The "Great Rotation"

Much has been written about how money will move into stocks as long-term rates rise and bond prices and funds sink.  And indeed since rates began to rise in May bonds have fallen and stocks have surged to record highs.  But the facts don't confirm the "great rotation" from bonds to stocks.

Money is pouring out of bonds.  In August investors withdrew $6.7 billion from bond ETFs.  That's nearly 3 percent of the assets in those funds.  Investors sold bond funds as well.  The world's biggest fund, Pimco Total Return, had $7.7 billion in net outflows in August and has lost 14 percent of its assets in the last four months.

But data show that most of the money coming out of bond funds has not gone into stocks.  In August, investors pulled more than $15 billion out of U.S. stock ETFs.  The largest ETF, SPDR Standard & Poor's 500, had the most withdrawals as the market fell.  Although stocks are having an exceptional year, last month investors feared an end to the stimulus program and military strikes in Syria.  That was a bad move.  Stocks rose 4 percent in the first half of September, and retail investors continue to underestimate this powerful bull market.

My belief for the past year or two, well before talk began of a rotation out of bonds, has been that investors searching for income will turn to stocks for lack of an alternative.  The acronym TINA says it all:  "There Is No Alternative."  That is every bit as rue today as it was last year and the year before.  Until short-term rates rise significantly, or for that matter rise at all, stocks will do well.  The bull market will continue with occasional, mild and very brief pullbacks.

Wharton Professor Jeremy Siegel said that if the economy grows, so will earnings and that would be good for stocks.  If the economy limps along or falters, rates would stay low for a longer time and that would also be good for stocks, which would be even more compelling buys compared to the alternatives.  A win-win situation, he says.  I agree.

David Vomund
www.ETFportfolios.net

Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.

Fixed-Income Funds for Long Term Investors

     Many fixed-income funds have fallen sharply ever since the Fed Chairman Bernanke talked about "tapering."  The iShares 20+ U.S. Treasury ETF (TLT) has lost 17% since May.  Yet retirees still need income form their investments and many investors don't want to be too exposed to the stock market.  What should they do?  That's the subject of my recent interview with TheStreet.com.

click here for TheStreet.com article

     In my interview I was asked for my favorite ETFs for income and long-term investing.  I believe income investors must include dividend-paying equities, but I limited my choices to fixed-income ETFs.  Here are the two I chose:

     PowerShares Senior Loan Portfolio (BKLN).  This is one of the most popular ETFs in 2013, gathering $3.6 billion in assets.  BKLN yields 4.6 percent and provides some protection against rising rates because it invests in floating-rate bonds.  Because most of the bonds are not investment grade, the risk to this fund is a slowing economy.

     iShares US Dollar Emerging Market Bond ETF (EMB).  Rising interest rates led to selling in most fixed-income funds and for many this selling is deserved.  But not in all.  I believe the selling in emerging market bond funds is overdone.  EMB is the largest emerging market bond fund with $4.1 billion in assets and it primarily hold U.S. dollar denominated government debt, much of it investment grade.  It yields 5.3 percent.

--David Vomund is an Incline Village-based fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.

For Every Problem ...

H.L. Mencken, "For every problem there is an answer -- simple, clear...and wrong." 

 

     Stocks have been falling for most of August.  Not by a lot and with very little trading, but the relentlessness of the selling makes the decline seem worse than it is (down 3.9 percent from high to low).  We're told the reason is clear: interest rates are rising.  Rising rates make for an easy headline.  The media never mention that a little profit-taking after a 20-percent rally this year was understandable and in fact healthy.  They are also missing the real point --- the economy.   

     The media expect a stronger economy, but recent economic reports tell a different story.  New home sales tanked last month as mortgage rates rose.  Retail sales are disappointing and durable goods orders saw its biggest drop in nearly a year.  The employment picture is the key to future growth.  New job creations are mostly in low-paying, part-time work in retailing, hotels and restaurants with few full-time positions.  I am certain the Fed looks beneath the headline numbers and sees just how weak the jobs picture is.  All this shows a weakening economy, not one about to accelerate.  Even so...

     The Fed still sees a second-half pickup to 3 percent GDP growth and 3.5 percent next year, but in their July meeting half the members began to question the official forecast.  If growth is much less (below 2 percent, as it is now), bonds would rally and rates would fall as investors realize that their optimism for the economy isn't justified.  How stock investors will take that remains to be seen.  So far, those who see the prospect of slow GDP (and therefore profit) growth are selling.  I believe that for lack of a good alternative in fixed income or cash equivalents they'll turn again to better-yielding stocks.  My favorites include Spectra Energy (SE) and Chesapeake Energy (CHK). 

     There have been several sell-offs in this great bull market, most recently in May and June and before that last fall, but all were brief and followed by new highs.  Sell-offs in bull markets are usually fast and this one has been typical.  In the past, the media were always ready with a reason (never just profit-taking).  The reason this time, they say, is that interest rates are rising.  End of story.  Wrong.  The market is telling us that economic growth won't pick up as much as the Fed expects.  That's the real story. 

 — David Vomund is an Incline Village-based fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.