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Old 08-14-2010, 08:32 PM   #21
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I tend to think that this will be temporary. This in no way implies that stocks overall are cheap; I don't think they are. Only that bonds are way expensive. If we were comparing hghly speculative companies' stocks vs. their bonds perhaps a case could be made to prefer the bonds. But we aren't. JNJ is blue chip; NuStar (NSH, GP of NuStar is one of my largest holdings) and Magellan will prosper as long as there are liquid fuels to be put into their pipes. It may be though that the aging population of retirees will require a higher risk premium, which from my POV is all to the good for one who is primarily a stock investor over time. Remember back in 1999 when that Glassman idiot who wrote for the Washington Post stated his opinion that there should be no risk premium at all?


These tidal movements can go on a long time, but they will very often eventually go from one absurdity to the opposite absurdity.

Ha
I am torn. If the markets are correctly predicting an extended period of no growth and moderate deflation in the developed countries. Then there will be no growth in corporate earnings (corporate earnings are already pretty high in relationship to GDP) and dividends, which is to me the sole reason to invest in stocks as opposed to bond. In this case then investors are correct to demand a risk premium for stocks.

Of course this assumes a level of intelligence and rationality in the market. Frankly, after the market gyrations of the last few years I am having a difficult time writing rational and market in the same sentence while keeping a straight face. On the other hand it wasn't that long ago I was predicting high inflation and now I am worried about deflation, so my investing IQ is nothing to brag about.

I am with you HaHa stocks aren't cheap on absolute basis, but relative to bonds they are . One observation that Josh has pointed out that is interesting is this.
The M* Dividend newsletter has 2 100K portfolios a builder which consists of traditional dividend champions (JNJ, UPS, Sysco (SYY), Clorox, Wells Fargo (well it use to be) bought for the prospect of future dividend growth and another portfolio the Harvest consisting of high yielders like Nustar, Magellan, KMP, MO, and some good REITs like Realty Income O.

The higher yield of the Harvest portfolio has meant it has performed much better than the builder portfolio up 13% vs 3% for the year, even though builder has a lot more blue chip stocks and is less risky. So I am having a hard time reconciling the equity income investor demand for high yield regardless of risk vs the bond investor who seems obsessed with safety.
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Old 08-14-2010, 09:28 PM   #22
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So I am having a hard time reconciling the equity income investor demand for high yield regardless of risk vs the bond investor who seems obsessed with safety.
I think it's a blonds vs. brunettes thing. One group is more speculative and likes stocks, the other group group is safety above all, and they are staying quite conservative. I am reading the Larry Swedroe book on bond investing. It's staight down the middle conservative- stay high quality, stay short to medium term, don't try to guess interest rate movements.

Ha
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Old 08-15-2010, 07:16 AM   #23
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So I am having a hard time reconciling the equity income investor demand for high yield regardless of risk vs the bond investor who seems obsessed with safety.
Yield chasing always entails increasing risk. Just look at this thread, which I'll paraphrase as follows: "Boy, it's a slam dunk investment decision to swap out of the most senior part of a company's capital structure into it's most junior for a pick-up of 65 bp in yield."

I don't think we're seeing a disconnect at all between equity and bond investors. I think 0% short-term rates are doing what they are designed to do . . . force investors further out in the risk spectrum. Bonds are no exception. Look at "High Yield" now yielding a whopping 7%.
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Old 08-15-2010, 05:24 PM   #24
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Yield chasing always entails increasing risk. Just look at this thread, which I'll paraphrase as follows: "Boy, it's a slam dunk investment decision to swap out of the most senior part of a company's capital structure into it's most junior for a pick-up of 65 bp in yield."

I don't think we're seeing a disconnect at all between equity and bond investors. I think 0% short-term rates are doing what they are designed to do . . . force investors further out in the risk spectrum. Bonds are no exception. Look at "High Yield" now yielding a whopping 7%.
Yes but..

Three years ago JNJ issued 10 year bonds with a 5.55% coupon. At the time the stock was paying an annual dividend of $1.66/year and trading at $62-63 producing a yield of 2.5-2.6%. Bond holders were receiving a premium of 300 BPs for forgoing any future dividend increases, stock appreciation, but having a very high probability (i.e. AAA credit rating) of getting their money back.

Three year later JNJs dividend has increased to $2.16/year the stock is down about 6% vs 25% for the S&P. But for bond holder instead of getting a premium of 300 BP for their improved capital position they are paying a penalty of 65 BPs.


That is a huge change in the perceived riskiness of stocks vs bonds. I contend that it has virtually nothing to do with JNJ fundamentally as a company. Even Tony Hayward would have trouble bankrupting the company in the next 10 years. I can easily understand why investors would be willing to accept 3% for JNJ 10 year bonds, but demand 7% for BBB bonds. Now it is possible that JNJ bonds back in 2007 were a bargain and the stock was overpriced. The fact that one is up 18% while the other is down 6% would support that.


Still, to use HaHa analogy, it feels like 1/2 the guys in the country not only decided that blond hair was ugly, but that even a 200 lb 50 year old brunette was hotter than a 25 year old 110 lb blond. (I think I am asking for trouble here..)
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Old 09-07-2010, 11:27 AM   #25
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JNJ is a fantastic dividend growth stock. I have 30+ years to buy, hold, and drip my JNJ into a huge income stream. I will always buy strong dividend growers that will (should) be around for at least the next 100 years. No matter what you do you've gotta hope for the best, and on that note my money is on the dividend growth.
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