Robert Kessler

August 3, 2012

Sticking with a Fixed Income Strategy, A Contrarian View

Three years into an economic recovery, it sure doesn’t feel like one. We are even beginning to hear the dreaded “R” for recession word here in the U.S.  A recent headline in the Financial Times read: “Blue-Chips Raise Recession Fears.” The FT reported that “estimates of revenue growth for the largest us companies are being scaled back sharply by Wall Street analysts, signaling a mounting risk that the world’s largest economy may enter recession later this year.”

It is a development we have talked about with many WEALTHTRACK guests. Sales and earnings estimates are being scaled back by analysts and companies alike as the global outlook becomes murkier. Recession is already happening in Europe.  The so-called peripherals- Greece, Spain and Italy- are there. Even mighty Germany is feeling the pressure from its weaker neighbors. Germany’s central bank recently estimated its economy had grown “moderately” in the second quarter. According to The Wall Street Journal, that’s “shorthand for growth between zero and five tenths of a percent.” Not exactly reassuring for Europe’s largest economy, which its finance minister rightly describes as the “Eurozone’s anchor of stability.”

So if global economies and company sales and earnings are slowing, what does it mean for the markets? That is a source of heated debate and both sides are being reflected in the stock and bond markets. On the one hand, investors have been buying dividend paying blue chip stocks for their dividend income and their financial strength. The S&P Dividend Aristocrats Index, which is made up of 30 companies that have consistently raised dividends for at least 25 years, has traded around record highs recently. How well will their prices and dividends hold up in a global slowdown?

On the other hand, yields on U.S. treasury bonds have extended their multi-decade long decline over the last year, lifting the prices of the underlying bonds, as global investors sought their safety and liquidity. It has also helped that Federal Reserve Chairman Ben Bernanke has clearly spelled out the Fed’s intentions to keep interest rates low. And he has reiterated time and again that the Fed is “prepared to take further action as appropriate to promote a stronger economic recovery.” As PIMCO bond guru Bill Gross put it, in explaining why he is holding 35% treasuries in his PIMCO Total Return Fund: “don’t underweight Uncle Sam in a debt crisis.”

This week’s WEALTHTRACK guest has been overweighting Uncle Sam in his portfolios for the ten years plus that I have been interviewing him. It’s been an extremely profitable run and he is sticking with it. He is Robert Kessler, founder and CEO of Kessler Investment Advisors, a manager of fixed income portfolios for institutions and high net worth individuals with a concentration in U.S. treasury debt. I began the interview by asking him about his long standing and contrarian investments in treasuries. What is he seeing that Wall Street is not?

Read More

WEALTHTRACK Episode #906; This program was originally broadcast on August 3, 2012.

Listen to the audio only version here:
Robert Kessler #906

Explore This Episode

We have compiled additional information and content related to this episode. Select a tab from the box below for more.

Guest Info

Robert Kessler
Founder, CEO
The Kessler Companies

Newsletter

Consuelo MackThis has not been a confidence building week. Stock markets experienced their fourth straight daily drop on Thursday, driven lower by several developments. What’s being described as an electronic trading bug at brokerage firm Knight Capital Group roiled trading in about 150 stocks on Wednesday. Knight, one of the country’s largest market makers in stocks, suffered an estimated $440 million loss from the trading errors and saw its stock plunge more than 60% today and 33% yesterday. The inexplicable and extremely volatile trading in multiple stocks is reminiscent of the “flash crash” of 2010 and follows the problems Facebook had in its recent public offering.  (Speaking of Facebook, its stock has fallen 47% since its initial public offering price of $38 on July 26th. Thursday’s closing price was $20.04.)

Then there is the economic outlook. The Federal Reserve is clearly concerned about growth. Although it did not introduce a new stimulus program, or QE3 as many on Wall Street had hoped it would in its policy setting committee meeting this week, Fed watchers felt that it sent a clear signal that it was ready to ease in the near term if the economy does not improve. We will get an important read on the economy’s health tomorrow morning when the Labor Department releases July’s employment report. Wall Street expects tepid job creation and unemployment to remain at around 8.2%.

Three years into an economic recovery, it sure doesn’t feel like one. We are even beginning to hear the dreaded “R” for recession word here in the U.S. A recent headline in the Financial Times read: “Blue-chips Raise Recession Fears.” The FT reported that “estimates of revenue growth for the largest U.S. companies are being scaled back sharply by Wall Street analysts, signaling a mounting risk that the world’s largest economy may enter recession later this year.”

It’s a development we have talked about with many WEALTHTRACK guests. Sales and earnings estimates are being scaled back by analysts and companies alike as the global outlook becomes murkier. Recession is already happening in Europe. The so called peripherals- Greece, Spain and Italy- are there. Even mighty Germany is feeling the pressure from its weaker neighbors. Germany’s central bank recently estimated its economy had grown “moderately” in the second quarter. According to The Wall Street Journal, that’s “shorthand for growth between zero and five tenths of a percent.” Not exactly reassuring for Europe’s largest economy, which its finance minister rightly describes as the “Eurozone’s anchor of stability.”

So if global economies and company sales and earnings are slowing, what does it mean for the markets? That is a source of heated debate and both sides are being reflected in the stock and bond markets. On the one hand, investors have been buying dividend paying blue chip stocks for their dividend income and their financial strength. The S&P Dividend Aristocrats Index, made up of 30 companies that have consistently raised dividends for at least 25 years, has traded around record highs recently. How well will their prices and dividends hold up in a global slowdown?

On the other hand, yields on U.S. Treasury bonds have extended their multi-decade decline over the last year, lifting the prices of the underlying bonds. Global investors continue to buy them for their perceived safety and very real liquidity. As PIMCO bond guru Bill Gross recently put it, in explaining why he is holding 35% Treasuries in his PIMCO Total Return Fund: “don’t underweight Uncle Sam in a debt crisis.”

This week’s WEALTHTRACK guest has been overweighting Uncle Sam in his portfolios for the ten plus years that I have been interviewing him. It’s been an extremely profitable strategy and he is sticking with it. He is Robert Kessler, Founder and CEO of Kessler Investment Advisors, a manager of sovereign debt portfolios for institutions and high net worth individuals with a concentration in U.S. Treasury debt. I’ll begin the interview by asking him about his long standing investments in Treasuries and what he is seeing that most on Wall Street are not?

As always, if you can’t join us at the appointed hour on your local public television station, you can watch the show on our website as a podcast or streaming video. You can also find the One Investment picks of our guests and my Action Points there.

For those of you who would like to see our program 48 hours in advance of the broadcast, you can subscribe to our WEALTHTRACK PREMIUM subscription service on the website.

Have a great weekend and make the week ahead a profitable and a productive one!

Best regards,

Consuelo

Action Point

One Investment

RETIREMENT SAFETY

Zero coupon U.S. Treasuries

“I would say zero coupon treasury, if it’s a retirement fund. If it’s in a retirement fund, there’s no issue about time. You’re keeping it for a long period of time. But the other money that you have is money that really has to be put to use now, and you don’t want to waste it. It’s not going to be there necessarily 20 years from now. It’s money you’re going to invest in. Well, I can’t find anything to invest in. So keep it in cash. I know I’m kind of escaping by saying that, but I don’t think there’s anything wrong with cash.”
– Robert Kessler

Learn about Zero Coupon Bonds

 

Transcript

WEALTHTRACK transcripts are now included in WEALTHTRACK Premium subscriptions. Sign in to access this weeks transcript.You can also purchase and download the transcript separately safely and securely with your credit card or PayPal account. You will need the free Adobe Acrobat Reader (Mac/Win) or Preview (Mac) to view and print the transcript.
WEALTHTRACK transcripts are available individually for $4.99. Click here to purchase a copy.

Bookshelf


Purchase DVD

Please check back for availability.

Archive

#802- 07/08/11
“Financial Thought Leader,” John Brynjolfsson, creator of the first “real return” mutual funds and “Great Investor” Robert Kessler, U.S. Treasury bond guru discuss managing the inflation and interest rate challenges ahead.

#827- 12/30/11
A contrarian who has been proven right over the last decade. Great Investor Robert Kessler explains why, after 40 years of out performing the stock market, much vilified U.S. Treasury bonds will continue to be the safe haven investment for the foreseeable future.

 


Tagged with:

Back to Top