounce off their support levels – though the negative divergences are a factor to watch – then the trend could reassert itself and higher prices would be favored.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Charting the Recent Bond Funds IEF and TLT

Uncategorized

The Really, Really Long Bond

October 14th, 2010

For the time being, income investors are probably better off being owners than lenders. Many solid US companies are paying dividend yields of 2%, 3% and 4%. Short-term corporate bonds, meanwhile, yield next to nothing. The bond market is getting nuttier by the day – offering ever-lower interest rates at ever-higher risks. The recent spate of 100-year bond issues illustrates the point.

100 years ago, back in 1910, Zeppelins were all the rage. After patenting his design at the turn of the century, Count Ferdinand von Zeppelin had successfully made his rigid airship the one and only legitimate form of flying transportation. True, in 1910 there were some country boys named the Wright Brothers tinkering with terribly unstable gliders and propeller flying machines. But the Zeppelin was the standard. You see, it just made so much more sense at the time…make a big cylinder out of the thinnest metal possible, fill it with cow intestines then fill those intestines with light, flammable gas; power the thing with a fire-breathing engine to float thousands of feet above ground… What’s not to love?

While the Wrights toiled on their design, Zeppelins ruled. The world’s first airline, DELAG, flew Zeppelins exclusively. Zeppelins had conducted commercial cargo and passenger flights long before Americans risked their lives or merchandise with airplanes as we know them today. Zeppelins were a hit with the German military too, while in 1913 the American Army deemed the Wright model C “dynamically unsuited for flying.” They had this nasty way of nose-diving and killing everyone on board, the Army said, and soon after discontinued its business with the Wright Company.

So imagine this: You’re an investor, alive and well in 1910. You have to chose to lend to one of these companies money for the next 100 years… Do you write Count Ferdinand a century bond, or do you loan the money to the Wright Brothers?

The Wrights, as you know, had the right idea, even though the opposite seemed true at the time. Had you lent them money 100 years ago, there’s a chance you’d get it back today, plus interest. Their company became the largest aircraft manufacturer in the world by the end of World War II and is now known as Curtiss-Wright, a publically traded component manufacturer with a $1.4 billion market cap.

Count Ferdinand and his Zeppelin, however, slowly floated into an antiquated reality until the Zeppelin industry – quite literally – crashed and burned into New Jersey in 1937. Your best shot at getting your 100-year Zeppelin bond cashed today would be mugging the crew of the Goodyear Blimp.

The moral of the story: The vast majority of people, your editor included, don’t know squat about what the world will be like 100 years from now. We can guess, but little more. And in the “game” of investing, guessing is a scary thought. Better to know for sure, or as close to sure as you can get.

Yet, the 100-year bond is now officially back in vogue. The last three months have seen the trifecta of century bond offerings:

  • A stalwart American company: Norfolk Southern, arguably the oldest railroad operation in the US, raised $250 million in August when it sold bonds to investors due in 2110.
  • A powerful multinational bank: AAA-rated Rabobank raised $350 million a month later selling 100-year bonds of their own.
  • A struggling sovereign state: Mexico borrowed $1 billion in early October, which most of its lenders won’t see until this time in 2110.

Here’s the best part: For the privilege of borrowing “investor” capital into the next century, not one of these issuers paid over 6%.

This is the latest chapter in the most powerful trend in investing at the moment: the hunt for yield. Investors are so hungry for high-yielding, stable return they are willing to take outlandish risks…like buying a 100-year bond from a government that has suffered two major currency crises and one sovereign default during the last 30 years.

Why? As with most financial bubbles, ask the Fed.

Having pushed interest rates to 0%, the Federal Reserve has made the cost of borrowing money around the world its cheapest…ever? Microsoft recently sold a wave of three-year bonds at a stunningly low 0.8% yield. Under such low-rate circumstances, companies can raise cash for almost nothing. Investors, meanwhile, are left gnawing on meatless bones… If you can finance your retirement on 0.8% annual returns, please tell us your secret.

So the average investor has to choose between a savings account that yields 1%, bonds that might yield even less and a stock market that just suffered its biggest collapse since the Great Depression.

This explains most investment trends of 2010. Appetite for yield is why the S&P Dividend Aristocrats index is outperforming the S&P 3-to-1 this year. It’s why, according to Dealogic, US companies have sold a record $168.5 billion in high-yield bonds so far in 2010. And it’s why investors are willing to entertain the idea of letting railroads, banks and struggling states borrow their hard-earned dollars for a hundred freakin’ years.

But the same way there are two sides to every story, not all century bond buyers are foolhardy investors. In fact there’s a good chance that, should deflation worsen in the US, 100-year bond owners will be able to sell their bonds on the secondary market for a premium.

Here’s one example: Norfolk Southern Railroad has issued 100-year bonds before. As of this writing, it would cost an investor $1,110 to buy a $1,000 century bond Norfolk Southern issued in 2005. That premium to par value is a sign of investor demand…the same way stock investors pay insane earnings multiples for “hot” companies like Google. Even though overpaying for that Norfolk Southern bond will cut it’s yield from 6% to an effective rate of 5.3%, investors can’t find better yield elsewhere…or they’re betting they can sell those bonds to a greater fool down the road.

In bond trading parlance, income investors are getting pushed “out on the curve.” Rates for US Treasuries and short term, investment-grade corporate debt are so dismal that anyone seeking meaningful income (like over 5%) has to take on an unusual amount of risk. Either they must take on default risk by lending to sketchy companies teetering on bankruptcy. Or they must expose themselves to interest-rate risk by lending for obscenely long periods…like 100 years.

Maybe, 100 years from now, a railway from West Virginia to New York (or the coal that it’s carrying) will be as useful as the Hindenburg. What will become of those Norfolk Southern 100 year bonds then? Geesh, will the Fed even be around in 2110? It wasn’t in 1910. If the dollar makes it to 2110, it’ll be one of the longest lasting currencies in the history of the world… What will those bonds be worth if they have to be redeemed in Ameros? Or yuan?

These are all questions Norfolk Southern century bond buyers are willing to dismiss…for a measly 5.9%.

As Eric Fry and Bill Bonner have reckoned in these pages before, we may be witnessing a sort of “peak debt” in the investment world. Earlier we mentioned that remarkable bond issue from Microsoft. It’s worth adding, the company currently pays a 2.6% dividend. So if you were forced to buy its debt or its equity, which would you choose…three years of 0.8% and no chance of capital appreciation, or three years of 2.6% dividends and a stake in future earnings?

We’d sooner take our chances with a solid yield and an uncertain future than a bond coupon that inflation will certainly consume. We don’t exactly crave a stake in the company that brought you the Zune, but with bonds at 0.8%…what’s the point?

There is money to be made in bond trading, like always. But for investors looking for stable returns and substantial yields, corporate debt – or any debt for that matter – ain’t what it used to be. Unlike years past, corporate equity is now the source of the best income risk/reward ratios.

To repeat: income investors, for the time being, are better off being owners than lenders.

Regards,

Ian Mathias
for The Daily Reckoning

The Really, Really Long Bond originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Really, Really Long Bond




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

The Really, Really Long Bond

October 14th, 2010

For the time being, income investors are probably better off being owners than lenders. Many solid US companies are paying dividend yields of 2%, 3% and 4%. Short-term corporate bonds, meanwhile, yield next to nothing. The bond market is getting nuttier by the day – offering ever-lower interest rates at ever-higher risks. The recent spate of 100-year bond issues illustrates the point.

100 years ago, back in 1910, Zeppelins were all the rage. After patenting his design at the turn of the century, Count Ferdinand von Zeppelin had successfully made his rigid airship the one and only legitimate form of flying transportation. True, in 1910 there were some country boys named the Wright Brothers tinkering with terribly unstable gliders and propeller flying machines. But the Zeppelin was the standard. You see, it just made so much more sense at the time…make a big cylinder out of the thinnest metal possible, fill it with cow intestines then fill those intestines with light, flammable gas; power the thing with a fire-breathing engine to float thousands of feet above ground… What’s not to love?

While the Wrights toiled on their design, Zeppelins ruled. The world’s first airline, DELAG, flew Zeppelins exclusively. Zeppelins had conducted commercial cargo and passenger flights long before Americans risked their lives or merchandise with airplanes as we know them today. Zeppelins were a hit with the German military too, while in 1913 the American Army deemed the Wright model C “dynamically unsuited for flying.” They had this nasty way of nose-diving and killing everyone on board, the Army said, and soon after discontinued its business with the Wright Company.

So imagine this: You’re an investor, alive and well in 1910. You have to chose to lend to one of these companies money for the next 100 years… Do you write Count Ferdinand a century bond, or do you loan the money to the Wright Brothers?

The Wrights, as you know, had the right idea, even though the opposite seemed true at the time. Had you lent them money 100 years ago, there’s a chance you’d get it back today, plus interest. Their company became the largest aircraft manufacturer in the world by the end of World War II and is now known as Curtiss-Wright, a publically traded component manufacturer with a $1.4 billion market cap.

Count Ferdinand and his Zeppelin, however, slowly floated into an antiquated reality until the Zeppelin industry – quite literally – crashed and burned into New Jersey in 1937. Your best shot at getting your 100-year Zeppelin bond cashed today would be mugging the crew of the Goodyear Blimp.

The moral of the story: The vast majority of people, your editor included, don’t know squat about what the world will be like 100 years from now. We can guess, but little more. And in the “game” of investing, guessing is a scary thought. Better to know for sure, or as close to sure as you can get.

Yet, the 100-year bond is now officially back in vogue. The last three months have seen the trifecta of century bond offerings:

  • A stalwart American company: Norfolk Southern, arguably the oldest railroad operation in the US, raised $250 million in August when it sold bonds to investors due in 2110.
  • A powerful multinational bank: AAA-rated Rabobank raised $350 million a month later selling 100-year bonds of their own.
  • A struggling sovereign state: Mexico borrowed $1 billion in early October, which most of its lenders won’t see until this time in 2110.

Here’s the best part: For the privilege of borrowing “investor” capital into the next century, not one of these issuers paid over 6%.

This is the latest chapter in the most powerful trend in investing at the moment: the hunt for yield. Investors are so hungry for high-yielding, stable return they are willing to take outlandish risks…like buying a 100-year bond from a government that has suffered two major currency crises and one sovereign default during the last 30 years.

Why? As with most financial bubbles, ask the Fed.

Having pushed interest rates to 0%, the Federal Reserve has made the cost of borrowing money around the world its cheapest…ever? Microsoft recently sold a wave of three-year bonds at a stunningly low 0.8% yield. Under such low-rate circumstances, companies can raise cash for almost nothing. Investors, meanwhile, are left gnawing on meatless bones… If you can finance your retirement on 0.8% annual returns, please tell us your secret.

So the average investor has to choose between a savings account that yields 1%, bonds that might yield even less and a stock market that just suffered its biggest collapse since the Great Depression.

This explains most investment trends of 2010. Appetite for yield is why the S&P Dividend Aristocrats index is outperforming the S&P 3-to-1 this year. It’s why, according to Dealogic, US companies have sold a record $168.5 billion in high-yield bonds so far in 2010. And it’s why investors are willing to entertain the idea of letting railroads, banks and struggling states borrow their hard-earned dollars for a hundred freakin’ years.

But the same way there are two sides to every story, not all century bond buyers are foolhardy investors. In fact there’s a good chance that, should deflation worsen in the US, 100-year bond owners will be able to sell their bonds on the secondary market for a premium.

Here’s one example: Norfolk Southern Railroad has issued 100-year bonds before. As of this writing, it would cost an investor $1,110 to buy a $1,000 century bond Norfolk Southern issued in 2005. That premium to par value is a sign of investor demand…the same way stock investors pay insane earnings multiples for “hot” companies like Google. Even though overpaying for that Norfolk Southern bond will cut it’s yield from 6% to an effective rate of 5.3%, investors can’t find better yield elsewhere…or they’re betting they can sell those bonds to a greater fool down the road.

In bond trading parlance, income investors are getting pushed “out on the curve.” Rates for US Treasuries and short term, investment-grade corporate debt are so dismal that anyone seeking meaningful income (like over 5%) has to take on an unusual amount of risk. Either they must take on default risk by lending to sketchy companies teetering on bankruptcy. Or they must expose themselves to interest-rate risk by lending for obscenely long periods…like 100 years.

Maybe, 100 years from now, a railway from West Virginia to New York (or the coal that it’s carrying) will be as useful as the Hindenburg. What will become of those Norfolk Southern 100 year bonds then? Geesh, will the Fed even be around in 2110? It wasn’t in 1910. If the dollar makes it to 2110, it’ll be one of the longest lasting currencies in the history of the world… What will those bonds be worth if they have to be redeemed in Ameros? Or yuan?

These are all questions Norfolk Southern century bond buyers are willing to dismiss…for a measly 5.9%.

As Eric Fry and Bill Bonner have reckoned in these pages before, we may be witnessing a sort of “peak debt” in the investment world. Earlier we mentioned that remarkable bond issue from Microsoft. It’s worth adding, the company currently pays a 2.6% dividend. So if you were forced to buy its debt or its equity, which would you choose…three years of 0.8% and no chance of capital appreciation, or three years of 2.6% dividends and a stake in future earnings?

We’d sooner take our chances with a solid yield and an uncertain future than a bond coupon that inflation will certainly consume. We don’t exactly crave a stake in the company that brought you the Zune, but with bonds at 0.8%…what’s the point?

There is money to be made in bond trading, like always. But for investors looking for stable returns and substantial yields, corporate debt – or any debt for that matter – ain’t what it used to be. Unlike years past, corporate equity is now the source of the best income risk/reward ratios.

To repeat: income investors, for the time being, are better off being owners than lenders.

Regards,

Ian Mathias
for The Daily Reckoning

The Really, Really Long Bond originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Really, Really Long Bond




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Commodities Rally With Everything Else

October 14th, 2010

The room was humming harder
as the ceiling flew away
When we called out for another drink
the waiter brought a tray

– From “A Whiter Shade of Pale” by Procol Harum

Everything up; dollar down. That’s been the trend of late, in anticipation of what the pundits are calling QEII – the Federal Reserve’s earnest promise to further debase the currency through the purchasing of government bonds…and assorted other shenanigans and high jinks to be announced in due course.

The thinking, if you can call it that, behind the Fed’s program is both simple and simple-minded. By threatening to ignite an inflationary inferno, the world’s central bankers – from Washington to the Far East – are hoping to “bring forward” future demand. Flooding the system with freshly-inked bills, they promise to make the dollar of tomorrow a little (or a lot) leaner than the dollar of today, thereby incentivizing savers to spend more on things their children won’t have the chance to buy for themselves when there is no more money (of value) left in the bank.

This kind of modern day monetary phlebotomy, whereby bankers promise to restore the strength of a hemophiliac economy by draining ever more of its crucial liquid, is, of course, nonsense. The fact that it works for a while, however, is key to the fraud. In the short term, people see all the “right” things – stocks, bonds, their national GDP – going up. They think they’ve hit upon an eternal sunrise. Then comes high noon…followed by the somber realization that afternoon is nigh. By nightfall, the eternal sunshine of the optimist’s mind is left, once again, out in the shivering cold, struck by the reality that central planners can’t stop nature from running its course.

At the moment, however, a deadly high noon showdown seems a long way off.

Stocks rose beyond 11,000 this week, tacking on another 75 points in yesterday’s session alone. Commodities are on the march too. The Continuous Commodities Index (a basket of 17 major commodity market prices rolled into one composite index) hit a fresh, two-year high this week, with everything from the grains to silver, copper, lumber, cotton and crude oil all creeping higher.

And that’s to say nothing of gold, that curious outsider of the financial world. The spot price rose above $1,380 per ounce yesterday. Gold bulls, as the newswires enthusiastically inform us, already have “$1,400 in their sights.”

The metal could be flirting with a short-term correction, posit some. With so many foamy mouthed traders piling in on the buy side of the trade, a few brave souls reckon it’s due for a quick snapback, possibly shedding $100 before it resumes its lunar trajectory. Maybe…but we’d rather be long central banker arrogance than short day trader enthusiasm, at least from an investment perspective. Traders will get it partly right and partly wrong along the way, in other words, but meddlers will always claim they know more than they can possibly know about the way the world works. Worse still, they always act as if they believe such a claim.

And so, with men of such impossible confidence manning the world’s printing presses, who would be willing to bet against gold over the long haul? Right now, the Dow/Gold ratio (assuming $1,380 per ounce gold and 11,100 on the Dow) is pretty close to 8:1. Historically, stocks become cheap and gold expensive at a ratio of between 1:1 and 2:1. In other words, when you can buy every company on the Dow Jones Industrial Average for the price of one or two ounces of gold, it’s time to sell your metal and load into, what will then be, massively out of favor stocks.

As for now, the sun is probably still on the rise. Everything is going up. Our bet is that this trend continues until, very suddenly, it doesn’t.

Joel Bowman
for The Daily Reckoning

Commodities Rally With Everything Else originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Commodities Rally With Everything Else




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

Commodities Rally With Everything Else

October 14th, 2010

The room was humming harder
as the ceiling flew away
When we called out for another drink
the waiter brought a tray

– From “A Whiter Shade of Pale” by Procol Harum

Everything up; dollar down. That’s been the trend of late, in anticipation of what the pundits are calling QEII – the Federal Reserve’s earnest promise to further debase the currency through the purchasing of government bonds…and assorted other shenanigans and high jinks to be announced in due course.

The thinking, if you can call it that, behind the Fed’s program is both simple and simple-minded. By threatening to ignite an inflationary inferno, the world’s central bankers – from Washington to the Far East – are hoping to “bring forward” future demand. Flooding the system with freshly-inked bills, they promise to make the dollar of tomorrow a little (or a lot) leaner than the dollar of today, thereby incentivizing savers to spend more on things their children won’t have the chance to buy for themselves when there is no more money (of value) left in the bank.

This kind of modern day monetary phlebotomy, whereby bankers promise to restore the strength of a hemophiliac economy by draining ever more of its crucial liquid, is, of course, nonsense. The fact that it works for a while, however, is key to the fraud. In the short term, people see all the “right” things – stocks, bonds, their national GDP – going up. They think they’ve hit upon an eternal sunrise. Then comes high noon…followed by the somber realization that afternoon is nigh. By nightfall, the eternal sunshine of the optimist’s mind is left, once again, out in the shivering cold, struck by the reality that central planners can’t stop nature from running its course.

At the moment, however, a deadly high noon showdown seems a long way off.

Stocks rose beyond 11,000 this week, tacking on another 75 points in yesterday’s session alone. Commodities are on the march too. The Continuous Commodities Index (a basket of 17 major commodity market prices rolled into one composite index) hit a fresh, two-year high this week, with everything from the grains to silver, copper, lumber, cotton and crude oil all creeping higher.

And that’s to say nothing of gold, that curious outsider of the financial world. The spot price rose above $1,380 per ounce yesterday. Gold bulls, as the newswires enthusiastically inform us, already have “$1,400 in their sights.”

The metal could be flirting with a short-term correction, posit some. With so many foamy mouthed traders piling in on the buy side of the trade, a few brave souls reckon it’s due for a quick snapback, possibly shedding $100 before it resumes its lunar trajectory. Maybe…but we’d rather be long central banker arrogance than short day trader enthusiasm, at least from an investment perspective. Traders will get it partly right and partly wrong along the way, in other words, but meddlers will always claim they know more than they can possibly know about the way the world works. Worse still, they always act as if they believe such a claim.

And so, with men of such impossible confidence manning the world’s printing presses, who would be willing to bet against gold over the long haul? Right now, the Dow/Gold ratio (assuming $1,380 per ounce gold and 11,100 on the Dow) is pretty close to 8:1. Historically, stocks become cheap and gold expensive at a ratio of between 1:1 and 2:1. In other words, when you can buy every company on the Dow Jones Industrial Average for the price of one or two ounces of gold, it’s time to sell your metal and load into, what will then be, massively out of favor stocks.

As for now, the sun is probably still on the rise. Everything is going up. Our bet is that this trend continues until, very suddenly, it doesn’t.

Joel Bowman
for The Daily Reckoning

Commodities Rally With Everything Else originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

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Commodities Rally With Everything Else




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

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