Bonds or Stocks?

In John Mauldin's Thoughts From the Frontline newsletter, Mauldin summarizes an article to be published in late-April by Rob Arnott, Chairman of Research Affiliates. Arnott compares the performance of bonds and of stocks from 1802 to present.

Here are the highlights in comparing bond investments over stock investments:

• Starting at any time from 1980 up to 2008, an investor in 20-year treasuries, rolling them over every year, beats the S&P 500 through January 2009! Even worse, going back 40 years to 1969, the 20-year bond investors still win, although by a marginal amount. And that is with a very bad bond market in the '70s
• Starting in 1802, we find that stocks have beat bonds by about 2.5%, which, compounding over two centuries, is a huge differential. But there were some periods just like the recent past where stocks did in fact not beat bonds
• In the late '90s, stock bulls would point out that there was no 30-year period where stocks did not beat bonds in the 20th century
• After 2000,  yields on stocks dropped to 1%, compared to 6% in bonds

This point was interesting:

• When someone tells you that stocks always beat bonds, or that stocks go up in the long run, they have not done their homework. At best, they are parroting bad research that makes their case, or they are simply trying to sell you something

On timing the market:

• 20-year returns you will get on your stock portfolios are VERY highly correlated with the valuations of the stock market at the time you invest. That is one reason why I contend that you can roughly time the stock market
• Valuations matter, as I wrote for many chapters in Bull's Eye Investing, where I suggested in 2003 that we were in a long-term secular bear market and that stocks would be a difficult place to be in the coming decade, based on valuations. I looked foolish in 2006 and most of 2007

On Financials (rule change):

• Mark-to-market rules for assets in distressed markets were suspended
• They [US Financial Accounting Standards Board (FASB)] widened the definition of "temporary" impairments of troubled assets, which will "allow banks to write up the value of some troubled assets if these have been hit by falling markets without (yet) suffering any significant credit losses." (www.gavekal.com)

Consequence? Banks can report a healthier balance sheet, at least until the commercial mortgage and credit card problems start having to be written off.

In regards to last week's February housing sales figures:

• the 4.7% rise was "plus or minus 18.3%". That means sales could have risen as much as 23% or dropped 13%. We won't know for awhile until we get real numbers and not estimates. Hanging your outlook for the economy or the housing market on one-month estimates is an exercise in futility, and could come back to embarrass you
• Ignore month-to-month estimated data. The key thing to look for is the direction of the revisions. If they are down, as they have been for over a year, then that is a bad sign

Source: Thoughts From the Frontline newsletter

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore 

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My Comments:

The market rules keep changing. This time, it is the accounting rules. Investors need to be aware of such changes. Comparing one set of figures from one year to a previous one ought to take the mark to market rule change into consideration. 

When improving figures are reported for financials, remember that fundamentally, nothing may have changed, the numbers have simply been reported differently.

Buy Bonds, Sell Stocks

In Ken Norquay's Section of Tech Talk, Ken suggests that it is not a good time to own stocks. It is a good time to own bonds. This is a reactino to yesterday's $1.2T policy change:

This article describes the awkward corner into which the stock market has backed big US pension funds. They are over-weighted in stocks and their 10-year return is negative. They are hoping to quietly bail out of the stock market and accumulate safer, higher yielding long term treasury bonds. These giants like to move slowly and steadily from one asset class to another. They don’t want to rock the boat.

But today the US government announced that THEY would be buying long term US treasury bonds too. Ouch! Apparently the US Federal reserve board doesn’t mind rocking the boat when they are trying to save their economy. Now what will those pension managers do?

Here’s one possibility: they will accelerate their selling of their giant stock portfolios and accelerate their buying of long term US treasury bonds.

Remember how sharply the US stock market dropped in Sept-Oct-Nov 2008? Remember how sharply US treasury bonds went up in Nov-Dec 2008? 2009 could turn out to be a good year to own bonds and another not-so-good year to own stocks.

Here is the source.

Comments:
"Don't fight the Fed" is a truism that applies today. It may not apply a few months from now if (most likely when) it turns out that the Fed's action to save both the U.S., and effectively the global economy, fails.

Investors need to work on what we know today, and to re-evaluate the validity of our investment plan. In my case, TLT (long TBT) is no longer a short sale, since the demand for long-term US bonds now exists. The perception that inflation will rise will also change the short-term view of the market, too.

This is a must read: Bernanke Inserts Gun In Mouth

$1 Trillion

The Federal Reserve is buying $300 Billion worth of long term treasuries over the next few months, and $750 Billion worth of Mortgage backed securities.

They are in effect printing even more money. The last time this was done was 40 years ago. The

Summary of Fed Statement:
http://www.calculatedriskblog.com/2009/03/fomc-buy-300-billion-in-long-term.html

Here are some a very good comments on this latest step:
http://globaleconomicanalysis.blogspot.com/2009/03/bernankes-grand-experiment-continues.html

http://zerohedge.blogspot.com/2009/03/fed-to-buy-treasuries-it-prints-to-fund.html

Spend to Insanity

As I have mentioned numerous times in previous entries, the market was pricing in a huge spending windfall in the U.S. Below are some numerical figures to quantify just how much this is going to cost. My highlights of the author's entry are marked in bold.


Notes from TSG Weekly Market Watch
Written by Matt Blackman

Source: Trading System Guru

< ... ... ... >

Have policy makers lost it?

Tough times call for drastic measures as we have experienced first hand of late but is there a limit to how much money policy makers can give away? And it is obvious the majority are strongly in favor of using the same policies to get us out of this mess that put us in this situation in the first place. It reminds me of that famous definition of insanity – doing the same thing and expecting a different result.

The federal budget deficit, estimated at around $450 billion for 2008, is projected to grow to $1.2 trillion in 2009 and that is without any more new spending or bailout initiatives. There is little doubt that with a Democratic President, Senate and Congress at the helm, Mr. Obama’s American Recovery and Reinvestment Plan estimated to cost $775 billion (so far) will most certainly grow in size. And it is equally likely that other programs will follow. Let’s do the math. At $1 trillion we are facing a budget deficit of 8% of GDP and that assumes GDP growth holds steady, which is not the case. But be that as it may, this size deficit would be a first in U.S. history. A shrinking economy and expanding bailout costs means the final ratio could be significantly higher. What does that mean?

First, Treasury will have to sell foreigners a lot more of its securities. At a deficit of $1.2 trillion, it would mean roughly three times more than last year. Are foreigners willing to pony up another $1.2 trillion in a deteriorating economy even if they are able? When our Asian sugar daddies finally pull the plug, they will leave a debt-ridden cash junkie behind and we all know what happens when demand exceeds supply. The cost of money goes up and the bigger the need, the faster the cost will rise as debt rapidly becomes a much more challenging habit to maintain.

So while spending like there is no tomorrow to stem the tide of bankruptcies and foreclosures may seem like a good idea on first blush, it is a plan that has the potential to produce some short-term gain in exchange for serious and very expensive long-term pain.

When that happens, expect to see the word ‘risk’ to gain a big pant-load more respect.

< ... ... ... >
Analysis:
The long-term 20-year U.S. bonds will need to fall in time. Its mini-rise since November 17th will need to be challenged, once the foreign money flows away from U.S. government debt. This will not happen immediately, since foreign investors are finding it difficult to look for alternate holdings. It can be seen that since the US dollar has rallied, gold (an alternate holding to the USD) has fallen, and the 20 yr. bond is still holding up, this scenario has yet to play its course.

See TLT Chart.