Four Actionable Investment Themes
This is a challenging time for individual investors. I get emails from many who wonder what they should be doing.
While I offer weekly updates in my Weighing the Week Ahead series, the advice is general. I am going to share several specific themes that flow from my regular analysis. While I am very careful in offering specific advice to clients, the themes that I am mentioning are worth consideration by everyone.
Worry about Bond Funds
Investors have rushed into bond funds — mostly because of the perception of safety.
In this article I explained why bond funds are risky, and why those needing fixed income should instead purchase specific bonds.
Doug Kass has a record of some great calls on tops and bottoms, including stocks in early 2009. He now is calling a major top in bonds. (from Business Insider and Barron's)
"Finally, my favorite short of the next decade is the U.S. bond market, for those that possess deep enough pockets, have the fortitude and the patience. I am long ProShares UltraShort 20+ Year Treasury [TBT], which is the inverse, double-short bond ETF. Over the past 2½ years, bonds have achieved a near 60% total return. A remarkable feature is the consistency of positive returns and the absence of many drawdown years of consequence. Nevertheless, they should be viewed as a return-free asset class that is very risky. The 10-year yields under 1.5%, less than half the yield during the recessions in 2001 and 2008. That means I am paying over 65 times earnings for a 10-year-bond, a rich price even by Amazon's or LinkedIn's standards"
Find a Growth Stock
Everyone can afford to own a growth stock. Google (GOOG) is fine. If you chose Facebook (FB), you were too early, but your time might come. My favorite is Apple (AAPL).
Oppenheimer's Carter Worth, who has also been getting some well-deserved attention on CNBC's Fast Money program, had a helpful note on Apple last week. (See your OPCO rep for access). He cited a very obscure fact — the number of times that Apple has declined 4% or more in a single day. (answer to follow.
I have frequently noted the difficulty in trying to do short-term trading in Apple. Those who sell have a problem finding a re-entry point. The stock trades on news and psychology, with frequent gaps. Those who choose to sell find themselves faced with "chasing" a rebound or perhaps missing a major rally.
If you subtract the $115 billion cash hoard and look at the P/E ratio on the rest of the stock price, you see a low single-digit multiple on a 20+ growth rate. My own price target is $750, but it keeps moving higher.
(Carter Worth's answer: 92 times in 10 years). I guess these were buying opportunities, as was last week's selling.
It is notoriously difficult to time your entry in Apple.
Find a Cyclical Stock
The current market prices cyclicals as if we were at the peak of the business cycle. This means that the P/E multiple is at a low point, ignoring the strength in earnings. Contrarian investors may choose to reject this notion, respecting the earnings strength of some of the leading companies.
Good post!
One note: Hasn’t Kass called long bonds the “short of the decade” since 2010. I know he was buying TBT or calls on TBT back in August 2010.
Optradero — Doug was a little early on this call, as were many others. He has been more aggressive in recent days, so I thought it was worth noting.
While I have also expected rates to rise for some time, it has not been a major theme (warning to investors) for me until recently.
Summary: You are correct, and thanks!
Jeff
Since I’ve retired from Cat I have a huge Bias
However like Cummings, Deere, Monsanto
It’s not going away anytime soon
It’s a ride both ways
If you are on the wrong side just wait. Sometimes for a while but you can wait.
Good call but I’m biased.
Hello: There is a recent and compelling argument against shorting bonds at this time by Lacy Hunt and Van Hoisington (following work by Reinhardt and Rogoff).
http://www.mauldineconomics.com/outsidethebox/hoisington-quarterly-review-and-outlook2
They claim that throughout history, when a government’s debt ratio gets extremely high, long-term bond yields remain quite low for extended periods – like a decade or two. That’s mainly because inflationary pressures in low-growth times, such as the present, are nil.
They, as well as Gary Shilling, predict LT Treasuries might get to 2.0 percent or below, and that future investors will view today’s 2.5% yield with envy.
Even so, at age 68, I’m a bit wary of taking an aggressive position on either side.
Thanks for your very insightful commentaries.
In reference to Doug Kass’s investment in TBT, you cautioned us to be “… wary about absolute losses in your bond fund.” Would you please expand on this. Thanks! David, a faithful follower
David — As we know, if interest rates go higher, the price of a bond moves lower. This is necessary for the coupon payment to match the market yield.
If you own individual bonds as part of your portfolio, and you do not plan to sell the bonds, unless the company defaults you will collect your full principal and interest — no absolute losses. The portfolio is lower on a mark-to-market basis, but you do not care.
Now let us suppose that you and I form a partnership to invest in bonds (a simple bond fund). Now try the same scenario. Interest rates move higher and the price of our bonds moves lower. We still collect the expected coupon and can plan to get our principal back at maturity.
But I change my mind — either due to preferences or other personal reasons. I want half the money in the partnership, which is forced to sell the assets at current prices. Your losses are now locked in, since you could not hold to maturity.
I go into a little more detail here: https://www.dashofinsight.com/a_dash_of_insight/2012/06/the-quest-for-yield-part-7-what-about-bonds.html
Fixed income investors should consider buying their own bonds.
Jeff
Sheldan — To determine the risk you need to decide whether the data from all of the other countries is actually relevant for the current US situation. This step is usually skipped by pundits citing the R&R book.
As to taking an aggressive position, I am not short bonds nor are my clients. I bring this up to suggest that you should consider replacing your bond funds with individual bonds. That is the conservative position.
Thanks for bringing this up.
Jeff