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Inside the Market

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(Jonathan Alcorn)
(Jonathan Alcorn)

Inside the Market

Q&A: Gary Shilling on why the latest rush into stocks will end miserably Add to ...

I’ve been a fan of U.S. treasury bonds, and particularly the 30-year bond, since 1981. The yield at that point was 15.2 per cent. And I said back then we are entering the bond rally of a lifetime. Prices have just skyrocketed, since the yield has now dropped to 3 per cent. I’ve never, never, never bought Treasury bonds for yield. I couldn’t care less what the yield is, as long as they are going down. In other words, I want the appreciation and that’s the same reason most people buy stocks of course. I’m of the opinion that if we’re right, and there’s a global recession shaping up, that will reduce demand for credit, and it will enhance the appeal of treasuries as a safe haven, and it will probably get more people worried about deflation then inflation. Those three factors I think could drive yields on treasuries down further, and if they go down further, we will go from 3 per cent to two per cent. You’ll have appreciation of about 16 per cent on a 30-year coupon bond assuming it takes place over a one year and you get a year’s worth of interest. And on a zero coupon bond it’ll be a total return of about 25 per cent.

Q: You have expressed a strong preference for income-producing securities for 2013. Very few Canadians are aware of U.S. mortgage REITs. What are you views on mortgage backed securities, and both agency and non-agency mortgage REITs? Thank you.  --Walter Schwager of Toronto

A: There’s been a big rush into mortgage backed securities, and particularly in the commercial area they are frothy. That’s in the category of junk bonds and I would definitely avoid them. Some of the others, some that are backed by Freddie May and Freddie Mac, or the federal housing administration, I think are probably much more desirable. They have government backing and if you’re going to get involved, that’s where I would get involved. ….I’m just taking a cautious attitude now because I think we’re in a never-never land where markets have departed from reality of what’s going on in the economies with this ongoing deleveraging and slow growth.

Q My concern is high valuation of some companies, in particular companies that may be years away from making any real profit. Linkedin comes to mind, and even Amazon. Do you feel that we are in bubble territory again and what is contributing to the bubble if, as they say, investors are staying away from the stock markets? -- Sean More from Prince George, BC.

Well I think we are in bubble territory and a lot of these … high growth rates just dazzle investors and it's always a question of, 'at what point do you get paid back? At what point do they have some earnings? At  what point will we see a possible dividend?’ The only reason you buy is that you think there’s a great fool out there who will pay an even higher price for them later. And of course, the whole idea is if they have exploding  earnings, well, they are going to be worth more eventually. But when that finally comes to fruition is questionable. I think a lot of these things have gotten away from reality and of course we saw the absolute fiasco with Facebook. I think a lot of people thought that, because they were users, they said ‘ok, I use it, I like it, it’s good,’ and they didn’t realize there’s a big difference between a social media vehicle that they enjoy using, and an investment. I think a lot of these things have gotten carried away.


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