Article Index


Bond-Buying Chaos Is Spinning Out of Control


A few weeks ago, the man formerly known as the Bond King, Bill Gross, tweeted that shorting German bunds would be the trade of the century.

I was gratified to see that he was reading my mind, as readers of my Credit Strategist newsletter already know.

As a result of a massive bond-buying program by the European Central Bank (ECB), the yields not only on German bunds but on all European debt had plunged to ridiculously low levels.

Here's what you need to know...

Why the Federal Reserve Will Move Rates

federal reserve

To say that markets are confused about when the Federal Reserve is going to raise interest rates is the understatement of the year.

The confusion is understandable. While the U.S. economy no longer needs crisis-era policies like zero interest rates and quantitative easing, the rest of the world is still struggling.

While some would argue that such policies are not the answer, central banks in Europe, Japan and China are doubling down on huge bond buying programs.

The question is whether the Federal Reserve will go its own way or allow weakness abroad to govern its next move...

What Are High-Yield Stocks?

high-yield stocks

With interest rates at an all-time low, high-yield stocks have replaced bonds as the best option to provide a stream of income in a portfolio. What's more, they deliver the added perk of equity ownership for potential growth.

Here we explain what high-yield stocks are and give readers a few examples to get them started today...

Argentina Stock Market Crash Reverses After Today's Deal – for Now

stock market crash argentina

Monday, a stock market crash to the tune of a 12.22% drop hit the Merval Argentina (BCBA: IAR), the most important index of the Buenos Aires Stock Exchange. The index fell to 5,847.78 by market close on Monday – 15% from its all-time high hit just six days prior.

But today, Argentina’s stock market got relief. Stocks are up 1.14% after the country’s lawyer said it will negotiate with a group of hedge funds that are suing over $1.33 billion in bonds.

The move is historic since Argentina had said it would never negotiate with the group – but, after what happened this week, they had little choice...

Money Morning Exclusive: Meredith Whitney on Muni Bonds and Red State-Blue State Migration

Bonds Q

In 2010 Meredith Whitney made an earth shattering statement during a CBS's "60 Minutes" interview that rocked the municipal bond investment world.

"There is not a doubt in my mind that you will see a spate of municipal-bond defaults,"said Meredith Whitney on Dec 19. She continued, "You could see 50 sizable defaults, and 50 to 100 sizeable defaults, more. This will amount to hundreds of billions of dollars' worth of defaults."

The muni bond market fell far short of Whitney's prediction. But many today feel she was merely ahead of her time.

Recently Detroit has defaulted on its muni bonds leaving investors hoping to get 10% return on their original investment, but there are no guarantees.

As Detroit moves closer to bankruptcy California has 10 cities facing the same fate. The cities of Atwater, Azusa, Compton, Fresno, Hercules, Mammoth Lakes, Monrovia, Oakland, San Jose and Vernon are ready to file for bankruptcy following the now bankrupt Stockton's lead.

Money Morning's Shah Gilani recently talked to Whitney in an exclusive interview about her new book, The Fate Of The States:
The new Geography of American Prosperity

She believes that wealth and opportunity are moving away from the coasts and toward the central corridor. The states of California, Florida and Nevada benefited from the housing boom. However instead of budgeting wisely, local governments spent their windfall profits as fast as they came in on pay increases for public employees, pension increases and pay hikes.

When the housing boom ended, the money stream became just a trickle of new capital. The states were left with pensions they couldn't pay and employees they couldn't afford. They were forced to raise taxes for schools and essential public services.

In contrast a much different scenario was developing in the interior states: N. Dakota, Texas, Indiana. These states avoided the housing crisis. Because foreclosure was not a serious problem they found themselves rich in capital with money to offer tax incentives to companies to relocate and retrain new employees.

These central states are also positioned to reap the massive benefits of from the oil and natural gas boom.

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What Bankrupt Athletes Wish They Knew About Financial Windfalls

Game football

Few among us haven't dreamed of sudden riches - the financial windfall of a big legal settlement, an unexpected inheritance, a winning lottery ticket, or, for the young and athletically gifted, a lucrative contract with a major professional sports franchise.

But it turns out that few are prepared for a financial windfall when it comes their way.

Nowhere is this more obvious than with big sports stars.

Despite the proliferation of multimillion-dollar contracts, an astonishing number of professional athletes are forced to declare bankruptcy within a few years of hanging up their jerseys.

In the National Football League, for example, where the average salary is $1.9 million, 78% of former players are in bankruptcy within five years of retirement. That figure is 60% for former National Basketball Association players, who earn an average of $5.5 million a year as players.

How can people so generously compensated go broke so quickly?

Part of it has to do with youth, but many of the mistakes athletes make with the financial windfall of a professional sports salary also are made by regular people who suddenly come into large sums of money.

There's a lot we all can learn from their mistakes. When it comes to financial windfalls, it's best to know what to expect ahead of time so you can put the money to work for you instead of squandering it.

"Every single day, people come into large sums of money, whether it's a thousand dollars or a million, and without proper planning, funds quickly disappear," writes Jim Wang in U.S. News and World Report. "Just look at the horrible stories you often hear of lottery winners, and you'll have enough evidence that everyone needs a little preparation, even if you don't expect to get a windfall."

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Beat Ben Bernanke with These Juicy Double-Digit Yields

With the economy beginning to stall, Ben Bernanke's war on the nation's savers rolls on.

From his promise to keep the Fed funds rate near zero through late 2014 to his efforts to push ten-year note yields even lower, the Fed Chairman is a saver's worst nightmare.

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The Five Questions You Need to Ask Your Financial Advisor Right Now

If you have a financial advisor you need to read this-especially if you are one of the 99%.

That's everybody who isn't a gazillionaire. You may know a few people who fit this bill.

Being a 99-percenter just means that you want to do better.

In that regard, you're no different than the 1%. They just have more money and by extension more freedom than you.

That doesn't mean they are any smarter.

I know plenty of uber-rich people who are financially inept. You probably do, too.

What sets people apart sometimes, though, is as simple as the questions they ask. True 1-percenters have this down pat-even if they don't have a gazillion dollars.

Here are five things you need to ask your financial advisor today if you want to join them.

If you do, you'll profit more consistently, reduce your risk and invest with greater peace of mind.

And I have no doubt that you will join the real 1%.

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No Bull: Could the 10-Year Note Hit 1%?

In the wake of Friday's disastrous jobs number, 10-year Treasury Note yields finally fell through the 1.5% level, trading as low 1.44% on the day.

That plunge took many traders, talking heads and politicians by surprise.

Our "leaders" in Washington D.C. were heard to say: "Nobody saw this coming."

Well, that's just not true. Not one iota.

If you've been reading Money Morning you saw this coming. So did tens of thousands of our Money Map Report subscribers.

I've been warning that 10 year yields would drop below 2% then hit 1.5% for more than 2 years now.

In fact, our readers had the opportunity to profit handsomely on our bond related recommendations that have earned them 30%-71% so far.

What does this mean for you?

First questions first...

Now that we've busted 1.5%, the next stop is 1%.

I can even see negative yields ahead, meaning that investors who buy Treasuries will actually be paying the government to keep their money.

Be prepared. I'm going to show you here what to do and - yes -how you can profit from this move-- even at this stage of the global financial crisis.

Why Bond Yields Will Continue to Fall

First off, 10-year yields dropping to 1% means several things:

  • Bond prices go even higher. Rates and prices go in opposite directions. Therefore when you hear that yields are falling, this means that bonds are in rally mode.
  • The world is more concerned with the return of its money than the return on its money. You can take your pick why. Personally I think it comes down to two things above all else: the looming disintegration of the Eurozone and the fact that our country is $212 trillion in the hole and warming up for another infantile debt ceiling debate instead of reining in spending.
  • More stimulus. Probably in the form of a perverse worldwide effort coordinated by central bankers as part of the greatest Ponzi scheme in recorded history.
But zero percent or negative yields - right here in the US of A?

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Investors Turn to TIPS as Warren Buffett Warns on Inflation

Warren Buffett last week did more than warn investors on the dangers of low interest rates and inflation.

The Oracle of Omaha also had harsh words for traditional bonds.

In a Fortunearticle Buffett went so far as to say, "Right now bonds should come with a warning label."

"They are among the most dangerous of assets," Buffett wrote, "Over the past century these instruments have destroyed the purchasing power of investors in many countries."

To prove his point Buffett labeled inflation as the primary threat to bond investors, noting it takes no less than $7 today to buy what $1 did in 1965.

Instead of bonds, Buffett recommends "productive assets," including farmland and real estate.

But he saved his highest praise for stocks, especially the stocks of companies like The Coca-Cola Co. (NYSE: KO) and International Business Machines Corp. (NYSE: IBM), that consistently deliver inflation-beating returns.

But what if you're not comfortable betting most or all of your chips on stocks? And if traditional bonds are out, where else can investors turn for inflation beating returns?

TIPS Insure Wealth Against Inflation

Enter Treasury Inflation Protected Securities, or TIPS.

Unlike regular bonds, TIPS are designed to protect your principal against the ravages of inflation.

In fact, TIPS zig when other securities zag, providing diversification and safety to your portfolio.

TIPS are considered to be an extremely low-risk investment since they are backed by the U.S. government, and their par value rises with inflation while their interest rate remains fixed.

Here's how they work.

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Are Federal Reserve Presidents Gaming the System?

The presidents of the U.S. Federal Reserve may not have used their knowledge for personal gain, but a look at their assets does show several apparent conflicts of interests. More than 600 pages of disclosure documents were released last week after Bloomberg News filed a Freedom of Information Act request. The most troubling revelation concerned […]

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Bankers Committed Fraud to Get Bigger Bonuses

In case you didn't catch the article titled "Guilty Pleas Hit the 'Mark'" in the Wall Street Journal, I'm here to make sure you don't miss it.

This is too good.

Three former employees of Credit Suisse Group AG (NYSE: CS) were charged with conspiracy to falsify books and records and wire fraud. They were accused of mismarking prices on bonds in their trading books by soliciting trumped-up prices for their withering securities from friends in the business.

By posting higher "marks" for their bonds in late 2007, they earned big year-end bonuses.

What a shock!

What's not a shock is that, after a bang-up 2007, Credit Suisse had to take a $2.85 billion write-down in the first quarter of 2008. No one knows how much of that loss was attributable to the three co-conspirators who were fired over their "wrongdoing."

Two of the three accused pled guilty. Also not shocking is the reason David Higgs - one who pled guilty - gave for his actions. He said he did it "to remain in good favor" with bosses, who determined his bonus and who profited handsomely themselves from his profitable trading and inventory marks.

As for Salmaan Siddiqui, the other trader who pleaded guilty? His attorney Ira Sorkin, the former Securities and Exchange Commission (SEC) enforcement chief, said of his client: "What he did was the result of his boss and his boss' boss directing him to do it."

You know what else is shocking?

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Money-Markets, CDs, and Bonds: The Ups and Downs of Stashing Your Cash

In today's volatile markets many investors are faced with the same troublesome question - "Where should I park my cash?"

In fact, investors have withdrawn a net total of $328 billion from the stock market since 2007, according to Strategic Insight.

Ever since, a big portion that cash has been looking for a home.

It seems simple enough, but investors are finding the answer to be more complicated than they imagined...

Thanks to our friends at the Federal Reserve, interest rates are at record lows. In fact, they're so low that most investors are getting practically nothing in returns.

Meanwhile, the stock market has put on a New Year's rally, rewarding those who were willing to jump in while leaving cautious investors wondering if they're holding too much boring old cash.

However, in order to have an adequate safety net, your cash on hand should be enough to cover about a year's worth of expenses, according to Shah Gilani, a retired hedge fund manager and Editor of the acclaimed Wall Street Insights & Indictments newsletter.

"That's a good safety net," Shah says.

But no matter how much cash you hold, you still have to balance your need for higher returns against your risk tolerance.

Because whether you're thinking "safety first" or are tempted to reach for a little more yield, the choice you make might determine whether you're able to sleep at night.

Three Places to Park Your Cash

With that in mind, here's a look at three of the most popular places to park your cash.

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The Madness of Crowds: How to Play Bonds, China, and Gold in 2012

Yes, I know that markets are irrational.

I read Charles Mackay's 1841 classic, "Extraordinary Popular Delusions and the Madness of Crowds" long before it ever became fashionable.

Even so, when you think about it, 2011 must set some kind of record.

As investors, that means we need to decide whether this madness will continue in 2012 and which direction to take.

Take the madness in the bond world, for instance.

Long-term bonds of a country with an out-of-control budget deficit and a worrying trade deficit are currently yielding 1.6% below inflation.

In other words, year after year, investors are willing to pay 1.6% of their capital to hold them. On top of that, investors have been so keen on this miserable asset in 2011 they have bid up its price by no less than 26%.

Conversely, China is revolutionizing the world economy.

Year after year, China puts up growth rates of 8% or more, and the latest data suggest that will continue throughout 2012.

What's more, Chinese stocks stand on a bargain-basement price-to-earnings (P/E) ratio of less than 8-times earnings. Yet, in 2011, investors shunned these bargains, giving the Chinese market a pathetic return of minus-22%.

It is Madness I Tell You

Do you see what I mean when I talk about irrational?

To a Martian, these statistics would be proof that earthly markets had lost their collective minds. That's not just a random walk - it's a deliberate stroll that will destroy your wealth.

For investors, it raises the question of how long this irrationality is going to last. Will this extreme irrationality persist in 2012, or will it reverse?

The first conclusion to be drawn is that current markets...

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Why Warren Buffett Is Buying – And You Should Be Too

Legendary investor Warren Buffett recently made news with his purchase of International Business Machines Corp. (NYSE: IBM), though I can't say I'm surprised.

Despite criticism that he's buying into a top-heavy market, that IBM is at a premium, and that he's losing his touch, chances are Buffett knows exactly what he's doing.

And guess what, it's exactly what I've been counseling investors to do since this crisis began - bolster defenses by putting money to work in companies that are backed by trillions of dollars in tailwinds, and have solid defensible businesses (Buffett calls these "moats").

According to a Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) filing made Monday but dated Sept. 30, 2011, Buffett also waded into General Dynamics Corp. (NYSE: GD), DirecTV (Nasdaq: DTV), CVS Caremark Corp. (NYSE: CVS), Intel Corp. (Nasdaq: INTC) and Visa Inc. (NYSE: V).

In the third quarter, Buffett funneled $10 billion into Berkshire's IBM stake, which now stands at 5.5%. Of course, Berkshire maintains a $13.5 billion stake in The Coca-Cola Co. (NYSE: KO) that remains the firm's largest.

Buffett Pulls the Trigger

As a long time Buffett watcher, I am somewhat surprised that he picked up Intel and IBM, if only because the Oracle of Omaha has a well-documented aversion to tech.

Still, I can see the logic. Both companies are global giants poised to profit from the whirlwind of growth set to take place thousands of miles from our shores in the decades ahead.

There are technical similarities, too.

For instance, IBM's price has risen more than 29% this year. As a result, at least five analysts have removed their buy recommendations because they believe the stock may have run its course, according to Bloomberg News and YahooFinance . At the moment, less than 50% of the analysts who cover IBM recommend buying the stock.

Back in 1988, it was much the same situation. Coke had more than doubled in size and analysts had much the same reaction when it came to doubts about further growth. Many openly bashed the stock's prospects and completely ignored the global growth potential that today is Coke's mainstay.

Coke is up tenfold since then. Enough said.

Here's what I think Buffett sees:

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