If You Don't Watch This Chart, You're Going to Lose Money
By Tom Dyson
Wednesday, May 6, 2009
The chart is of the long-bond yield. The "long bond" is the nickname for the 30-year Treasury bond.
As I wrote in my last essay, long-bond prices are plummeting right now. They have just broken down to new five-month lows... and the selling pressure is so strong, not even the Fed's printing press can hold prices up.
When the long bond falls in price, its interest rate rises... The long bond's yield was as low as 2.5% in December. It has now risen past 4%. This could be a huge problem for income investors.
The long bond competes with other income investments for investor capital. So a rise in the long bond's interest rate can crush certain income investments. Let me explain...
If the long bond's yield rises from 4% to 8%, the yield on all other income investments must also rise by 4%. A 12% junk bond would become a 16% junk bond. A 14% dividend payer would have to become an 18% dividend payer.
Here's the problem: For yields to rise that much, prices must fall – a lot.
So right now, as long-bond rates rise, buying income investments is a treacherous proposition. Here's the advice I gave to readers of my 12% Letter on how to safely earn income in a bond bear market...
First, keep compounding. When you reinvest your dividends, your dividends start paying dividends, too. Compounding is a powerful force that builds fortunes. A bear market in the long bond will NOT hurt the power of compounding.
Second, the "junkiest" bonds and high-yield stocks will suffer the most from a long-bond bear market. Avoid risky income investments that use debt and financial engineering to pay large dividends. Stick with only the best-quality, high-cash-flow businesses that relentlessly raise their dividends.
Finally, make sure you understand how to trade a covered call. Covered calls are the perfect strategy for collecting income in a bond bear market. Unlike bond coupons or stock dividends, the yield you earn from selling covered calls has nothing to do with market interest rates or credit quality. You can generate double-digit dividend yields without taking big interest-rate risks.
Take these precautions, and you should have no problem earning high income yields in a long-bond bear market.
Good investing,
Tom
P.S. You can learn exactly how to protect your income portfolio with a subscription to The 12% Letter. Now is the perfect time to take advantage of these ideas. To learn more about a subscription, click here. |
THE STOCK MARKET IS GOING TO SUFFER A SEVERE DROP SOON
Remember our imminent "short-term correction" forecast for copper?
We nailed it almost to the day. Copper plunged 12% after that column. Well, we're making another imminent "short-term correction" call today. This time, it's for the stock market.
Markets are like runners. They can't run flat-out for long before getting "winded." Rallies eventually stumble and shake off the latecomers. These shake offs are usually fast and severe. And now that the S&P 500 has sprinted 32% in less than a month... now that the average investor is "hot for stocks" again... we're due for a correction right now.
Keep in mind... this is no "long-term" call. It's simply an observation that stocks are incredibly popular right now... and overstretched by nearly every indicator we use to monitor the internal health of the market. For those of you in the trader camp, here's the low-hanging fruit.
 |
|
 |
 |
Obama says it's time for U.S. corporations to pay their "fair" share of America's taxes. To that end, he is moving to close tax loopholes that permit multinational corporations headquartered in the U.S. to keep their foreign earnings offshore and untaxed.
I'll spare you the details... but the net result is easy to understand: the largest tax increase on U.S. corporations since 1986.
The move will surely play well to the president's fans, who sincerely believe giving the government more resources will make our country a better place. It doesn't occur to these people that any lasting reduction to a corporation's global profitability will injure the company's shareholders.
It also doesn't seem to occur to these folks that for many large multinational companies, their foreign earnings are larger than their U.S. earnings. Paying U.S. taxes on a business you own in China or India doesn't make much sense. Why keep your headquarters in America, when most of your business is overseas?
– Porter Stansberry,
S&A Digest
President Barack Obama's plan to impose U.S. taxes on corporate America's overseas profits threatens to open a big crater in the financial statements of technology companies.
If Obama's proposal becomes law, the hard-hit companies would include tech bellwethers like Hewlett-Packard Co., IBM Corp., Cisco Systems Inc., Microsoft Corp. and Google Inc.
Each of those companies realized a benefit of more than $1 billion from lower foreign tax rates in their most recent fiscal years – an advantage that could lost if Obama is able to change the rules.
– Associated Press
|
 |
|
|
This Is When the Big Money Is Made in Stocks
Tuesday, May 5, 2009
This Market Is Weaker Than a Wet Paper Bag
Monday, May 4, 2009
Where to Find the Best Deals in Physical Gold
Saturday, May 2, 2009
How to Buy the World's Cheapest Market... at a Double-Digit Discount
Friday, May 1, 2009
Meet the Investors Who Will Send Gold to $2,000 per Ounce
Thursday, April 30, 2009 |
|
