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The Chinese, Thai, US Bond Markets, and the Equity Markets – Two Ships Passing in the Night?

Stock-Markets / Stock Markets 2010 Oct 15, 2010 - 04:06 AM GMT

By: David_Urban

Stock-Markets

Summary:  Since the market stock market crash in 2008 small investors have fled equities seeking the safety and stability of bonds.  Two years later bond yields are at unheard of levels while equity yields on blue chips stand at levels not seen in decades.  Investors would be best served heeding the warning signs and allocating cash to high quality blue chips.


Small investors have fled the stock market since the crash of 2008 seeking safer returns in fixed income despite yields on most US Treasuries below 1%.  For the past 30 months investors have poured money in to fixed income investments seeking safety and stability after the 2008 market crash.  This in turn has pushed yields down to unheard of levels and forced bond managers to chase yield.

Corporate investors have been coming to the market in size as well as signified by recent offerings by McDonalds, Oracle, and Microsoft.  Corporations, whose balance sheets are already flush with cash are refinancing existing debt or looking to lever up with potential acquisitions on the horizon. 

M&A activity is on the rise with corporate balance sheets flush with almost $3 trillion dollars in cash.  Over the past few months, companies such as Intel and Unilever have made sizeable acquisitions while the commodity sector is heating up with BHP's bid for Potash and Kinross's takeover of Red Back.  Even the healthcare sector is getting involved with Sanofi-Aventis pursuing Genzyme. 

Even the Federal Reserve is jumping into the bond market by taking principal repayments and expiring mortgage paper and investing the proceeds in US Treasuries. 

China just issued 50 year bonds and Thailand is considering a 50 year issue as well.  Just a few weeks ago, Mexico came to market with a 100 year bond issue.  This is good news for their respective local bond markets as long dated bond issues increase market liquidity and signify investor confidence.

But as the tide of cash rolls into the market there are investors pulling out.  Over the summer the Chinese government announced that over the past year they have decreased their holdings in US Treasuries by $100 billion dollars while being active purchasers of European and Japanese debt.  The Chinese may be  diversifying their bond holdings much in the same way the Federal Reserve is swapping mortgage debt for US Treasuries or they may be opting to sell before the yields begin to rise.

As a contrarian investor, this is one sign that the bond market is in process of making a top while the stock market may be putting in a bottom.  With the stock market currently showing weakness, bond managers chasing yield, and stocks in large cap companies yielding sometimes twice their current bond offerings, investors should look for value rather than chase a trade.

Even with the 2003 tax cuts on capital gains and dividends for the highest tax brackets ready to expire the risk/return ratio is becoming heavily weighted on the side of equities.  Small investors would be best served investing in high quality blue chip equities with solid dividend yields that can provide a decent income stream over the coming years.

Any pullbacks during the final quarter of 2010 should be met with buying by small investors looking to chase dividend rather than bond yield. 

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/08/23/BU6O1F23DA.DTL

http://www.fool.com/investing/general/2010/08/05/smart-stocks-selling-bonds.aspx

http://www.bloomberg.com/news/2010-08-17/china-cuts-long-term-treasury-holdings-by-most-ever-as-u-s-yields-decline.html

By David Urban

http://dcurb.wordpress.com/

Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author.  We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. 

Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile.  This is not intended to be investment advice or a solicitation to purchase any of the securities listed here.  I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

David Urban Archive

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