How to Protect Yourself From the Collapse of Treasury Bonds
By now, you've probably taken note of the growing bubble in Treasury bonds.
The yield on the 10-year Treasury bond fell below 2% for the first time in 50 years in the wake of the U.S. credit rating downgrade.
That's irrational, and more importantly, dangerous.
A Treasury bond bubble is a unique creature. In fact, it's never been seen before, so determining its fate requires some careful thought.
But what's absolutely certain is that U.S. Treasuries are not a safe haven investment – far from it.
Treasury bonds carry five very dangerous risks – including negative yields, higher inflation, panic selling, an outright collapse, and default.
So let's take a closer look at those risks before determining the best way to profit.
First, real yields on Treasuries, after accounting for inflation, are now negative. Not only are nominal Treasury yields below the current inflation rate, but 10-year Treasury Inflation Protected Securities (TIPS) have traded on a yield of less than zero.
That is very unusual and economically distorting. Long-term bond yields in the zero-inflation 19th century never fell below 2.2%, which is to be expected. The guy who provides the money should get paid for doing so. However, any reversion to historical patterns would cause a major bond bear market. Ten-year Treasury yields would rise to the 5% to 6% range – even if inflation gets no faster – giving investors a 27% mark-to-market loss.
Of course, inflation will accelerate.
The consumer price index (CPI) inflation is up 3.6% from last year. And it's likely to rise much further as a result of the Federal Reserve's loose monetary policies.
If inflation were to rise to 10%, which is perfectly plausible, bond yields would have to rise to 12% to 13%, giving investors a 59% mark-to-market loss as well as eroding the value of their principal.
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Alliance Bernstein Holding LP's (NYSE: AB) 9.4% Dividend Yield is Too Juicy to Pass Up
In a market denoted by volatility, stocks with a high dividend payout typically come at a premium, but in the case of AllianceBernstein Holding LP (NYSE: AB) we have a bargain.
This is a company that has broad global exposure, no debt to service, and a 9.4% dividend yield.
Better still, AB stock has been beaten down of late, which means we have the opportunity to snap up this gem at a bargain-basement price.
For patient investors looking for cash flow, it doesn't get any better than this. So it's time to buy AllianceBernstein Holding LP (NYSE: AB) (**).
Why AllianceBernstein Holding LP (NYSE: AB) Is a Buy
AllianceBernstein isn't a household name but it's one of the largest asset managers in the world. The $1.5 billion company is the end result of Alliance Capital Management acquiring Sanford C. Bernstein in 2000.
The company has offices in New York, London, Frankfurt, Tokyo, Hong Kong, Sydney and Chicago, giving the company a truly global reach.
Another great thing about AllianceBernstein is that it pays 100% of its earnings per share to investors. That's why the stock currently sports a yield of 9.4%.
Jackson Hole Speech: Fed Can't Fix Economy Without Washington's Help
The U.S. Federal Reserve has exhausted nearly all of its resources in trying to help the U.S. economy, Chairman Ben S. Bernanke said in a speech Friday at Jackson Hole, WY.
Now it's up to the federal government to do its part by fixing U.S. fiscal policy.
"Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank," Bernanke said in his address to the annual conference in sponsored by the Kansas City Fed.
Some analysts thought Bernanke would hint at a third round of quantitative easing, but instead he handed off responsibility for reviving the economy to Congress and the White House.
The absence of any policy changes at first disappointed Wall Street – the Dow Jones Industrial Average fell 220 points immediately following the speech – but the negative sentiment didn't last. The Dow closed up 134.72 points, or 1.21%, while the Standard & Poor's 500 Index rose 17.53 points, or 1.51%.
"The Federal Reserve Chairman may have left the door open for more easing measures, but he has given the markets nothing concrete this morning," John Kilduff, a partner at Again Capital LLC, told Reuters. "It appears the Fed has stepped back, leaving us to await efforts from the White House and Congress, if any, to bolster theeconomy. This is a bearish development."
The only tidbit of fresh information Bernanke offered in his Jackson Hole speech was the extension of the Federal Open Market Committee's (FOMC) September meeting from one day to two (Sept. 20-21), "to allow a fuller discussion" of the "merits and costs" of the Fed's policy options.
Bernanke's Jackson Hole Speech: Why QE3 Won't Spell Relief
U.S. Federal Reserve Chairman Ben S. Bernanke has a choice to make this morning (Friday) before giving his Jackson Hole speech.
And he can't win either way.
Bernanke can telegraph a third round of quantitative easing (QE3), which most economists believe would at best be ineffective. Or he could do nothing to reassure the markets that have already priced in another $500 billion to $600 billion of central bank U.S. Treasury purchases.
In either case, the outcome won't be pretty.
Many analysts already have questioned the effectiveness of QE1 and QE2, and even the ones that don't are pessimistic about the potential outcome of QE3.
Money Morning Chief Investment Strategist Keith Fitz-Gerald said that although the markets may be looking for QE3, it would be a bad idea.
"It has never worked since the dawn of recorded time and it will not work now," Money Morning Chief Investment Strategist Keith Fitz-Gerald said on the Fox Business program "Varney and Co." "You cannot debase your currency and work your way out of this for anything but a short-term basis."
However, should Bernanke indicate the Fed is not considering QE3, the markets – which have risen about 5% this week — could choke on the news.
"The market's sending a signal to Bernanke saying, 'We want QE3 and we want it this week, or we're going to hammer you and the market will get absolutely killed,'" Keith Springer, president of Springer Financial Advisory, told CNBC.com. "The stock market is addicted to QE."
Third Time the Charm?
Some observers viewed the week's glum economic reports on housing, manufacturing and unemployment as possible catalysts for Fed action.
"It's almost as if negative news is being priced in as something positive because it underscores the argument that the Fed needs to do something," Abigail Huffman, director of research for Russell Investments, told The Wall Street Journal. "People are hedging their bets. They're hoping for the best and positioning for the worst."
Apple Inc. (Nasdaq: AAPL) Loses its Magic Touch with Steve Jobs' Departure
Jobs helped Apple's share price climb to $373 – a 9,020% gain since 1997 when he was named interim CEO. Earlier this month, Apple's market capitalization grew to $337.17 billion and it briefly displaced Exxon Mobil Corp. (NYSE: XOM) as the most valuable U.S. company, but was unable to hold the lead.
All this from a college dropout who quit his first job to backpack around India.
Yet, the legendary Jobs stunned fans and employees late Wednesday when he announced he would step down as the chief executive officer of the tech giant, 35 years after making his first computer in his parents' garage.
Jobs recommended the company appoint his current fill-in Chief Operating Officer Tim Cook as CEO. Apple's Board immediately did so.
Still, as capable as Cook may be, Jobs' "magic man" presence is irreplaceable.
"I believe the top is in for Apple and it will become a more "normal' company in the future," said Money Morning Global Macro Trends Specialist Jack Barnes. "Steve was an edge they cannot replace. While the company is rich and profitable, it has lost its prophet."
Steve Jobs' Irreplaceable Creative Force
The news wasn't a shock to some Apple-watchers who speculated Jobs' worsening health would lead to a premature exit.
Jobs had been on medical leave since January, popping up occasionally for conferences and product unveilings. This is his third health-related absence; he was gone in 2004 to undergo pancreatic cancer treatment, and again in 2009 for a liver transplant.
Jobs' personality and demanding management style – paired with his creative genius – are what vaulted Apple to the innovative tech leader it's become.
Perhaps the hardest loss for Apple will be Jobs' intuition.
"The big thing about Steve Jobs is not his genius or his charisma but his extraordinary risk-taking," Alan Deutschman, who wrote a biography of Jobs, told The New York Times. "Apple has been so innovative because Jobs takes major risks, which is rare in corporate America. He doesn't market-test anything. It's all his own judgment and perfectionism and gut."
The Next Banking Crisis Starts Here
Fears of a banking crisis and rolling contagion are making global stock and bond markets extraordinarily volatile – and with good reason.
Another financial meltdown, on par with what we saw in 2008, is looming large on the horizon.
One of two potential triggers could ignite a new banking crisis, a rapid contagion, and a second financial meltdown:
- One or more of the troubled European countries could default outright.
- Or a major money center bank could be turned away from the interbank borrowing market by its peers.
The panic resulting from either catalyst could start at any time.
And it would spread like wildfire.
The threat of a banking crisis leading to a meltdown centers on Europe. European banks hold huge amounts of their home sovereign's debt, as well as debt of their Eurozone neighbors.
So when default risk rises for any sovereign in the euro area, every one of the region's banks feels the impact on their balance sheets.
Of course, it may not be immediately reflected in write-downs because many banks hold sovereign bonds in their "held-to-maturity" books, as opposed to accounting for them in their "available-to-trade" books.
Being held to maturity means bonds are accounted for at amortized cost as opposed to being marked-to-market, as they would have to be in the trading book.
This is a double-edged sword for banks. Banks don't have to mark down bonds in the long-hold book unless they become "impaired." But in an uncertain market, fearful investors may hammer a bank's stock because its true exposure to bad debt is unknown.
A less obvious spillover of holding so much sovereign paper is that banks use those sovereign bonds as collateral to borrow from other banks in the short-term funding markets. As the value of sovereign collateral comes into question, it can be haircut (reduced in value as collateral) drastically, or not accepted at all.
Banks right now want solid collateral from the counterparty banks to which they are lending their funds. And since lenders already own huge amounts of sovereign debt, they are starting to turn away distressed sovereign paper as inadequate collateral.
When that happens, banks in need of funding are forced to turn to central banks. And that's where it gets really scary.
The Latest Development With Private Briefing's Mystery Energy Stock
In last Friday's Private Briefing, former hedge-fund manager Jack Barnes told subscribers about a U.S.-based energy company he believed could be a "high-risk/high-return" profit play.
Just a few days later, the head of a major overseas energy firm announced plans to partner up with the American company and the stock jumped more than 6%.
That's just the beginning, Barnes said.
Higher Corn Market Prices Will Hit Your Wallet
A smaller-than-expected U.S. fall harvest, combined with strong demand, has sown the seeds of higher corn market prices. That will inflate your grocery bill, but it's also an investing opportunity that should persist into next year according to some experts.
The United States Department of Agriculture (USDA) recently reduced its forecast for the fall corn crop to 12.9 billion bushels from 13.5 billion based on damage from spring flooding and summer drought in several key corn-producing states.
Midwest temperatures averaged eight degrees higher than normal in July, while some areas got less than a third of their normal rainfall.
"Corn is dead on some of the sandiest ground and looks more like the middle of October than mid-August. The corn crop is pretty much a done deal," Mike Mawdsley of broker Market 1 told Agrimoney.com.
In addition to lowering its estimate for the fall harvest, the USDA has also lowered its quality rating of the U.S. corn crop. The USDA had rated 70% of the corn crop "good to excellent" as of June 26; that number fell to 60% on Aug. 14 and was revised down to 57% on Monday. Last year, 70% of the corn crop was rated good to excellent.
Many experts believe the USDA has only just begun to downgrade.
"The USDA crop forecast should …still prove too optimistic, despite the downward revision already made in August,"Commerzbank analysts said.
Another group, MDA Information Systems Inc., has already undercut the USDA's harvest estimate. MDA forecasts a corn crop of just 12.23 billion bushels.
The ever-worsening harvest forecasts have steadily pushed corn market prices higher.
The price of corn has soared 70% in the past 12 months, with futures for September and December delivery well north of $7 a bushel. September futures on the Chicago Board of Trade (CBOT) rose to $7.29 on Tuesday, while December futures rose to $7.42.
That's bad for consumers. Corn is the single-biggest cause of increases in food prices, which are expected to rise 4% for 2011. Analysts expect higher corn market prices to help push retail food prices up another 4% next year.