The verdict is in…
The Federal Reserve will taper further. In its statement, the Federal Reserve said, “Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month.” (Source: Board of Governors of the Federal Reserve System web site, March 19, 2014.) The Federal Reserve has been tapering quantitative easing since January by $10.0 billion each month, coming down from $85.0 billion a month in December.
To us, it will not to be a surprise to see the Federal Reserve taper further. If this becomes the case, then in just five months, there will be no quantitative easing. The printing presses will stop.
This doesn’t bother me. It’s all too known and expected.
With this taper announcement, the central bank also provided its projections on where the federal funds rate—the rate at which the Federal Reserve lends to the banks—will go. It said the rate can increase to one percent by 2015. By 2016, this rate can go up to two percent. Mind you, the federal funds rate has been sitting at 0.25% for some time now—since the U.S. economy was in the midst of the financial crisis.
What happens next?
Economics 101 tells us that when interest rates increase, bond prices decline and bond yields increase.
Quantitative easing and low interest rates have caused more harm than good. These two phenomena caused the bond prices to rise and … Read More
Generally speaking, investors move their money from risky assets, such as stocks, to less risky assets, like bonds and cash, when they feel uncertainty is increasing. One of the most recent and great examples of this was the 2008–2009 sell-off in the stock market. Investors ran to the bond market, driving bond prices higher and yields lower. Their reasoning was that the stock market could see a further decline—and it did. On top of that, the Federal Reserve started to buy bonds, so investors had more incentive to stay in the bond market.
In 2013, we saw investors rush to the stock market, and we also heard that the Federal Reserve will be reducing its bond purchases. This created pressures on the bond market, and bond prices declined very quickly. The notion this time was very simple: why stay with low yields when you can get a higher return on your investments in the stock market, especially since the Federal Reserve isn’t buying as much.
Since entering 2014, something interesting has been happening. We are seeing investors rushing to the bond market, and the stock market is seeing a decline. Below, you can see the chart that shows this relationship. I have plotted yields of 30-year U.S. bonds as an indicator of the bond market and the S&P 500 as an indicator of the stock market. Pay close attention to the circled area.
Chart courtesy of www.StockCharts.com
Note that when we see buying in the bond market, yields decline. This is the phenomenon we have seen occurring since the beginning of 2014.
The chart above suggests that investors are leaning … Read More
There’s always something investors are worried about. Recently, we heard about the U.S. government reaching the debt limit, shutting down, and inching close to defaulting on its debt. Investors reacted, and the key stock indices started to slide lower due to concern over what could happen.
Now, with a deal being struck to extend the debt ceiling and budget deadlines, those worries are over, meaning U.S. creditors will get their interest payments and the government will go on operating as usual.
This all brings one very critical question to mind: how can investors save their portfolio from situations like these?
In situations where investors are unsure about what will happen to their portfolio, they can follow these three simple investment strategies. These strategies can help investors not only rationally decide on what to do with their portfolio; but they may even find an investment opportunity as a result.
1. Assess the Situation
Take the recent debt ceiling issue, for example. There were concerns that Congress wouldn’t come to a consensus and the U.S. government would have to tell its creditors that they can’t pay them, causing bond prices to decline and portfolios heavy on bonds to suffer massive losses. But what a lot of investors forgot was that the U.S. economy has gone through similar acts many times before, having passed the debt ceiling 78 times.
The lesson here is that investors need to see whether or not the event/situation they are worried about is going to affect their portfolio in the long run. If it doesn’t—and historically, it hasn’t made much of an impact—they should just wait and see … Read More
In spite of high unemployment and stagnant wages, sales reported by U.S. automakers have been incredibly robust, with America’s big three automakers reporting double-digit sales growth for August.
General Motors Company (NYSE/GM), the second-largest U.S. automaker, said its August sales rose 15% year-over-year, making August its strongest month since September 2008. Ford Motor Company (NYSE/F), the largest U.S. automaker, and the Chrysler Group each realized 12% increases last month. (Source: “New Vehicle Sales,” Motor Intelligence web site, September 4, 2013.)
Interestingly—or perhaps not all that surprisingly—some non-U.S. automakers and their luxury divisions reported some of the largest gains. Maserati of N.A. Inc sales were up 49% in August, Rolls Royce sales were up 121%, and Jaguar sales were up more than 67%.
For the current year-to-date, U.S. light market vehicle deliveries total 10.64 million, a 9.6% increase over the 9.71 million sold during the same period last year. If car sales keep this pace, the U.S. is on track for its best year since 16.1 million vehicles were sold in 2007.
Why are so many more Americans buying from U.S. automakers? Thanks to better trade-in values and record-low interest rates, more and more Americans are opting to lease from U.S. automakers.
Once used primarily as a tool for attracting luxury car buyers, leasing is now an attractive option for a growing segment of the population. And it shows no signs of slowing down; the number of Americans leasing from U.S. automakers has been at least 22.5% in every month this year. During the second quarter, leases accounted for more than 27% of all sales, versus 24% in the same period … Read More
“I think it’s all about taking risk; you have to take more of it—get out of your comfort zone. You can’t just keep doing the same thing and expect different results—it’s that simple.” These were the exact words from my friend, Mr. Speculator, on portfolio management. “I am not looking for just a menial 10% return,” he added. “I am in it for a much bigger gain. To gain more, you have to risk more.”
Mr. Speculator is right about one thing: to gain more you have to risk more.
However, long-term investors who are saving for retirement, their kids’ education, or anything else for that matter, should not follow the lead of Mr. Speculator. Taking high risks can be dangerous, and at times, it’s no different than gambling. Being willing to risk it all is not a good investment management technique.
When it comes to retirement, investors need to have a very strong focus on one four-letter word—“risk”—or else one move in the wrong direction could make a dent in their portfolio—which may cause them to push back their retirement or give up on their plans altogether.
Take a look at the current bond market, for example; clearly, the risks are increasing. Look at the chart of the yield on 10-year U.S. Treasury notes below:
Chart courtesy of www.StockCharts.com
The yields have increased roughly 75% since the beginning of May.
Bond investors are fleeing. According to the Investment Company Institute, in June, U.S. long-term bond mutual funds had a net outflow of 60.4 billion—this was the first since August of 2011. In July, they continued to flock to the … Read More
Starting near the end of 2012 and then going into 2013, there was a significant amount of noise around the concept of the “Great Rotation.”
The idea behind this concept is that low yields on U.S. bonds would cause investors to sell their bonds positions, which would eventually bring bond prices down, driving investors toward stocks. That would send the key stock indices higher.
Now, since the Federal Reserve announced that it might be pulling back on its quantitative easing, the concept of the Great Rotation seems to be gaining some traction once again. And investors are asking if it’s really going to happen.
Looking at the chart below of 10-year U.S. bond yields, it’s very clear that investors don’t like the U.S. bonds—they are selling. The yields on 10-year U.S. bonds have skyrocketed; they are now more than 44% higher than they were at their lowest level in August 2012.
Chart courtesy of www.StockCharts.com
According to TrimTabs, an investment research company, through to June 24, investors sold $61.7 billion worth of bond mutual funds and exchange-traded funds (ETFs). While this may not sound big, this is the highest sell-off since October 2008, when investors sold $41.8 billion worth of mutual funds and ETFs. (Source: Bhaktavatsalam, S.V., “U.S. Bond Funds Have Record $61.7 Billion in Redemptions,” Bloomberg, June 26, 2013.)
Now that we see investors fleeing the bonds market, shouldn’t they go to the stock market, thereby causing the markets to climb higher?
Yes, according to the concept of the Great Rotation, the key stock indices should be climbing higher. Sadly, the reality is the opposite: as the bond prices … Read More
The financial crisis of 2008–2009 was one of the most stressful periods for not only the U.S., but the entire global economy—the financial system was on the verge of collapse. As a result, investors, who dislike risk, moved toward safer assets, such as bonds, because they would rather get a certain lower rate of return than chance taking a loss.
On top of all this, central banks implemented loose monetary policy to provide liquidity to the financial system, lowering interest rates and purchasing troubled assets from the banks.
This phenomenon caused bond prices to skyrocket and yields to collapse. Take a look at the chart below, showing activity in 30-year U.S. bonds.
Chart courtesy of www.StockCharts.com
The 30-year bonds rallied. In October of 2008, just before the stock market started to drop, these bonds were trading below 115. They have come a long way since, and they currently hover around 145—an increase of more than 26%. As the prices of 30-year bonds increased, their yields collapsed as well. Before the financial crisis began, getting a yield of around five percent was normal. Now, the same yields have plummeted, and investors only get a yield of around three percent—a 40% drop.
The Great Rotation
The Federal Reserve has kept interest rates near zero for sometime now—it plans to keep them there until 2015. The idea behind what is called the “Great Rotation” is very simple: bond prices went up, and the yields collapsed. What happens when the Federal Reserve starts to increase interest rates and gets away from the loose monetary policy?
There are misconceptions with investors that bonds are … Read More