Ongoing stock market worries and a string of discouraging economic reports have imbued the U.S. bond market with "safe-haven" status. The upshot: Investors have poured record amounts of money into bond funds.
"It is hard to pick up the newspaper and see anyone optimistic," Francis Kinniry from The Vanguard Group Inc., told Bloomberg News. "The problem is there is not a lot of good news on the recovery front and that translates in people's mind to poor capital markets."
Bond funds for the past two years have seen inflows almost as high as stock funds did during the Internet bubble, according to the Investment Company Institute (ICI). From January 2008 through June 2010, outflows from equity funds totaled $232 billion, while inflows to bond funds hit a staggering $559 billion.
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Are Bonds a Bubble? Don't Bet on It
With the stock market unsteady, don't overlook the value of adding bonds to your portfolio. They provide income and are more reliable than equities.
Indeed, bonds have had a strong run up in the past decade - so strong, in fact, that many investors are afraid they've entered bubble territory. But not Albert Edwards, chief strategist at the old-school French bank Societe Generale SA (PINK: SCGLY).
Edwards isn't your typical white-shoe analyst. Guys in his position tend to have a perpetually optimistic worldview. Since they are in the business of selling the dream, they need to talk up assets. But Edwards is an iconoclast who is known as one of the dourer professional forecasters.
Indeed, bonds have had a strong run up in the past decade - so strong, in fact, that many investors are afraid they've entered bubble territory. But not Albert Edwards, chief strategist at the old-school French bank Societe Generale SA (PINK: SCGLY).
Edwards isn't your typical white-shoe analyst. Guys in his position tend to have a perpetually optimistic worldview. Since they are in the business of selling the dream, they need to talk up assets. But Edwards is an iconoclast who is known as one of the dourer professional forecasters.
Defensive Investing: Beware of Municipal Bonds
Of the speculative excesses that misguided monetary policy and a prolonged recession has caused, the one that poses the most danger to investor wealth is the financial bubble in state and local municipal bonds.
Municipal bonds - usually referred to as "munis" - are very popular portfolio plays because of tax advantages that, in effect, enhance their rates of return. There's also an allure because of their local nature: Investors can invest in specific bond issues that provided the money for projects such as schools, highways, bridges, hospitals or housing that actually affects the community in which the investor lives. That makes them a very tangible investment.
But there's a problem.
State-and-local-government finances have taken a bigger beating during this economic downturn than during any other recession since World War II. Even worse, that beating came after the easy money available during this stretch encouraged those same governments to venture well beyond any reasonable limits in terms of their borrowing. They're now stuck with a bigger-than-warranted debt load - which can't be covered by the property tax stream that's been reduced by record-level housing defaults.
The bottom line: At the present time, "munis" may not be the benign - or even alluring - investment that they've been in the past. In fact, thanks to continued fallout from the worst financial crisis since the Great Depression, some munis may be more akin to bombs than bonds - ticking away and just waiting to blow up your portfolio.
Municipal bonds - usually referred to as "munis" - are very popular portfolio plays because of tax advantages that, in effect, enhance their rates of return. There's also an allure because of their local nature: Investors can invest in specific bond issues that provided the money for projects such as schools, highways, bridges, hospitals or housing that actually affects the community in which the investor lives. That makes them a very tangible investment.
But there's a problem.
State-and-local-government finances have taken a bigger beating during this economic downturn than during any other recession since World War II. Even worse, that beating came after the easy money available during this stretch encouraged those same governments to venture well beyond any reasonable limits in terms of their borrowing. They're now stuck with a bigger-than-warranted debt load - which can't be covered by the property tax stream that's been reduced by record-level housing defaults.
The bottom line: At the present time, "munis" may not be the benign - or even alluring - investment that they've been in the past. In fact, thanks to continued fallout from the worst financial crisis since the Great Depression, some munis may be more akin to bombs than bonds - ticking away and just waiting to blow up your portfolio.
To understand why "muni" bonds may be dangerous, please read on...
Has the U.S. Lost its Grip on the Credit-Rating Business?
There's a new name in the credit-rating-agency business these days: It's Dagong Global Credit Rating Co. Ltd., and this Beijing-backed business is China's bid for a spot in the global-credit-rating oligopoly.
And Dagong's Chairman Guan Jianzhong doesn't think much of his long-established U.S. competitors.
"The Western rating agencies are politicized and highly ideological and they do not adhere to objective standards," Jianzhong told The Financial Times earlier this month.
Is he right? And does the newly passed Wall Street Reform and Consumer Protection Act correct their flaws, or does it make matters worse? It's a question that affects all investors - even those of us that don't invest in bonds, as we'll soon see.
And Dagong's Chairman Guan Jianzhong doesn't think much of his long-established U.S. competitors.
"The Western rating agencies are politicized and highly ideological and they do not adhere to objective standards," Jianzhong told The Financial Times earlier this month.
Is he right? And does the newly passed Wall Street Reform and Consumer Protection Act correct their flaws, or does it make matters worse? It's a question that affects all investors - even those of us that don't invest in bonds, as we'll soon see.
To understand how credit-raters will influence investments going forward, please read on...
State Budget Crises Threaten U.S. Economic Recovery
Across the country state budget crises are threatening to undermine the U.S. economic recovery.
Some 48 states are emerging from a round of painful budget cuts for their 2010 fiscal budgets, and at least 46 states face shortfalls for the upcoming 2011 fiscal year, which in most states began July 1.
The recession has caused the steepest decline in state tax receipts on record - and states will continue to struggle to find the revenue needed to support critical public services for a number of years as a result.
Since virtually all states are required to balance their operating budgets each year they cannot maintain services during an economic downturn by running a deficit, as the federal government does.
Some 48 states are emerging from a round of painful budget cuts for their 2010 fiscal budgets, and at least 46 states face shortfalls for the upcoming 2011 fiscal year, which in most states began July 1.
The recession has caused the steepest decline in state tax receipts on record - and states will continue to struggle to find the revenue needed to support critical public services for a number of years as a result.
Since virtually all states are required to balance their operating budgets each year they cannot maintain services during an economic downturn by running a deficit, as the federal government does.
High-Yield Hangover: Cash Pouring Into Junk-Bond Funds May Signal Stormy Seas For Stocks
Investors are plowing money into junk-bond funds, which leveraged borrowers at private equity funds are using to pay dividends to themselves and to buy out more public companies.
The huge-and-growing overhang of debt-laden portfolio companies that private-equity shops want to take public - when combined with additional leveraged deals in the pipeline - will keep a lid on U.S. stock prices and could even spark a sell-off for stocks in both the United States and Europe.
Let me explain...
The huge-and-growing overhang of debt-laden portfolio companies that private-equity shops want to take public - when combined with additional leveraged deals in the pipeline - will keep a lid on U.S. stock prices and could even spark a sell-off for stocks in both the United States and Europe.
Let me explain...
To understand how this push into junk bonds is magnifying stock-market risk, please read on...
Money Morning Mailbag: Investors Show Growing Concerns Over Deflation
The threat of deflation has been making its rounds as inflationary measures like the consumer price index (CPI) fell for the first time in 13 months in April, dropping 0.1%. Core CPI - which excludes food and energy prices - rose only 0.9%, its smallest gain since 1966. The producer price index (PPI) also dipped 0.1%.
"The recent trend in inflation has been swiftly to the downside," Eric Green, chief U.S. rates strategist at TD Securities, told Reuters. "All measures of inflation are decelerating."
Investment behavior has shown an anxious but mixed sentiment of hedging against both inflation and deflation: Demand for gold metal is outstripping supply by more than 1% per year and has pushed gold prices to record highs, while others have sought out both corporate bonds and U.S. Treasuries for safety.
"The recent trend in inflation has been swiftly to the downside," Eric Green, chief U.S. rates strategist at TD Securities, told Reuters. "All measures of inflation are decelerating."
Investment behavior has shown an anxious but mixed sentiment of hedging against both inflation and deflation: Demand for gold metal is outstripping supply by more than 1% per year and has pushed gold prices to record highs, while others have sought out both corporate bonds and U.S. Treasuries for safety.
The Shift Toward De-globalization is Bullish for Gold
You can see signs of de-globalization everywhere. Just look at the intense shareholder opposition to Prudential PLC's proposed takeover of the Asian operations of American International Group Inc. (NYSE: AIG).
And that's just one example.
The market scare on news that North Korea had, indeed, sunk a South Korean Naval vessel was another. The "flight to safety" in U.S. Treasuries - sparked by the increasing concern about the future of the euro and the viability of Greek government finances - is a third.
All over the world, little by little, the apparently inexorable tide of "globalization" - making the world "flat" in the words of Thomas L. Friedman - is retreating. If a full-scale financial crisis breaks out in the next few months, that retreat will become a rout. And the world will become de-globalized.
And that's just one example.
The market scare on news that North Korea had, indeed, sunk a South Korean Naval vessel was another. The "flight to safety" in U.S. Treasuries - sparked by the increasing concern about the future of the euro and the viability of Greek government finances - is a third.
All over the world, little by little, the apparently inexorable tide of "globalization" - making the world "flat" in the words of Thomas L. Friedman - is retreating. If a full-scale financial crisis breaks out in the next few months, that retreat will become a rout. And the world will become de-globalized.
For the warning signs of de-globalization, please read on...
U.S. Treasury Bonds: The Not-So-Safe "Safe Haven"
In the last few weeks, international investors spooked by the budget crisis in Greece and the turmoil in southern Europe have been flocking into the U.S. Treasury bond market as a "safe haven."
The huge resulting funds flows have pushed the 10-year Treasury bond yield down to 3.16%, very little above its level during the crisis of October 2008. To a rational investor, this is extremely peculiar: After all, what on earth is safe about the "haven" of long-term U.S. Treasury bonds?
To learn about the potential investment dangers posed by U.S. government debt, please read on...
The huge resulting funds flows have pushed the 10-year Treasury bond yield down to 3.16%, very little above its level during the crisis of October 2008. To a rational investor, this is extremely peculiar: After all, what on earth is safe about the "haven" of long-term U.S. Treasury bonds?
To learn about the potential investment dangers posed by U.S. government debt, please read on...
Why the Eurozone Debt Contagion is Telling Us That It's Time to Buy Dividend Stocks, REITS and MLPs
With the escalating Eurozone-debt-contagion fears of recent weeks, a significant shift is taking place in the global stock-and-bond markets.
The powerful bull cycle that grew out of the early March 2009 market lows - the quickest and strongest stock-market rebound of the past 50 years - has been losing some of its youthful verve as it matures. That means we can expect the pace of gains to moderate as asset classes (stocks, bonds, currencies, commodities) begin to differentiate themselves.
But that doesn't mean the profit opportunities are gone. As that differentiation plays out, such income-oriented plays as high-yielding dividend stocks, real estate investment trusts (REITS) and master-limited partnerships (MLPs) will prove to be major beneficiaries, experiencing a handsome run-up in price. Shrewd investors will move into those investments before their prices increase.
The powerful bull cycle that grew out of the early March 2009 market lows - the quickest and strongest stock-market rebound of the past 50 years - has been losing some of its youthful verve as it matures. That means we can expect the pace of gains to moderate as asset classes (stocks, bonds, currencies, commodities) begin to differentiate themselves.
But that doesn't mean the profit opportunities are gone. As that differentiation plays out, such income-oriented plays as high-yielding dividend stocks, real estate investment trusts (REITS) and master-limited partnerships (MLPs) will prove to be major beneficiaries, experiencing a handsome run-up in price. Shrewd investors will move into those investments before their prices increase.
To see what stock-market sectors hold the most promise, please read on...
Greece's Action on Aid Package Fails to Quiet Threat of Debt Contagion
A request by Greece to trigger a $60 billion rescue package has failed to quell turmoil surrounding the country's bonds - heightening concerns that the debt contagion will force the European Union (EU) to bail out the region's other heavily indebted nations.
Greece on Friday asked the International Monetary Fund (IMF) and European governments to fund the emergency aid package to help fend off default when debt payments come due next month.
But instead of stabilizing the markets, uncertainty about Germany's willingness to fund its portion of the package, along with the potential for more bailouts, raised the cost of insuring Greek debt against default to a new record.
The euro plummeted after briefly bouncing off a 12-month low of $1.32 against the dollar Friday.
Greece on Friday asked the International Monetary Fund (IMF) and European governments to fund the emergency aid package to help fend off default when debt payments come due next month.
But instead of stabilizing the markets, uncertainty about Germany's willingness to fund its portion of the package, along with the potential for more bailouts, raised the cost of insuring Greek debt against default to a new record.
The euro plummeted after briefly bouncing off a 12-month low of $1.32 against the dollar Friday.
Why the Bulls Can Stand Strong at Home and Overseas
Stocks enjoyed another plus week, closing one of the better Marches of the past 80 years. It seems like ages since volatility has been this low, and there have been many complaints about complacency and listlessness. Yet those concerns may be misplaced if indeed we are enjoying the second leg of a normal bull cycle. Low volatility in a bearish phase does suggest complacency, to be sure, but in a bullish phase it serves more to keep expectations in check.
As Greece's Woes Demonstrate, the Fuse Has Been Lit on the Global Debt Bomb
The big story in the international markets so far in the New Year has been the increasing shakiness of a number of countries' government bonds, with Greece right now being the most troubled of all.
Since U.S. investors tend to avoid foreign government bonds, many will dismiss this as an irrelevant development.
That's a mistake. The reality is that the international implications of this bond-market problem are serious for the world's stock markets, as well as for the global economy as a whole.
The fuse has been lit on a global debt bomb. And Greece has quickly become a poster child for the explosion that's all but certain to occur.
Since U.S. investors tend to avoid foreign government bonds, many will dismiss this as an irrelevant development.
That's a mistake. The reality is that the international implications of this bond-market problem are serious for the world's stock markets, as well as for the global economy as a whole.
The fuse has been lit on a global debt bomb. And Greece has quickly become a poster child for the explosion that's all but certain to occur.
To find out all about the "Global Debt Bomb," read on...
Markman on the Markets: Historic Bull Run in Bonds Points to Higher Prices for U.S. Stocks
A sluggish month in the stock market has equity investors worrying about what's next.
But those equity investors would feel so much better if they'd just spend a little time studying the credit markets. And with good reason: The bull market in credit that continues to rage in the face of this stock-market lethargy leads us to one simple conclusion.
Stock prices have to head higher.
Indeed, independent analyst Brian Reynolds tells us that if stocks were trading at the same level as credit, the Standard & Poor's 500 Index would already be at 1,350 - 22% above where it closed on Friday.
For those who argue that the market has already rallied a great deal, or too much, let me just note that the S&P 500 would have to rise by another 41% just to get back to the level of three years ago. The key thing that bulls have in their back pocket is that investors are still trying to get used to the idea that the sky hasn't fallen - and have not yet priced in the prospects for a 25% increase in S&P 500 profits that we are likely to see in 2010.
But those equity investors would feel so much better if they'd just spend a little time studying the credit markets. And with good reason: The bull market in credit that continues to rage in the face of this stock-market lethargy leads us to one simple conclusion.
Stock prices have to head higher.
Indeed, independent analyst Brian Reynolds tells us that if stocks were trading at the same level as credit, the Standard & Poor's 500 Index would already be at 1,350 - 22% above where it closed on Friday.
For those who argue that the market has already rallied a great deal, or too much, let me just note that the S&P 500 would have to rise by another 41% just to get back to the level of three years ago. The key thing that bulls have in their back pocket is that investors are still trying to get used to the idea that the sky hasn't fallen - and have not yet priced in the prospects for a 25% increase in S&P 500 profits that we are likely to see in 2010.
Could a Spike in Bond Yields Cause the Economy to Stumble in the New Year?
In normal times, at their most basic level, bond prices follow some very simple laws of financial physics: When interest rates rise, bond prices fall and bond yields rise; when rates fall, bond prices rise, and bond yields drop.
However, bonds could break those laws of financial physics in the New Year - and in a big way. That could inflict some real financial pain on the U.S. recovery, the dollar, the shuddering housing market - and could even ignite a major stock-market reversal.
The U.S. Federal Reserve continues to hold rates on U.S. Treasury securities to artificially low levels - a strategy central bank Chairman Ben S. Bernanke just this week said the Fed intends to adhere to for the foreseeable future.