Friday, February 15, 2013

And The Fraud Rolls on 1 Year Later

Hello Friends!

I am not sure who is still following me since I haven't posted in about a year, but I felt compelled to share my thoughts around the markets. 

It's quite amazing to me to see where stocks are 4 years from the lows that were set in 2009.  The amount of corruption/money printing that it took for us to get here is something I never could have expected.  My hope and expectations as I wrote this blog back in 2008/2009 was that we would take our medicine and write down the losses from the housing boom.  This turned out to be a silly mistake considering the astounding amounts of Wall St money that flowed into Washington DC following the crisis.

So where are we now after a 4 year boom in stocks?  That's a great question.  History is always a great barometer of what's to come and it's told us in the past that most bull markets last around 4 years.  I suspect we are nearing the euphoria stage of this current run up in stocks.

However, thanks to the Fed, the game has changed.  Bonds IMO are no longer a "safe haven" anymore thanks to the Fed buying 80% of the longer end of the bond market..  I mean let's get real here:  Does a 2% yield on the 10 year represent real RISK from an inflationary standpoint?  I think not.

So what have here are investors that are desperate for yield done in response to this new dynamic.  They have taken on much greater risk in order to maintain their 5% yields by buying high yield junk bonds and high dividend stocks.  Savers are getting screwed with a capital S thanks to the Fed's 0% interest policy.

I can honestly can say that I don't blame them for chasing yield.  I mean you gotta pay the bills right?.  However, do I think this is a good long term strategy?  Of course not.  IMO the sheep are being led to slaughter.  Risky assets have been bid up to ridiculous prices.  Historically junk bonds do not pay 5%.  These are treasury type yields  .  Investors need to realize that junk bonds are called JUNK for a reason.  They are highly risky and could very well blow up in your face.  I would suggest that high yield investors take a good hard look at their portfolios and perhaps pare down these holdings.

That being said, I have different feelings around strong dividend stocks that have strong balance sheets.  I think the next crisis will be around solvency, and I am curious to see how this dynamic plays out between stocks with strong balance shets and bonds.

The key question for me is this:  Would you prefer to own treasuries that are essentially bankrupt as we continue to run up our deficits or own stocks like Microsoft, Intel , and Cisco and others that have $30-$60 billion in cash on their balance sheets and continue to pay strong dividends..

This IMO is the million dollar question moving forward.