Thursday, July 12, 2012


Retail investors have shunned the equity markets as they feel as though they are rigged.  I talk to people all the time that don't care what kind of interest rate they receive, they just don't want to lose money.  In the last month we've been handed a couple of new scandals that reinforce that the entire financial system is similar to visiting a crooked casino with fixed tables and slot machines.

Think back for a moment and recall these assaults on market participants;

2007-2011 - Large bank mortgage fraud and financial crisis resulting in bail outs
2008 - Bernie Madoff ponzi
2009 - R Allen Standford (Standford Financial Group) ponzi
2011 - 2012 - Banks caught manipulating Libor rates during the crisis
2011 - MF Global collapse where segregated account monies are stolen
2012 - JPM is involved in a total meltdown of its "hedge position" related to corporate bond interest rates.  Initially the loss is estimated at $2B, now it could be as high as $5B.
2012 - Peregrine Financial and PFG Best implosion where $220 Million is missing

And who can forget this one?

2008 - 2012 - Federal Reserve ravages the American public and crushes pensioners and savers in an attempt to boost housing thereby saving banks.

We will soon find I am sure that the Fed was completely aware of the manipulation of Libor and rather than do anything about it, was happy to let this go because the business of the Fed is really the business of the biggest banks.  

Let's take a look at the Fed's handiwork.  Below is a graph of the 10 Year Treasury Yield which now shows we are sub 1.50% at 1.48%!   - Source Bloomberg

I hope you didn't bet against treasuries thinking that because we were at historical lows, we couldn't go lower!  We are now within a few basis points of all-time lows.  Certainly this is a picture of financial health, right?

5 Yr View - 10 Yr Yield -

The killer here is that this action by the Fed via "Operation Twist" and the inaction or complete incompetence of the SEC, CFTC, NFA, and FED to regulate banks, brokerages, futures trading firms, and themselves is that drives regular investors away from markets that may actually provide some return into assets that are completely worthless or in term of inflation, money losers.

Investors scrambling to get out of equities have chased yield into corporate bonds.  The Merrill Lynch US Corporate Bond Index with 1 to 10 year maturities is pegged at a 2.76% yield!  So, if these investors don't already have these bond holdings and are looking to buy today, they are weighing taking on a 5 to 7 year bond with some company risk, and perhaps even some interest rate risk, and lots of inflation risk for some taxable yield that is less than 3%!  Are you kidding me?

I mentioned taxes, so how about one of those safe municipal bonds?    Muni's are even scarier.  We are now seeing a host of cities threaten or actually file for bankruptcy as they are finally coming to grips with the reality that they can't pay 100% of the healthcare cost of employees and retirees and also can't promise an 8% return for life on their pensions.  Meredith Whitney may be finally redeemed although her timing has been off, but that is how it is when you are making dire predictions in a completely manipulated environment.  As an investor, I have felt that individual municipal bonds are frankly difficult to invest in simply because it is too hard to do prudent financial analysis on the city in real time.  Often, the city's financials are released with significant delays and therefore an investor must rely on those awesome rating agencies who always are ahead of the game in determining financial risk!

In addition to the perils associated with knowing what you are buying, the yield on municipals are lows as well, adding to the danger and the poor risk and reward pay off.  Merrill Lynch's 7 to 12 year muni index suggest that the average yield is a staggering 1.76%!  So much for retiring, Mom and Pop.

For almost two years I've been advocating the approach to buy dividend paying multi-national firms as an approach to investing.  First, I suggested this because it was an attempt to pre-invest ahead of portfolio managers as they realized after us that we were heading for recession.  Second, I felt like government stimulus would help these larger firms.

Can we continue to invest in this area?  Maybe, the real issue is that there may not be a place to hide if the economy continues to slow.  Yes, these stocks will fall less, even if you are in utilities and healthcare because everything could go down, the play here would be to try to minimize those losses as much as possible.  Perhaps buyers of those treasuries are right after all, in this new normal, perhaps 1.48% for 10 year risk on a government that is deficit spending like no other country has ever done is a great deal!


Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at