Can Turtles Fly?

One of the ideas that I'm looking at is corporate bonds. How attractive are present yields compared to the past? Bond investors typically look at spreads (against US Treasuries) to gauge risk and attractiveness. You can check out a spread graph from this post at Calculated Risk. I'm going to break the rules and ignore spreads for the most part. In fact it might be downright dangerous to look at spreads. I'm of the opinion that the US Treasuries might be in a bubble (prices high, yields low) so any spread against them will look wide. The threat of inflation in the future is real. If I'm going to invest in bonds, it is better to look at raw yields. The following is a chart of Aaa and Baa corporate bond yields(thanks to CalculatedRisk for the idea of looking through the FedRes FRED database): The spreads are extremely wide but the raw yield is not that high compared to history. The BBB bonds are simply at the level they were in 2000 (the forward 10-year inflation picture...

Sort of old news by now but for those who may not have heard, the Bush administration is abandoning its original TARP bailout program , which called for buying financial assets (mostly mortgage-related,) and is shifting it focus to capital injections and to the consumer: The Treasury Department on Wednesday officially abandoned the original strategy behind its $700 billion effort to rescue the financial system, as administration officials acknowledged that banks and financial institutions were as unwilling as ever to lend to consumers. ... The program, still in the planning stages, would for the first time use bailout funds specifically to help consumers instead of banks, savings and loans and Wall Street firms. Treasury officials said they hoped to invest about $50 billion from the bailout fund into the new loan facility, with the aim of helping companies that issue credit cards, make student loans and finance car purchases. As envisioned, the Treasury would put up about 5 percent of ...

Want to know which parts of the US had a housing bubble? Well, one needs to look no further than the percent of homes underwater: The above chart from The New York Times ( accompanying article here ) plots the percentage negative equity. The bubble areas had high speculation (Nevada for example) and/or homes being bought by people who clearly couldn't afford to. So those individuals (speculators/investors and those who were nowhere near the affordability point) have already defaulted or given up. Such areas would show up as large price declines (because the high price was an unsustainble "bogus" price.) Although this isn't a perfect measure of a bubble, my feeling is that it is a good estimate. The usual suspects--coastal areas, California, Nevada, Florida--shows up in darker shades that is indicative of a higher percentage of homes that are underwater. I see some people assuming that a house is not worth paying for if the debt is greater than the equity value but th...

MarketWatch reports how IEA doesn't see peak oil any time soon and in fact thinks under-investment is a bigger problem: The International Energy Agency on Wednesday dismissed fears about peak oil, but the group said under-investment could lead to production troubles. The IEA published the full report on its world energy outlook after releasing a summary last week. "Although global oil production is not expected to peak before 2030, conventional crude-oil production is projected to level off toward the end of the projection period," it said. Canadian oil sands, extra heavy oil, gas-to-liquids and coal-to-liquids will have to make up the difference. But it warned that OPEC countries will need to step up their investment campaign. Some 64 million barrels of oil equivalent a day of additional gross capacity, the equivalent of six times the amount Saudi Arabia produces today, must be brought on stream from 2007 to 2030, with about half needed by 2015. Now, IEA, like anyone el...

I have talked about merger arbitrage blowing up in the past and here is another example. In the recent case, a Canadian hedge fund has posted massive losses this year due to some unusual problems with their merger arbitrage positions . The fund posted superb returns over the last few years, only to collapse this year: The president of Lawrence Asset Management Inc. made a name for himself running the firm's flagship hedge fund with stellar returns such as his 75-per-cent gain in 2007. But the stock market crash has dealt a blow to Lawrence Partners Fund, which suspended redemptions this week after plunging 65 per cent for the first 10 months of this year. Do keep in mind that returns are geometric so a 50% decline would wipe out a 100% gain in the past. The problem with hedge funds is that you cannot tell if they are making money due to skill or via leverage. A 75% return in one year is great but how much of that is due to leverage? There are many hedge fund managers who have reco...

Going with the strategy suggested by Marc Faber yesterday, is it worth investing in junk bonds rather than stocks? It's certainly an interesting strategy. Others such as David Merkel also takes a look but from a switching model point of view. The following is a chart of some popular bond ETFs: Note that interest and dividends are not included so this chart is kind of misleading. However, for our purposes, it's good enough. The junk bonds certainly look attractive. I recall someone saying that the stock market is pricing in a recession while the bond market is pricing in a depression. That might be an exaggeration but junk bonds do look attractive. Even if you think corporations are going to have difficulties, then, as Marc Faber said yesterday, the stock is worth zero (upon default) so bonds are still better. One needs to do further homework. The chart above is too short (risk was underpriced in the last 5 years) and one needs to look at how junk bonds performed in the early 7...

UPDATE: Fixed the broken link thanks to Vlado. I think I figured out the cause of my link problems. Bloomberg's URLs have a double-quote or something that messes up the link in Blogger. Bloomberg has a pretty good interview with Marc Faber that you can find here . This is a good interview because Marc Faber is allowed to expound on his worldview. Who knows how correct his views will turn out to be but it's good to hear detailed explanation of why he thinks what he thinks. Here are some quick notes, with my thoughts (not in any order): Stocks not that attractive since he expects weak earnings for a while. Marc Faber says that high yield corporate bonds are attractive. He thinks bonds with around 13% to 15% yield look more attractive than stocks. Bonds with yields like that are non-investment-grade (probably rated around BB). This is one area I'm looking at. I'm not familiar with bonds so I'm trying to learn what my broker allows me to buy (at reasonable commissions)...