It’s no surprise that the past month has seen a wicked selloff in the bond market. With the Fed publicly considering “tapering” its purchases of Treasuries and MBS it’s hard for bond investors to resist the urge to frontrun them.
What may have come as a surprise to many, however, is the action in sectors like the utilities and REITs which have seen a quick drop of around 10% over the same time. I’ve seen a shift over the past year or so on the part of the average investor from traditional income sources like bonds into riskier securities like these.
These investors, I would guess, have been unaware of the increased risk they were taking until it was made plain to them by the fast selloff. Surely they didn’t understand the concept of “reaching for yield” when they were buying and that in doing precisely this they were getting a few more pennies today by risking dollars tomorrow.
This selloff occurred in reaction to a mere interest rate move from 1.65% to 2.2% on the 10-year treasury bond. Just 3 years ago this rate was 3.5%. Imagine if it traded back to that level. How much more would utilities and REITs, etc. need to lose to make their yields competitive? 10%? 20%? 30%? And to think investors have been buying these things for an extra 1% or 2% annual return.
I’ve recently written that stocks are very unattractive, as well, at current levels. To me, perhaps the only truly conservative asset class out there right now is cash… only until another juicy opportunity presents itself, of course.
FIRE Wall Street
This is the advice Bernie Madoff is now giving from behind bars after perpetrating the largest ponzi scheme in history. Is he trying to make amends? Probably. And though he has zero credibility he definitely has unique inside insight into how Wall Street uses the average investor for profit.
One of these ways is through hedge funds which are now open to general public for investment. However, this is one of the worst possible options for individual investors mainly because the fee structure virtually guarantees the fund managers will get rich… at your expense. I’m sure this is one of the things Bernie was thinking about when dispensing his new advice.
There is another side to Mr. Madoff’s warning, though, and Lance Roberts last week published an article on this exact topic:
For individuals it is important to understand the relationship between your financial advisor, their firm and you. When you hire a realtor to sell your house there is a clear understanding that the realtor will sell your house for a commission. It is spelled out in advance in a contract and compensation is based on performance. However, when it comes to financial advisors at major Wall Street firms the relationship is not quite as clear… Wall Street is not “invested” along with you but rather use you to make income. This is why “buy and hold” investment strategies are so widely promoted. As long as your dollars are invested the mutual funds and brokerage firms collect fees regardless of market conditions. While “buy and hold” strategies are certainly in their best interest – it is not necessarily yours.
I strongly urge you to go read the whole piece. For most, it will be a real eye-opener. Aside from hedge funds like Mr. Madoff’s which are ripe for abuses, the very business model of every Wall Street firm is designed to take advantage of individual investors rather than to assist and advise them as their bold logos and shiny television commercials suggest. And Roberts does a great job explaining just how it works. Just read it.
And speaking of television, there’s another Wall Street icon you would do well to ignore. It turns out Jim Cramer’s investment advice is woefully detrimental to your financial health. He’s made some really bad calls lately. That’s not all that unusual; everyone makes mistakes. But when someone suggests they can make buy or sell calls on a thousand different stocks doesn’t that sound a bit too good to be true? If not, I’m sure Mr. Madoff would love to speak with you.
So is there anyone you can trust? In fact, there is. And your best bet is to find someone who is independent (unaffiliated with a major Wall Street firm), truly has expertise in the field and accepts fiduciary duty in their relationship with clients. There are a few areas where they can really make a difference.
Bobbing For Apple
I’ve extensively gone over the fundamental case for Apple shares. Since then, however, the company has announced a massive stock buyback and increased the dividend. This only serves to dramatically improve the stock’s investment value.
What I find even more interesting, however, is that sentiment is turning more positive, as well. Notable bears on the stock (who were right) like Doug Kass and Jeff Gundlach have recently disclosed they now own the shares.
This may have something to do with the fact that the company’s long drought for announcing any new products may be coming to an end. Next week we should see the company announce a new Pandora/Spotify competitor. Apple has secured deals with the three top record labels to make the product a reality.
What’s even more exciting to me about this than its face value is that it sets an interesting precedent for the long-rumored Apple TV. If iRadio, as the new service is supposedly called, is a success Apple will have a great case to make to television content creators that the same can be done with their product.
My guess is that Apple views iRadio as an important product on its own but also as an experiment. If the experiment works they will have a model of media consumption that is more efficient and enjoyable for consumers and more profitable for producers. I’m on the edge of my seat.
Technically, the stock looks to be in the midst of a bottoming process. The daily chart now shows an inverted head and shoulders bottom with the neckline around $460: