Have you heard about the great exodus lately? I am not talking about the exodus of Missolonghi, but the exodus from fixed income to equities.
We all knew it was going to happen sooner or later, we all knew that all that money won't be tied to very low yields forever, but no one knew when it was going to happen. Analyst after analyst all these years (yours truly included) were calling for the great exodus to happen again and again, but it never happened.
As a result of the Fed buying billions every month in government and mortgage-backed securities, the fixed income crowd felt safe and secure, earning at least something -- or nothing at all in many cases -- while their money was secure.
However as we all now know, the Fed has said that it will curtail these asset purchases. The cut-off point is the U.S. unemployment rate of 7%. But since the U.S. economy is doing a little better, the market is already front-running the Fed in that regard. As a result, bond yields have been rising.
While the entire spectrum of the yield curve will eventually be affected, the first to feel the brunt of this change will be longer-dated maturities. The chart below depicts the iShares Barclays 20+ Yr Treasury Bond ETF (TLT). As you can see, it has fallen over 10% lately. That's a very big loss if you are bond investor, which testifies to just how many investors are exiting longer-term bonds.
So where will this money from bonds go? In equities more than likely. Rising rates will not affect equities negatively at this point (as many think) because money will be leaving fixed income and flowing to equities. Equities might feel the pinch when yields stabilize or yields start going south once again. But I think that is several years out.
For the time being, equities will benefit from this mass exodus that is currently happening. If you have not noticed, U.S. markets are recording new highs day after day.
This exodus is not something that will happen overnight, but will probably be in the making for several years. As a result, I think the flow of money from fixed income to equities will be vast. How much I am not sure, but whatever the number, it will push equity prices up.
However there is another issue at hand. Since developing economies today have a lot of problems, not only will investors (U.S. or otherwise) sell fixed income securities in the U.S., but will probably divest some of their holdings in developing economies also.
China's exports took a surprising tumble in June and growth for the largest Asian economy is lower than what most anticipated. And let's not forget Brazil either, they are also having their share of problems. And where will all this money go? I think most of it will flow to U.S. equities, with Europe as the runner up.
As a result of all this money flowing into equities, I think U.S. markets are ripe to repeat what happened in 1999. In other words, markets will once again become one big bubble. This, however, is not something that will happen overnight, but will take several years. So it is not something that concerns us today. We are not at that stage yet.
And the funny thing is, U.S. equities will go up even if the U.S. economy does not perform all that well, even if unemployment remains around 7% and even if corporate profits stall. No matter what happens in the near future, this market will go up as a result of this fixed income exodus and that will inflate stocks like it's 1999 all over again.
So what do you buy in this environment?
Well if you are a lazy investor, buying the S&P 500 SPDR ETF (SPY) is the easy way to go. But since this is a more speculative market, buying the NASDAQ 100 tracker (QQQ) will probably make you more money.
As far as stocks, Apple (AAPL) is one of the cheaper stocks around, even if the sector has been under some strain lately. Oh yeah, BlackBerry (BBRY) is a good one also. Forget earnings and revenue figures in this market. Very soon investors will be piling in stocks that either have not moved or are coming from a long correction.
Then there are the different bubble stocks like LinkedIn (LNKD) and Tesla (TSLA), that I wrote of the other day. I don't advise buying them, but I don't advise shorting them either. Shorting anything when an avalanche of cash is flowing into equities, is currently not the prescribed thing to do.
So sit back and enjoy the ride folks, it's going to be interesting to see how high and how expensive this market becomes, and how this next bubble in equities pops all over again.