Good news: Bond timers are bearish
By Mark Hulbert, CBS.MarketWatch.com
Last Update: 12:03 AM ET April 23, 2003
ANNANDALE, Va. (CBS.MW) -- Believe it or not, the sentiment environment in the bond market is more positive today than it was a month ago, despite a sizeable intervening rally.
Since March 20, when I last wrote about bond market sentiment, the nearby T-Bond futures contract has risen 1.2 percent. Yet the average bond market timing investment newsletter editor is more bearish now than he was then.
And he already was bearish then. Since bull markets like to climb a wall of worry, that means that the sentiment picture is even more bullish now than it was on March 20.
I base my comments on the latest readings from the Hulbert Bond Newsletter Sentiment Index (HBNSI), which is calculated by averaging the percentage bond market exposures of investment newsletters monitored by the HFD. In order to create an index that always reflects advisers' latest thinking, newsletters are excluded from the HBNSI if they do not have the ability to communicate on a daily basis with their subscribers.
As of the bond market's close on Tuesday, the HBNSI stood at negative 7.8 percent. On March 20, in contrast, it stood at 15.6 percent. This means that, despite the bond market's rally over the past month, the average bond timing newsletter editor has reduced his exposure to the bond market by more than 23 percentage points.
Of course, it is easy to see why bond timers on balance are so bearish. Bonds are trading at close to 40-year highs, and it is difficult to envision how interest rates can decline much more -- absent a global economic collapse and deflation.
It's also worrisome that bonds were bid up so much earlier this year by a flight to quality arising from geopolitical concerns. If those concerns continue to abate, bonds presumably should suffer by an opposite flight away from quality.
Yet contrarians advise us not to be overly concerned by these gloomy scenarios. The prospects often appear to be bleakest before major rallies, they remind us.
It would be surprising if the news were NOT awful. And while this argument does not automatically mean that the bond market is about to take off, it does suggest that we shouldn't become overly depressed by the negative arguments that bond timing newsletters are making these days.
Besides, the news on the interest rate front is not all bad. Take the strong rally among utilities, for example. Since the March 11 market low, for example, the normally staid Dow Jones Utility Average ($UTIL: news, chart, profile) has nearly kept pace with the Dow Jones Industrials Average ($INDU: news, chart, profile) (up 12.1 percent vs. 12.8 percent, before dividends).
Because most utilities currently are so heavily saddled with debt, with many in danger of violating covenants they made when originally borrowing, utilities currently are even more sensitive than they normally are to even tiny upticks in interest rates. By bidding their prices higher over the past month, the market implicitly must be betting on a favorable interest rate environment.
If so, then not only might bonds be an attractive investment right now, but utilities might be also.
With that in mind, I queried the Hulbert Financial Digest database to find out which utilities currently are recommended by at least two of the newsletters that the HFD monitors. The result of my query follows. The third column indicates the number of newsletters currently recommending that issue.
Southern Co. (SO: news, chart, profile) 7
Entergy Corp. (ETR: news, chart, profile) 5
Duke Energy Co. (DUK: news, chart, profile) 4
Ameren Corp. (AEE: news, chart, profile) 3
Exelon Corp. (EXC: news, chart, profile) 3
FPL Group (FPL: news, chart, profile) 3
Black Hills Corp. (BKH: news, chart, profile) 2
CINergy Corp. (CIN: news, chart, profile) 2
Cleco Corp. (CNL: news, chart, profile) 2
Dominion Resources (D: news, chart, profile) 2
Duke Energy Corp. (DKE: news, chart, profile) 2
Great Plains Energy (GXP: news, chart, profile) 2
Idacorp (IDA: news, chart, profile) 2
Pinnacle West Corp. (PNW: news, chart, profile) 2
Progress Energy (PGN: news, chart, profile) 2 |
