My first piece for Morningstar is out, and it’s about how to look for early signs of inflation.
The Financial Times’ blog, FTAlphaville, has a recurring feature titled “This is nuts. When’s the crash?” The feature has often focused on Chinese stock valuations, but another favorite subject is European bond yields.
Bonds are IOUs that make regular interest payments. If you’re an investor, your main interest is getting paid interest when you’re supposed to, and getting your principal back. If you’re very confident about your borrower, you charge them a low interest rate. If you’re worried about getting paid back, you charge a high interest rate.
So it makes some sense that Greek 10-year bonds pay 12.6% annual interest. There may be people who believe that Greece won’t default, but they probably get that information from the radio signals in their teeth.
And it also makes some sense that Germany’s 10-year bond yield is 0.79%. The country has a solid AAA credit rating, and German inflation is lower than the Mariana Trench.
Once we get beyond Greece and Germany, things get odder. Take Italy, for example, which has the world’s third-largest bond market, behind the U.S. and Japan. Italy has a BBB-, which is considered “lower medium grade,” about ten notches below Germany. Italy’s bond yields 2.32%, or 0.03 percentage points lower than the U.S. 10-year Treasury note, which is also a AAA credit.*
Then there’s Spain, which, until recently, was also teetering on the brink of default. It’s 10-year yield is 2.34%, one-one hundredth of a percentage point lower than the U.S. Ireland’s 10-year note. Its credit rating: BBB, one notch above Italy’s, and nine below the U.S.
Bond yields take into account more than credit ratings, such as the outlook for inflation and the country’s national debt. And Spain and Italy have shored up their finances, to some extent. But bear in mind that Spain’s 10-year note touched 8% when the Greek crisis first began, and that Italy’s crested just shy of 8%. While there’s plenty of upside to yields worldwide, the sky’s the limit in Europe.
And that’s a problem if you own international bonds, because bond prices fall when interest rates rise. If your fund owns German bonds, a 0.79% yield isn’t going to cushion you from much pain. Making matters worse: If the dollar rises in value, you’ll lose on the currency translation, too. Currently, world bond funds are down an average 2.11% this year, according to Morningstar. Things are likely to get worse before they get much better.
* Ok, S&P gives us an AA+ rating. But Fitch and Moody’s go with AAA.
New technology companies look at dividends the way kids look at their grandfathers’ ear hair: Just plain nasty. Who needs dividends when you’ve got growth, and plenty of shiny new things to invest in?
But after tech companies reach a certain age — if they reach a certain age — they warm up to dividends. Dividends, after all, reward shareholders and executives alike. (And, for long-term stockholders, dividends have the same tax treatment as capital gains). And paying dividends is considered a Nice Thing To Do when you have more cash than you know what to do with.
Currently, 10 tech companies with four-star or better ratings from Standard & Poor’s have dividend yields higher than 2%, which is higher than the average stock in the S&P 500 index. The average yield: 2.73%.
That’s the good news. The bad news, more or less, is that these companies have lost an average 9.27% this year, even with dividends reinvested. Biggest loser: The identity-challenged Hewlett-Packard (HPQ), down 20.2%. Biggest gainer: Microchip Technology (MCHP), up 7.1%.
On the other hand, these are about the cheapest tech stocks you’ll find, and you get paid to wait for them to return to Wall Street’s favor. Intel, for example, trades for 12.7 times its estimated earnings. HP trades for a measly 8.2 times estimated earnings.
Bear in mind that in technology, things can always get worse. But generally speaking, it’s better to buy cheap than dear, and a dividend never hurts, whippersnappers. The 10 tech dividend stars:
- CA (ticker: CA), 3.36% dividend yield.
- Intel (INTC), 3.06%
- Microchip Technology (MCHP), 3%
- Cisco Systems (CSCO), 2.95%
- Qualcomm (QCOM), 2.88%
- Symantec (SYMC), 2.56%
- Xerox (XRX), 2.53%
- Corning (GLW), 2.36%
- Motorola Solutions (MSI), 2.35%
- Hewlett Packard (HPQ), 2.22%
My family has spent summers at Lake James, Indiana, for time out of mind. Many of the lake cottages there were built in the early part of the last century, when you could buy a lot for $50.
These were fishing cottages, mostly: A step above camping in that the roof was unlikely to blow off, and you could cook inside. Over the years, owners added niceties like plumbing and extra bedrooms.
Now many of those cottages are being torn down to make way for starter castles, with guest houses, enormous boat lifts and even widow’s walks. If there’s a building boom in this corner of Northern Indiana, what does that tell us about the housing market overall?
Things appear to looking up, at least according to the National Association of Home Builders’ latest survey, which registered 59 in June, up from 54 in May, and the highest level this year. Any reading above 50 indicates that home builders feel the market for new homes is good.
“The HMI indices measuring current and future sales expectations are at their highest levels since the last quarter of 2005, indicating a growing optimism among builders that housing will continue to strengthen in the months ahead,” said NAHB Chief Economist David Crowe. “At the same time, builders remain sensitive to consumers’ ability to buy a new home.”
One reason builders could be feeling optimistic: New home starts jumped 20.2% in April. Existing home sales also had a big bounce in May, up 8% from a year earlier. Both measures are a long way from their bubble tops, but that’s a good thing.
Housing busts take a long time to work out, because defaulting on a loan, foreclosing on the home, and getting it re-sold is a tedious business. And as the market tanks, people take their homes off the market and wait for the next boom, which means that actual inventory (from foreclosures) and theoretical inventory (from discouraged sellers) grows dramatically. In an environment where people are not getting raises and are worried about losing their jobs, a new or used home is a tough sell indeed.
But the number of homes in foreclosure are the lowest since 2007, and the employment situation, while tepid, is getting a bit less lukewarm. While mortgage rates have moved up this week, housing booms seem to be more of a matter of consumer confidence, demographics and employment than interest rates. If you were thinking of buying or selling a home, even outside of Indiana, this might be a good time to do so.
Hello young people! Satan here. Call me whatever you like. Prince of Darkness, Beelzebub, Old Scratch. Heck, call me Stan, if it keeps you from cowering in the corner like that.
Look, I’m here to talk to you about contributing to your 401(k). You’ve heard all the arguments before: You need to save for your retirement, you won’t be young forever, it doesn’t really take that much out of your salary, blah, blah, blah.
But you just won’t budge. Well, let me tempt you. You’ve always wanted that nice car, right? You know the one. But you can’t afford a down payment, and you’re not quite ready to sell your soul for it. Stupid human!
Sorry. I have these outbursts. Did I scorch the couch? My bad.
Anyway, as I was saying. Your company will match your contributions dollar for dollar, up to 5% of your salary, right? You make $50,000 a year, so that means if you save 5%, you’ll have $5,000 after one year (with the match), even if you don’t earn a cent on your investments.
Now, let’s say you quit that loser job after just two years. So you have $10,000 in your account now. After paying $1,000 taxes for taking money out before age 59 1/2, and paying $2,500 (roughly) in federal income tax on the withdrawal, you’ll still have $6,500 left for that down payment. That’s a 30% return on your $5,000 investment, thanks to your employer’s foolish generosity. And that’s not counting any gains you may have made in the funds you bought in the 401(k).
Pretty tempting, eh? Go on, kid. Open that 401(k). You’ll feel 10 feet tall.
Just one thing. Don’t get all impressed by the power of saving and decide to actually, you know, save that money. Stay away from compound interest tables. Don’t start looking up how much you’d have after 30 years. Wait! What are you doing with that infernal phone? Stupid human!
The average intermediate-term government bond fund has fallen 0.18% this year, and 1.02% this past month, including reinvested interest. Most bond investors are probably not waking up and shouting “I’m ruined!”
Nevertheless, it’s alarming for investors, who have plunked down nearly $57 billion into bond funds this year, according to the Investment Company Institute, the funds’ trade group. Anyone who owned bonds during the financial meltdown — government bonds, that is — was glad to have them.
But the 10-year T-note yield has fallen from 15.84% in September 1981, making it one of the longest bull markets in history. Bond bear markets, unlike those in stocks, tend to be incremental, slow-motion disasters — a bit like being mauled by old, fat chihuahuas.
The bellwether 10-year Treasury note now yields 2.49%, up from 1.67% in February. The average 10-year T-note yield since 1962 — which is far as the data on Yahoo Finance goes — has been 6.43%. The median — half higher, half lower — is 6.11%. Either way, yields have a long way to go before they reach a relatively normal yield. And if history is any guide, markets typically overshoot on the way up and the way down.
A while ago, I suggested a no-bond portfolio for those worried about rising interest rates. Basically, you’d substitute money funds for bond funds in your portfolio. After all, the Fed is likely to raise short-term interest rates, which, in turn, could push bond yields higher as well. While the bond market could certainly settle down, it’s hard to argue that yields will stay this low for a long period of time.
Image courtesy of Angry Chihuahua meme generator. Somehow, I don’t think this one will go viral.
As we start the summer driving season, it’s a good time to reflect on the fact that the average U.S. passenger vehicle is a record 11.4 years old, according to Polk.
Part of this is because most cars really are better these days: You can go 100,000 miles without changing spark plugs, and hitting the 100,000 mile mark is now more a sign of middle age rather than utter decrepitude. And if you’re in a major city, you can get by with taxis, Uber and Zipcars.
The other part reason the U.S. auto fleet is so old is that many people still don’t feel secure enough in their jobs to make a major purchase like a new car. Nor do they earn enough. The median family income is about $50,000; a modest new car will set you back $15,000 to $25,000.
And it’s not entirely the auto industry’s fault that cars are so expensive. In 1970, a Volkwagen Beetle cost $1,874. Adjusted for inflation, that’s $11,427 today. And current starter autos have nice touches like air bags and heat.
Nevertheless, it’s a reasonable bet that car sales will accelerate a bit in coming months, assuming the unemployment rate remains steady and wages tick up a bit. And that, in turn, could be good news for auto stocks. So far this year, automakers are up 8.49%, vs. 3.23% for the Standard and Poor’s 500 stock index. Toyota has gained 9.89% this year, Honda’s up 15.92% and Volkswagen has gained 16%.
The laggards are U.S. automakers. Ford has fallen 0.19% this year, and GM is up 3.9%. Both are dead cheap stocks, however: GM trades for 6.6 times estimated 2015 earnings, and Ford clocks in at 7.6 times earnings. American cars, by and large, are sturdy and well priced. They might finally start to accelerate later in the year, if the economy doesn’t sputter too badly.