Thursday, August 5, 2010

The Debts of the Spenders: The Stock Bulls Do Have a Case. Kind Of.

The stock bulls have a fair value case. I know its not trendy to talk fundamentals anymore but bear with me. With interest rates so low, the P/E values don't look so bloated anymore.

If interest rates are double digits, the present value of a dollar that you're going to receive in the future from an investment is not nearly as high as the present value of a dollar if rates are 4% (which happens to be the rate of a 30 year treasury). In other words, a dollar of future profit becomes that much more valuable.

There has also been much talk about Bernanke restarting the bond purchase program again. This is synonymous with steady low rates.

And many companies are sitting on cash hoards. That means they wil either have to invest in plant/equipment, labor (hah!), or start giving out bigger dividends.

In fact, with bond yields so low and some asset classes like mortgage securities trading above par, then it seems buying a bunch of blue chip stocks that yield consistent divvies is the way to go. Just stuff them in your IRA and wait for capital appreciation. Few financial advisors will tell you this because they can't make any commissions off this strategy.

I also urge readers to look at this article for some historical context. Note the year it was published:
*Credit goes to Kauneongal for the IRA strategy.

Tuesday, August 3, 2010

The Debts of the Lenders: China on the Soapbox Again About US Treasuries

More harsh rhetoric about US fiscal profligacy. Chinese buyers, represented mostly by the state, are growing increasingly vocal in their criticism for the US to follow a European style austerity plan. . . . or else.

“I do not think U.S. Treasuries are safe in the medium-and long-run,” Yu, a
member of the state-backed Chinese Academy of Social Sciences, wrote yesterday
in an e-mailed response to questions. China is unable to sell the securities in
a “big way” and a “scary trajectory” of budget deficits and a growing supply of
U.S. dollars put their value at risk, he said.

“China has to depend more on demand and supply in the foreign exchange
market for the determination of the yuan exchange rate,” Yu wrote. “Only God
knows how much value that China has stored in the U.S. government securities
will be left in the future when China needs to run down its reserves.”

“The U.S. government has strong incentives to reduce its real burden of
debt through inflation and dollar devaluation,” he said. “Whichever way it is,
the yuan-recorded market value of Treasuries will fall, causing huge capital
losses to China’s central bank.”

Sunday, August 1, 2010

The Debts of the Lenders: China's Silk Road to Latin America

Great article from Bloomberg.

“The potential for inter-emerging market trade is ginormous,” said Jim
, chief economist at Goldman Sachs Group Inc. in London, who coined
the term BRIC in 2001 to describe the rising role of Brazil, Russia, India and
China. “That makes it quite difficult to see how you get a sustained global
recession because of what’s going on in the west.”