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.”
[expand title=”Read More” trigpos=”below” swaptitle=”Hide Text”]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? [/expand]
This 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.)
