1. California Real Estate: I mentioned in a prior post a study by a professor who claimed that California would work off its inventory of new homes in 2009 and would need new homes to fill demand. VIX Below 40/Housing Recovery?/Budget Deficits & the Value of Treasuries/ABC & CBS Programs on Gun Show Loophole USATODAY.com I also mentioned in several prior posts, including the one linked above, several news reports that home prices had declined in several California markets to such a degree that the median price home was affordable for about 1/2 of the families in the community. First Industrial/Immelt's Letter/Double Top in the S & P 500?/Home Prices & Household Income/This was a major change from the affordability percentage at the height of the real estate madness, which was around 15% of the families, due to skyrocketing prices far exceeding the range of affordability, a process doomed to fail and to fail badly with much misery. Something had to give, and after a few years of parabolic price increase in a few states the prices have returned to levels that buyers can afford without a funky mortgage product doomed to caused problems.
The WSJ reported yesterday that home prices in California rose 1.4% in April, marking the second consecutive month of increases. WSJ.com So there is light appearing at the end of this dark tunnel.
2. Alan Abelson finds someone less cheerful than him-David Rosenberg: Alan Abelson, the titular head of the perma bear party- who was bullish for a month or two back in the early 1980s-does whatever he can every week to describe the glass as perpetually empty. One of his favorite journalistic techniques is to pull out his rolodex containing the names of a 100 or so like minded individuals, and call one of them whose outlook is more bearish than his own which is generally hard to do.
This week Alan features a David Rosenberg, formerly of Merrill Lynch, and now chief economist and head strategist for a firm in Canada called Gluskin Sheff (??), who once again makes his case again for piling into 10 year treasuries and shorting stocks. Barrons.com Just a few weeks ago, around 4/2/09, Rosenberg was predicting that the current rally would falter, with the 10 year treasury soaring in value and falling in yield to a mere 2% while the S & P 500 would suffer another catastrophic decline by falling to the 475 to 650 range.
This week Alan features a David Rosenberg, formerly of Merrill Lynch, and now chief economist and head strategist for a firm in Canada called Gluskin Sheff (??), who once again makes his case again for piling into 10 year treasuries and shorting stocks. Barrons.com Just a few weeks ago, around 4/2/09, Rosenberg was predicting that the current rally would falter, with the 10 year treasury soaring in value and falling in yield to a mere 2% while the S & P 500 would suffer another catastrophic decline by falling to the 475 to 650 range.
In early April, when Yahoo Finance ran the dire forecast made by Rosenberg, the ten year treasury yield was around 2.65%. MDC - Java Chart - WSJ.com Now, it has fallen in price and yields 3.46%. I guess that Rosenberg is sticking to his opinion judging from the chorus of negativity dispensed by him and Abelson in Alan's perpetually ghoulish Up and Down Wall Street column. During their marriage of virulent pessimism, the S & P has risen 25% and their investment of choice, the ten year treasury has fallen in value. One thing about a perma bear like Abelson, as long as he stays pessimistic forever as he will do, eventually he will look smart and even prescient.
I do not have the luxury of reaching definitive conclusions about the future course of events. I can only try to evaluate new information free from any bias including any ideological prism which distorts information and any personality quirk which makes some overly pessimistic or optimistic by nature irrespective of the evidence-even overwhelming reliable evidence.
At best, I know that my opinions are based on a range of possibilities for alternate scenarios. In that real world the most definite opinion that I can muster about the future starts with the phrase "more probable than not based on what I know today". Rosenberg's 2% 10 Treasury scenario is one that I would characterize as unlikely. Is it possible? Yes it is conceivable, a very low possibility of maybe 1 in 7 now. I would submit that it becomes only the probable hypothesis when you ignore or devalue the importance of a large number of other current events and focus your attention just on mortgage delinquencies and similar types of data which are likely to remain negative for several more months.
At best, I know that my opinions are based on a range of possibilities for alternate scenarios. In that real world the most definite opinion that I can muster about the future starts with the phrase "more probable than not based on what I know today". Rosenberg's 2% 10 Treasury scenario is one that I would characterize as unlikely. Is it possible? Yes it is conceivable, a very low possibility of maybe 1 in 7 now. I would submit that it becomes only the probable hypothesis when you ignore or devalue the importance of a large number of other current events and focus your attention just on mortgage delinquencies and similar types of data which are likely to remain negative for several more months.
I mentioned in an earlier post that I was concerned about the bond asset class failing. Bond Asset class in danger of failing?/Moody's Comments on U.S Debt Rating/BAC Equity Capital Raise Good for Preferred shareholders? It is part of a natural process for bonds to succeed and then fail. It has succeeded for a very long time. I would make the case that the treasury bond market has been in a long term secular bull market since 1982, with some occasional hiccups typical of a long secular bull market.
Prior to 1982, unless we forget, the long treasury market had failed for an extended period of time, from 1946 to 1981, as noted by Roger Gibson in his book Asset Allocation ( see pp. 34 et seq: Google Book Search ) Looking at Gibson's data, that is a bear market that I would prefer to miss next time. I also believe David Swenson who runs Yale's endowment has little faith in the long term performance of non-inflation protected bonds and keeps them primarily as a hedge against deflation, which would not be the correct course in my view for all times and circumstances. ETF Database NPR
Prior to 1982, unless we forget, the long treasury market had failed for an extended period of time, from 1946 to 1981, as noted by Roger Gibson in his book Asset Allocation ( see pp. 34 et seq: Google Book Search ) Looking at Gibson's data, that is a bear market that I would prefer to miss next time. I also believe David Swenson who runs Yale's endowment has little faith in the long term performance of non-inflation protected bonds and keeps them primarily as a hedge against deflation, which would not be the correct course in my view for all times and circumstances. ETF Database NPR
As a consequence, Yale entered 2008 with about 5% in non-inflation protected bonds: Research
So, as far as I am concerned, I will let Rosenberg and Abelson, and their fellow travelers, gorge themselves on long tern treasury paper yielding 3 to 4%. It is good for the country that so many are willing to part with their cash at such low yields to help Uncle Sam out in his time of need. I have said the same about some bond ETFs like BND. For both the Total Bond Market index and all treasury bonds with the possible exception of the TIP, I do not believe that the current yield compensates me for the risks associated with those securities.
My response was not to sell the low yielding bond ETFs and to buy stocks. Instead, I transitioned my bond investments by selling low yielding bond ETFs and investing the proceeds into other securities that provided me with a higher fixed coupon yield and/or some protection against inflation by having a float provision along with a guaranteed yield. Those buys are discussed in posts linked in these main Gateway Posts.
Speaking for myself, the opportunities in some of these more exotic instruments have passed. I am now in a wait and see mode, though I am inclined to keep my floaters with a guaranteed minimum yield as a core part of my asset allocation and most of the securities that I bought at very favorable prices during the meltdowns in the 4th quarter of 2008 and in the 1st quarter of 2009. It is best to become familiar with these types of securities, because there will probably be other similar opportunities in the future. It may take years for the next buying opportunity to arise, and the reason for the meltdown in prices may be different next time, an inflation problem perhaps or something else that spooks the individual investor, who is the primary owner of Trust Certificates, and a major source of trading in the other securities that I bought to replace my bond ETFs.
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