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Junk Bond Are the New Sovereigns


Important nugget in new Fitch report about the absurdly low default rates so far in 2010 on junk bonds:

Just one year after the most volatile and unnerving period on record for the financial markets and for the U.S. economy, the pace of high yield defaults has slowed so dramatically in 2010 that even the most optimistic forecasts do not reflect that defaults are running at a full-year rate of roughly 1%. In the first five months of 2010, there have been nine issuer defaults affecting a combined $1.7 billion in bonds, for a year-to-date par default rate of less than half a percent. In 2009, 151 issuers defaulted on a record $118.6 billion in bonds, producing a 13.7% default rate. The decline in defaults has been so steep that on a trailing 12-month basis the default rate is already down to 5.9% but this level is overwhelmingly a product of 2009 defaults. [Emphasis mine]

We’re not far off the annual run rate of sovereign defaults in the 1980s, so, as a friend of mine likes to say, maybe junk bonds are the new sovereigns.

Get Low, Get Low, Get Low, Get Low

via EconomPic by Jake on 6/24/10

Thanks to Lil Jon for the headline of the post... Peter Boockvar via The Big Picture details:
Outside of the late ‘08, early ‘09 panic into US Treasuries where the 10 yr yield got to 2.06%, the 10 yr bond yield is now at the lowest level since at least 1962 (as far back as Bloomberg goes) at 3.07%, breaking the June ‘03 level of 3.11% less than 2 weeks before Greenspan cut the fed funds rate to 1%.
Add high quality spread to the equation and we get an even lower figure. The aggregate bond index (i.e. the Barclays Capital Aggregate made up mainly of Treasuries, Corporates, and Agency MBS), which EconomPic detailed a few weeks back:
We have a new milestone to watch... the Barclays Capital Aggregate Bond Index (i.e. the most popular US dollar fixed income benchmark) closed at a mere 3.08% on May 21st. That is the lowest level EVER (well, at least since the benchmark's January 1973 inception).
Hit a new 2.94% low as of yesterday's close.

Source: Barclays Capital

Science Fiction: Nokia goes Android | Monday Note

via mondaynote.com

Emerging Markets: A 50% Allocation is the New Neutral


Interesting claim in a recent II article about emerging markets: You should be allocating half of your portfolio to such markets based on their real share of global economies.

Emerging markets constitute 13 percent of the MSCI all country world index, so by that measure, most Western institutional investors are indeed underweight. But some analysts regard the MSCI weighting as excessively low. The index firm bases its weightings on the free float of shares in a given market; many emerging-markets companies have only a modest percentage of their shares in public hands, with the bulk still held by controlling families or governments. “Why should the somewhat arbitrary and fairly static rules of an index provider define useful investment allocations?” asks Ashmore’s Booth. He contends that investors should have a 50 percent exposure, which equals the emerging markets’ share of global economic output based on purchasing-power parity. “That’s if they’re neutral, not bullish,” he says.

Of course if emerging markets deserve that sort of weighting then they are hardly emerging anymore. And that makes frontier markets – equatorial Africa, Vietnam, etc. -- the new emerging markets, a thesis I largely agree with.

Retire Rich 2010: Robert Arnott's magic indexing formula - May. 27, 2010

Robert Arnott's magic indexing formula

rob_arnott.top.jpg /.../

Arnott's Big Idea is a concept he calls "fundamental indexing." It's a system that allocates money to stocks based on the economic footprint of the underlying companies rather than by the more common method of market capitalization. As we'll see, it's a near-revolutionary challenge to the accepted wisdom about passive investing. And it has already won over a range of large institutional clients, from the national pension fund of France to CalPERS, the $200 billion retirement fund for California's public employees. "Rob is one of a handful of guys on the cutting edge of investment thinking," says Dan Bienvenue, a senior portfolio manager at CalPERS. "In conventional indexing you're always average. Rob's method has historically beaten the average."

/.../

Why do fundamental indexes fare far better? The principal reason is that they are regularly rebalancing their holdings by selling expensive stocks and buying cheap ones, relentlessly exploiting what's known as the "value effect." It's well established, both in academic studies and through decades of fund performance, that "value stocks," companies with low price/earnings multiples and low price/book ratios, perform better over time than expensive growth stocks that boast high P/Es. "The market does a good job choosing which companies will grow and which will shrink," says Arnott. "The problem is that investors pay too much for hot, glamorous growth stocks and set the bar too high." In the fundamental index, the rebalancing goes strictly by formula: When a company's market cap jumps faster than its sales or profits, the fund sells just enough of it so that its investment once again reflects not its price but its scale in the economy.

/.../

After the big rally over the past year, stocks would appear to be extremely expensive. But Jason Hsu, one of Arnott's chief lieutenants, says that while tech and health care are carrying prices far in excess of their economic size, a lot of big companies still appear cheap, including financials, industrials, and large retailers. The cap-weighted funds, however, are putting half their money in just one-quarter of the stocks, an unusually large bet on expensive companies. In other words, the market is paying dearly for growth that may not happen. Arnott is confident how things will turn out. "When the gap between the cheap and the expensive is this big," he says, "the fundamental index usually outperforms by more than the traditional two points."

nekaj za indexerje :)

Elliot Wave predicts triple-digit Dow Peter Brimelow - MarketWatch

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By Peter Brimelow , MarketWatch

NEW YORK (MarketWatch) -- An investment letter that called the Crash of 2008 said that this would be a bad year -- and it now says it will get worse.

A whole generation of investors think that Robert Prechter and his Elliott Wave Theory letters, Elliott Wave Financial Forecasts and Elliott Wave Theorist, are permabears. And they've certainly seemed that way for the last decade -- although it should be noted that the stock market is now roughly back where it started. ( See April 26, 2002 column. )

But Prechter was very bullish after the 1974 low and, briefly, after being one of the very few services to make money in 2008. Then he announced that "2010 is the year when the bear market in stocks returns in full force." ( See Jan. 22 column. )

Elliott Wave Financial Forecasts (EWFF) makes recommendations specific enough to be tracked by the Hulbert Financial Digest. (The Elliott Wave Theorist is too, well, theoretical.)

Over the year to date, EWFF is up just 0.4% by Hulbert Financial Digest count through May vs. negative 0.3% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.

Over the past 12 months, its bearishness did cause it to gain just 4.75% compared to 22.89% for the total return Wilshire 5000. But over the past three years, the letter's bearishness paid off handsomely. It's up an annualized 5.25% against negative 8.12% annualized for the total return Wilshire 5000.

And even over the past 10 years, so badly damaged have stocks been that the letter was up an annualized 1.05%, outperforming a mere 0.22% annualized gain for the Wilshire 5000.

The EWFF issue published in early May said flatly: "The topping process is over for the countertrend rally that started in the first quarter of 2009. The next leg lower that commenced in April should now deliver a decline that will ultimately be bigger than the 2007-2009 sell-off. ... Gold poked to a new high, but in doing so, likely completed a pattern in mid-May that will lead to a multi-month selloff. ... The U.S. dollar index /quotes/comstock/11j!i:dxy0 (DXY 85.56, +0.01, +0.01%) is fulfilling EWFF's forecast for a strong advance."

All of which fits right into Prechter's repeated predictions of a massive coming deflation.

In a rare comment on individual stocks, EWFF says: "Google Inc. /quotes/comstock/15*!goog/quotes/nls/goog (GOOG 500.03, -0.05, -0.01%) made its countertrend rally on Jan. 4, four months before the DJIA and Nasdaq, and appears to be locked in a decline the EWFF also forecast last August. Its early reversal is a bearish development for the broad market, as Google is an icon of the last great stock craze. The failure of its stock price to reignite is a clear sign that the animal spirits of the old bull market are all but gone."

How bad? The clearest statement comes from the Elliott Wave Theorist, discussing a numerological technical theory with which it supplements the Wave Theory's complex patterns: "The only way for the developing configuration to satisfy a perfect set of Fibonacci time relationships is for the stock market to fall over the next six years and bottom in 2016."

"Stock market bulls and most economists think that a new bull market and economic recovery are underway. Most bears are looking for either a long sideways bear market à la 1966-1982, or a hyperinflationary run to infinity. Our Elliott Wave outlook opposes both of these scenarios. The most likely profile is a stock market crash of historic proportions."

Elliott Wave Theorist offers several reasons, including: "This bear market is of Supercycle degree, the biggest since 1720-1784. It should therefore include a decline deeper that the 89% decline of 1929-1932. A decline of 91.5% or more would carry it below 1,000."

There will be a short-term rally at some point, thinks Prechter, but it will be a trap: "The 7.25-year and 20-year cycles are both scheduled to top in 2012, suggesting that 2012 will mark the last vestiges of self-destructive hope. Then the final years of decline will usher in capitulation and finally despair."

via marketwatch.com

Chanos: Integrated Oil is in Stealth Liquidation


From Bloomberg TV, this clip of Jim Chanos explaining how, unnoticed by what my friend Gregor calls "investors [who] are slack-jawed cotton candy eaters, moving from the Medicine Man Tent to the Bumper Car ride", the major oil companies are busily doing a stealth liquidation. That, you see, is what happens when you are an integrated oil company that hasn't replaced reserves in years, and yet persists in borrowing to pay out dividends and support the share price. You liquidate and hope no-one notices.

Buy Reinsurers Young Man

Buy Reinsurers Young Man

Not to be more crass than usual, but with Macondo costs getting locked down, however briefly, and aggregated among BP and insurers, this is normally the time when you buy insurers. Premiums for deepwater offshore rigs are being jacked as much as 50%, and shallow rigs are seeing premiums go up 15-25%, so insurers with oil exposure are likely to see cash flows increase fairly markedly.

reinsurers


[link to original | source: Paul Kedrosky's Infectious Greed | published: 1 day ago | shared via feedly]

(download)

Show Me the Money

via EconomPic by Jake on 6/3/10

After looking at historical equity and bond data (going back to 1871) for my equity valuation analysis posts, I was reminded of the following Peter Bernstein piece regarding an event that occurred in 1958 (and was to last 50 years):
In the second quarter of 1958, the dividend yield on stocks was 3.9% and the yield on 10-year Treasuries was 2.9%. Three months later, dividend yields were down to 3.5% while Treasuries had climbed to match them at 3.5%. The next three months made history, as stock prices kept rising and pushed the dividend yield down to 3.3% while bond prices kept falling and drove the bond yield up to 3.8%. As the graph on page 2 demonstrates, this, too, was unprecedented. The two yields had come close in the past but had always backed away at the critical moment. In 1958, they reversed their historical positions and have never looked back.

When this inversion occurred, my two older partners assured me it was an anomaly. The markets would soon be set to rights, with dividends once again yielding more than bonds. That was the relationship ordained by Heaven, after all, because stocks were riskier than bonds and should have the higher yield. Well, as I always tell this story, I am still waiting for the anomaly to be corrected.

This "anomaly" corrected briefly during the crisis, but Treasury yields are once again higher than dividend payouts.

But is this about to change?

Rather than paying out dividends (or using cash to make acquisitions), corporations have been hoarding cash at an unprecedented level. Marketwatch provides the money quotes:

"Keeping cash on hand for a rainy day is a good idea. The currency stores at some tech firms, however, leave them prepared for a stormy 40 days and 40 nights," said Patrick McGurn, special counsel for RiskMetrics, a shareholder advisory firm.
And the details:

Which makes me wonder... if companies continue to prefer to act like cash cows (rather than make capital expenditures) and cash continues to yield close to zero, what is the chance corporations begin to give some of this cash back to shareholders and reverse this long term trend?

Source: Irrational Exuberance