But there are a few investors that are really worth listening to. One is Société Générale’s Albert Edwards and another is Morgan Stanley’s Teun Draaisma.
Both of these men got a lot right throughout the credit crunch, accurately and bravely calling tops and bottoms in the markets. And, both of these men have just released separate research papers saying the same thing:
Investors want to buy corporate bonds.
A strong consensus – investors favour corporate bonds
Source: Société Générale
Albert and Teun carried out separate investigations into the preferences of their direct clients. Both studies revealed that the least favoured asset class among investors is government bonds. As the chart above shows, equities, or stocks, received a mixed reception while clearly the most popular asset class for the year ahead was corporate bonds with 62% and 48% of the votes in the respective surveys.
The allure of corporate bonds
It is easy to see why investors are keen on corporate bonds, which are effectively IOU’s on company debt.
The yields (or interest) that corporate bonds are paying is greater than you will receive on a government bond and more than you will receive on a stock. 10 year yields on UK government bonds are 3.14% a year… the average dividend yield on the FTSE 100 is 6.1%... the yield on National Rail corporate bonds? A tasty 7.8%.
Also, investors are slowly opening their minds to an increase in risk.
Many investors tucked their money away in supposedly risk-free government bonds. These not only pay a poor yield, but their prices are now looking a bit toppish.
It’s the same old story. Something becomes flavour of the week, everybody buys it until the price gets too high and then everyone sells out again. Now this could happen to government debt, which looks expensive.
But this desire to move into a different asset class is not seeing investors rush into stocks. Have no doubt, there are good stocks out there, but you need to know how to pick them. There are many stock market sectors that are still big no-no’s, regardless of how cheap they appear to be..
However, the corporate bond market is looking attractive. With high yields and very cheap prices it’s understandable that investors favour this market.
If everyone agrees then where is the opportunity?
Wait a minute. If corporate bonds are so good and these investors are so bullish on them, surely we’ve already missed the opportunity?
It’s the basic principle of being a contrarian. See what the crowd is doing and do the opposite. If these two reports are saying that corporate bonds are favoured by investors then we agree that would be a good reason not to invest in them in a normal market…?
Thankfully, this is not a normal kind of market.
What investors want to do right now and what they are actually doing are two different things. In this market, with all the will in the world, investors still do not have the guts to go out there and buy anything that is not a government bond. That is because they are scared. They are scared of the dangers that lurk in the risk-bearing markets of corporate bonds and equity.
And that is your opportunity. By not waiting around you will gain the first mover advantage on what is a very promising trend.
Of course its still important to choose carefully, you can’t just jump into any old corporate bond. But by getting into these markets ahead of the masses, you stand to make the best return. The crowd will eventually catch on and buy in, they always do. And when they do buy in, prices will balloon and your returns will too.
The audacity of fear
BY THEO CASEY
That wasn’t meant to happen.
At 5pm last night, in the back of meeting room 3, I watched Barack Obama be inaugurated as the first African-American president of the United States of America.
I was enthralled and impressed. I found his acceptance speech struck just the right business-like tone to Americans worried about the state of the US economy. And, of course, to people in every other country worried about the spreading recessionary US economy.
President Obama’s assured, optimistic rhetoric made me think of the old slogan adopted by the British government in the lead up to WWII, “Keep Calm and Carry On”.
The message was clear – the world is not coming to an end.
Almost out of courtesy and tradition, I expected a slight rally on inauguration day. But it seems today’s markets have no time for courtesy. The Dow Jones Industrial average sank 4% to 7949, its lowest level since November 20, and recording the worst Inauguration Day performance since the index was created in 1931.
You’ll see from the chart below, mapping yesterday’s session on the Dow Jones Industrial Average - the composite index including 30 of the largest stocks in America - it punched below 8,000 for the first time this year.
Presidential plunge – The Dow falls below 8,000 in yesterday’s historic session
Source: Financial Times
On yesterday’s showing, it will be some time before the US stock market adopts President Obama’s “yes we can” attitude.
The Daily Reckoning – The start of something catatrophic
BY BILL BONNER
Euphoria was almost universal yesterday... except on Wall Street.
“Dad, don’t pick on Obama,” said Maria, calling from California. “I watched the inaugural yesterday. It was moving. Really moving. They seem like such nice people... and they really want to do what’s right. At least, that’s the way it seems to me...”
We watched the TV news. The British press focused on the race issue. Blacks interviewed by the BBC spoke of the ‘historic moment’... of the dreams of Martin Luther King finally realized... of a new era of race relations. There were hoorahs and tears...
We were never fond of racism, so we weren’t especially tearful upon reading the obituaries for it. Besides, we’re a little suspicious of the coroner’s report. We’d like to see the toe tag, just to be sure.
Still, everyone wants Obama to succeed. His mother and grandmother, looking down from heaven. His relatives in Kenya. His party. His country. The entire world. Even we hardened cynics here at the Daily Reckoning wish him well.
But we weren’t born yesterday.
And neither was the stock market. The man who got the warmest welcome ever from the press and the public got the rudest brush off from Wall Street. It was the worst sell-off for an inauguration day in history. The Dow fell 332 points. Oil traded around $40. The dollar strengthened... to $1.28 per euro.
O! Bama! Where is thy bounce? Perhaps it is already over. From their low in November, to their high a couple weeks ago, stocks worldwide recovered about a quarter of what they had lost. Now, they seem to be going down again.
We don’t know what the stock market sees, but we see a lot more trouble coming.
To read today’s Daily Reckoning in full, click here.
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