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Strategies & Market Trends : Are you considering quitting your dayjob to daytrade?! -- Ignore unavailable to you. Want to Upgrade?

To: kaydee who wrote (38)	1/17/1999 12:54:00 PM
From: Bonnie Bear	Read Replies (2) \| Respond to of 611

On bonds: a brief tutorial: The bond market is bigger than the stock market. In general, financial assets will flow to the place where they can get the highest rate of return at lowest risk. All else being equal, bonds are less risky than stocks, even junk bonds are less risky than stock. The reason for this is that bondholders have first rights to the assets of a company. So markets are like a chess game... 1) treasuries and Ginnie Maes are considered risk-free (except for interest-rate risk) because the U.S. Government backs them. 2) foreign government bonds have interest rates tied to the stability of the governments and the inflationary expectations of that government. 3) corporate bonds have higher risk than U.S. gov bonds, so their return has to be higher to compensate for the risk that the company will be default on the payments.. 4) junk, or high-yield, have higher risk than corporates, the bondholder demands huge payments because the bond is not backed by current cash flow or existing assets (e.g. a smallcap stock) 5) preferred, and convertible preferred...stock/bond hybrid thingies that make payments like bonds but have the upside of stocks. 6) common stock...you know about these things. Back in the old days, stocks sold around book value of a company and the dividend yield had to be higher than Treasury bonds to get anyone to buy them instead of corporate bonds. 7) REITs: a different breed of animal..a bondlike affair used to hold real estate and pass on rent, depreciation cash flow, etc to stockholders. 8) derivatives: Ahh...an unregulated nightmare...nobody knows how huge the derivatives market is, maybe 10 times the size of the stock market.. The DOW and big S&P companies consist of big companies hugely in debt...in order to justify the DOW moving up, they were eventually modeled according to their bond holdings held to maturity, as measured for risk against the thirty-year treasury bond...so if you overlay the DOW with the return of the thirty-year zero-coupon bond (use BTTTX as a proxy) you can see the game that's played. When the stocks get too overvalued, money is sloshed back into the bond market. Lately the FED has been printing money like crazy...stocks go up on days when fed prints money...goes down when fed "withdraws liquidity" or interest rates go up on bonds.... so even a stock day-trader needs to keep an eye on all the other players in the field...money can move instantly and goes where it will be treated the best...