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Ted Barac

 
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  • Why Buy Long-Term Treasuries? Dividend Growth Retirees Should Consider It For Ballast [View article]
    Thanks for referencing my article and for adding to the debate, George. Just one point of clarification. In saying that I believe that investors should avoid long-dated Treasuries, I am certainly not advocating going "all-in" equities. Rather, I am saying that I believe that shorter-dated Treasuries (4-5 year) and cash are better risk/reward alternatives for the non-equity portion of a portfolio.

    Further to the considerable yield curve flattening over the past year, you are only giving up about 110 bps by owning 5-year Treasuries versus 30-year (c. 1.3% versus 2.4%). Thus, I believe that taking on the massive incremental interest rate and inflation rate risks of the longer-dated bond, for only an extra 1.1% in yield, is not prudent. I also believe that cash is a good alternative to Treasuries if you want to reduce your equity exposure.
    Jan 14, 2015. 10:08 AM | 3 Likes Like |Link to Comment
  • Why Is Anyone Buying Long-Term Treasuries? [View article]
    I should add that the equity risk premium implies that Treasuries are risk free, whereas they obviously bear interest rate and inflation risks (the crux of the discussion here). Thus, the ERP is really the premium to risk-free nominal returns if the Treasury is held to maturity.
    Jan 13, 2015. 04:05 PM | 2 Likes Like |Link to Comment
  • Why Is Anyone Buying Long-Term Treasuries? [View article]
    "Ted. Here's a question that few have raised:

    If it makes no sense to buy US 10-year Treasuries merely because the yield is high *relative* to 10-year bonds from other developed nations, does it make no sense to buy US stocks merely because the aggregate earnings yield is high relative to 10-year US Treasuries?

    Most CNBC pundits (and the Federal Reserve) believe that US stocks are reasonably priced today because of the *relative* low yield of the US 10-year Treasury.

    In other words: If it's ok to claim that US stocks are reasonably priced based on the low 10-year Treasury rate, why is it not ok to claim the 10-year Treasury is reasonably priced based on the low European/Japan long bond rates?"

    Great question. I believe that it's because stocks trade and are valued relative to their risk-free alternative (i.e the equity risk premium). It gives you a gauge of how much of an (earnings) yield premium you are receiving in return for the risk assumed. I think that this is a relevant metric that makes a lot of sense (albeit, as with any metric, there are flaws and limitstions and it shouldn't be used as an absolute in isolation). It's not a relative value comparison of similar assets, but a measure of the risk premium being paid.

    On the other hand, saying that Long-term Treasuries are cheap because German bunds offer a lower yield (a relative value comparison of similar assets) is the equivalent of arguments during the dotcom bubble that one company is cheap at 100x earnings because another is trading at 150x earnings. Only makes sense to me if you're doing a pair trade and taking both positions (one long and one short). If both are overvalued both can implode together.
    Jan 13, 2015. 03:35 PM | 1 Like Like |Link to Comment
  • Why Is Anyone Buying Long-Term Treasuries? [View article]
    Hi Robert,

    No, I'm not long TBT (or any other short Treasury ETF) and have no short exposure to long-dated Treasuries via options or any other means.
    Jan 12, 2015. 05:32 PM | 1 Like Like |Link to Comment
  • Why Is Anyone Buying Long-Term Treasuries? [View article]
    Thanks for the comment, Blackgold,

    Those are definitely factors currently impacting inflation expectations and yield levels. That said, we are talking about 30 year bonds and taking the data that you laid out and trying to forecast macro and inflation trends 5, 10, and 20 years from now isn't easy.

    Perhaps you will be able to trade out before everyone else if and when the trends/dynamics change. I would rather take the 110bps haircut and hold 5 year Treasuries (with a 1.4% yield versus 2.5% for 30 year Treasuries) and avoid the massive interest rate risks of the longer-dated instruments. I think that chasing that extra 1.1% in yield under the assumption that you can predict long-term inflation and/or trade out before everyone else (if your predictions change) isn't worth the risk.
    Jan 12, 2015. 04:46 PM | 4 Likes Like |Link to Comment
  • Why Is Anyone Buying Long-Term Treasuries? [View article]
    You're right to be confused with my example of 2013, Left Banker. Thanks for pointing out the mistake. I should have used last year (2014) when both stocks and bonds increased in value (i.e. no negative correlation). To be clear; however, there generally is a negative correlation.
    Jan 12, 2015. 04:09 PM | Likes Like |Link to Comment
  • Why Is Anyone Buying Long-Term Treasuries? [View article]
    Thanks for the comment, WallStreetDebunker,

    Like I said, interest rates could very well stay low for much longer. My point is that I don't think that you're being adequately paid for the uncertainty or potential that they don't.
    Jan 12, 2015. 02:20 PM | 3 Likes Like |Link to Comment
  • Why Is Anyone Buying Long-Term Treasuries? [View article]
    Hi Nick,

    I think that short-term Treasuries offer the best value in fixed-income, if you're looking for protection from an equity sell-off while minimizing your downside if interest rates increase. That said, most of my non-equity exposure is in cash.

    Also, remember that Treasuries don't always correlate negatively with stocks (look what happened to Treasuries in 2013 when the S&P 500 TR was up 32%).
    Jan 12, 2015. 02:17 PM | Likes Like |Link to Comment
  • Why Is Anyone Buying Long-Term Treasuries? [View article]
    Thanks for the comment, diuwer. I'm skeptical, but if you can systematically predict short-term interest rate movements for long-dated Treasury bonds and "trade" accordingly, more power to you. Was TLT a good trade or did investors just pick the right side of a coin flip? Does the 30% move in 2014 mean its' a good investment for 2015? I would argue no to the latter question.
    Jan 12, 2015. 02:08 PM | 2 Likes Like |Link to Comment
  • Quarterly Performance Letter For December 2014 [View instapost]
    Thanks for the kind words, kitstricker. Much appreciated.
    Jan 7, 2015. 09:01 PM | Likes Like |Link to Comment
  • Updating My Thesis: I Liked Sprint At $6.28, But Not At $4.34 [View article]
    Great comment, 15346002.

    Sprint was, indeed, punished for the failed merger, but a lot of the share price under-performance has also been due to the (very weak) recent quarterly results (and guidance) from early November (shares closed at $6.20 the day before results).

    Agree with your thought on T-mobile and their pricing strategies (and the Street's reaction and the negative impact on the other carriers). It has created a more difficult situation for all of the carriers.

    With regard to Sprint, I think positive gross adds would, obviously be well received, but the overall revenue and margin impact (and guidance) will be important, as well. Customer numbers don't really matter if the financials don't improve or provide the prospect for future improvements.
    Dec 30, 2014. 10:36 AM | Likes Like |Link to Comment
  • Sprint And The Severe Market Overreaction, Part II [View article]
    Not sure about Sprint's access to Softbank's deep pockets. If Softbank commits additional capital, I think it would need to be on an arm's-length basis (because of the minorities) at close to market rates. At current price levels for the debt and equity, that would mean considerable dilution (if they put in new equity) or more leverage for an already highly debt-laden company (with additional expensive debt).

    That said, Sprint could, potentially, benefit from having Softbank as a lender of last resort and Softbank's implicit support puts downward pressure on the credit spreads of their debt instruments (though still very expensive/yieldy).

    I've been very disappointed with the recent results and, given pricing trends in the US cell phone market, I don't see much to be optimistic about on the operational side. That said, maybe the depressed share price could incentivize Softbank to take them private (and eliminate the minority complications and resultant need to conduct business in an arm's length) or some other M&A upside event.
    Dec 16, 2014. 02:40 PM | 2 Likes Like |Link to Comment
  • Softbank Vs. Mr. Market On Sprint: Place Your Bets [View article]
    Despite a significant jump in the price of Sprint in months following this article, this call has obviously performed poorly and, unfortunately, I do think that the sell-off in Sprint's shares has been entirely rational.

    The competitive environment has been worse than I expected and the margin developments, following the closure of the Nextel iDen network, has been disappointing to me. Given Sprint's already weak margins, I question their ability to turn things around by lowering prices (and the increasingly competitive price war that now characterizes the market is of very legitimate concern).

    I do see upside possibilities from M&A (even the potential for Softbank to take S private), but it's not enough for me to hold the shares right now.

    Note: Position may change at any time without notice.
    Dec 15, 2014. 01:06 PM | Likes Like |Link to Comment
  • Amazon: Free Cash Flow Not What The Bulls Purport It To Be [View article]
    Fair point, Paulo, and I understand the logic of looking at capital leases the way that you do. At the end of the day, all of these issues and a full analysis of the financial statements need to be considered. Amazon provides good details on the capital leases, so it's easy to make whatever adjustments you see as appropriate.
    Dec 12, 2014. 03:06 PM | Likes Like |Link to Comment
  • Amazon: Free Cash Flow Not What The Bulls Purport It To Be [View article]
    Dejavu! I went through this Amzn leasing debate with Paulo before (with his prior article on Amzn's overuse of operating leases and my rebuttal article...see link, below). Slightly different issue with capital leases, but the main ideas (accounting for leasing assets versus buying) are the same. I'm in Treetis' camp, but it's a good debate to have with important issues to consider.

    http://bit.ly/12CrK2V
    Dec 12, 2014. 09:37 AM | 2 Likes Like |Link to Comment
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