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The “Bond Bubble”

On August 24, 2010, in Bonds, Economy, by Tim

[The following commentary is from the latest issue of the Weekend Update (Volume V, Issue 34) at Iacono Research. For subscription details, click here.]

The increasing amount of commentary on the subject of whether or not the world now faces a “bond bubble” combined with a recent article detailing the poor performance of inverse bond funds in 2010 seemed like sufficient justification to revisit a topic that was discussed here three weeks ago when I took “A Quick Look at Rising Rate Funds” (see Volume V, Issue 31).

Recall that, in the referenced discussion topic, short-term and long-term charts of Treasury yields were shown, in which it is clear to see that interest rates rose for decades to a peak in the early 1980s and have retreated from there to what now appears to be the end of another secular trend. Also, 13 inverse bond funds were presented in table form with the following three being suggested as likely candidates for the model portfolio when the time is right:

  • Profunds Rising Rates Opportunity 10 (RTPIX)
  • Rydex Inverse Government Long Bond Strategy (RYJUX)
  • ProShares Short 20+ Year Treasury (TBF)

Obviously, as should be clear when looking at the graphic below, the time has not been right over the last four months because all three of these “unleveraged” funds – a key consideration for a position that may be held in the model portfolio for a very long time – have been big losers. Funds that apply leverage of between 1.25x and 3x have done much worse than the 1x funds, in some cases the year-to-date losses exceeding 40 percent.

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Vanguard Blog: You’re Too Late for Gold

On August 13, 2010, in Commodities, by Tim

Writing for the Vangaurd Blog, John Ameriks offers these thoughts about how the world’s smartest investors are foolishly piling into gold and how some of the richest people in the world are deluding themselves if they think the metal will help preserve their wealth.

We’ve been hearing a lot about gold over the last few months, related to concerns about inflation, the creditworthiness of various governments, and fallout from the financial crisis—all against the backdrop of what is the most significant increase in inflation-adjusted gold prices since the early 1980s.
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Over this entire 140-year period, the average price of one ounce of gold was $480 (in 2010 dollars). If the gold price remains stable through the end of this year—not a given by any means—there will have been only one other year in the last 140 (1980) in which the inflation-adjusted average daily price of an ounce of gold was higher than in 2010.

In other words, there was only one year in the last 140 when it would have cost you more in terms of foregone alternative goods and services to become the owner of an ounce of gold. These data show that during some periods of extreme inflationary or broader economic distress, gold prices have increased sharply, only to recede back to lower levels as things return to normal.

Of course, what is conveniently omitted from the discussion above is that gold was money during 100 of those 140 years – that’s kind of important.  As for the future, somehow, it’s not clear to me that, this time, the gold price is going “back to lower levels as things return to normal” – whatever “normal” is these days.

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Wither the “Death Cross”?

On August 9, 2010, in Stocks, by Tim

Does anyone else remember a time when there were so many false positives for the economy and financial markets as in recent weeks and months? That is, false so far. The ECRI Weekly Leading Index has been screaming recession for about a month now and all we’ve seen in other economic data is slowing growth (though the jury is certainly still out on the U.S. economy). And stocks have recovered nicely from their recent swoon despite the much-discussed July 8th “Death Cross” warning (i.e., when the 50- and 200-day moving averages cross) as we are reminded in this item at The Dynamic Hedge blog.

Of course, the growing talk about the Fed cranking up the printing press should be factored into the performance of equity markets since that time. It seems the specter of QE II has compelled more than a few trading algorithms to bid prices higher, a development that could quickly reverse gear if the central bank fails to come through with any soothing words that begin with a “B” (preferably a “T”) when they conclude their policy meeting tomorrow.

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May Case-Shiller: Being Paid to Buy Homes

On July 28, 2010, in Housing, by Tim

After watching some of the evening news commentary last night on the latest Case-Shiller home price data, it became quite clear that the mainstream media did the nation a big disservice by fawning over the price increases in May, juiced as they were by the expiring homebuyer tax credit. Economist (surprise!) Casey Mulligan writing at a NY Times blog was similarly clueless. Here’s a pretty good take on the data from the Wall Street Journal:

The WSJ story referenced in the interview above – Supply of Homes Set to Grow – details the supply problem that looms and the math is pretty simple. In addition to some homebuilders ramping up production you have more than a year’s supply of foreclosed homes that have yet to hit the market, all of which makes any talk of a lasting rebound premature.

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New Home Sales Surge 24 Percent!

On July 26, 2010, in Housing, by Tim

It appears as though the U.S. housing market has finally turned the corner as the Census Bureau reported(.pdf) a short while ago that new home sales surged 24 percent in June, the biggest monthly increase in almost six decades of record keeping.

This stunning increase has caused housing bears across the land to “throw in the towel”, retracting recent predictions of a double-dip decline for home prices, and the mainstream financial media is overflowing with glowing headlines about the resurgence of the nation’s housing market as shown below.

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Dueling Outlooks for Stocks

On July 16, 2010, in Stocks, by Tim

If you’re confused about whether now is a good time to buy or sell stocks, don’t look to CNBC to provide you with any clear guidance as the increasingly gloomy outlook for the global economy and equity markets has seen a fair number of bearish headlines mixed in with the usual complement of bullish ones. Here’s a good example from earlier today:

Markets Will Rally Into Year End: Strategist

So where should investors look to put their money amidst the uncertainty? Jay Leupp, senior portfolio manager at Grubb & Ellis AGA; and Harry Clark, founder, president and CEO of Clark Capital Management Group, discussed their views.

“Looking at the broader market, we see 14 to 15 percent earnings growth for the next couple of years,” Leupp told CNBC.

“We see a good value entry point here.”

World at Risk of Folding in on Itself: Deputy Doom

The global economy is at risk of folding in on itself unless policy makers face up to the threats of inflation inflexibility and exchange-rate inflexibility, according to Arun Motianey, director of fixed income strategy at Roubini Global Economics.

A Japan-like outcome is a big risk for the developed world with deflation a big danger, he said.

Recent figures show that the recovery is sputtering in the US while China’s booming growth has slowed down slightly, as Beijing unwinds stimulus measures.

One could argue that simply because there are regular bearish views on equity markets at the network, the situation must be quite dire. It’s no wonder that retail investors have withdrawn more money from the stock market than they’ve added over the last year or so.

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