Re: THE CASE AGAINST INTEREST SENSITIVE STOCKS/FUNDS/BONDS
This is going to be an oversimplification, but here goes.
"We've got a goldilock's economy" -- Right? Well, yes, right NOW we do. What makes a goldilocks economy? Well, it (1) not too hot, (2) not too cold, it's (3) just right.
Translated, that means (1) there is not an excessive amount of production capacity being utilized (factories working overtime) leading to increased demands on workers (wage inflation) which leads to increased costs of goods and services (general inflation) which causes the FED to RAISE INTEREST RATES.
And it's not too cold (2), because we don't have massive downsizing (loss of jobs) leading to less money to spend on durable goods, services and discretionary items; so less durable goods are planned to be made and factories lay off more workers; savings become depleated, stocks are cashed in causing stock prices to decrease. People FEEL less wealthy so they spend less. Prices begin to decline for durables cause nobody's buying them. The FED sees this and decides to LOWER INTEREST RATES, so credit is cheaper so all these savings-depleated people can more easily buy the things they need.
We currently have neither of these scenerios. Everything is just right. But "just right" probably won't last forever. So we must decide into which of the above scenerios are we headed? Is it the one in which interest rates will be raised? Or lowered?
What is the evidence?
FOR RAISING RATES
1) What is the capacity utilization rate? I dunno, but it's good to near hi.
2) Is there wage inflation? not much, but this is being watched very closely by the bond market, it is their biggest fear right now.
3) Is there general inflation? Increasing CPI (or whatever) -- some, especially in oil, precious metals now, real estate slightly.
FOR LOWERING RATES
1) Is there massive downsizing and increasing unemployment? NO
2) Are the cost of goods and services decreasing? NO
3) Are people living off savings? Many never had any
4) Are stocks being cashed in? Yes, but for different reasons.
Look at it. More evidence for increase in rates than decrease.
WHAT HAPPENS TO INTEREST SENSITIVE STOCKS, BONDS, & FUNDS WHEN INTEREST RATES RISE?
Assume the current 30 yr. bond rate is 6.60%. That's close.
Let's say tomorrow you buy $10,000 worth of a bond, stock, fund that is interest sensitive. Let's say that security yields the same as the 30 yr. bond to which it is pegged. So you have a security that is worth $10,000 in price and you will receive $660 over the course of the next year. You could sell the security 5 minutes after you buy it and get ~$10,000 back (-commissions). So you plan to hold this, but March 1st, the FED decides to RAISE RATES 1/4 point. The 30 yr. Bond follows suit, and the yield goes to 6.9%. The security that you just bought has to maintain its marketability, so it has to give a yield that is competitive, and the only way it has to do that is to drop its share/purchase price. The $10,000 that you've sunk into it shrinks to $9575 [660/9575=6.9%] so that the $660 interest you've been receiving is constant, but the yield on the security is now 6.9%
Repeat that for another 1/4 point, 30 yr bond at ~ 7.25%, and your security cash-in value is about $9103 [660/9103=7.25%]. Do you want to loose $900 (almost 10%) because you bought it at the wrong time?
I learned this the hard way. This is why I do not think this is the right time to buy interest sensitive stocks, bonds, and funds.
All IMHO
P. Webster |
