In light of the recent election events I’m trying to digest everything that is happening now and would appreciate some intelligent input. From what we’ve seen lately stocks are at an all time high, FANG stocks are hurting and $1.2T was wiped from the treasury market pushing yields to 3%. From a value investing perspective we’re still chasing good cash flow at cheap valuations as well as attractive bonds. However, I can’t ignore PE Shiller index that demonstrates the relationship low interest rates have to overall PE ratios. Prior to the election, the market as a whole had a 40-50 PE ratio capacity due to the low interest rate environment. As it stands, 3% rates reduce our PE capacity to 33.33. The average PE right now is 26.80. At the same time, we’re expecting $1T in infrastructure investment which should benefit earnings over time. It is my view that interest rates have been forced up before companies have had a chance to improve their earnings. That being said, what does the road ahead look like for us? Are we looking towards a whipsaw pattern with euphoric level valuations followed by a correction that will wipe out over-leveraged companies and reward those with low valuations? Or are we looking at a Reagan type bull market? Keep in mind that under Reagan average PEs were in the single digits and PEs on black Friday were under 20. If we are about to experience a Reagan type bull market should we be seeking value in the Bond market instead?
Evan Bleker: This is not the question you should be asking. Nobody can predict the direction of the market with any sort of reliability. Buy a basket of cheap financially conservative common stocks and rebalance when optimal.
Michael Morse: I wasn’t in the market for a Reagan type market so i have no clue what your talking about….but…i am as a trader & investor….taking advantage of this markets exhuberance in a matter such as your question is asking. You can say it’s the contrarian in me that is calling the shots. (People don’t like to hear “gut” feeling).
Michael Morse: Everything has it’s ups and downs. Since bond market moves at a snails pace…you can take your time trading it. A slow, long term trader is most commonly called an investor.
Evan Bleker: Tom Murr, there are a lot available internationally.
David Geof: There may very well be investment in infrastructure but it comes at a cost of ‘protectionism’. Our fund is looking into which companies will benefit from this – US companies will find costs increasing if Trump adds tariffs, promotes the use of US labour etc, and one of the most efficient ways of cutting down to run marginal production costs is to invest in automation techniques. Therefore we have been looking into who makes the best automated production machinery – KUKA is one to watch, for example
Justin Carroll: The move-up in bond yields has been great for financials and insurers. The value in C, BAC, AGO, AGM and MBI has been plain for all to see but a lid was placed on these stocks reflecting that value by artificially low bond yields. The Fed should have started raising rates 12 months ago. Now that bond yields are rising, the market is leading where the Fed will have to follow and FANGs and utilities are going to see meaningful compression of P/E multiples in the coming months, in my view.
Chinmay Sangoram: Short gold, long USD, Long Bonds, short equity.. That’s the strategy at least till year end.. I anticipate a 25 bps hike in Dec, which will send bond yields soaring, cause rumbling in equity markets, and the USD should look more attractive than Gold..
Michael Morse: If bond yields rise…bond prices fall. You don’t want to be long bonds till after yields rise.
Justin Carroll: Why would you want to be long bonds going into an interest rate hike?
Chinmay Sangoram: Investment in bonds isn’t done for capital appreciation.. Bond investments are a long term low risk investment avenue.. It is because of unconventional unorthodox and insane central bank policies like zero Interest rates, negative interest rates and Quantitative Easing; that bonds have become short term trading instruments..
Chinmay Sangoram: The reason why I would be long bonds is because yields – especially on the 2 yr & 5 yr yr T Bonds – will head north.. Those seeking price/capital appreciation by investing in bonds for short term, should go short on bonds..
Michael Morse: It doesn’t have anything to do with quantitative easing or interest rates. Bonds sold off with the stock market in 2008. The market trades together in big crisis yet appears to trade opposite in minor crisis cycles.
Chinmay Sangoram: Bonds(or for that matter Debt market Instruments), unlike stocks, come with a maturity date.. And hence, bonds as an asset class are used for capital protection, and not capital appreciation.. Albeit only if u treat them as intermediate/long term investments, and not as short term trading instruments..
Michael Morse: What’s the point of holding on to them when they are close to par?
Chinmay Sangoram: They’re close to par only because interest rates haven’t been raised.. When interest rates are raised, they’ll move downwards, and away from par.. And that’s why u can lock in the future upside, once yields rise & prices fall..
Chinmay Sangoram: Think of it like this.. To get $1,000,000 upon maturity, 2 yrs later, u need to invest $950,000 right now.. Once interest rates rise in Dec, the same will go down to maybe 900k or even 850k.. So 850k investment will give u a 150k return in 2 years(assuming u hold it until maturity).. The same 850k invested in stocks will not guarantee a return of 150k without active and knowledgeable management of investments..
Michael Morse: Why not sell near par and wait then buy the dip. Your cap gain will be included at maturity. You’ll make more than just holding to maturity. If you invest 950k now you waste 100k of time waiting for your 1M payoff. I’m not saying sell bonds and put it …See more
Allen Kaplun: Michael Morse Correct. I’d probably want to slowly ease into bonds until we peak at our forecasted 6% on 30-yr treasuries and then snap up a bunch more.
Michael Wei: Read Howard Marks memo on macro forecasting https://www.oaktreecapital.com/…/1993-02-15-the-value…
Michael Morse: Gold is a bet on inflation.Treasury Strips are a bet on deflation. KNOW WHAT YOU OWN.
Jeremy Bailey: Banks and Insurance companies do well with rising interest rates, and there were plenty of those available at damn cheap prices…until the last week. Think about what businesses are most likely to benefit from highly probable trends. The market always corrects, but great companies bought well always win for shareholders in the end. If you are really concerned, increase your cash levels until you feel better, but I would never be out of the market entirely. Market timing really is impossible.
Michael Morse: You keep telling the masses that. Keep them mutual funds in business.
Allen Kaplun: Hold on a minute. Its improper to buy banks just because we’re on an up trend with interest rates. Banks are notorious for losing 20 yrs of profits in 1 yr. I’m not just talking about 2008. It happened in the early ’90s as well. If the plan is to chase rising interest rates, its better to get into interest rate options.