On Investment Time Horizons – Seeking Alpha

David Merkel observes that Shiller’s CAPE10 ratio and Tobin’s Q-ratio both “indicate that stocks are not likely to return a lot over the next 10 years”.

The CAPE10 ratio is a long-term, smoothed PE-ratio first popularized by Yale Professor Robert Shiller in his book Irrational Exuberance. CAPE10 compares the current S&P 500 index value to the average of the last 10-years annual earnings. James Tobin’s Q-ratio compares current price to net worth (total company assets minus liabilities).

Merkel points out, however, that “the same is true of most high-quality bond investments …. and high-yield investments when expected losses are netted out…..I am not crazy about buying bonds here. The risk-reward is awkward, but the same is true of stocks.”

Bottom line is investors are being starved of yield by the Fed’s Twist and QE3 operations. Investors may be forced to take on additional risk in order to boost yields, but that could end in disaster, with capital losses if yields rise or earnings fall. Where possible, the safest strategy would be to tighten your belt and sit this out.

via On Investment Time Horizons – Seeking Alpha.

Yield Is The Last Refuge Of Scoundrels – Seeking Alpha

By David Merkel:

What’s that I see? We’re at a 50-year low for yields on low investment-grade-rated bonds. Surely the economy should be booming. What, like the Great Depression, we are in a liquidity trap? Seems that way…….

Baa Corporate Bond Yield WBAA

via Yield Is The Last Refuge Of Scoundrels – Seeking Alpha.

Treasury yields rising — good for stocks

10-Year Treasury yields are headed for a test of resistance at 1.70 percent after recovery above the descending trendline warned of a “bear trap” — actually a bull trap because yields are the inverse of price. Follow-through above 1.60 percent has confirmed, and breakout above 1.70 would signal an advance to 2.0 percent* — a bullish sign for stocks.

10-Year Treasury Yields

* Target calculation: 1.70 + ( 1.70 – 1.40 ) = 2.00

Treasury yields: What a difference a day makes

10-Year Treasury yields gapped above resistance at 1.45 percent and the descending trendline, signaling an outflow from Treasuries and into stocks. Breakout above 1.70 percent would suggest a primary down-trend for bonds (price is the inverse of yield) and an up-trend for stocks.

10-Year Treasury Yields

* Target calculation: 1.45 – ( 1.70 – 1.45 ) = 1.20

Falling Treasury yields: Money is flowing out of stocks

Retracement of 10-Year Treasury yields respected the new resistance level after breaking support at 1.45 percent, signaling a decline to 1.20 percent*. There has been little change in Fed holdings over the past week that could distort bond flows. Declining yields reflect investors leaving stocks for the safety of bonds and warn of a stock market correction. Recovery above 1.70 percent is most unlikely– without QE3 — but would suggest another stock market rally.

10-Year Treasury Yields

* Target calculation: 1.45 – ( 1.70 – 1.45 ) = 1.20

Treasury yields continue to fall

10-Year Treasury yields are testing support at 1.45 percent. Breach would offer a target of 1.20 percent*. Declining yields suggest that money is flowing out of stocks and into bonds. Recovery above 1.70 percent is unlikely but would suggest another stock market rally.

10-Year Treasury Yields

* Target calculation: 1.45 – ( 1.70 – 1.45 ) = 1.20

Latest stats from the Fed show holdings of Treasury notes and bonds increased by $3.9 billion over the last week, which may have contributed to the decline. Holdings of (short-term) Treasury bills fell to $14.6 billion, leaving little room for further “Twist” operations — where the Fed swaps short-term holdings for long-term Treasuries.

Falling Treasury yields: Money is flowing out of stocks

10-Year Treasury yields broke medium-term support at 1.55 percent, indicating another decline. Breach of support at 1.45 percent would confirm, offering a target of 1.20 percent*. Latest stats from the Fed show holdings of Treasury notes and bonds fell over the last week, so the fall is not due to “Operation Twist”. Declining yields suggest that the current stock market rally is likely to fail: money is flowing out of stocks and into bonds. Recovery above 1.70 percent is unlikely but would suggest another stock market rally.

10-Year Treasury Yields

* Target calculation: 1.45 – ( 1.70 – 1.45 ) = 1.20

Treasury yields fall

10-Year Treasury yields are testing support at 1.55 percent. Falling yields suggest that the current stock market rally is likely to fail: money is flowing into bonds — not stocks. Failure of support would strengthen the warning. Recovery above 1.70 percent is less likely but would bolster the stock market rally.

Index

Stocks Out of Fashion Amid a Bonding With Bonds – WSJ.com

Since the start of 2007, a cumulative $350 billion has flowed out of stock funds and a little over $1 trillion has moved into bond funds….. In 2011, 45% was in stock funds and 25% in bonds; in 2005, the mix was 55% for stocks and 15% in bonds…..

via AHEAD OF THE TAPE: Stocks Out of Fashion Amid a Bonding With Bonds – WSJ.com.

Comment:~ Low bond yields and higher risk premiums on stocks (stock earnings yield minus bond yield) highlight investors flight to safety. But this is no guarantee that bonds will continue to out-perform stocks. Bond yields must be close to hitting a “floor” and, with no further capital gains, investor returns will be meagre — while stocks grow increasingly attractive.

Bernanke Acknowledges Treasury Strategy at Odds With Fed Policy – WSJ

Kristina Peterson and Jon Hilsenrath: The Fed’s [Twist] program is designed to work by taking long-term bonds off the market, nudging investors into riskier assets, such as stocks, that could help boost the economy. The problem is that while the Fed has been snapping long-term bonds off the market, the Treasury Department has been ramping up its issuance of long-term debt to take advantage of historically low long-term rates. Since October 2008, the average maturity of outstanding marketable Treasurys has climbed by nearly 32%, reaching almost 64 months in May, the agency said earlier this month. That’s its highest level in a decade.

via Bernanke Acknowledges Treasury Strategy at Odds With Fed Policy – Real Time Economics – WSJ.