Friday, February 13, 2015

Bond Investors Should Take a Page Out of LeBron James's Playbook


Bond investors who are trying to figure out their investment choices would do well to study NBA star LeBron James, according to Michael Lewitt at The Credit Strategist

To much fanfare, LeBron James is returned to his home state of Ohio to play for the Cleveland Cavaliers. But it’s not his choice of teams that makes him such a good role model for bond investors — it’s the contract he signed, according to Lewitt.

James agreed to a short-term two-year deal, which is expected to help net him more money when he renegotiates down the line, given a new NBA television deal that’s in the works.

Currently, corporate bond investors are staring down paltry income from bonds as buyers pile into the market amid low interest rates. Recently, the 10-year Treasury note traded at a yield of 2.2%.

But, like LeBron, bond investors could see a bigger payout ahead, given the strong possibility that rates could rise.

Lewitt says, "The most likely course of events over the next two to three years and then the next three to five years is higher market volatility as a result of rising rates. This will create the opportunity for investors who have planned properly not only to avoid large losses (both realized and unrealized or mark-to-market) on their bond portfolios, but to be positioned to take advantage of the opportunities that market dislocations will create."

So what’s a bond buyer to do? Like LeBron’s contract choice, they should go short-term.

"Investors would be wiser to follow LeBron’s example and keep the duration of their commitments short.

Friday, February 6, 2015

S&P 500 Sector Leaders

1. Utilities - The S&P 500 Utilities sector finished as the strongest stock market sector in 2014 with a 24% gain. The group benefited by flocking to steady dividend payers and Warren Buffett’s Berkshire Hathaway desire to scoop up companies in the electric distribution businesses. 

2. Health Care – Propelled by large and small Biotech stocks, the Health Care sector is just behind the Utilities sector with a gain of 23%. 

3. Information Technology - The S&P 500 Information Technology sector with major components Apple, Intel, Microsoft, Cisco, Facebook and Google posted an 18% gain. 

4. Consumer Staples – As a group, the Consumer Staples sector gained 13%. The group includes Philip Morris, Proctor & Gamble, Colgate, Altria, Pepsi, Wal-Mart, CVS, Walgreen and Costco.

5. Financials - The Financial sector of the S&P 500 Index rose 12%. The group is large and tends to trade at a discount to the market. The forward price-to-earnings ratio (P/E) for the sector, based on consensus 2016 earnings estimates is 12%, compared with 16% for the full index. Components include Wells Fargo, Bank of America, JP Morgan and Citigroup. 

6. Industrials - The Industrials sector posted an 8% gain. United Technologies, 3M and Union Pacific are leaders with additional strength provided by the airlines, which are benefiting from low oil prices. 

7. Consumer Discretionary - The S&P 500 Consumer Discretionary sector finished higher by 8%. Leaders include Comcast, Disney and Home Depot.

8. Materials - The Materials group with Dow Chemical, du Pont and Monsanto gained 5%.

9. Telecommunication Services - The Telecommunication Services sector - the smallest S&P 500 sector, up just 1%. The sector is ravaged by competition and losses from leaders Verizon and AT&T.

10. Energy - The Energy sector claimed the spot as the worst S&P 500 sector in 2014 with a 10% decline. The sudden decline in oil prices surprised everyone. With new U.S. producers now curtailing expansion plans, it may take some time to determine if oil will go through its usual cycle and eventually rebound. Large companies like ExxonMobil fared better than smaller competitors.

Wednesday, January 21, 2015

2015 Outlook Part II

"The U.S. continues to be the brightest spot in the global economic outlook," declared the Cornell’s Steve Kyle on December 9 at the annual Agribusiness Economic Outlook Conference. "But we need to reduce the drag caused by fiscal policy while avoiding a premature tightening of monetary policy." Steve Kyle is the Director of Graduate Studies at Cornell University School of Economics.

Kyle’s predictions for 2015:

• Another year of 3 percent growth in U.S. Gross Domestic Product.

• Unemployment to drop to 5.5 percent, perhaps as low as 5 percent in 2015.

• Inflation will remain at its current, negligible level.

• Interest rates should remain near zero - Though long rates may creep up.

• Fiscal policy is always "the big uncertainty," says Kyle "Let’s hope for a bit of willingness to spend since we need it and it isn’t an election year."

• Regarding Europe, Kyle said there’s "no hope for relief as long as their political establishment remains wedded to austerity."

. . . . and Five Possible Surprises
1. Europe is the new Japan. Despite their negative demographic trends, investors hope for mean-ingful improvement in their economies as they reap the benefits from low currencies & cheap oil. However, stocks in these markets are probably better to rent vs. own.
2. The Hong Kong government will be faced with increased protests for the right to choose inde-pendent candidates. The HK stock market lags while the markets in Singapore and Shanghai begin to rebound.

3. The U.S. Federal reserve continues to maintain a low interest rate policy through most of the year.

4. Crude oil prices stage only slight rebounds before stabilizing in the mid-$60 range. Meanwhile, the economic benefits of low oil prices continue to gain momentum. The U.S. approves the Key-stone pipeline project, which keeps speculators from investing in oil.
5. The U.S. stock market continues its strong performance based on improved economic growth resulting from low oil prices. Analysts project 1/3% growth for the U.S. Gross Domestic Product (GDP) for every sustainable $10 decline per barrel of oil.* The financial and consumer sectors assume stock market leadership positions from utility and healthcare sectors.