Bill Gross: Investment Outlook (October 2009)

Thursday, October 29th, 2009

Bill Gross, co-founder and co-CIO of PIMCO, is to my mind one of the shrewdest money men around. His monthly newsletter, this month entitled “Midnight Candles”, therefore always makes for thought-provoking reading.

He concludes the newsletter as follows:

“Asset appreciation in US and other G-7 economies has been artificially elevated for years. In order to prevent prices sinking even lower than recent downtrends averaging 30% for stocks, homes, commercial real estate, and certain high yield bonds, central banks must keep policy rates historically low for an extended period of time. If policy rates are artificially low then bond investors should recognize that artificial buyers of notes and bonds (quantitative easing programs and Chinese currency fixing) have compressed almost all interest rates.

“But while this may support asset prices - including Treasury paper across the front end and belly of the curve, at the same time it provides little reward in terms of future income. Investors, of course, notice this inevitable conclusion by referencing Treasury Bills at .15%, two-year Notes at less than 1%, and 10-year maturities at a paltry 3.40%. Absent deflationary momentum, this is all a Treasury investor can expect. What you see in the bond market is often what you get.

“Broadening the concept to the US bond market as a whole (mortgages + investment grade corporates), the total bond market yields only 3.5%. To get more than that, high yield, distressed mortgages, and stocks beckon the investor increasingly beguiled by hopes of a V-shaped recovery and ‘old normal’ market standards. Not likely, and the risks outweigh the rewards at this point.

“Investors must recognize that if assets appreciate with nominal GDP, a 4-5% return is about all they can expect even with abnormally low policy rates. Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets - while still continuously supported by Fed and Treasury policymakers - is likely at its pinnacle. Out, out, brief candle.”

Click here for the full article.

Source: Bill Gross, PIMCO - Investment Outlook, November 2009.

Tags: Asset Appreciation, Asset Prices, Bill Gross, Bond Investors, Central Banks, Chinese Currency, Commercial Real Estate, Gross Co, Gross Investment, High Yield Bonds, Inevitable Conclusion, Investment Grade, Investment Outlook, Maturities, Money Men, Nominal Gdp, PIMCO, Rage Rage, Treasury Bills, Us Bond Market
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Barron’s Confidence Index - Sentiment for Equities Improves

Friday, July 3rd, 2009

As often stated in my weekly “Words from the Wise” reviews, a confidence indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds.

Source: Plexus Asset Management (based on data from I-Net Bridge)

Not surprisingly, a strong historical relationship exists between the Barron’s Confidence Index and the S&P 500’s 12-month rate of change.

Source: Plexus Asset Management (based on data from I-Net Bridge)

The improvement in the Barron’s indicator augurs well for the outlook for equities - specifically for the return of confidence - and provides further evidence that US stock markets are in all likelihood mapping out a base development formation. However, in the short term I still maintain it is quite likely that markets could consolidate further and possibly retrace more of the prior gains.

Tags: Amp, Barron, Bond Investors, Bonds, Bridge, Cape Town, Change Management, Change Source, Confidence Index, Confidence Indicator, Discrepancy, Index Points, Investment, Investor Confidence, Likelihood Mapping, Outlook, Plexus Asset Management, Postcards, Relationship, Sentiment, Stock Markets, Target
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High Yield Spreads Heading South

Wednesday, June 10th, 2009

The spread on junk bonds has been declining consistently over the past few months and has now reached the lowest level since September last year. High-yield spreads, as shown by the Merrill Lynch US High Yield Index, have dropped by 51.5% to 1,059 from a record high of 2,182 on December 15. This means the spread between high-yield debt and comparable US Treasuries was 1,059 basis points by the close of business on Friday. This level is still 155 basis points above the pre-Lehman bankruptcy levels.

Source: Merrill Lynch Global Index System

Another indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds. Again, the Index is back at September levels.

With the US 10-year Treasury Note yield at 3.88%, high-yield borrowers still have to pay 14.47% per year to borrow money for a 10-year period. At these rates it remains almost impossible for companies with a less-than-perfect credit status to conduct business profitably.

Although high-yield spreads have narrowed considerably and the credit convalescence process seems to be on track, they still has a way to go before reaching pre-crisis levels and investor confidence returning to more “normal” levels.

Tags: Barron, Basis Points, Bond Investors, Borrowers, Cape Town, Confidence Index, Convalescence, Crisis Levels, Discrepancy, Global Index, High Yield Debt, Investor Confidence, Junk Bonds, Lehman, Merrill Lynch, Merrill Lynch Global Index System, Postcards, Target, Treasuries, Year Treasury Note
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Bill Gross: Staying rich in the “new normal”

Thursday, June 4th, 2009

Bill Gross, co-founder and co-CIO of PIMCO, is to my mind one of the shrewdest money men around. His monthly newsletter, this month entitled “Staying Rich in the New Normal”, therefore always makes for thought-provoking reading. Click to listen to Bill Gross below:

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He concludes the newsletter as follows:

“The obvious solution to both dollar weakness and higher yields is to move quickly towards a more balanced budget once a sustained recovery is assured, but don’t count on the former or the latter. It is probable that trillion-dollar deficits are here to stay because any recovery is likely to reflect ‘new normal’ GDP growth rates of 1%-2% not 3%+ as we used to have.

“Staying rich in this future world will require strategies that reflect this altered vision of global economic growth and delevered financial markets. Bond investors should therefore confine maturities to the front end of yield curves where continuing low yields and downside price protection are more probable. Holders of dollars should diversify their own baskets before central banks and sovereign wealth funds ultimately do the same.

“All investors should expect considerably lower rates of return than what they grew accustomed to only a few years ago. Staying rich in the ‘new normal’ may … require investors to resemble … Will Rogers, who opined in the early 30s that he wasn’t as much concerned about the return on his money as the return of his money.”

Click here for the full article.

Source: Bill Gross, PIMCO - Investment Outlook, June 2009.

Tags: Article Source, Balanced Budget, Bill Gross, Bond Investors, Central Banks, Co Founder, Dollar Weakness, Downside, Financial Markets, Future World, Gdp Growth Rates, Global Economic Growth, Gross Co, Investment Outlook, Maturities, Money Men, PIMCO, Target, Will Rogers, Yield Curves
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Jeremy Siegel: Outlook for Government Bonds

Friday, May 15th, 2009

Jeremy Siegel, on his outlook for government bonds:

40 years ago [US] treasury bonds were yielding over 6.3 percent, about twice their yield today. It is mathematically impossible for government bonds to come close to matching those 12 percent returns in future decades. Stocks, on the contrary, can easily repeat their returns over the past four decades, since those returns were near their
historical average…

For the 55-year period from December 1925, when the well-known Ibbotson stock and bond series begins, through January 1982, total real government bond returns were negative. This means that, by rolling over in long-term government bonds, reinvesting all the coupons, and thereby taking no income, investors’ bond portfolios were sinking in value.

Most strikingly, for the 40-year period from 1941 through 1981, government bond investors lost a whopping 62 percent of their value after inflation. A loss in purchasing power over this long a period has never happened in stocks. There has never even been a 20-year period when real returns in stocks have been negative. In fact, the worst 30-year real return for stocks is plus 2.6 percent per year, just slightly below the average real return investors earn with government bonds.

Looking at today’s markets, the forward-looking prospects for government bonds are very poor. Yields on 30-year inflation-protected bonds are 2.3 percent, and yields are only 4 percent on 30-year Treasuries. In contrast, after stocks have fallen 50 percent from their previous high, as they did in March of this year, their subsequent 30-year real returns have always been in excess of 10 percent per year.

The 40-year outperformance of government bonds over large stocks has ended.

As a addendum, Robert Arnott, of Research Affiliates opined about bonds vs. stocks in Bonds: Reversion Cuts Both Ways?

Tags: 1941, 30 Year Treasuries, Addendum, Bond Investors, Bond Portfolios, Bond Returns, Bond Series, Bonds Vs Stocks, Contrary, Government Bond, Government Bonds, Ibbotson, Inflation Protected Bonds, Jeremy Siegel, Outperformance, Poor Yields, Prospects, Purchasing Power, Research Affiliates, Robert Arnott, Stocks Bonds, Us Treasury Bonds
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Picture du Jour: Stock markets – it’s all about confidence

Tuesday, May 5th, 2009

A key requirement for the recent stock market gains to be more enduring and for the bear’s corpse to be put to rest, is the restoration of investor confidence. A few comments regarding this issue are highlighted in this post.

As shown in Sunday’s “Words from the Wise” review, a confidence indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds.

Not surprisingly, a strong historical relationship exists between the Barron’s Confidence Index and the S&P 500 Index’s 12-month rate of change.

Click on the image below for a larger graph.

The improvement in the Barron’s indicator augers well for the outlook for equities - specifically for the return of confidence - and provides further evidence that US stock markets are mapping out a base development formation. The early January highs and 200 day-moving averages are the next important targets and a break above these levels would signal the completion of the base formation and a secular bottom (as has already been seen in leading markets such as China and Brazil). (The Nasdaq Composite Index is also already above its January high and 200-day line.) Meanwhile, the speed and magnitude of the rally argue for markets to consolidate and possibly retrace some of the past eight weeks’ gains prior to launching an attack on longer-term indicators used to distinguish between primary bull and bear markets .

Tags: Amp, Barron, Bear Markets, Bond Investors, Bonds, Bull And Bear, Confidence Index, Confidence Indicator, Corpse, Discrepancy, Graph, Investor Confidence, Magnitude, Moving Averages, Nasdaq Composite Index, Nasdaq Index, Rally, Stock Market Gains, Stock Markets, Targets, Term Indicators
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Stock markets – keep an eye on confidence measures

Thursday, March 26th, 2009

It is important that confidence be restored for the recent stock market gains to be more enduring. A few comments regarding this issue are highlighted in this post.

As shown in Sunday’s “Words from the Wise” review, there is a strong historical relationship between the US Consumer Confidence Index and the 12-month change in the S&P 500 Index. One needs to take a view on the direction of consumer confidence, but should it for argument’s sake pick up from 30 to 40 by the end of June, the relationship indicates a S&P 500 decline of 30-35% in year-ago terms. Using end-of-quarter prices, this means an Index at between 832 and 896 by mid-year.

Source: Plexus Asset Management (based on data from I-Net Bridge)

Interestingly, a report from Franklin Templeton Investments has just arrived, also showing that when confidence was low in the past, it had been time to buy. For example, on average, stocks returned 12.5% a year following consumer confidence of 66 or lower. The consumer confidence reading at the end of February was 25.

Another confidence indicator worth monitoring, is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been an improvement in the ratio since its all-time low in December, showing that bond investors are growing somewhat more confident and have started opting for more speculative bonds over high-grade bonds.

Source: I-Net Bridge

Not surprisingly, a strong historical relationship also exists between the Barron’s Confidence Index and the S&P 500’s 12-month rate of change. But unlike consumer confidence that has not yet bottomed, the Barron’s indicator has already been working its way higher over the three months.

Source: Plexus Asset Management (based on data from I-Net Bridge)

As mentioned before, taking one step at a time, the next hurdle is the release of potentially ugly earnings and guidance announcements in April. By then a clearer picture should also start emerging on the results of the Fed’s medicine and whether credit markets are thawing and confidence is beginning to improve.

Tags: Asset Management, Barron, Bond Investors, Bonds, Bridge, Buy Stocks, Confidence Indicator, Confidence Measures, Consumer Confidence Index, Decline, Discrepancy, Franklin Templeton Investments, Investor Confidence, Relationship, Sake, Stock Market Gains, Stock Markets, Stocks, Three Months, Us Consumer Confidence
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