It’s been more than two months since I devoted a column to what contrarian analysis has to say about the bond market.  It’s time for an update.

My last column on bond market sentiment was written in the wake of the Sept. 20 meeting of the Federal Reserve’s Open Market Committee, at which the federal funds rate was left unchanged at 5.25%. I reported that there was a preponderance of bulls among the bond-timing newsletters tracked by the Hulbert Financial Digest, which meant — from a contrarian point of view — that bonds were vulnerable to a decline. That in turn implied that interest rates would rise.

The fed funds rate remains at that same level today, of course. And over the two months since then, longer-maturity rates have risen and then fallen back, with the net result being that they are slightly lower today than where they stood on Sept. 20.

So the best you can say about the contrarian forecast made two months ago is that it was right for a month and then wrong.  That mixed track record does not mean you should give up on contrarian analysis, however. It’s exceedingly rare for the average market timing newsletter to correctly forecast the market’s trend for more than a couple of months in a row. The past few months appear to be one of those rare exceptions.

To appreciate how rare it is for bond timers to correctly assess the market’s trend, consider how few bond timing newsletters have beaten a buy-and-hold over the past decade. The Hulbert Financial Digest has performance data for 27 different bond-timing strategies over this period, and of them, just one has beaten a buy-and-hold.

That’s a success rate of less than 4%.

Keep that figure in mind the next time you would otherwise be inclined to follow the consensus forecast among bond timing newsletters.

What is that consensus forecast today? It’s that bonds will go up and interest rates will decline. Contrarians, of course, are betting just the opposite.

Consider the latest readings of the Hulbert Bond Newsletter Sentiment Index (HBNSI), which reflects the average recommended bond market exposure among a subset of short-term bond timing newsletters tracked by the Hulbert Financial Digest. As of Tuesday night, the HBNSI stood at 43.2%.

But for a slightly higher reading earlier this month, the current reading is the highest in more than five years.

What this means: The consensus among a group of bond timers who rarely get it right is that bonds are more attractive today than in more than five years.

How do you want to bet?

By Mark Hulbert

To view the full story click here:

Marketwatch- Too many bond bulls story

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

Posted by bondsblog as Market Trends at 10:50 AM EST

No Comments »

Yesterday’s late-session selling pressure was more than reversed overnight, with 10-year yields returning to 4.50% and the market’s grind higher resuming. Much of the overnight strength as been attributed to month-end extension demand and the weaker-than-expected German Retail Sales print (coming in at -0.2% MoM for Oct. vs. -2.9% prior and +1.5% consensus. This tees the market up for another potential test of the 4.50% level, particularly with the set of bond bullish data and month-end demand expected today.

The RBSGC Economics team expects core-PCE grew just +0.1% in October, bringing the YoY figure to 2.3%, off its recent highs — though still above the Fed’s comfort-zone. We also get an updated read on the manufacturing sector with Chicago PMI; consensus is calling for a modest uptick to 54.4 in November vs. the 53.5 October read. The OFHEO House Price Index will be released this morning and is expected to show a +0.5% QoQ gain in US home prices — the lowest since September ‘96 — clearly bullish at this point in the cycle.

As for Wednesday’s highlights, the reception to the 5-year auction was average
– tailing 0.9 bps with a bid-to-cover 2.28 vs. 2.31 norm. The most striking aspect of the auction was the strong indirect interest at 35% vs. 27.2% norm.
Excluding the 57.7% of September, yesterday’s indirect bid was the strongest since Dec ‘05. The foreign bid has been a key component, and strong over the last several auctions — we suspect the foreign demand was solid as well.

Our take on the Fed’s Beige book was that it hit the mark of the Fed’s ongoing rhetoric. The report shows continued moderating growth, but in line with the Fed’s estimates — little surprise there. It also highlighted the worries about the housing market and concerns in the auto sector. One interesting note was that the inflationary pressures have been stable/slightly higher and input prices are also on the rise (energy) — hawkish if anything.

TACTICAL BIAS: We have been bullish all week and we see little reason to alter this bias at this point. We like the longer end of the curve Thursday, with the data expected to come in bond bullish and the month-end extension demand remains a meaningful factor this month. Our 2s/10s inversion bias may seem a little tired at this point, but we continue to view this steepening as a temporary pull back and an opportunity to reenter flattening trades.

The data will undoubtedly set the tone for the session and we see little compelling reason to fade any bid that emerges in that wake of benign inflation or soft growth data. There is no meaningful Fedspeak scheduled for Thursday and while there have been a couple deal pricings, the data has overshadowed the pricings to a large extent — we see no reason for this to shift on Thursday.

IMPENDING EVENTS:
* Month-end extension
* Initial jobless claims 315k vs. 321k prior
* PCE Oct, +0.1% MoM vs. +0.1% prior.
* Core-PCE Oct, +0.1% vs. +0.2% MoM. YoY 2.3% vs. 2.4% Sept.
* Chicago PMI Nov, 54.4 consensus vs. 53.3 prior.
* Help-wanted Index Oct, 30 consensus vs. 30 prior.
* OFHEO home prices Q3, +0.5% vs. 1.2% prior.

OVERNIGHT EVENTS:
* German Retail Sales Oct, -0.2% vs. -2.9% Sept, well below expectations for a
+1.5% gain and helped support EGBs.
* UK Nationwide House Prices Nov, +1.4% vs., +0.8% revised Oct.
Better-than-forecast. Moderating some of the overnight buying pressure triggered by the German data.
* BoJ’s Tadao Noda comments that the central bank could raise interest rates despite the current low level of CPI — watch for the release of November’s figures tonight.
* Japanese Construction Orders Oct, +8.8% vs. +9.08% prior, outpacing expectations for a +8.1% gain.
* Japanese Housing Starts Oct, +2.2% vs. 4.0%, better than the -0.5% consensus.
Helped support Nikkei, which was up 1.2%

OVERNIGHT FLOWS: Overnight volume was average, with TY trading at 90% of the 10-day moving-average while cash traded at 106%. 2s were the most active issue with 50% of the traded volumes, while 10s took 24% and 5s 17%. The month-end extension was credited for much of the overnight buying interest, and we saw some speculative selling of 2s and 30s.

Away we heard of Asian speculative buying of 10s, Japanese real money selling in the 10-year sector and Asian real money selling of 10s. Also some Asian real money extending from shorter dated paper further out to the 3-year sector.

NOTE: The views expressed are not of Bonds Financial but of the post’s author.  Bonds Financial Inc. makes no claim to and regarding the accuracy, correctness or completeness of the views expressed.

Posted by bondsblog as Morning Call at 10:31 AM EST

No Comments »

Defining who is “rich” and who is “not rich,” is a preoccupation with egalitarians, social scientists, politicians, and others.

A recent article on philanthropy in Worth magazine (“Behind Buffett’s Beneficence,” by Michael Seltzer, December, 2000) offered some thought-provoking statistics. A 2006 survey estimated that there were roughly 9 million individuals worldwide with liquid financial assets of $1 million or more. Approximately 85,000 people had more than $30 million. At the other end of the economic see-saw were more than one billion people who live on less than $1 per day!

With world population pushing an estimated 6.66 billion persons, about 15% subsist on less than a dollar a day. The 9 million individuals with $1 million or more approximate 1.3% of global population. The uber-rich with $30 million plus are a tiny fraction, well less than 1% (.015%).

What does it mean to be a millionaire, percentage-wise in an exclusive club? Early in my career as a financial planner, I read Thomas Stanley’s seminal work, The Millionaire Next Door, a book that helped to shape my advisory skills.

Many millionaires do not regard themselves as “rich” or even “wealthy.” They are salt-of-the-earth people who learned to work, save, and spend prudently. They save for a rainy day, keep debt under control, and cherish self-reliance and family values. They have put money into proper perspective.

When it comes to an Investment Policy relative to money, they know that the question is not about how much one has. The real question is how much of a cash flow stream is needed to meet goals, now and later, and what can one expect within realistic and conservative parameters? Explore that line of inquiry and a person may not be as wealthy as he or she thinks.

A second article in Worth (12/06), “Live Long and Prosper” by Elizabeth Morris, offers a clue to the challenge of “wealth management.” A woman who reaches age 65 has a 44% chance of living to age 90. (The odds of living longer are even greater for a non-smoker who is cancer free). A man 65 has a 34% chance of seeing his 90th birthday (again, non-smokers have a leg up). But here’s the zinger. For a couple age 65, there is a 63% chance that one of them will live beyond age 90!

There comes a point, usually called “retirement,” when no longer are you accumulating assets; you are distributing assets to provide cash flow. You then must balance longevity possibilities with inflation assumptions.

The progression from age 65 to 90 spans twenty-five years. Someone who retired in 1980 and turned 90 in 2005 witnessed a shrinkage in buying power. It took $2.54 in 2005 to buy what $1 did in 1980. Conversely, a 1980 dollar had the buying power of less than 39 cents by 2005. And that is using general CPI numbers. Given rising medical costs and the prices for other services, the inflation rate for older citizens is estimated to be a third higher than the reported CPI.

The first task of money is “security.” Only when they sense that there is enough to assure a reasonable and sustainable living, while not running out of money before death, do people begin to feel secure. They want sufficient reserves to ride out the vicissitudes of bond and stock markets, and to meet unexpected expenses. They want a steady “paycheck” to meet living expenses, and sufficient returns to overcome inflation and taxation.

Only after basic security is covered, do people move to higher levels of self-actualization (Maslow’s hierarchy of needs) and think about fun, gifts, and dreams. A price tag can be placed on all goals and cash flow objectives and measured against financial horsepower to determine feasibility.

Here’s the rub. Studies show that to minimize the possibility of depleting capital prior to death, one should not take more than 4% to 5% annually off of a portfolio. With a $1 million portfolio, that is a targeted annual cash flow stream of $40,000 to $50,000. When you look at cash flow feasibility, suddenly the Millionaires Club does not look like high cotton anymore!

Plus, if you are spending 5%, you need to earn 8% - 9% annually over time as total return to preserve long run buying power. That adds investment risk to the equation, which can cause people to want to expand their asset pile for even more peace of mind!

When you view money not as a static liquid net worth number, and more in terms of sustainable inflation–adjusted cash flow potential, perceptions of wealth, and “how much is enough?,” change.

Yes, being a millionaire is still an exclusive club with obligations of stewardship and gratefulness. But it takes $2.54 million today to buy what $1 million purchased in 1980. A million bucks is not chopped liver but it isn’t red meat either! In grocery store terms, it’s more like pasta.

By Lewis Walker, CFP®, CIMC®, CRC®

Lewis Walker, CFP®, CIMC®, CRC®, is a financial planner and investment consultant with offices in the Forum on Peachtree Parkway in Peachtree Corners; 770/441-2603, lewisw@theinvestmentcoach.com. Lewis has been elected to the Board of Directors of the Wealth Advisor Institute, headquartered in Washington, DC.

Posted by bondsblog as Financial Planning with Lewis Walker at 10:26 AM EST

No Comments »