J.D. Steinhilber - Seeking Alpha 'J.D. Steinhilber' Tag RSS Syndication from SeekingAlpha.com SeekingAlpha.com http://seekingalpha.com/author/steinhilber Bond Market Outlook: Stick to Shorter Term High Quality Investments http://seekingalpha.com/article/171599-bond-market-outlook-stick-to-shorter-term-high-quality-investments?source=feed 171599 In contrast to a year ago, when - in the wake of the financial collapse - enticing yields were available on a wide range of bond investments, one is hard-pressed these days to find attractive opportunities in the fixed income markets. Cash earns next to nothing, creating a real dilemma for conservative savers, who should not expect relief any time soon, given the Fed's commitment to "exceptionally low rates for an extended period." Despite trillion dollar deficits, the 10-year Treasury yield remains artificially depressed at around 3.5%, due in part to unsustainable demand from (1) Federal Reserve monetization actions, and (2) U.S. banks able to borrow from the Fed at 0% and earn the spread on Treasuries.

In addition, the Chinese and other foreign central banks, despite their complaints about U.S. monetary and fiscal policies, continue to reinvest their trade surpluses in U.S. government bonds. Notwithstanding the very bleak longer-term outlook for government bonds, the U.S. for the time being is having no trouble selling its debt. Yields on riskier classes of debt have generally fallen to unattractive levels. Corporate bonds, which were a relative bargain at the start of the year, have recovered so much that in many instances absolute borrowing costs have fallen to their lowest levels in 15-20 years. Similarly, municipal bonds no longer offer the attractive yields and spreads they had early in the year. TIPs, while still a better value than traditional Treasuries, do not offer the same level of protection from fiscal profligacy as they did early in the year. "Break even" inflation rates, derived from nominal versus inflation protected bond yields, have moved closer to long term averages, with the 10 year rate now pricing in around 2% inflation, up from a low of 0.5% in January.

]]> Thu, 05 Nov 2009 15:42:43 -0500 J.D. Steinhilber In contrast to a year ago, when - in the wake of the financial collapse - enticing yields were available on a wide range of bond investments, one is hard-pressed these days to find attractive opportunities in the fixed income markets. Cash earns next to nothing, creating a real dilemma for conservative savers, who should not expect relief any time soon, given the Fed's commitment to "exceptionally low rates for an extended period." Despite trillion dollar deficits, the 10-year Treasury yield remains artificially depressed at around 3.5%, due in part to unsustainable demand from (1) Federal Reserve monetization actions, and (2) U.S. banks able to borrow from the Fed at 0% and earn the spread on Treasuries.

In addition, the Chinese and other foreign central banks, despite their complaints about U.S. monetary and fiscal policies, continue to reinvest their trade surpluses in U.S. government bonds. Notwithstanding the very bleak longer-term outlook for government bonds, the U.S. for the time being is having no trouble selling its debt. Yields on riskier classes of debt have generally fallen to unattractive levels. Corporate bonds, which were a relative bargain at the start of the year, have recovered so much that in many instances absolute borrowing costs have fallen to their lowest levels in 15-20 years. Similarly, municipal bonds no longer offer the attractive yields and spreads they had early in the year. TIPs, while still a better value than traditional Treasuries, do not offer the same level of protection from fiscal profligacy as they did early in the year. "Break even" inflation rates, derived from nominal versus inflation protected bond yields, have moved closer to long term averages, with the 10 year rate now pricing in around 2% inflation, up from a low of 0.5% in January.


Complete Story »]]> AGG BND LQD SHY J.D. Steinhilber Fed's Crisis Policies Will Continue to Backstop Financial Assets http://seekingalpha.com/article/171577-fed-s-crisis-policies-will-continue-to-backstop-financial-assets?source=feed 171577 In last month’s report, we noted that the stock market was vulnerable to a correction following seven straight up months, and a 60% gain in the S&P 500 from the March lows. By mid-October, stocks had pushed even farther into overbought territory, testing a key resistance level at 1100 in the S&P 500. The 1100-1120 zone is important technically because (1) it represents a 50% retracement of the entire bear market from October 2007 to March 2009 and (2) it marks the spot where the major down trend-line originating from the October 2007 peak comes into play. Consequently, this resistance zone is a significant technical barrier that the market will have to overcome at some point to dispel any lingering doubt about whether this is a legitimate bull market or just a huge bear market rally.

Stocks managed to survive October with only moderate declines, but in the past two weeks have experienced the most significant correction since early July. The S&P 500 dropped 6.5% from its recent peak, but other indexes (e.g. small-caps and emerging markets) suffered 10% declines. The stock market was highly extended and ripe for a pullback, so this correction was to be expected, and thus far has not done any serious technical damage to the uptrend that has been in place since March. The weight of the evidence continues to suggest that we are experiencing an overdue correction in the context of an ongoing bull market that will extend into 2010.

]]> Thu, 05 Nov 2009 15:33:47 -0500 J.D. Steinhilber In last month’s report, we noted that the stock market was vulnerable to a correction following seven straight up months, and a 60% gain in the S&P 500 from the March lows. By mid-October, stocks had pushed even farther into overbought territory, testing a key resistance level at 1100 in the S&P 500. The 1100-1120 zone is important technically because (1) it represents a 50% retracement of the entire bear market from October 2007 to March 2009 and (2) it marks the spot where the major down trend-line originating from the October 2007 peak comes into play. Consequently, this resistance zone is a significant technical barrier that the market will have to overcome at some point to dispel any lingering doubt about whether this is a legitimate bull market or just a huge bear market rally.

Stocks managed to survive October with only moderate declines, but in the past two weeks have experienced the most significant correction since early July. The S&P 500 dropped 6.5% from its recent peak, but other indexes (e.g. small-caps and emerging markets) suffered 10% declines. The stock market was highly extended and ripe for a pullback, so this correction was to be expected, and thus far has not done any serious technical damage to the uptrend that has been in place since March. The weight of the evidence continues to suggest that we are experiencing an overdue correction in the context of an ongoing bull market that will extend into 2010.


Complete Story »]]> DIA QQQQ SPY J.D. Steinhilber September Real Asset Review http://seekingalpha.com/article/166215-september-real-asset-review?source=feed 166215 Real asset investments (e.g. real estate, commodities, and gold) registered across the board gains in September. By far, the most profitable real asset investment over the past five years has been gold, which has appreciated 19.2% per annum.

Gold is viewed by many as an alternate currency - one that is not subject to government-sponsored devaluation. One of the most important influences on the price of gold is the level of real interest rates, which can be derived by subtracting the expected inflation rate from the official short term lending rate. In the U.S., the official short-term lending rate is 0% to 0.25%. Inflation expectations looking out over the next five years are approximately 1.5%, so the "real" short term interest rate is negative 1.25 to 1.5%.

]]> Tue, 13 Oct 2009 09:12:09 -0400 J.D. Steinhilber Real asset investments (e.g. real estate, commodities, and gold) registered across the board gains in September. By far, the most profitable real asset investment over the past five years has been gold, which has appreciated 19.2% per annum.

Gold is viewed by many as an alternate currency - one that is not subject to government-sponsored devaluation. One of the most important influences on the price of gold is the level of real interest rates, which can be derived by subtracting the expected inflation rate from the official short term lending rate. In the U.S., the official short-term lending rate is 0% to 0.25%. Inflation expectations looking out over the next five years are approximately 1.5%, so the "real" short term interest rate is negative 1.25 to 1.5%.


Complete Story »]]> GLD REZ J.D. Steinhilber The Bond Investor's Dilemma http://seekingalpha.com/article/166210-the-bond-investor-s-dilemma?source=feed 166210 Bond investors now confront a dilemma similar to the one faced by stock investors. Broadly speaking, credit markets have had such a strong advance this year that markets now appear stretched and valuations are uninspiring. Accordingly, bond investors looking to allocate new capital are probably best served by waiting for a better entry point or sticking to shorterterm, high-quality investments.

The challenge faced by investors seeking a respectable and reasonably secure stream of income from bonds is this: on one hand, you want to protect yourself against future inflation risk, which is accomplished by keeping the average maturity relatively short (i.e. under five years). On the other hand, you can't bring the average maturity in too far without damaging the income flow, due to the Fed's zero percent interest rate policy and the resulting steepness of the yield curve. Cash is unattractive, because you don't want to earn a negative real return. Meanwhile, yields on lower-quality bonds, such as high yield corporates, no longer seem to offer any margin of safety.

]]> Tue, 13 Oct 2009 08:55:23 -0400 J.D. Steinhilber Bond investors now confront a dilemma similar to the one faced by stock investors. Broadly speaking, credit markets have had such a strong advance this year that markets now appear stretched and valuations are uninspiring. Accordingly, bond investors looking to allocate new capital are probably best served by waiting for a better entry point or sticking to shorterterm, high-quality investments.

The challenge faced by investors seeking a respectable and reasonably secure stream of income from bonds is this: on one hand, you want to protect yourself against future inflation risk, which is accomplished by keeping the average maturity relatively short (i.e. under five years). On the other hand, you can't bring the average maturity in too far without damaging the income flow, due to the Fed's zero percent interest rate policy and the resulting steepness of the yield curve. Cash is unattractive, because you don't want to earn a negative real return. Meanwhile, yields on lower-quality bonds, such as high yield corporates, no longer seem to offer any margin of safety.


Complete Story »]]> BND HYG LQD SHY J.D. Steinhilber Market Review: Recent Pullbacks Should Be Viewed in Context http://seekingalpha.com/article/165757-market-review-recent-pullbacks-should-be-viewed-in-context?source=feed 165757 Equity markets just enjoyed their best quarter since 1998, but in the past two weeks have come under a degree of selling pressure not seen since the early June/late July correction. Pullbacks have been relatively minor thus far - clipping only 5% off the S&P 500 - but the odds seem to favor a deeper correction. By any measure, the stock market had gotten extended following seven consecutive months of gains. At its recent peak on September 23, the S&P 500 was 62% higher than its early March low and 20% above its 200-day moving price average. Not since 1983 has the index traded this far above its 200-day moving average. The stock market has entered a riskier phase as a result of this intermediate-term overbought condition and the large gains that have already occurred.

Investors contemplating new commitments to stocks need to be prepared that a correction of 10%+ could occur at any time. Using the S&P 500, the first line of major support comes in at 975-1000, and that may well contain any further weakness that could develop. If those levels give way, the S&P 500 would be vulnerable to a deeper correction to the 925 area, which we suspect would represent the worst case scenario between now and the end of the year. The weight of the evidence suggests that such a correction would be in the context of an ongoing bull market that will extend well into 2010 (at a minimum). Moreover, the upside potential from further advances is significant enough to argue against taking anything other than modest defensive measures at this stage. The trend in stock prices is decisively up; the internal technical health of the market is strong in terms of widespread participation (breadth) and the absence of negative divergences.

]]> Fri, 09 Oct 2009 09:41:54 -0400 J.D. Steinhilber Equity markets just enjoyed their best quarter since 1998, but in the past two weeks have come under a degree of selling pressure not seen since the early June/late July correction. Pullbacks have been relatively minor thus far - clipping only 5% off the S&P 500 - but the odds seem to favor a deeper correction. By any measure, the stock market had gotten extended following seven consecutive months of gains. At its recent peak on September 23, the S&P 500 was 62% higher than its early March low and 20% above its 200-day moving price average. Not since 1983 has the index traded this far above its 200-day moving average. The stock market has entered a riskier phase as a result of this intermediate-term overbought condition and the large gains that have already occurred.

Investors contemplating new commitments to stocks need to be prepared that a correction of 10%+ could occur at any time. Using the S&P 500, the first line of major support comes in at 975-1000, and that may well contain any further weakness that could develop. If those levels give way, the S&P 500 would be vulnerable to a deeper correction to the 925 area, which we suspect would represent the worst case scenario between now and the end of the year. The weight of the evidence suggests that such a correction would be in the context of an ongoing bull market that will extend well into 2010 (at a minimum). Moreover, the upside potential from further advances is significant enough to argue against taking anything other than modest defensive measures at this stage. The trend in stock prices is decisively up; the internal technical health of the market is strong in terms of widespread participation (breadth) and the absence of negative divergences.


Complete Story »]]> DIA QQQQ SPY J.D. Steinhilber Why You Should Have Some Gold in Your Portfolio http://seekingalpha.com/article/160175-why-you-should-have-some-gold-in-your-portfolio?source=feed 160175 The price of gold has suddenly caught a bid, jumping over $40/ounce in the past week. Gold appears to be breaking to the upside of a consolidation range that hs been in place since February of this year. Gold had been lagging behind the 2009 performance of commodities such as oil and copper, which are more correlated to global economic growth. However, concerns about U.S. monetary and fiscal debauchery appear to be heating up, and gold is now in a seasonally strong period that runs through the end of the year. It remains to be seen whether the current move will carry gold decisively through the $1000 barrier, which was last tested at the height of the financial and banking crisis in February.

The short-term bullish outlook for gold would be negated if it were to reverse and close below $945/ounce. For several key reasons, we continue to be of the opinion that in the current environment every investment portfolio ought to have an allocation to gold: (i) there is a major risk of government-sponsored monetary debasement inflation over time as a means of dealing with the debt overhang in the U.S. economy; (ii) the allocations to gold in U.S. investors’ portfolios is still relatively small and there is plenty of room for investment demand in this country to increase; (iii) gold is a highly valued investment in key developing countries such as China and India, so global demand for gold will remain very strong as wealth accumulates in such countries; and (iv) as a result of its monetary (anti-fiat currency characteristics), gold provides diversification benefits unlike any other commodity.

]]> Sun, 06 Sep 2009 08:06:43 -0400 J.D. Steinhilber The price of gold has suddenly caught a bid, jumping over $40/ounce in the past week. Gold appears to be breaking to the upside of a consolidation range that hs been in place since February of this year. Gold had been lagging behind the 2009 performance of commodities such as oil and copper, which are more correlated to global economic growth. However, concerns about U.S. monetary and fiscal debauchery appear to be heating up, and gold is now in a seasonally strong period that runs through the end of the year. It remains to be seen whether the current move will carry gold decisively through the $1000 barrier, which was last tested at the height of the financial and banking crisis in February.

The short-term bullish outlook for gold would be negated if it were to reverse and close below $945/ounce. For several key reasons, we continue to be of the opinion that in the current environment every investment portfolio ought to have an allocation to gold: (i) there is a major risk of government-sponsored monetary debasement inflation over time as a means of dealing with the debt overhang in the U.S. economy; (ii) the allocations to gold in U.S. investors’ portfolios is still relatively small and there is plenty of room for investment demand in this country to increase; (iii) gold is a highly valued investment in key developing countries such as China and India, so global demand for gold will remain very strong as wealth accumulates in such countries; and (iv) as a result of its monetary (anti-fiat currency characteristics), gold provides diversification benefits unlike any other commodity.


Complete Story »]]> GLD IAU J.D. Steinhilber NAREIT All-REIT Index Yield Is Uninspiring http://seekingalpha.com/article/160176-nareit-all-reit-index-yield-is-uninspiring?source=feed 160176 Following the recent rebound in REIT prices, the yield on the NAREIT All-REIT index has dropped to 5.14%, well below the average of 6.42% since 1998. This level of yield is uninspiring, given the negative fundamentals of the asset class. Other areas of the equity markets are more attractively valued, which argues for an underweight allocation to U.S. REITs.

]]> Sun, 06 Sep 2009 08:06:26 -0400 J.D. Steinhilber Following the recent rebound in REIT prices, the yield on the NAREIT All-REIT index has dropped to 5.14%, well below the average of 6.42% since 1998. This level of yield is uninspiring, given the negative fundamentals of the asset class. Other areas of the equity markets are more attractively valued, which argues for an underweight allocation to U.S. REITs.


Complete Story »]]> REZ J.D. Steinhilber Higher Interest Rates: Not a Question of 'If' but 'When' http://seekingalpha.com/article/160163-higher-interest-rates-not-a-question-of-if-but-when?source=feed 160163 After reaching a yield of nearly 3.9% in early August, the 10-year Treasury yield has fallen back to 3.35%. Since mid-May, the 10-Year T-Note yield has fluctuated between 3.25% and 4.0%. We would be surprised if the yield drops below the bottom of this range, except perhaps on a very short-term basis coincident with a possible stock market correction this fall. Conversely, we think it is just a matter of time before Treasury yields move above the 4.0% level on a sustained basis.

Our conviction is that the inflationary efforts of the government will eventually overwhelm the deflationary effects of private sector deleveraging. Higher inflation and interest rates are therefore not a question of if but when. On any longer-term basis, the Treasury bond market seems to be badly mispricing risk. Does anyone seriously think that government bond prices won’t at some point begin to reflect concerns about the fiscal condition of the U.S.?

]]> Sun, 06 Sep 2009 07:53:46 -0400 J.D. Steinhilber After reaching a yield of nearly 3.9% in early August, the 10-year Treasury yield has fallen back to 3.35%. Since mid-May, the 10-Year T-Note yield has fluctuated between 3.25% and 4.0%. We would be surprised if the yield drops below the bottom of this range, except perhaps on a very short-term basis coincident with a possible stock market correction this fall. Conversely, we think it is just a matter of time before Treasury yields move above the 4.0% level on a sustained basis.

Our conviction is that the inflationary efforts of the government will eventually overwhelm the deflationary effects of private sector deleveraging. Higher inflation and interest rates are therefore not a question of if but when. On any longer-term basis, the Treasury bond market seems to be badly mispricing risk. Does anyone seriously think that government bond prices won’t at some point begin to reflect concerns about the fiscal condition of the U.S.?


Complete Story »]]> IEI SHY TIP J.D. Steinhilber Strong Start for Bull Market, But Investors Are Nervously Eyeing the Exits http://seekingalpha.com/article/160154-strong-start-for-bull-market-but-investors-are-nervously-eyeing-the-exits?source=feed 160154 The bull market that began on March 9 has gotten off to the strongest start of any bull market in U.S. stocks since 1940 (see chart below). Given (i) widespread perceptions that stocks have "come too far too fast" and the economic recovery is largely government-induced and not sustainable, and (ii) that we have entered the traditionally weak months of September and October (with last fall’s carnage the most recent historical example), our sense is that many investors are nervously eyeing the exits.

Click to enlarge:

]]> Sun, 06 Sep 2009 07:07:23 -0400 J.D. Steinhilber The bull market that began on March 9 has gotten off to the strongest start of any bull market in U.S. stocks since 1940 (see chart below). Given (i) widespread perceptions that stocks have "come too far too fast" and the economic recovery is largely government-induced and not sustainable, and (ii) that we have entered the traditionally weak months of September and October (with last fall’s carnage the most recent historical example), our sense is that many investors are nervously eyeing the exits.

Click to enlarge:


Complete Story »]]> DIA QQQQ SPY J.D. Steinhilber Market Outlook: Avoid Overconfidence and Retain a Healthy Respect for Risk http://seekingalpha.com/article/155253-market-outlook-avoid-overconfidence-and-retain-a-healthy-respect-for-risk?source=feed 155253 Global stock markets rallied sharply in July - capping the best five-month run in stock prices since 1938 - and have broken out to new bull market highs. Markets have priced in an end to the Great Recession, as evidence of economic stabilization has accumulated.

With the S&P 500 up 50% since the panic lows of early March, the “easy money” in the financial markets has been made, and now it is the trajectory and substance of the economic recovery that will be the greatest determinant of stock market returns. Thanks in large part to the ultra-expansionary fiscal and monetary policies that have been implemented globally, the economy appears set to recover - for awhile. But a self-sustaining recovery needs more than just government stimulus and inventory replenishment; it requires a reinforcing cycle of increasing consumer spending and incomes, and there is no evidence yet of that.

]]> Tue, 11 Aug 2009 02:58:08 -0400 J.D. Steinhilber Global stock markets rallied sharply in July - capping the best five-month run in stock prices since 1938 - and have broken out to new bull market highs. Markets have priced in an end to the Great Recession, as evidence of economic stabilization has accumulated.

With the S&P 500 up 50% since the panic lows of early March, the “easy money” in the financial markets has been made, and now it is the trajectory and substance of the economic recovery that will be the greatest determinant of stock market returns. Thanks in large part to the ultra-expansionary fiscal and monetary policies that have been implemented globally, the economy appears set to recover - for awhile. But a self-sustaining recovery needs more than just government stimulus and inventory replenishment; it requires a reinforcing cycle of increasing consumer spending and incomes, and there is no evidence yet of that.


Complete Story »]]> DIA EEM QQQQ SPY J.D. Steinhilber Dollar Rebound Could Cause Pullback Commodities, Foreign Stocks, Bonds http://seekingalpha.com/article/142595-dollar-rebound-could-cause-pullback-commodities-foreign-stocks-bonds?source=feed 142595 Commodities, natural resources stocks, and foreign real estate stocks all enjoyed strong gains in May. Like stocks, commodities are benefiting from economic optimism. Commodities are also benefiting from the “reflation trade,” where rising inflation expectations stimulates the purchases of “anti-dollar” asset classes such as commodities, gold, resource/materials stocks, and foreign stocks.

The U.S. dollar index dropped 4.9% in May, and, along with Treasury Bonds, has been one of the weakest asset classes in 2009. The U.S. dollar index is approaching key support levels in the 76-78 range (versus a current value of 79.2). Accordingly, we would be surprised if the US dollar had much additional downside risk relative to most other major currencies with respect to either the short- or the intermediate-term.

]]> Thu, 11 Jun 2009 05:24:31 -0400 J.D. Steinhilber Commodities, natural resources stocks, and foreign real estate stocks all enjoyed strong gains in May. Like stocks, commodities are benefiting from economic optimism. Commodities are also benefiting from the “reflation trade,” where rising inflation expectations stimulates the purchases of “anti-dollar” asset classes such as commodities, gold, resource/materials stocks, and foreign stocks.

The U.S. dollar index dropped 4.9% in May, and, along with Treasury Bonds, has been one of the weakest asset classes in 2009. The U.S. dollar index is approaching key support levels in the 76-78 range (versus a current value of 79.2). Accordingly, we would be surprised if the US dollar had much additional downside risk relative to most other major currencies with respect to either the short- or the intermediate-term.


Complete Story »]]> REM REZ RTL UDN UUP J.D. Steinhilber The 'Bond Vigilantes' Are Back http://seekingalpha.com/article/142590-the-bond-vigilantes-are-back?source=feed 142590 Long-term U.S. Treasury bonds were the top performing asset class in 2008, but they have been the worst-performing investment in 2009. The 10-year Treasury bond yield has increased 170 basis points this year, and has jumped 120 basis points since March 18, when the Fed announced its intention to purchase Treasury bonds to hold down interest rates. It seems the “Bond Vigilantes” are back.

This is a term used to describe Treasury bond investors who can enforce some discipline on a government that is potentially behaving very irresponsibly with respect to fiscal and monetary easing, and courting serious inflation risks. A dramatic rebound in inflation expectations accounts for nearly all of the rise in nominal Treasury yields in 2009. In the past six months, the spread between the 10-year Treasury yield and the 10-year TIPS yield (which represents the market’s expectation of the annual CPI inflation rate over the next 10 years), has jumped from under 50 basis points to nearly 200 basis points.

]]> Thu, 11 Jun 2009 05:08:21 -0400 J.D. Steinhilber Long-term U.S. Treasury bonds were the top performing asset class in 2008, but they have been the worst-performing investment in 2009. The 10-year Treasury bond yield has increased 170 basis points this year, and has jumped 120 basis points since March 18, when the Fed announced its intention to purchase Treasury bonds to hold down interest rates. It seems the “Bond Vigilantes” are back.

This is a term used to describe Treasury bond investors who can enforce some discipline on a government that is potentially behaving very irresponsibly with respect to fiscal and monetary easing, and courting serious inflation risks. A dramatic rebound in inflation expectations accounts for nearly all of the rise in nominal Treasury yields in 2009. In the past six months, the spread between the 10-year Treasury yield and the 10-year TIPS yield (which represents the market’s expectation of the annual CPI inflation rate over the next 10 years), has jumped from under 50 basis points to nearly 200 basis points.


Complete Story »]]> AGG HYG IEF IPE SHY TIP J.D. Steinhilber Stocks Undervalued in Current Economic Environment http://seekingalpha.com/article/142534-stocks-undervalued-in-current-economic-environment?source=feed 142534 As a result of the 40% to 65% (depending on the index) gains we have seen off the lows, stocks have moved from (nearly) dirt cheap levels three months ago to valuations that seem appropriate to mildly undervalued given the economic environment and the yields available in fixed income markets.

The economy is clearly beginning to recover, but the strength and durability of the rebound remains to be seen. After this initial bounce from government stimulus and pent-up demand runs its course, the economy may be vulnerable to a “rolling recession” type of environment as a result of private sector balance sheet rehabilitation, which will involve a multi-year process of higher savings and debt reduction.

]]> Thu, 11 Jun 2009 04:42:10 -0400 J.D. Steinhilber As a result of the 40% to 65% (depending on the index) gains we have seen off the lows, stocks have moved from (nearly) dirt cheap levels three months ago to valuations that seem appropriate to mildly undervalued given the economic environment and the yields available in fixed income markets.

The economy is clearly beginning to recover, but the strength and durability of the rebound remains to be seen. After this initial bounce from government stimulus and pent-up demand runs its course, the economy may be vulnerable to a “rolling recession” type of environment as a result of private sector balance sheet rehabilitation, which will involve a multi-year process of higher savings and debt reduction.


Complete Story »]]> EEM SPY J.D. Steinhilber Market Outlook: Expect Volatility and a Shallow Correction http://seekingalpha.com/article/142531-market-outlook-expect-volatility-and-a-shallow-correction?source=feed 142531 What a difference three months makes. From the early March lows through June 1, broad stock indexes are up between 40% (S&P 500) and 65% (MSCI Emerging Markets). The price of oil has doubled from its first quarter bottom, and yields on junk bond indexes have nearly been cut in half. The predominant worry has shifted from a debt deflation trap to a government-sponsored inflation problem. Investors have steadily renounced their extreme risk aversion and demand for safety.

Equity, commodity, and credit markets are unequivocally acting as though the credit crisis is over and a new global economic recovery is on the way. Apart from the typically strong initial rebound from a bear market bottom, two factors would seem to account for the extraordinary shift in the investment landscape over the past three months. First, the fear of financial and economic apocalypse was more intense than the vast majority of investors had ever before experienced.

]]> Thu, 11 Jun 2009 02:22:54 -0400 J.D. Steinhilber What a difference three months makes. From the early March lows through June 1, broad stock indexes are up between 40% (S&P 500) and 65% (MSCI Emerging Markets). The price of oil has doubled from its first quarter bottom, and yields on junk bond indexes have nearly been cut in half. The predominant worry has shifted from a debt deflation trap to a government-sponsored inflation problem. Investors have steadily renounced their extreme risk aversion and demand for safety.

Equity, commodity, and credit markets are unequivocally acting as though the credit crisis is over and a new global economic recovery is on the way. Apart from the typically strong initial rebound from a bear market bottom, two factors would seem to account for the extraordinary shift in the investment landscape over the past three months. First, the fear of financial and economic apocalypse was more intense than the vast majority of investors had ever before experienced.


Complete Story »]]> DIA EEM HYG QQQQ SHY SPY J.D. Steinhilber Corporate Bonds: Higher Return Potential, Better Portfolio Diversification http://seekingalpha.com/article/135795-corporate-bonds-higher-return-potential-better-portfolio-diversification?source=feed 135795 Treasuries have been the worst performing fixed income asset class over the past two months, as investors have embraced risk amid improving confidence. The Treasury market is also under pressure from a projected Federal budget deficit of $1.8 trillion in the current fiscal year. The combination of rising Treasury yields and falling yields on other fixed income asset classes has resulted in a significant narrowing of the historically wide yield “spreads” that developed in the wake of last fall’s financial collapse. Yields on junk bond indexes have dropped from 20% to 13% , while yields on investment-grade corporate bonds have fallen from nearly 9% to under 6.5%.

At current yield levels, investment-grade corporate bonds provide a much better combination of return potential and portfolio diversification benefits than junk bonds. Short to intermediate term maturities are favored to limit interest rate risk. Pricing anomalies in the municipal bond market have largely been corrected. Today, a 10-year, AAA-rated general obligation municipal bond yields approximately the same as a 10-year Treasury bond. In late 2008, such municipal bonds could be purchased with yields 175% those of 10-year T-notes.

]]> Wed, 06 May 2009 14:38:16 -0400 J.D. Steinhilber Treasuries have been the worst performing fixed income asset class over the past two months, as investors have embraced risk amid improving confidence. The Treasury market is also under pressure from a projected Federal budget deficit of $1.8 trillion in the current fiscal year. The combination of rising Treasury yields and falling yields on other fixed income asset classes has resulted in a significant narrowing of the historically wide yield “spreads” that developed in the wake of last fall’s financial collapse. Yields on junk bond indexes have dropped from 20% to 13% , while yields on investment-grade corporate bonds have fallen from nearly 9% to under 6.5%.

At current yield levels, investment-grade corporate bonds provide a much better combination of return potential and portfolio diversification benefits than junk bonds. Short to intermediate term maturities are favored to limit interest rate risk. Pricing anomalies in the municipal bond market have largely been corrected. Today, a 10-year, AAA-rated general obligation municipal bond yields approximately the same as a 10-year Treasury bond. In late 2008, such municipal bonds could be purchased with yields 175% those of 10-year T-notes.


Complete Story »]]> AGG HYG IPE MBB MUB SHV SHY TIP J.D. Steinhilber Global Stock Market Valuations: Patience Is a Virtue http://seekingalpha.com/article/135067-global-stock-market-valuations-patience-is-a-virtue?source=feed 135067 Stocks, both in the U.S. and abroad, are attractively valued from a historical perspective, but the economic challenges following the bursting of the credit bubble are daunting. This argues for a neutral (and patient) allocation to stocks in a longer-term asset allocation context.

The economy is stabilizing from the free-fall that began last September, and will likely spend an extended period at approximately the current level of economic activity, propped up by massive government intervention and stimulus, and simultaneously weighed down by private sector balance sheet rehabilitation, which will involve a multi-year process of higher savings and debt reduction.

]]> Mon, 04 May 2009 14:13:54 -0400 J.D. Steinhilber Stocks, both in the U.S. and abroad, are attractively valued from a historical perspective, but the economic challenges following the bursting of the credit bubble are daunting. This argues for a neutral (and patient) allocation to stocks in a longer-term asset allocation context.

The economy is stabilizing from the free-fall that began last September, and will likely spend an extended period at approximately the current level of economic activity, propped up by massive government intervention and stimulus, and simultaneously weighed down by private sector balance sheet rehabilitation, which will involve a multi-year process of higher savings and debt reduction.


Complete Story »]]> J.D. Steinhilber Market, Economy Downward Spiral Has Been Broken http://seekingalpha.com/article/135024-market-economy-downward-spiral-has-been-broken?source=feed 135024 We have been on record for the past month with the view that a major market bottom was made in early March, when fears of financial and economic Armageddon peaked. The technical market action over the course of the past two months’ rally is much more characteristic of a sustainable new uptrend than a short-lived bear market reprieve. The downward spiral in the economy and markets has been broken (regrettably at the cost of a massive extension of government credit and obligations).

Leading economic indicators and consumer confidence readings have improved to a degree that indicates the worst of the economic downturn is behind us. Consequently, investors have begun the process of moving away from the heavily defensive posture of two months ago. We have seen a broad-based rally in risk assets, and a simultaneous retreat from “safe havens” such as Treasuries, cash, and gold. Emerging markets stocks surged 17% in April, the best monthly gain in 20 years, and high-yield corporate bonds returned 11% in April, the best monthly performance for that asset class in its history.

]]> Mon, 04 May 2009 08:23:35 -0400 J.D. Steinhilber We have been on record for the past month with the view that a major market bottom was made in early March, when fears of financial and economic Armageddon peaked. The technical market action over the course of the past two months’ rally is much more characteristic of a sustainable new uptrend than a short-lived bear market reprieve. The downward spiral in the economy and markets has been broken (regrettably at the cost of a massive extension of government credit and obligations).

Leading economic indicators and consumer confidence readings have improved to a degree that indicates the worst of the economic downturn is behind us. Consequently, investors have begun the process of moving away from the heavily defensive posture of two months ago. We have seen a broad-based rally in risk assets, and a simultaneous retreat from “safe havens” such as Treasuries, cash, and gold. Emerging markets stocks surged 17% in April, the best monthly gain in 20 years, and high-yield corporate bonds returned 11% in April, the best monthly performance for that asset class in its history.


Complete Story »]]> DIA QQQQ SPY J.D. Steinhilber Stocks Are Due for Consolidation, But the Worst Is Behind Us http://seekingalpha.com/article/131973-stocks-are-due-for-consolidation-but-the-worst-is-behind-us?source=feed 131973 The stock market has enjoyed its sharpest six-week rally since 1938, surging 28% from March 9th through last Friday. The financial sector – up an impressive 79% over this period – has led the advance, as fears of systemic failure have abated. To put the recent surge in financial stocks in perspective, the sector is still down over 10% year-to-date, which reflects how severe the carnage was in the first two months of the year, and how a large percentage gains are mathematically achievable from the very small base that financial stocks were reduced to six weeks ago.

Investors are now pondering whether the recent rebound in the stock market is the start of a new cyclical bull market, or merely a “dead cat bounce” like the six-week rally we had from late November to early January. Stocks are clearly very stretched in the short term, and due for a period of correction and consolidation, but evidence is accumulating that a major bottom was made in early March.

]]> Tue, 21 Apr 2009 06:10:15 -0400 J.D. Steinhilber The stock market has enjoyed its sharpest six-week rally since 1938, surging 28% from March 9th through last Friday. The financial sector – up an impressive 79% over this period – has led the advance, as fears of systemic failure have abated. To put the recent surge in financial stocks in perspective, the sector is still down over 10% year-to-date, which reflects how severe the carnage was in the first two months of the year, and how a large percentage gains are mathematically achievable from the very small base that financial stocks were reduced to six weeks ago.

Investors are now pondering whether the recent rebound in the stock market is the start of a new cyclical bull market, or merely a “dead cat bounce” like the six-week rally we had from late November to early January. Stocks are clearly very stretched in the short term, and due for a period of correction and consolidation, but evidence is accumulating that a major bottom was made in early March.


Complete Story »]]> DIA SPY J.D. Steinhilber Firming Commodity Prices Signal Economic Stabilization http://seekingalpha.com/article/131668-firming-commodity-prices-signal-economic-stabilization?source=feed 131668 Cyclical commodity prices such as oil and industrial metals have been in firming trend, signaling that the global economy is stabilizing and the government’s massive reflation effort is beginning to have its intended effect.

It is hard to imagine that the astounding amount of money the U.S. is throwing at the credit crisis won’t lead to an inflation problem, probably starting within the next 12 to 24 months. Commodity investments are a natural defense against this eventual outcome, and should serve as an effective diversification tool over time in a balanced investment portfolio.

]]> Sun, 19 Apr 2009 14:47:04 -0400 J.D. Steinhilber Cyclical commodity prices such as oil and industrial metals have been in firming trend, signaling that the global economy is stabilizing and the government’s massive reflation effort is beginning to have its intended effect.

It is hard to imagine that the astounding amount of money the U.S. is throwing at the credit crisis won’t lead to an inflation problem, probably starting within the next 12 to 24 months. Commodity investments are a natural defense against this eventual outcome, and should serve as an effective diversification tool over time in a balanced investment portfolio.


Complete Story »]]> DJP SPY J.D. Steinhilber Bond Market Outlook: Think Short Term http://seekingalpha.com/article/131283-bond-market-outlook-think-short-term?source=feed 131283 Since the Fed announced its intention to “monetize” (i.e. buy with newly printed dollars) our own Treasury debt, analysts have been pondering the eventual outcome of this operation. Will the marketplace render a verdict, in the form of a much weaker dollar or a much higher gold price, that the U.S. is pushing too far the privileges of issuing the world’s reserve currency? (Our sense is that the dollar’s status is not likely to be threatened anytime soon, due to a lack of credible alternatives, and a shared global interest in getting through this crisis without introducing another major uncertainty into a fragile marketplace.)

Will the Fed artificially suppress longer-term Treasury yields to such a degree that there will be no willing buyers, apart from the Fed, for the T-Bonds that will need to be issued in great quantity to fund projected fiscal deficits?

]]> Thu, 16 Apr 2009 14:41:51 -0400 J.D. Steinhilber Since the Fed announced its intention to “monetize” (i.e. buy with newly printed dollars) our own Treasury debt, analysts have been pondering the eventual outcome of this operation. Will the marketplace render a verdict, in the form of a much weaker dollar or a much higher gold price, that the U.S. is pushing too far the privileges of issuing the world’s reserve currency? (Our sense is that the dollar’s status is not likely to be threatened anytime soon, due to a lack of credible alternatives, and a shared global interest in getting through this crisis without introducing another major uncertainty into a fragile marketplace.)

Will the Fed artificially suppress longer-term Treasury yields to such a degree that there will be no willing buyers, apart from the Fed, for the T-Bonds that will need to be issued in great quantity to fund projected fiscal deficits?


Complete Story »]]> AGG SHY TIP J.D. Steinhilber