Who's Smarter: Bond Guys or Stock Guys?

Our issue is how to reconcile the opposite views of experts in the bond world versus experts in the stock world. The market is always full of opposing views. One stock guy predicts UP and the other predicts DOWN. However, when the bond guys and the stock guys disagree, that is a more fundamental problem for us.

We have a tendency to think of bond guys as more detailed and more fundamental in their thinking and process than stock guys, so maybe a bit more right. That could be entirely wrong and unfair, but one thing is sure — they can’t both be right if they predict opposite outcomes, unless they are predicting based on different time frames — then they can both be right.

Anyway, this is the kind of headlines day that makes us want to toss our hands in the air and go fishing.

First you see this:

July 13 (Bloomberg) – … “It’s going to be a while before we’re confident we’re going to have a strong, sustainable recovery in place,” Treasury Secretary Timothy Geithner said, according to the transcript of an interview with “CNN’s Fareed Zakaria GPS” show broadcast yesterday.

Then this:

July 13 (Bloomberg) — Bond investors across the country are snapping up 10-year Treasury notes as expectations for a U.S. economic recovery this year disappear.
Firms from New York-based BlackRock Inc. to Franklin Templeton Investments in San Mateo, California, are turning more bullish [on bonds -- bearish on stocks] … Declining consumer confidence, falling stocks and unemployment climbing toward 10 percent has overcome concern that record auctions of government debt will overwhelm demand. …“You are starting to hear more concerns about how well the economy is doing,” said Michael Materasso, co-chairman of the fixed-income policy committee at Franklin Templeton …

Then you see this:

July 13 (Bloomberg) – U.S. stocks rallied, sending the Standard & Poor’s 500 Index to its best gain in six weeks …[VIX] slid the most since March. … Barclays Plc boosted its 2009 projection for the S&P 500 by 23 percent to 930 [ 3% above today] and said U.S. stocks are poised for a “recovery rally” as the world’s largest economy improves. Barry Knapp, head of U.S. equity strategy at Barclays in New York, raised his forecast from 757, citing the bank’s higher projections for economic growth in the second half of 2009 in a note to clients after financial markets closed July 10.

Then this:

July 13 (Bloomberg) — The last time stocks in developing countries got this expensive was in October 2007, just before the MSCI Emerging Markets Index began a 12-month tumble that erased half its value. … The MSCI gauge trades at 15.4 times reported earnings, compared with 14 for the Standard & Poor’s 500 Index, according to weekly data compiled by Bloomberg. When developing nations last commanded a premium, the 22-country benchmark sank 54 percent in the next year.

We may as well toss in the currency guys:

July 13 (Bloomberg) — Currency traders are becoming more bullish on the dollar and yen as hopes for a global economic recovery this year fade.

These come a week after bond powerhouse PIMCO published Co-CEO Mohamed El-Erian’s warning statement:

July 8 (PIMCO) – “policy by experimentation” — The bottom line is a simple yet powerful one. The global crisis is morphing again. Having already contaminated (in a sequential and cumulative manner) housing, finance and the consumer, it is now threatening the potency and credibility of the economic policymaking apparatus. As far as I can see, there are no first best policy responses that are readily available and easy to implement. Instead, the economy will continue to struggle, navigating both the adverse implications of last year’s financial crisis and the unintended consequences of the experimental policy responses.

We could go on with more examples, but it appears the stock investor and bond investor worlds may be divergent in their forecasts.

We do note that the rule that emerging markets at a multiple premium to the US “was” an indication of overvaluation, but if the US economy is going to be so hamstrung by debt, lack of credit, high taxes and stifling regulation, maybe the multiple discount/premium relationship will reverse going forward.

The least we conclude is that the cross-currents are more severe than in most recent prior times. Clarity is low. The “unknown unknowns” are probably greater in number and significance than normal.

In good times, we tend to ride with the stock guys, but in transitional or troubled times, we tend to ride with the bond guys.

Some relevant symbols: SPY, IWV, VTI, BND, AGG, LQD, IEF, TLT, EEM, VWO

Disclosure: we own some of the named securities in some accounts.

Comments

[Wesley Mouch:]

I would have answered that bond guys are smarter than stock guys before this last year's debacle. But now, some "bond guys" are buying treasuries at record prices from a borrower that has a pretty good record of repaying in devalued dollars, and does not appear to have any plans on changing strategy.

Jul 14 12:39 PM

[HipHoption:]

There is no doubt in my mind that pure credit guys dig deeper than pure stock guys but that's largely a function of their risk. Stock traders try to predict future earnings and put a P/E multiple on that. Bond traders look as asset value and recovery rates, free cash-flow, term structure, and other more complex metrics. I can't speak for treasury traders, but I'd put my money on a pure corporate bond trader over a pure stock trader any day.

Jul 14 01:21 PM

[Living4Divi...:]

Nice article - you wrote "In good times, we tend to ride with the stock guys, but in transitional or troubled times, we tend to ride with the bond guys."

Most of the time, it's good times, that's why I'm a stock guy - in fact I wrote an article saying stocks are the best bet:
seekingalpha.com/artic...

Jul 14 01:48 PM

[basehitz:]

When unclear, I keep the bets small and wait. Early March was pretty obvious and I was very aggressive. Now I am skeptical overall but hold some long positions. The flood of earnings should give the market direction. Until then, I wait on heavy bets and trade the noise with small bets to keep it interesting.

Jul 15 08:42 AM

[donzelion:]

Buy low, sell high...right now, I'm skeptical of bonds and stocks. Seems the best investment is in workers themselves, since employers seem to be abandoning them. Sadly, since I'm in no position to hire them, the best proxy I can find: prosper.com and similar peer-to-peer lenders.

Jul 15 03:07 PM