Today I giving orders to corporate CFOs (Chief Financial Officers).
I know you may be sitting on top of a mountain of cash per today's WSJ article: "U.S. companies are holding more cash in the bank than at any point on record, underscoring persistent worries about financial markets and about the sustainability of the economic recovery. The Federal Reserve reported Thursday that non financial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952. Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963."
And some of you have sold notes & bonds to raise cheap money. BUT most are making a fundamental error. When long term money is cheap, GET IT AND GET AS MUCH AS POSSIBLE.
Sell long term bonds - lock in low rates for 30 year bonds. Fund all your foreseeable and unforeseeable funding needs for the next ten years with fixed rate debt with terms at maturities of at least 10 years, preferably 30 years. Prefund any maturities coming with the next five years. DO IT !!!
Stay away from floating rate debt and short and intermediate term maturities. If you want lower floating rates for awhile, do a short term interest rate swap against the long term bonds.
Give the CEO a war chest to use to build and grow the company NOW as record low fixed rates. This will increase the value of your company immeasurably over time.
Now for investors ... wait, don't buy that long term debt. Let the pension funds and insurance companies and mutual funds who have to buy do the buying. Wait. Soon the US economy will start to perk up - maybe late this year, and then rates will start to rise. If you buy now, you can easily lose one or two year's of interest in price declines. Wait.
Actions
I'm tempted to buy some BP, but will wait. IF the oil spill hits the beaches on the west coast of Florida, I think BP will go to zero as the damages will be incalculable.
Word of the Day
"Homeostasis" - noun [$10]
Homeostasis means a tendency towards relatively stable equilibrium between interdependent elements, esp. as maintained by physiological processes.
Sentence: I doubt the markets will achieve homeostasis until hedge funds are regulated heavily and have much less money. Until then, asset allocation trades will rule: buy low, sell high AND sell high, buy low. You must do BOTH.
Showing posts with label bonds. Show all posts
Showing posts with label bonds. Show all posts
Friday, June 11, 2010
Friday, March 26, 2010
It's Just a Matter of Time ...
for US interest rates to go up ... a lot.
They are below equilibrium levels versus long term core inflation of 2%. And the supply is huge, a tidal wave of huge Treasury auctions as far as the eye can see. Corporate and mortgage competition is low due to the weak economy. What will have IF house sales grow to normal levels ? Demand for mortgages will grow precisely when the Fed is no longer a buyer, but is a seller.
The competition from corporations and households for loans is very weak. Household debt levels keep dropping. Banks flush with excess reserves put the money in T-bills and short term Treasury notes. When their customers start to want money - and when the economy is obviously stable so banks will be willing to lend - that source of demand will vaporize.
Foreign buyers have gotten a good return lately as the dollar strength gave them a bonus. But soon the dollar will stop going up and those buyers will face losses IF the dollar resumes its long term decline.
Yesterday's auction showed some weakness - WSJ: "A sudden drop-off in investor demand for U.S. Treasury notes is raising questions about whether interest rates will finally begin a march higher—a climb that would jack up the government's borrowing costs and spell trouble for the fragile housing market."
Maybe the calendar in Japan caused the drop-off. Or may it was the derivative market - WSJ: "Adding to the focus on the Treasury market's woes this week has been an unusual development in an important, but usually ignored, market: interest-rate swaps. These common derivatives entail contracts that typically involve trading one stream of interest income for another. And in the past week, investors are being paid more to own U.S. Treasuries than U.S. corporate bonds."
Why does this derivative market exist ? It's just a casino for hedge funds and banks to pits trading skills against each other. It serves no useful public purpose. And it can impact the "real" market for bonds. Get rid of it NOW.
The huge tidal wave of governmental demand for debt in the US will soon run into natural demand from a stable economy. That collision will cause trouble for the stock market, in my humble opinion.
Hence my neutral - bearish intermediate term outlook until that rate rise gets priced in.
Word of the Day
"Trenchant" - adjective [$10]
Trenchant means 1. lean, incisive (a trenchant comment); 2. forceful, effective and vigorous; 3. caustic, cutting (trenchant criticism); distinct, clear cut.
Sentence: Writing a trenchant blog every business day is not easy; a lack of ideas occasionally occurs and then ... I wing it.
They are below equilibrium levels versus long term core inflation of 2%. And the supply is huge, a tidal wave of huge Treasury auctions as far as the eye can see. Corporate and mortgage competition is low due to the weak economy. What will have IF house sales grow to normal levels ? Demand for mortgages will grow precisely when the Fed is no longer a buyer, but is a seller.
The competition from corporations and households for loans is very weak. Household debt levels keep dropping. Banks flush with excess reserves put the money in T-bills and short term Treasury notes. When their customers start to want money - and when the economy is obviously stable so banks will be willing to lend - that source of demand will vaporize.
Foreign buyers have gotten a good return lately as the dollar strength gave them a bonus. But soon the dollar will stop going up and those buyers will face losses IF the dollar resumes its long term decline.
Yesterday's auction showed some weakness - WSJ: "A sudden drop-off in investor demand for U.S. Treasury notes is raising questions about whether interest rates will finally begin a march higher—a climb that would jack up the government's borrowing costs and spell trouble for the fragile housing market."
Maybe the calendar in Japan caused the drop-off. Or may it was the derivative market - WSJ: "Adding to the focus on the Treasury market's woes this week has been an unusual development in an important, but usually ignored, market: interest-rate swaps. These common derivatives entail contracts that typically involve trading one stream of interest income for another. And in the past week, investors are being paid more to own U.S. Treasuries than U.S. corporate bonds."
Why does this derivative market exist ? It's just a casino for hedge funds and banks to pits trading skills against each other. It serves no useful public purpose. And it can impact the "real" market for bonds. Get rid of it NOW.
The huge tidal wave of governmental demand for debt in the US will soon run into natural demand from a stable economy. That collision will cause trouble for the stock market, in my humble opinion.
Hence my neutral - bearish intermediate term outlook until that rate rise gets priced in.
Word of the Day
"Trenchant" - adjective [$10]
Trenchant means 1. lean, incisive (a trenchant comment); 2. forceful, effective and vigorous; 3. caustic, cutting (trenchant criticism); distinct, clear cut.
Sentence: Writing a trenchant blog every business day is not easy; a lack of ideas occasionally occurs and then ... I wing it.
Tuesday, March 16, 2010
People and Money
The world is awash in money now. US dollars held overseas are the monetary base for the world and provide foreign central banks with the capability to increase the supplies of their own local currencies. This is particularly true for China - it needs dollars to support the yuan, which would otherwise likely be deemed valueless, as currencies of dictatorships usually are. The world is awash in Euros and yen, too.
Signs of this are everywhere in the financial pages of major newspapers - from FT: "Sovereign bond markets in developing countries have seen a record $129bn in new deals so far this year ... Emerging market yields narrowed to 2.57 percentage points over US Treasuries on Monday compared with 3.5 percentage points a month ago ... Indonesian five-year bond yields, for instance, have fallen to 3.77 per cent. "
Who is buying Indonesia bonds for a puny 3.77% absolute yield ?
US corporate bond yields are very, very low, too, and bonds sales are huge. The huge high tide in money worldwide is finding its way into the bond markets, raising their prices and lowering yields. Spread measures don't tell the true pictures. The US five year Treasury rate is 2.4%. Core inflation is about 2%, so people are taking a real return of less than 1% locked in for five years.
Again, who is buying this paper at foolish absolute yields ?
One answer is the banks. Instead of making loans to productive companies, banks prefer buying securities. Obviously the regulators again missed something important. Why are banks becoming houses of securities instead of the engines of lending to productive companies that was their original purpose ? Likely because they are run by executives from Wall Street and not loan officers. And also because regulators actually give some preference to liquid securities in assessing that oft-cited number, "Tier 1 capital". Loans require more Tier 1 capital versus high grade securities.
The Fed and other regulators need to change this if small and medium sized business is to get the loans they need to grow.
Who else is buying those bonds ?
CLUE: What other "asset" is the world awash in ?
ANSWER: Older people - the grey hairs, the cue-tips. Demographics data show a greying Europe, a grey Japan and a very rapidly greying China. The US is somewhat greying as baby boomer hit retirement ages, but has some balance from decades of large immigration of young people and echos of the baby booms.
People in retirements - those with the money to retire - want safe yield from bonds and annuities for a large portion of their assets. Older people are buying them, or are investing in funds that do the buying.
Two major countries with youthful demographics are India and Brazil. I already mentioned China's grey hair. Russia is greying, too. That means BRIC is really a quite BI and a rather old RC. Very, very different demographics. The long term implications of this are huge.
What does this mean ?
Stop thinking about BRIC as a unit - that might have worked by accident in the first decade of the 21st century, but it won't work in second decade. Those nations are too different to lump together.
Don't buy those bonds. The absolute yields are too puny to risk locking up your money there. One is better off in blue chip, dividend paying stocks, gold and cash or TIPs. Worldwide inflation is likely coming and will likely be worst in the emerging markets. The convergence of world price parity eventually means serious inflation in those nations, or deflation in the US and Europe. Obviously the huge tide of money worldwide means it will be the former, not the latter.
IF you must buy fixed income, I'd stick to some fixed annuity type for a small/moderate portion of assets and put that money there strictly using time diversification. Use only AAA rated insurance companies and avoid high fees if possible. One benefit of this is you won't have the price risk worries owning bonds. The time diversification will give you some protection from inflation.
The only bonds worth buying are municipal bonds - 5% tax free is a great absolute rate now. But you'd better diversify hugely and stay away from anything with an unusually high yield. And use time diversification there, too. No CA, NV or AZ. No major cities. No Michigan. Nothing with event risk, such as medical centers in hurricane target zones. Get at least 5% and get 5 years call protection on a 20 year bond, or 10 years call protection a 30 year bond. Buy bonds with A ratings or better. No A- or lower.
I used to rule out FL, too, but now I realize it is not addicted to a graduated income tax. I'll look at the west coast - no east coast as it's a hurricane target zone. Hurricanes have a tough time curling around enough to hit the west hard.
Word of the Day
"Passe-partout" - noun [$10] (also "passepartout") from French for "passes everywhere"
Passepartout means 1. a master key; 2. a simple picture frame (esp. for mounted photographs) esp. one consisting of a piece of glass stuck to a backing by adhesive tape along the edges; 3. adhesive tape or paper used for this.
Sentence: Today's post poses questions and issues to consider, but provides no passe-partout for investors.
Signs of this are everywhere in the financial pages of major newspapers - from FT: "Sovereign bond markets in developing countries have seen a record $129bn in new deals so far this year ... Emerging market yields narrowed to 2.57 percentage points over US Treasuries on Monday compared with 3.5 percentage points a month ago ... Indonesian five-year bond yields, for instance, have fallen to 3.77 per cent. "
Who is buying Indonesia bonds for a puny 3.77% absolute yield ?
US corporate bond yields are very, very low, too, and bonds sales are huge. The huge high tide in money worldwide is finding its way into the bond markets, raising their prices and lowering yields. Spread measures don't tell the true pictures. The US five year Treasury rate is 2.4%. Core inflation is about 2%, so people are taking a real return of less than 1% locked in for five years.
Again, who is buying this paper at foolish absolute yields ?
One answer is the banks. Instead of making loans to productive companies, banks prefer buying securities. Obviously the regulators again missed something important. Why are banks becoming houses of securities instead of the engines of lending to productive companies that was their original purpose ? Likely because they are run by executives from Wall Street and not loan officers. And also because regulators actually give some preference to liquid securities in assessing that oft-cited number, "Tier 1 capital". Loans require more Tier 1 capital versus high grade securities.
The Fed and other regulators need to change this if small and medium sized business is to get the loans they need to grow.
Who else is buying those bonds ?
CLUE: What other "asset" is the world awash in ?
ANSWER: Older people - the grey hairs, the cue-tips. Demographics data show a greying Europe, a grey Japan and a very rapidly greying China. The US is somewhat greying as baby boomer hit retirement ages, but has some balance from decades of large immigration of young people and echos of the baby booms.
People in retirements - those with the money to retire - want safe yield from bonds and annuities for a large portion of their assets. Older people are buying them, or are investing in funds that do the buying.
Two major countries with youthful demographics are India and Brazil. I already mentioned China's grey hair. Russia is greying, too. That means BRIC is really a quite BI and a rather old RC. Very, very different demographics. The long term implications of this are huge.
What does this mean ?
Stop thinking about BRIC as a unit - that might have worked by accident in the first decade of the 21st century, but it won't work in second decade. Those nations are too different to lump together.
Don't buy those bonds. The absolute yields are too puny to risk locking up your money there. One is better off in blue chip, dividend paying stocks, gold and cash or TIPs. Worldwide inflation is likely coming and will likely be worst in the emerging markets. The convergence of world price parity eventually means serious inflation in those nations, or deflation in the US and Europe. Obviously the huge tide of money worldwide means it will be the former, not the latter.
IF you must buy fixed income, I'd stick to some fixed annuity type for a small/moderate portion of assets and put that money there strictly using time diversification. Use only AAA rated insurance companies and avoid high fees if possible. One benefit of this is you won't have the price risk worries owning bonds. The time diversification will give you some protection from inflation.
The only bonds worth buying are municipal bonds - 5% tax free is a great absolute rate now. But you'd better diversify hugely and stay away from anything with an unusually high yield. And use time diversification there, too. No CA, NV or AZ. No major cities. No Michigan. Nothing with event risk, such as medical centers in hurricane target zones. Get at least 5% and get 5 years call protection on a 20 year bond, or 10 years call protection a 30 year bond. Buy bonds with A ratings or better. No A- or lower.
I used to rule out FL, too, but now I realize it is not addicted to a graduated income tax. I'll look at the west coast - no east coast as it's a hurricane target zone. Hurricanes have a tough time curling around enough to hit the west hard.
Word of the Day
"Passe-partout" - noun [$10] (also "passepartout") from French for "passes everywhere"
Passepartout means 1. a master key; 2. a simple picture frame (esp. for mounted photographs) esp. one consisting of a piece of glass stuck to a backing by adhesive tape along the edges; 3. adhesive tape or paper used for this.
Sentence: Today's post poses questions and issues to consider, but provides no passe-partout for investors.
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