Juggling Dynamite

Stock floggers like to talk about how dividend yields are “attractive” today relative to cash and bonds. Except that in their imaginary world, capital risk in equities is always “contained” to fleeting “corrections of 5 to 10%” that always bounce back quickly. Sure.

In reality, the inconvenient byproduct of stock prices at the very top end of historic valuation ranges is that dividend yields are also necessarily at the very bottom end of historical ranges (the S&P 500 today is yielding less than 2%). And the larger routinely glossed over point here–not to be missed–is that stocks have no face value, no maturity date, no contractually prescribed income rate and absolutely no collateral assurances in the event of the issuer’s insolvency.

Not surprising then that as stocks have soared farther and farther away from reasonable reward for the risk prospects, international flows have been steadily moving out of emerging markets and high risk bets into the relative safety, maturity and contractually prescribed coupon payments of government bonds. In particular North American government bonds, which as we mentioned here a couple of weeks ago offer the highest yields of the 11 largest, most liquid, bond markets in the world today.

With global instability mounting and the US dollar in relative favor, the US 10-year is now revisiting support in the 2.4% range, and lower North American yields appear the path of least resistance over the next several months.

Waiting for the inevitable mean reversion of this epic Fed-led speculative episode can feel tedious (if we let it). Seeing familiar false prophets (who have already been revealed as unworthy leaders several times over the past 15 years), paraded like heroes is emblematic of foolish times. But the payoff for those with patience and the discipline of a value-based rule set promises to be one for the history books.

Given the conditions we are presented with, each adult must pick their own strategy, and run this race his or her own way.

But we should make no mistake–this is no sprint. Secular bears are a long, hilly marathon–the triumph of endurance over speed, mind over ego.

Carter Worth, chief market technician at Sterne Agee, says that despite what the U.S. market cap may suggest, small and mid-size groups are “starting to falter”.Here is a direct video link.

Alex Brummer, author of “Bad Banks: Greed, Incompetence and the Next Global Crisis”, says the much-needed change of culture in the banking sector hasn’t happened. Here is a direct video link.