Something’s Always Going Up

[jk]

Re: Something’s Always Going Up

jk, Finster:
Generally, if not always, the higher yield on bonds as I understand reflects greater risk. On the other hand, if the yield were 6% on the SPX, I expect it would be a excellent buying opportunity. Why are not the Canadian energy trusts considered risky investments, even disallowing the taxation issue that caused them to "tank"?

the current trusts have 4more years of tax advantage.
they still own oil/gas in the ground.

[Jim Nickerson]

Re: Something’s Always Going Up

the current trusts have 4more years of tax advantage.
they still own oil/gas in the ground.

Yes, but what about that makes them less risky when it comes to the yield they are paying? Do their high yields not signifiy significant risks?

[jk]

Re: Something’s Always Going Up

Yes, but what about that makes them less risky when it comes to the yield they are paying? Do their high yields not signifiy significant risks?

their high yields are a function of a. the price of oil, b. their advantageous tax structure. they do not pay corporate income tax, which would reduce their yields by a third or more.

[Jim Nickerson]

Re: Something’s Always Going Up

Here's a perspective out of Barron's " A Sampling of Advisory Opinion" 11/6/06 issue.

Asset Shift
Notes from the Rock Star Road Show by DWS Scudder Investments
222 S. Riverside Plaza, Chicago, Ill. 60606
Nov. 1: Over the past 10 to 15 years, there's been a dramatic shift from three asset classes -- stocks, bonds and cash -- to five: stocks, bonds, cash, commodities and real estate. Commodities and real estate have always been available for [big-caliber] investors, but now are available for every investor...Comparing current Wall Street consensus with my suggestions, what I am simply saying is: Overweight stocks. Underweight bonds. Underweight cash. Overweight commodities. Overweight real estate.

-- Bob Froehlich

This reads similar to what I've been reading on iTulip.

P.S. Thanks, jk, for explaining the high yield of Canadian Income Trusts. It is their not paying corporate taxes on their earnings that drives up the yield that I did not understand.

[Finster]

Re: Something’s Always Going Up

Here's a perspective out of Barron's " A Sampling of Advisory Opinion" 11/6/06 issue.

Asset Shift
Notes from the Rock Star Road Show by DWS Scudder Investments
222 S. Riverside Plaza, Chicago, Ill. 60606
Nov. 1: Over the past 10 to 15 years, there's been a dramatic shift from three asset classes -- stocks, bonds and cash -- to five: stocks, bonds, cash, commodities and real estate. Commodities and real estate have always been available for [big-caliber] investors, but now are available for every investor...Comparing current Wall Street consensus with my suggestions, what I am simply saying is: Overweight stocks. Underweight bonds. Underweight cash. Overweight commodities. Overweight real estate.

-- Bob Froehlich

This reads similar to what I've been reading on iTulip.

Has Froelich been reading Finster? It reads startlingly similar to what I've been saying. From the opening post of this thread (Oct. 30):

First, what are those major asset classes? For some they are stocks, bonds and cash. Some broaden the field to include commodities and real estate. A drawback of the first categorization is the problem of inflation. During periods of rising inflation, which many here expect, financial assets such as stocks bonds and cash can fail to keep up. In the 1970's for example, bonds and cash lost value to inflation, and even as the growth of corporate earnings under-girded stocks, their prices relative to those earnings contracted as the time value of money shrank with rising interest rates. The result was that a portfolio of stocks, bonds and cash lost value on all three fronts.

Note that in my three-class dynamic model, real estate is treated as a special case of equity, and cash as a special case of bond. One can then either keep the real estate as a proportion of total equity and cash as a proportion of total bond fixed, or use other criteria to adjust the relative weightings of each. My current target weightings differ from Froelich's in that they call for slightly underweighting stock and real estate. The rest is pretty close; I call for underweighting cash and bonds and strongly overweighting commodities.

[bart]

Re: Something’s Always Going Up

A bit off topic here but I didn't want to start a new thread:

Guru Stock Market Forecasting Grades

[Finster]

Re: Something’s Always Going Up

A bit off topic here but I didn't want to start a new thread:

Guru Stock Market Forecasting Grades

Probably the unimpressive showing of the gurus reflects their failure to include the records of Bart and Finster ... ;)

[bart]

Re: Something’s Always Going Up

Probably the unimpressive showing of the gurus reflects their failure to include the records of Bart and Finster ... ;)

http://www.nowandfutures.com/grins/rimshot.mp3 ;)

[shahzadmasih]

Re: Something’s Always Going Up


Hi, This post is very informative, however I would like some specific information. If someone can help me then please send me a private message. Best Regards,

[Finster]

Re: Something’s Always Going Up

Hi, This post is very informative, however I would like some specific information. If someone can help me then please send me a private message. Best Regards,

You mean about asset allocation? Or about the Canadian trusts? What kind of information are you looking for?

[Jim Nickerson]

Re: Something’s Always Going Up

You mean about asset allocation? Or about the Canadian trusts? What kind of information are you looking for?

Possibly this is phishing.

[Finster]

Re: Something’s Always Going Up

Possibly this is phishing.

Duh me.

Thanks, Jim.

[Jim Nickerson]

Re: Something’s Always Going Up

Finster or anyone,

If one were to allocate as H. Browne suggested, what are the differences in choosing TIPs versus TLT as the bond portion of the investment? Especially if one thinks, as Finster has suggested he does, that Bonds are overvalued.

It seems to me if inflation is going up, and assuming that will be reflected in bond prices, that TIP would be better than TLT.

[Finster]

Re: Something’s Always Going Up

Finster or anyone,

If one were to allocate as H. Browne suggested, what are the differences in choosing TIPs versus TLT as the bond portion of the investment? Especially if one thinks, as Finster has suggested he does, that Bonds are overvalued.

What the heck, I'll give it a whirl. My view is that the difference isn't that great, but would generally prefer the "straight" bonds. I personally use TLT for part of that allocation.

For one thing, Browne's concept involves playing asset classes off of each other and requires they be complementary in character. Stocks themselves, particularly dividend-paying stocks, are not altogether different than inflation-indexed bonds. So using the latter would be somewhat overlapping in purpose with the stock allocation.

For another, TIPs are pretty much just as overvalued as other bonds.

Finally, I'm uncomfortable with the "false advertising" aspect of these things billed as "Treasury Inflation-Protected Securities". They are not. First, they are indexed to the CPI, which is a consumer price index. Second, the CPI systematically understates even consumer prices. We have the situation where the same overall entity which is making payments to the holder of those securities is also the one that is calculating the CPI escalator. Higher CPI costs the payer-calculator more. A bit of a fox-guarding-the-henhouse deal, that is. Third, even assuming the CPI was a true index of overall inflation, the holder is still not inflation-protected. This is because tax is levied on the nominal return, not the real (inflation adjusted) return.

This last point bears illustration. Suppose hypothetically inflation runs at 4.5% and the real component of the TIPS return is 1.5%, for a total of 6%. Suppose you pay a 28% rate on the nominal return. This comes to .28*6%, or 1.68%. Out of your "real" return of 1.5%, then, you pay 1.68% in taxes, leaving you in the hole by 0.18%. Calling something that gives you a negative real return "inflation-protected" would be laughable if it were not true.

[Jim Nickerson]

Re: Something’s Always Going Up

Good enough, Finster, none of thoughts did I have. Thanks.