Sunday, November 11, 2012

Buttonwood: Desperately seeking yield | The Economist

Buttonwood: Desperately seeking yield | The Economist
"For investors, the risks are twofold. The first is that economies will dip back into recession and that more companies will default on their bond issues, forcing investors to suffer write-downs on their holdings. The credit risk of corporate bonds is reflected in the excess interest rate, or spread, they offer over government bonds. At the moment this spread is lower than it was at the start of the year and lower than its five-year average. But it is still well above the levels of 2005 and 2006, when the credit bubble was inflating."

The thirst for yield continues. It's difficult not to invest in corporate bonds, with most yielding 5-6%. Even the trashiest companies are borrowing at record low yields. But when will the party end? Bernanke has committed to record low interest rates until 2015-ish. With stagnant global economic growth, I don't see money supply-induced inflation on the horizon. Price inflation doesn't count, since supply-side variables could spark a price increase in commodities.

So what's the case for equities? Equities are currently overvalued, in my opinion, since low interest rates have artificially increased asset/security values. M&A activity is curiously low. Companies would rather increase dividends, increase buybacks or just sit on cash at 0%. 

In my opinion, investing in preferred stock appears to be the best bet. Whether as an investor, you're privy to preferred public equities, or if you invest in private equity (especially higher beta private companies), the rewards are tremendous, if you do stay the course...

With a low VIX and low trading volumes, I wouldn't put my money in public stocks...However, caveat emptor...

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