Quite possibly. We've been saying stay away from precious metals as a long term investment for a while now (although we do occasionally swing trade gold etfs). But now we're seeing some indications that it might be a good time to consider shorting silver.
Market Vane has just reported that bullish sentiment for silver is over 90%. And now word comes that Disciplined Investor Andrew Horowitz, former winner of the MSN Strategy Lab stock picking contest, has begun shorting the metal. We've got a lot of respect for Andrew here, and while we may not be jumping on the bandwagon just yet, we find his reasoning to be pretty sound.
Thursday, April 21, 2011
Four Things You Need to Know About Corporate Bonds
1. There is a significant amount of fraud in the Wall Street bond market. The bond market is much larger than the stock market, and because the number of individual investors is fewer there is far less transparency. Danny Moses, who worked for Steve Eisman, was known to ask Wall Street salesmen, "How are you going to fuck me?" when engaging in trades with them that saved too perfect.
2. Moody's, Standard and Poor's, and Fitch IBCA offer credit ratings to help you understand risk. One of Wall Street's dirty little secrets is that the people who rate financial products are the people who can't get jobs with the big firms. In other words, almost by definition the ratings people are less qualified to assess the security of bonds than the people selling them. Which explains why the ratings agencies rated mortgage backed securities so highly just before they plunged the world into a financial crisis.
3. When you buy a bond you may be assuming call risk. Some bonds are written so that the issuer has the right to pay off the bond after a certain specified time. It might want to do this if interest rates fall, since in that case it would be cheaper to pay off the bond and then refinance at a lower interest rate.
4. Bond purchasers also have to be aware of event risk. Aflac, for example, gets 70%+ of its earnings from Japan, so it was hit hard by the earthquake / tsunami / meltdown. More mundane risks can come from regulatory changes, or even corporate mismanagement.
Does this mean you should never invest in corporate bonds? Absolutely not. But as with everything, due diligence is a must.
2. Moody's, Standard and Poor's, and Fitch IBCA offer credit ratings to help you understand risk. One of Wall Street's dirty little secrets is that the people who rate financial products are the people who can't get jobs with the big firms. In other words, almost by definition the ratings people are less qualified to assess the security of bonds than the people selling them. Which explains why the ratings agencies rated mortgage backed securities so highly just before they plunged the world into a financial crisis.
3. When you buy a bond you may be assuming call risk. Some bonds are written so that the issuer has the right to pay off the bond after a certain specified time. It might want to do this if interest rates fall, since in that case it would be cheaper to pay off the bond and then refinance at a lower interest rate.
4. Bond purchasers also have to be aware of event risk. Aflac, for example, gets 70%+ of its earnings from Japan, so it was hit hard by the earthquake / tsunami / meltdown. More mundane risks can come from regulatory changes, or even corporate mismanagement.
Does this mean you should never invest in corporate bonds? Absolutely not. But as with everything, due diligence is a must.
Sunday, April 17, 2011
Federal Reserve Bank President Comments on QE3
William Dudley, President of the Federal Reserve Bank of New York, said the following about QE2 and QE3 while at a conference in Hong Kong. "I’d be very surprised if we didn’t complete QE2. After that, though, the hurdle for QE3 is higher . . . One reason we embarked on QE2 was we really were worried about the risk of deflation in the U.S . . . Now the risks of deflation are greatly diminished. So one of the motivations behind QE2 is no longer in place.”
So QE3 isn't a given, but we can't completely rule it out either. The unemployment rate continues to fall, but it's still not at a satisfactory level yet. Quantitative Easing allows the government to stimulate the economy without having to fight Congress for more money; it also makes Americans feel better about the economy, since the stock market keeps on going up, which is particularly useful when you're up for election in the near future. But of course you're going to get inflation with all of this printing money, so the administration has to decide just how much inflation it can create before it starts to derail the progress the economy is making.
That being said, as investors we're enjoying the benefits of QE in the market.
So QE3 isn't a given, but we can't completely rule it out either. The unemployment rate continues to fall, but it's still not at a satisfactory level yet. Quantitative Easing allows the government to stimulate the economy without having to fight Congress for more money; it also makes Americans feel better about the economy, since the stock market keeps on going up, which is particularly useful when you're up for election in the near future. But of course you're going to get inflation with all of this printing money, so the administration has to decide just how much inflation it can create before it starts to derail the progress the economy is making.
That being said, as investors we're enjoying the benefits of QE in the market.
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