Low yield and high risk equal bustThe loans in this group did not go to solid credits. Although market interest rates were low when these mortgages were written, the mortgages had rates averaging 11.2 percent. Yet investors who put up most of the money were willing to accept a floating rate of just 30 basis points - three-tenths of one percentage point - over the London interbank offered rate. At the moment, that gives them a yield of 3.2 percent.
If Moody's is right, those investors will eventually suffer capital losses. That is quite a combo for a security: low yield and high risk.This is absolutely amazing to me and brings new meaning to the Death of Real Yields I speak of so often.
Not so fastFASTER economic growth means higher returns for investors. That is a big part of the rationale for investing in emerging markets.
The problem with this argument is that it is not true. Research by the London Business School looked at 17 countries over 108 years. The countries with the slowest-growing economies (as measured by GDP growth over five-year periods) returned 8% a year; the markets in the fastest-growing economies, by contrast, returned just 5% a year.
When a broader group of 53 economies, including many emerging markets, were examined, the tortoises beat the hares by a wider margin—12% to 6-7%. James Montier of Société Générale found that the slowest-growing emerging markets have delivered higher returns than the fastest growers over the past 20 years.
Kohl's Net Falls; Shares Drop on Profit Forecast (Update1)May 15 (Bloomberg) -- Kohl's Corp., the fourth-largest U.S. department-store company, said earnings dropped 27 percent and forecast profit that trails some analysts' estimates as consumers facing record gasoline prices slowed spending on clothes.
Trailed some analysts' estimates? I find that hard to believe. Surely the analysts saw this coming.Sales at stores open at least a year fell 6.7 percent. Shoppers have curbed spending on clothing and home goods as housing values decline and costs for food and fuel surge.
Pillars of Retail Strength don't concern themselves with same store sales though (see link below).``We're facing a downturn led by the consumers, and there is no visibility today as to when this is going to get better,'' Richard Jaffe, an analyst at Stifel Nicolaus & Co., said in an interview on Bloomberg Television. He recommends buying the shares.
The retailer ``is really running a very tight ship in a very tough environment,'' Jaffe said.
Looks to me like it is analogy time.
First Mate: We can't slow the ship. We've hit yet another iceberg. The water keeps coming in through the hull creating somewhat of a downturn. There is no visibility due to the fog.
Captain: Get China on the radio. Tell them we've rethought their offer. We're willing to sell them our ship at the agreed upon price.
``We do think there's a chance to get some of that stimulus money with an aggressive marketing campaign,'' Mansell said.
Retailers are specifically targeting some of the "free" money sent to us by using expensive money ("aggressive marketing campaigns"). I'm not arguing that they shouldn't. I'm simply suggesting that inflation causes malinvestments. That's the theory. In my opinion, here's the practice.
See Also:Our Pillars of Retail Strength
Bernanke: Banks must get better at foreseeing riskWASHINGTON (AP) -- Commercial banks and other financial institutions need to beef up their ability to detect and protect themselves against risks like the credit and mortgage debacles, Federal Reserve Chairman Ben Bernanke said Thursday.
The trio of crises -- housing, credit and financial -- have exposed weaknesses in financial firms' so-called risk-management practices....
If only they could see as well as Bernanke.
Bernanke's thoughts at the top of the housing bubble/crisis:
October 27, 2005Bernanke: There's No Housing Bubble to Go BustU.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.
Bernanke's thoughts on the credit and financial crises:
August 7, 2007
Federal Reserve: FOMC StatementEconomic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.
Just 10 days later:
August 17, 2007
Federal Reserve: FOMC StatementFinancial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably.10 days is a long time when predicting the future. Ask any weatherman.
I have charted two funds based on their adjusted close (adjusted for dividends and splits). The chart shows the growth since January, 2004.
TIP is a bond fund made up of treasury inflation protected securities. They are considered to be among the safest bond investments in America as they are fully backed by the US Government and have inflation protection (tied to the CPI). It is therefore not a fund designed to make you rich. The primary risk in this fund is interest rate risk since the fund holds long-term bonds. Changes in real interest rates (rates adjusted for inflation) change the value of those underlying bonds. That adds volatility as seen in the chart.
SWYSX is a high yield bond fund. The primary risk in this fund is/was the bonds themselves (low credit quality). There is little interest rate risk since the fund holds short-term bonds. Changes in interest rates do not create much volatility. Note the lack of volatility in the chart.
Clearly volatility and risk are not necessarily the same thing. I suggest that one fund was offering the Illusion of Prosperity and one was offering the Illusion of Risk. For what it is worth, since 2006 I've been increasingly embracing the Illusion of Risk (TIP).
May 3, 2004Buffett's Wit and WisdomTIPS [Treasury Inflation Protected Securities] are not a bad investment for people worried about inflation heating up, which we're seeing signs of.Some seem to think TIPS are overvalued now.With TIPS Like These, Investors Need AdviceThe bidding frenzy has sent TIPS prices soaring. The bonds have become wildly overvalued and now offer a terrible long-term bet.Just how wildly overvalued could they be? If a 15% total return (~3.2% average annual return before inflation) over the past four and a half years truly represents an investment bubble, then our country is in seriously deep trouble (which it may be anyway).
This is not investment advice so please do not take it as such.
MAB pointed SWYSX out to me in the comments.
See Also:TIPS Investors "Need" Advice ApparentlySource Data:Yahoo: Historical TIPSYahoo: Historical SWYSX
Food prices poised to drop sharply: YardeniTORONTO — Market strategist Ed Yardeni, who made a name for himself with accurate calls on the U.S. stock market's bull runs of recent decades, says that soaring food prices won't last because farmers are rushing to plant more crops and agricultural productivity is increasing with new investment.Just bull runs? Why is that sounding an alarm bell?“There's so much capital now that's going to pour into agriculture that I think food prices are going to come down sharply,” Mr. Yardeni said at a presentation Wednesday morning sponsored by Thomson Reuters Academy.So much more money pours into something and it automatically leads to sharply lower prices? Good to know. Quick, someone get the government to give me a trillion dollars. I want to do my part to help. I promise to pour it into lots of things. I think I'll start with rice just for kicks and giggles. I wonder if Costco accepts rather large third-party government checks?And U.S. consumers are likely to surprise economists with their spending even in the midst of a huge downturn in housing prices..I think it is safe to say we're being surprised. In fact, that might have something to do with why the government is sending out tax rebate checks to reduce the suspense. Just a hunch.“You know how we Americans are,” Mr. Yardeni said. “When we're happy we spend money, and when we're depressed, we spend more.”And what do we do if we are Greatly Depressed? Spend even more?
I never heard of him. I was curious just how much of a name he made for himself. Maybe you will be too. The first one is a must read. It plays out like a comedy sketch, lol.
January 24, 2000Hypester Yardeni is Y2KO'dI'm not going to blame anyone. The data were what were available at the time. I'm not making any excuses. The three summarizing words are "I was wrong."November 3, 2000False Assumptions about the Market's FutureTo be sure, Buffett is a long-time skeptic about the stock market's high valuations. But Edward Yardeni, an economist and New Economy booster at Deutsche Bank Alex. Brown, essentially agrees with the legendary investor. Yardeni believes nominal GDP will average a 6% growth rate over the next 10 years (4% or 5% GDP growth and 2% or 1% inflation) and that corporate earnings won't do much better than that. However, he does think the earnings and stock prices of the S&P 500 could increase at a 10% pace, thanks to the growing dominance of high-tech companies in that index. Still, that pales next to the S&P 500's 26% average annual gain from 1995 through 1999.The S&P 500 index closed at 1427 on November 3, 2000.
The S&P 500 index closed today at 1409.
Warren Buffett: 1
Edward Yardeni: 0
How very stagflationary. It seems the #1 "false assumption" was the 10% pace. Maybe that's just me though.
Feel free to substitute your favorite "S" word. Some might choose Spain. Others might choose stagflation. There's also the obvious, but the powers that be tell me that's already fully priced in.OECD warning as stagflation goes globalThe ECB's task is doubly complicated by the yawning gulf between the Germanic and Latin blocs of the eurozone. Industrial output fell in Italy, France, and Spain in March. April manufacturing orders fell at the fastest rate since the dotcom bust in Italy and Spain. "We're suffering a clear and profound slowdown in the Spanish economy", said Pedro Solbes, the country's finance minister.That's priceless. Here are last year's quotes from the "See Also" section below.
David Taguas, Head of the Spanish Prime Minister's Economic Research Unit:
To talk about severe adjustments or a meltdown in prices is ridiculous.
That sort of crisis is unthinkable.
Is completely out of the question.
We have the good fortune to have one of the most efficient financial systems in the world. That's insurance in times of turbulence.Rafael Pacheco, Housing Director, Spanish Government:
You cannot speak of a crisis.
The issue of Spain's crumbling property market intruded on the bank's policy agenda last week, pitting the South against the hawkish Bundesbank chief Axel Weber.
Crumbling? I thought they were counting on it. Last year government officials said:Spain plans to restore a fifth of its coastline from overdeveloped concrete jungle to a more natural state by enforcing legislation to demolish illegal construction."The euro has been trading on the German export story. The market has conveniently ignored the collapse in Spain, and the near recession in Italy," he said.That's just like the market, isn't it?
See Also:Spain's Economy Revisited
We can't know how bad it will get. - Briefing notes for housing minister Caroline Flint
Get used to disappointment. - Westley
But we need to plan now to put in place effective measures against the risk that it does get worse and to prepare for the upturn. - Briefing notes for housing minister Caroline FlintOh, what I wouldn't give for a holocaust cloak. - Westley
Given present trends, they will clearly show sizeable falls in prices later this year -- at best down 5-10 percent year-on-year. - Briefing notes for housing minister Caroline FlintThe six-fingered man returned and demanded it, but at one tenth his promised price. My father refused. - Inigo MontoyaThe notes make clear that the fundamentals of the economy are sound with high employment and low inflation but as everyone knows the market is being affected by the global credit crunch. - A spokesman for her ministry, the Department of Communities and Local GovernmentIt's been twenty years now and I'm starting to lose confidence. - Inigo MontoyaThis is a partial and therefore misleading account of the notes. - A spokesman for her ministry, the Department of Communities and Local GovernmentI thought it fitting considering the rocky terrain. - Man in Black (Westley)Source Data:"Can't know" how bad housing market will get
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