Redistributing Capital in This Market

 |  Includes: C, IEF, IEI, JPM, PCY, PLND, SHY, TLH, TLT
by: Ray

It is time to par back on high yield, in my opinion. The returns have been very strong over the past 12 months and there is no reason to be a pig. While I owned some high yield throughout the last year I piled into it in 4Q09, but with returns for bonds through the roof and the complicit nature of the markets, I think it is time to dump the junk.

I am not selling all of my holdings, but 80% seems reasonable. The issue is, where does one redistribute capital in this market? I am not selling my PCY, emerging market debt, since I feel it has room to run and the 6% yield is attractive. I am also holding BBB+ or investment grade bonds for now as well. I just cannot phantom why the markets are trading so complicit to risk right now and there seems to be very little value left in most equities to be had. Until I find something short-term, treasuries seem to be the only place to go, but even there I only expect the yields to drop back into .90% versus the 1.04% we are currently at.

I am considering preferred stocks, such as JPM or Citi (NYSE:C) preferred, since they have an implied guarantee, still. Outside of that, there is not much out there and I am not wild about investing in financials since they are still insolvent. My other grand ideas for 2010 have already surpassed my expectations as well, frontier markets are on fire, up some 10% YTD, and even my PLND (Poland) ETF has performed very well, up 11% YTD. I actually expected Poland to take a hit with the President and central banker’s demise over the weekend, I just hope they avoid Keynesian economics still. Even my boring portfolio has performed extremely well.

So, what to do with one's capital is the tough question to answer right now. Besides going short I am not really excited about anything. Valuations are way too rich and if Alcoa (NYSE:AA) is any indication how earnings season will go, I feel good about shorting the markets more. However, Alcoa never makes its estimates, but the revenue miss was horrid. I believe the selloff must be coming as there is very little value to be had out there and spreads are so tight it is crazy to think there is more room to run. Treasuries and VIX calls it is! Since everyone hates those trades right now it must be right.