Displaying items by tag: rates

(New York)

Aside from the general tensions over rising rates and what they mean for the economy, investors need to pay attention to another important consideration. That consideration is that with each basis point of increase, stocks are looking less attractive as the allure of dividends fades. While for years the view has been that “there is no alternative” to investing in equities because of weak bond yields, that perception is now fading as yields rise to a place where they start to offer acceptable returns. “Investors now have a viable alternative to cash with yields finally above inflation levels”, says the chief investment strategist at BlackRock.

FINSUM: It might not a recession, but the simple emergence of a viable alternative might be what ultimately unwinds this bull market.

(New York)

While some see the housing market as being in the middle of a long push upward, some see a lot of risks on the horizon as rates rise. In particular, mortgage rates look set to move strongly higher as the Fed keeps hiking rates. 30-year mortgage rates just hit a four-year high and are already hurting refinancings. Not only will the rates hurt new buyers, but they also keep people from moving, which could create bottlenecks in the system. The rise in rates is also challenging because home prices have risen sharply.

FINSUM: So the big point which counteracts all this negativity is that Millennials are entering their home-buying years, so there is a large pool of demand to support prices. The higher end of the market may be where things are weakest.

(New York)

Okay investors, hold on to your hats. A big name has just come down with a stern and gloomy warning for the markets. JP Morgan is saying that stocks may have a giant bear market. How big? Try a 40% correction, according to the bank’s co-president. Daniel Pinto, the bank’s co-president who oversees trading and investment banking, says that markets are bound for a big correction because of fears over rising interest rates and inflation. The bank thinks the market will see a two- to three-year downturn where prices will fall up to 40%.

FINSUM: This is a big correction that JP Morgan is calling for. We do think the market might go through a rough patch, but we don’t know if it is going to reach these kind of Financial Crisis era proportions.

(New York)

If ever there was a “5 stock” piece that investors might want to read, this is probably it. Barron’s has published an article naming five stocks which will do well as rates rise. Interestingly, these choices are not based on macroeconomics (e.g. REITS do poorly as rates rise), but based on the actual underlying financial obligations of the companies, with pension obligations being the key factor. The five names that come out when one looks at the situation that way are companies which investors will be very familiar with: GM, Ford, Xerox, American Airlines, and General Electric. The piece summarizes the benefits this way, saying “In general, as the health of pension plans improve, so should balance sheets, cash flows, and earnings due to lower pension contributions and costs”.

FINSUM: These look like very good calls because they are not obvious, but the benefits will be in time. Very interesting to see GE on there given its struggles lately.

(New York)

PIMCO, perhaps the most famous bond investor in the world, has just published a piece covering their view of where yields are headed. Their conclusion is that they do see the risk for rates rising as the US budget deficit grows and the economy strengthens, but that on the whole they are not too concerned about a big jump. Their view is best summarized in their own words, “Nevertheless, we believe powerful forces are working against a permanent increase in the trajectory of economic growth in the U.S., including the aging population, productivity trends, sovereign indebtedness, credit growth, and an imbalance between savings and investments”.

FINSUM: Our readers will have noticed that this view exactly matches what we have been saying about bond yields.