"There is no investment alternative" is the new popular
Wall Street axiom in the latest attempt to get the public to double
down on equities by shifting assets out of bonds. But is there
really "no alternative to equities"?
A Low Yield World
The general premise behind the TINA (There is No Alternative)
theory is that with such low interest rates, the only logical place
to park money is in the riskier equities. Basically, low
interest rates provide low returns, and the low yields aren't worth
the risk in owning bonds.
But, low interest rates also affect equities as the S&P
500's dividend yield also sits at an all time low, below 2%.
So although interest rates are low, equity dividends are also low,
making equities no more desirable than Treasuries from a dividend
Given the risk versus reward dynamic, buying equities for such
low dividends may actually be a downright bad decision based on
current prices and discussed below, but, first, here are three
things those reaching for yield seem to be forgetting:
-Treasury and other debt yields can rise very quickly (as has
been the case since May when some Treasuries doubled in
price). When Treasury rates rise, they become relatively more
attractive than they were previously;
-Dividends and dividend growth can be slashed by companies just as
quickly as yields can rise (as was the case in 2008 and most
recessions in the past when companies slashed dividends);
-With dividend yields also at all time lows, capital losses can
more than wipe out a year, two years, or even five years of
dividend gains instantly. The Utilities Select Sector SPDR
(NYSEARCA:XLU) was yielding 3.6% in April but fell 10% through
June. It has still yet to recover April's highs and now has a
YTD loss for those April buyers- including dividends. With
dividend yields at all time lows, this risk has never been higher
in owning stocks for dividend yields alone.
The following chart was provided in the December 2013 edition
Profit Strategy Newsletter
(released on 11/22) and shows why the TINA (there
is no alternative) crowd is likely to be very wrong at exactly
the wrong time.
At current prices, U.S. stocks (NYSEARCA:SPY) are reaching the
most expensive levels they have ever seen when priced in comparable
Treasury prices (NYSEARCA:TLT). The only other times equities
were this expensive compared to Treasuries was early 2000 and late
2007, just before major equity market declines kicked off and the
stocks versus bonds ratio swung back toward equilibrium.
In reality, the TINA crowd is diving head first
into equities when Treasuries are a better relative
buy. The chart above shows that compared to Treasury prices,
equities are reaching the upper extremes of valuation associated
with recent major market tops.
Insult to Injury
Even worse, rising interest rates make the current equity valuation
situation worse. As rates rise, bond prices fall, making
equities that much more expensive compared to alternatives.
It also means that as would be expected, when the markets move back
to equilibrium equities will fall much faster than Treasury
But, rising interest rates are something we have been prepared
and able to get ahead of.
In May we were warning that a rising interest rate environment
was around the corner and our Technical Forecast readers were
provided analysis, charts, and trade alerts like:
"Continue to switch bonds into shorter durations" and "shorter
term bonds such as the iShares 1-3 year Treasury bond
(NYSEARCA:SHY) or the Barclays 1-3 month T-Bill (NYSEARCA:BIL)
remain the safer place for your bond money".
Those who shifted their Treasury bond exposure to shorter durations
as we suggested since then have saved over 9%.
Practically speaking, as interest rates rise
(NYSEARCA:STPP), Treasuries become more attractive as a yield
investment. Curiously, the TINA crowd wants more
yield but they're looking for it in the wrong place!
At current prices for equities, bonds are much more attractive
in price, and a continued rise in interest rates will only make
them even more so.
Profit Strategy Newsletter
exposes the mistakes of the TINA psychology and dives
into the tradeoff between equities and bonds along with high
profit opportunities in other major asset classes.
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