Tags: Strategic | Financial | Stocks | Bonds

Strategic Financial CIO: Stocks, Bonds Might Not Be as Safe as You Think

By    |   Friday, 20 July 2012 11:47 AM

While recent data show investors continue to leave stocks for the relative safety of bonds, both financial instruments are not as safe as one might think, Lincoln Ellis, chief investment officer at Strategic Financial Group, told Yahoo.

The last time Treasury yields were at record lows, as they are currently, the S&P 500 was trading at 1260.

Today, the S&P 500 is trading around 1,350, only 5 percent off the high, but 10 percent away from where it was last time yields were at historic lows, Ellis noted.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

A massive discrepancy between market valuations and Treasurys exists, and the reason for the discrepancy is a scarcity of “safe” assets, he said, “whatever ‘safe’ assets look like these days, mostly German bunds and U.S. Treasurys.”

In addition, institutional investors make up the bulk of the actual market participation, as retail has really put itself on the sidelines, and these institutional investors are and have to buy particular types of assets.

Ellis also believes people are beginning “to understand that we are in for a much longer, more difficult economic slog than previously anticipated.”

“Whether you are in the inflationary or deflationary camp, bonds may be, particularly if you have the Federal Reserve Chairman at your back, a safe place to be,” he added.

Regarding corporate bonds, he stated, buying them only makes sense on a “relative-value trade.”

“Actual market participation continues to dry up, so we’re only seeing participation that is a relative-value trade,” he noted.

Ellis referenced Charles Prince, former chief executive officer of Citigroup Inc., saying in 2007, “As long as the music is playing, you’ve got to get up and dance.”

“It is this Charlie Prince moment again in the market where you see market participants dancing around for particular seats,” he said. “And when that music stops, the pain will not simply be in the equity space, but it will be in the fixed-income space, as well.”

Ellis noted that if confidence is lost in the Fed’s ability to continue to monetize debt, pump in stimulus or support confidence in future growth expectations, Treasurys, corporate bonds and U.S. equities could all sell off at the same time.

Therefore, he is moving to very defensive places, nonfinancial equities with decent yields, and raising cash.

“We think there will be another opportunity to find better relative value in the second half of the year,” Ellis said.

According to Leon Cooperman, chief executive officer of Omega Advisors Inc., stocks are the place to be because stock prices are underpriced.

In addition, he said, stocks will climb because of the unlikely chance of a recession and a corresponding bear market, supportive monetary policy from central banks, low valuations and the general willingness of investors to take on risk.

“Stocks are cheap against inflation, they’re cheap against their own history, they’re cheap against interest rates, they’re allowing for slower secular growth and they’re allowing for lower interest rates,” he stated.

Speaking at the CNBC Institutional Investor Delivering Alpha conference in New York, Cooperman compared buying Treasurys with “walking in front of a steam roller to pick up a dime,” Forbes reported.

Cooperman believes the bond trade is overdone, particularly since the yield is so low on government bonds.

“U.S. government bonds are to be avoided,” he said, CNBC reported. “They are a very unattractive asset class.”

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

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Friday, 20 July 2012 11:47 AM
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