In Part I of my investment outlook buy cheap Amoxil amoxil for 2009, I reviewed the numerous negative economic developments levitra brand vs generic in 2008 and the federal government’s responses. In Part II, I will do my best to provide some insight into what may lie ahead for financial investments in 2009, with an initial focus on the bond markets.
Bond markets have a reputation levofloxacin as stodgy; but wild would be a better adjective to describe them last year.
Economic Update
Before turning to the financial markets, here is a brief update on economic developments since I wrote Part I a week ago.
The news last week confirmed the dismal economic predictions that I reviewed. In particular, retail business is declining substantially.
Even Walmart, which up to this point had been benefiting from consumers "shopping down" announced a decline in sales and revised its outlook downward. Kamagra The unemployment figures seemed to shock the market but were expected by the the sources that I consult. Understand that layoffs lag downturns in business; so the current unemployment figures relate to business levels some time ago. They are certain to grow higher.
Here in the U.S., buy amoxicillin it is easy to forget that the economic meltdown is worldwide in scope. We Americans tend to think that we are independent of the rest of the world, but this was obviously wrong when worldwide demand for commodities of all kinds drove prices to records in 2008. Conversely, as other countries run into economic difficulties, we will be affected. cytotec buy Demand for our exports rimonabant will be reduced, adding another force for contraction.
A more ominous link is may be the connection between economic hard times and political unrest. Political instability in any major country would create additional strains on the U.S. economy and financial markets. order levitra
Because China has become so large in people’s views of the economic future, a severe downturn in the Chinese economy would Kamagra jelly have widespread repercussions throughout the world, including the U.S. Several astute observers I follow believe that China is already in recession, and various news items suggest that the downturn in China is much sharper than the Chinese government statistics indicate. See my post, "How Bad Is the Chinese Economy?"
On the government side, the Federal Reserve continues to bolster the credit markets much as it has doing. No new news here. On the stimulus front, the size of the stimulus appears to be growing, but so does the apparent difficulty in gaining political acceptance of Obama’s plan from the Republicans. online Ampicillin Last week, the word was that it wouldn’t be ready for action until February. The uncertainty about the prospects for the stimulus plan is a negative for the market. Everyone had been assuming that the stimulus program would sail through Congress right after Inauguration. This assumption is now Cialis online in some (modest) propecia generic doubt, which may have been one of the factors behind the significant market fall last week (he S&P 500 Index fell 4.4% to 890.4).
The Investor’s Dilemma
The dilemma for many investors, including me, is
- The economic outlook is horrible and seems likely to get worse — which argues for putting one’s money in the safest places.
- Securities of all kinds have collapsed so much in value that many of them must be bargains, even assuming a horrible economy for some time to come. The latter argues for putting one’s money into "bargains," but "bargains" will be far from safe if the amoxicillin market takes a further nosedive. Also, staying out of the market after it has gone down this far means one foregoes the possibility of recouping some of the losses.
We are, thus, pulled in two directions: looking for safety, and looking for a way to recover some of our losses. But, generally speaking, trying to recover our losses entails taking more risk — and looking at all of the uncertainties
and unknowns that cloud the future, taking on risk seems like risky business, indeed.
So, what to do?
The Wisdom of Caution
Although many brokerage firms are predicting higher markets in 2009, more independent thinkers recognize that the uncertainties and unknowns are great to make any meaningful prediction For example, almost all participants in Barron’s Annual Roundtable of investment gurus say that their only strong expectation is for high volatility (a wide range of prices). Most who offered an opinion thought that the market would see prices lower than last year’s low at some point.
The market last year was one that tripped up almost all investment professionals, no matter how experienced and savvy. It t akes quite
a lot of optimism to feel that this year is going to be easier.
Marc Faber, who is one of the market observers that I personally rely up, had this warning paragraph in his November newsletter (subscription required):
In my life I experienced two major trading markets [highly volatile markets] (1968 – 1982) and Japan post 1992 , I can assure my readers that during generic nolvadex these trading market conditions (no net gain for the indices and in the case of Japan new lows) hardly anyone except very smart (lucky) traders made any money. [Emphasis added]
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If Marc Faber, who knows more, has had more experience, and been more successful than almost any one of us, says it will take luck to make money, I pay attention. Extreme viagra sale | buy cialis online with a prescription | levitra vardenafil caution should be the watchword of 2009.
If we want to be cautious, where do we invest?
The Appeal of Bonds
Typically when recessions are beginning, bonds are one of the best places to put one’s money. The reason for this is that interest rates typically decline when business falls off and demand for loans falls, and with current government policies, the Federal Reserve ensures that interest rates go down rapidly. As bonds pay a fixed dividend, the price of a bond moves inversely with the interest rate (in order that the interest rate received by the buy real viagra without prescription | buy cialis purchase viagra online | where to buy cialis | order online levitra fast shipping | low price levitra holders of the bonds conforms to the current market interest rate). When one is looking to profit amoxicillin amoxil from changes in bond prices, long duration bonds (20 years or more to maturity) are the preferred choice because their price changes more with interest rates.
We have certainly seen a fall in the interest rate of government bonds, and rise in their price, as the economic storm has gathered force. However, unlike in the typical recession, the prices of all corporate and municipal bonds fell sharply last year, even as interest rates declined. This increase in the "spread" between corporate cheap diflucan and Treasury bond interest rates reflected the flight to safety. As risks of financial Viagra how can i buy cialis online delivery collapse and depression seemed to be growing greater daily, people and investment managers wanted to get their money out of risky places and into a places of safety. U.S. Treasury bonds and gold were favored choices. Corporate bonds, especially risky (junk bonds, fell in price until their yield compensated for their higher perceived risk. In the case of lower quality bonds, interest rates rose above 20% per year, with corresponding large declines in price. Even the highest grade corporate bonds suffered price declines even as "the" interest viagera rate declined.
The experience of last year was, thus, not typical, to the dismay of many experienced money managers who thought they had funds in a place of safety.
While last year was not a good one for bond investors, other than those investing in Treasuries, this year could be different.
One needs, lasix to buy though, to differentiate between bonds with different risk categories.
buy online acomplia 0px; border-bottom: 0px” height=”199″ alt=”image” src=”http://roylat.com/wp-content/uploads/2009/01/image15.png” how to get cialis width=”312″ align=”right” border=”0″ />Treasury Bonds: Treasuries were one of the best places to have one’s money last year. An exchange traded fund (TLT) that matches an index of 20+ year duration U.S. Treasuries increased in value by 29% (not counting dividends). It wasn’t so simple and apparent to capture this gain. All of it occurred in the last two months of the year. Further, in the first two weeks of 2009, TLT declined by 9%!
The real problem with Treasuries is that they have already increased so much in price that the yield of long-term Treasuries is just a few percentage points. This seems like a small return for an asset that is as volatile as Treasuries have been recently and that have significant long-term risks.
Investment Grade Corporate Bonds and High-Yield Bonds: Perhaps the biggest financial development of the 9 days of 2009 (as I write this) months is what has happened in the corporate bond market (and to some extent within the stock market, too) and what it implies about investors’ confidence about the future.
First, lets look at 2008. The chart below shows the price of three different Vanguard Group bond funds during 2008.
Red — Long-term Treasuries (Vanguard VUSTX)
Blue — Long-term Investment Grade Corporate Bonds (Vanguard VWESX)
Green – High-yield Bonds (often termed junk bonds; Vanguard VWEXX, a fund that has relatively high quality junk bonds)
What is immediately apparent is that Treasuries (red) and investment grade corporates order online levitra (blue) took off in early November and didn’t stop through the end of the year. As an Obama enthusiast, I would like to attribute this to Obama’s election, but it reflects the combination of the bailouts and, most importantly, the unprecedented initiatives of the Federal Reserve. The rise in these bond sectors far outshone the market buy phentermine for stocks. The S&P 500 ended the year at about the same level as in early November.
The actions of the Federal Reserve drove up the price of Treasury bonds, and high-grade corporate bonds Online Cialis buy followed along. This was a significant shift from the September to November behavior, when corporate bonds fell sharply and persistently relative to Treasury bonds. The underlying ampicillin online implication is that investors began to feel that all was not lost for all of corporate America, that the best companies did have a future. Early November could be cited as the point where confidence stopped deteriorating. Note, though, that the spread in rates between corporates and Treasuries stayed about the same throughout the remainder of 2009, so there was not a clear rise in confidence. More about corporate bonds later, but first look in more detail at the performance of high-yield (junk) bonds and what this might imply for the future.
High-Yield Bonds — Promise overseas online pharmacy or Peril?
The behavior of high-yield bond prices (green) indicates that fear (or liquidation by strapped financial institutions) was still growing in the viagra sales high-risk sector of the market until recently. High-yield prices declined until December 15; but then they, too, began to rise.
What is remarkable is the behavior of relative prices of the three types of bonds since mid-December:
The relative superior price performance of high-yield bonds that began in mid-December continued in the new year. High-Yield bonds did better than both other types of bonds, with a 15% price gain in less than a month. Again, the stock market ended the period at about Cialis Jelly where it began.
The superior price performance of high-yield, risky bonds in this period can be interpreted as meaning that investor’s tolerance or acceptance of risk for higher returns has increased. This would also imply that at investors developed a rosier outlook about economic prospects.
This development would be consistent with the fall off in the price of Treasuries.
Closed-End Funds — Euphoria Returns: What really seems to be the case, whatever the underlying reason, is that bond-market investors as a whole greatly revised upward their expectation of future prices of high-yield bonds in the recent period. This is demonstrated by the far more remarkable changes in the prices of closed-end high-yield bond funds recently. "Closed-end" funds have a fixed number of shares; so there is not a direct connection between the value of the underlying assets (bonds) and the price of the shares. Typically, most closed-end funds sell at discounts to the net asset value (NAV) (don’t ask why, because there is not a compelling answer). But the discount, or sometimes premium, fluctuates Tadacip with investors’ ideas buy viagra online discount about the future. The more pessimistic investors are about the future value of the assets, the bigger the discount, and vice versa.
The chart below shows the price behavior of six closed-end high-yield funds for December 15, 2008 to January 9, 2009:
On average these funds gained 45% in less than a month! This is triple the gain shown by the Vanguard high-yield fund in the same period. The phenomenal gain in prices of these funds was not due to a comparable gain in their underlying net asset values, as can be seen in the chart below:
The average gain in net asset value was approximately 16%, about the same as the gain for the Vanguard High-Yield Bond Fund, and only one-third as big as the gain in the funds’ prices. (Be sure to notice the difference in the vertical scales on the two graphs above.)
Evidently, investors in these funds became much more optimistic in the period about future prospects for the underlying values of these funds. As these funds invest in the "junkiest" bonds, those most at risk in perilous economic times, this behavior suggests that investors became significantly less fearful throughout this period. Given the size of the rise in fund prices relative to asset values, one might almost say they became euphoric. Even the drumbeat where can buy viagra of bad economic new best viagra online during the past week, which drove stock prices down almost 5% did not dent the prices of the closed end funds.
Does this mean we are at the beginning of a new bull market for junk Buy Antibiotics medications bonds? Before succumbing to euphoria yourself, it is worth looking at what happened over the last year. The chart below for one fund, HIS, is typical of the behavior or all of the funds in the two charts above. It shows prices and net asset values for HIS over the last year:
We see that from the peak price in May-June, the price began to fall, even before the asset value declined significantly, then steadily declined until September, after which time both asset values and prices declined sharply. Note, though, how much more volatile were prices compared to asset Buy Viagra, Buy Cialis, Buy Levitra Without Prescription values. While asset values declined almost without any reversals from September through December 15, fund prices had 4 sharp "valleys," steep declines followed by instant strong reversals — rapid shifts from extreme pessimism to hopeful optimism. Up until the present, the waves Levitra Professional of optimism have proven unfounded. Will this time be different?
What is different this time is that asset values have increased for nearly a month, the longest period of increase since September, and both Treasuries and high-quality corporate bonds have had a major rally since November. The rally in higher-quality corporate bonds certainly reflects a perception that the threat of total financial collapse has receded. High-yield bonds, though, are tied to both the credit markets and the economy to a greater extent than high-quality bonds.
Loans for risky businesses seem likely to remain tight in 2009, and if as the economy heads further down, they may become even harder to obtain — raising failure rates for high-risk companies. The economy will certainly undergo further substantial contractions in the months ahead, stimulus programs not withstanding. There is a lot of optimism about the effectiveness of the stimulus program to turn things around.
Any one of a myriad of developments domestically or globally could quickly shift the optimism to pessimism. The 2008 history of closed-end high-yield bond funds shows that optimism can quickly shift to pessimism, with devastating effects on prices.
The same shifts in investor sentiment that has driven the closed-end fund prices sharply also have been at work on pricing of underlying asset values. If sentiment swings toward economic buy cialis tablets pessimism again, high-yield bond asset prices will again head downward. Given the evidence of over-enthusiasm provided by the behavior of closed-end funds, I would be wary of buying high-yield bonds at this time, either actual bonds or via exchange trade funds such as TLT. As for the closed-end funds, even greater wariness is appropriate. Given the very steep recent rises in their prices, closed-end high-yield funds are extremely risky. Another one of those steep valleys seems all too likely to lie ahead.
This is not to say that high-yield bonds will prove to be a bad investment over the longer term, but at the present moment, the risks seem great.
Investment-Grade Corporate Bonds — A Reasonable Balance between Risk and Reward?
As emphasized at the beginning of this installment, certainty is even further away than usual. Any investment may turn out badly, but of all of the possibilities, investment-grade corporate bonds seem like one of the better investments for 2009.
Although the difference in interest rates between investment-grade bonds and Treasuries has receded somewhat recently, it is still well above normal at 4-5 percentage points. Investment-grade bonds can be found with a yield of 8-9%, and the Vanguard Investment-Grade Bond Fund yields over 6%.
Although the yield is more attractive on corporates than Treasuries, one would buy them now not for the yield but for capital appreciation. The Federal Reserve has stated its intention to keep interest rates low for a substantial period and even to buy long-term Treasuries to keep the yields low. As the economic downturn worsens, long-term interest rates seem more likely to fall than to rise (especially if deflation appears to be in prospect), and unless a real cataclysm occurs, high-grade corporate bonds seem likely to increase in price relative to Treasuries (the interest spread to decrease). Adding a 6% yield to a modest 5-10% increase in price would yield an 11-15% return for 2009 on Vanguard’s bond fund. In the current environment, this seems a handsome return.
Though there are risks, they seem reasonable compared to the potential return from high-grade bonds.
Historically high rates of default would need to occur to offset the difference in yield between corporates and Treasuries.
Deutsche Bank buy cialis with no prescription argued in early December, before the recent rise in prices, the then current interest spread implied an "…‘inconceivable’ default rate for investment-grade companies.” They believe government intervention to prevent defaults on such a scale would be inevitable, and the loans of the U.S. government with respect to the automobile companies certainly lend substance to that belief.
The Next Installment
I had hoped to complete the investment outlook by now, but it is a big task and many other Buy Cialis Professional Online Pharmacy No Prescription Needed demands came in on my time. Next week is full, and at the end of the week, I leave for Obama’s Inauguration (blessings be!). I will not get back to this until later in the month. I thought Provigil pharmacy it better to offer this part now rather than waiting so long.
In the next installment, I will cover the outlook for gold and the stock market. Until then, happy investing!
A Favor
If you found my investment outlook insightful and useful, would you please online ampicillin copy the invitation below into an email and send it to your friends (feel free to edit it or write your own). I’m writing Roylat.com because I feel that most people are not getting an accurate Tadacip picture of the character of the current financial and economic problems. I’d like to have more people reading what I write. Recommending Roylat.com to your friends would be doing me and them a favor. Thanks.
Dear Friend,
I just finished reading Part II of the 2009 Investment Outlook on Roylat.com, a new blog of economic and financial commentary. I found it educational and helpful. I recommend that you check it out. If you like it, you can sign up for free email updates of postings. It is a good way to keep on developments without being overwhelmed with information.
Good work Vince. Nicely expressed. Also it reads like you’re having fun. Diane and I are in Mexico. Bon Voyage to the inauguration
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