Thursday, April 10, 2014

Emerging Market Debt Options to Hedge Fed Taper and Stock Volatility

Managing money in the current financial market is beginning to resemble the game of musical chairs I played years ago in grade school.  Last year, at virtually the same moment in the year, the market “forces” decided that the music would stop and the debt market, primarily the longer duration bond market as well as high dividend paying stocks such as utilities (VPU), telecom (VZ) (T) and REITs (VNQ), would not have a seat at the table.  Municipal bonds (MUB) last summer were also ostracized from the game, with the fears of bankruptcies in Detroit and Puerto Rico looming large and investors warned to stay away as the market was far too risky for entry.

The T-Bond (TLT) (TLH) (IEF) route moved the 10 year from around 2% in early 2013 to a high touching 3% precisely at year end.  The longer duration securities such as the 30 year also traded down in value, up in yield in 2013, about 90 basis points to end the year at almost 4%.  All the related interest-sensitive markets were beaten into submission going into year end.  Opportunities for savvy income investors were plentiful – for a brief moment.

Market Dancing to a Different Tune in 2014

Since the beginning of 2014, however, the music has been noticeably different.


Tuesday, April 1, 2014

Stock Market Ends Q1 2014 on an Uptick on Charitable Rate Fed Speak – Buyers Beware

On March 31, 2014, the last trading day of the quarter, the stock market moved higher allowing the S&P500 to eke out a gain of 1.6% YTD, while the DOW shows a YTD loss of -.7%.  Fed Chair Janet Yellen took center stage giving a heart wrenching speech about the lack of work for the under employed and her perspective that excessive slack remains in the economy.  It sounded more like a speech by for the head of a charitable organization like the Red Cross than the head of the most the most powerful central bank on the planet.

The extremely “dovish” speech by Chair Yellen should come as no surprise to anyone.  Investors, however, should not be lulled into a false sense of safety by the recent Fed talk.  The current market has been run up by a large diversion in the flow of funds driven by the over $1T QE3 program at the Fed which began in January 2013.  This program is scheduled to be wound down over the remainder of 2014.  What should be a concern for investors is that the market stood virtually at a standstill in Q1 despite what continued to be extraordinary bond purchase levels by the Federal Reserve. During the quarter the purchase rate was reduced by $10B per month, having been maintained at $85B throughout 2013.  Based on this trend alone, stock investors should be cautious when setting new positions.  But there are other measurable signals which show cracks in the current market valuation.