Traderbill's Financial Markets Weblog

D.R. Horton announced today that they are offering 4-7/8% 30 year fixed rate mortgages on their unsold homes…the catch? none! Just have to have a FICO score of 690…how is that for a low bar? AND put up 5% down…on a $400k home that however is $20k…know anyone who needs a cheap home that is sitting on $20k?///not if they were long stocks…sorry! The sick thing about this is that those who are desperately trying to sell their homes just got the shaft from the builder they bought from!

Nobody worried about Crude at $80…$85…$90…$95…but $100…now that’s a problem! Remember when Greenspan warned that it was a danger above $35??? Perhaps we should replace the decimal number system with binary…who can get concerned about 1’s and 0’s?

What do a weak dollar (and weakening Sterling now)  …especially against the Canadian dollar (our principal trading partner), and rising commodities prices…especially food and energy (Gold also up another $9 overnight to $869), rapidly declining bond yields…especially inflation protected bonds (30 year TIP this morning yielding just 1.79%), a weak stock market…especially the financial sector, all have in common? Nevermind, the rest of the world will carry the US economy  …as late as two weeks ago we heard that from the bulls. Do you believe that will happen? If so, where is the strength in multinationals? Warnings now that their only advantage is in the currency translation…not a pretty picture.   

Who told you that bonds were a good investment last year? Nobody…not even Bill Gross, the bond king. When you say bonds, everyone gets glassy-eyed…even though they perceive themselves as experts in stocks. But bond investing for small investors is simple and inexpensive thanks to ETF’s…most mutual funds are far too expensive and not necessarily that good. So in the interest of education only, TB offers the following iShares ETF’s for bonds (excluding muni’s since they just started in late 2007):

(1/3/07-1/2/08)                   12 mos. return    reinvested

SHY                                                2.90%                 3.40%

1-3 yr Treasury 

IEI                                                  6.15%               10.71%

3-7 yr Treasury 

IEF                                                 5.99%               10.83%

7-10 yr Treasury 

TIP                                                7.47%             12.32%

 Index of all outstanding issues

LQD                                                -0.3%                 5.18%   

iBoxx Corp Bond Fund 

GBF                                                 2.73%                 7.84%

Lehman Govt/Corp Index* 

GVI                                                 3.25%                 8.15%

Lehman Aggregate (includes Mtgs)* 

*Inception date was 1/12/07 so returns are interpolated

Here are the key takeaways:

1. Governments have far outperformed corporates and mortgages

2. TIPS…and these are a blend, not the 30 yr TIP were the best performer

3. The performance of SHY and IEI will not fare so well next year

4. Corporates could be the next value area…note mortgages are high quality not subprime and these are indexes that only own representative issues, not the entire index

5. While Utilities have risen 14.86%/18.33% over the same period, note the impact of compounding even with low bond yields…are utilities overpriced? Over the last 2 yrs they are up 17.3%/21.3% annualized…is that too far for a very sleepy sector?

As stated this is for informational purposes only and not a recommendation to buy bonds…merely to consider them… unlike pure equity specialists who not only ignore them but loathe them. Just like they ignored the housing meltdown and subprime crisis and the impact on consumption and are now crying for the Fed to ease…lots…which guarantees (sic) a stock market rally, right?

Where are all the stock bulls now? They are scarcer than bears were six months ago.