Sunday, October 17, 2010

Finance

I've been trying to figure out when to start investing again.  Schwab's October 7 report on Treasury yield curve flattening argued that this is a good time to be investing in equities.  As they explain, when the Treasury yield curve is steep and positive (there is a large difference between 10 year Treasury yields and 3 month Treasury yields), it means the risk of rising inflation is high, and the market is factoring in rising interest rates.  A negative sloping yield curve means that the risk of recession is high, and interest rates are about to start dropping.  The yield curve has gone from pretty steep (with a 3.83% difference between the 10 year and 3 month Treasury yields) to fast approaching flat.  Their argument is that a flat yield curve is a good time for stocks.  That's true--but if the yield curve's slope punches through 0 into the negatives, it is a sign of a rapidly falling economy.

However: when I start looking at what is now available, it looks like interest rates are beginning to perk up, in anticipation of adult supervision taking over in Congress.   (I want to think this is going to happen, but at this point I can only assume that Republicans will be taking over Congress.  Adult supervision of Congress remains uncertain.)

I was pleased to see that some of the government agency bonds now have yields above 4%. 
FED NATL MTG 4%30BONDS DUE 10/28/30 is a 4% coupon, currently selling at 99.375, for a 4.046% annualized yield.  It is callable at face value 10/28/2011--and my past experience is that Fannie Mae bonds are always called before maturity--but that's still a decent return for a very low risk bond.
I was also looking at other possible investments, and I found Harris Preferred Capital (HBC/PR), the preferred stock shares of Harris Capital--with a current yield of 7.24%.  (Yes, that's the dividend that they have been paying.)  There is also Barclays Bank PLC ADR (BCS/PRD).  This is the ADR for Barclays Bank, and presumably has all the foreign exchange risks and opportunities that comes with holding shares in a foreign corporation.  But the current yield is 7.74%.  Both of these trade in a fairly narrow range, partly because they are callable at $25, and both are just above that level right now.  There is some risk that if they were called before you received the next scheduled dividend that you could lose money.
I was going to observe that both of these have S&P ratings of A--but after Wall Street's inability to correctly evaluate risk, I'm not sure how meaningful an S&P rating is anymore.

6 comments:

Epsilon Given said...

The Motley Fool makes a very good case that any time is a good time to invest in the stock market, so long as you invest in about ten to fifteen solid companies, and make sure you do you homework--checking on companies about once a month for what they call "rule makers" (well-established companies), or about once a week if it's what they call a "rule-breaker" (an up-and-coming company set to take the market by storm).

I haven't had the time to do what they teach...nor have I had the time to research good mutual funds...but then, none of this matters, because I don't have the money to invest in anything, either :-(.

Epsilon Given said...

Oh, and the argument they provide to illustrate it's always a good time to invest in the stock market?

First, you should only put in money you won't need for the next five to ten years.

Second, unless the market completely collapses, it will still be there, through thick and thin...and if the stock market completely collapses, it's likely that society itself would have completely collapsed--in which case, money of any sort will unlikely be any good.

jimlongx said...

I sell structural steel to fabricators who are building new office buildings, shopping centers, manufacturing plants, coal preparation plants, etc. These customers are tanking- they have been taking work below cost for over a year (too many suppiers chasing a smaller pie)- I think it's going to hit the fan this winter.

pchand29 said...
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Allen Cogbill said...

Well, how you choose to invest depends much on your time horizon, of course, but I personally find bonds to be a really bad investment, unless they are really short-term.

You might find Jim Rogers' assessment of where to put money interesting, along with the rest of his talk(s) (the second is more useful than the first). His time horizon may be longer than yours, though.

Rogers, btw, somehow made a gazillion dollars in the markets, though I cannot recall just how.

jimlongx said...

I think bonds (I'm in LQD and VBLTX) are a good investment because I'm anticipating deflation. When the deflation starts turning into inflation you'll definitely want to be out of bonds at that time.
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