Market Euphoria May Turn to Despair If 10-Year Yield Jumps to 3%

[Dosser]

Another recent article from SCMP:

http://www.scmp.com/business/china-busin...d-confused

The author also seems rather dazed and confused, noting that 'markets are suffering from multiple-personality disorder in which conventional correlations and clean narratives have given way to volatile and conflicting movements in asset prices.'

Specuvestor refers to Buffet on the long bond, without identifying a source. I wonder if it is this short article from 2015:

http://www.businessinsider.com/buffett-i...ued-2015-5

A simple and magisterial overview, which helps to put the day-to-day noise in context.

[weijian]

Specuvestor refers to Buffet on the long bond, without identifying a source. I wonder if it is this short article from 2015:

http://www.businessinsider.com/buffett-i...ued-2015-5

A simple and magisterial overview, which helps to put the day-to-day noise in context.

my initial thought is this famous classic piece he gave:

ie. the 2 17 year period of long term interest rate changes (1 period was 1964-1981, 2nd period was 1982-1998)

http://archive.fortune.com/magazines/for.../index.htm

[specuvestor]

Maybe just take a look at what he just said:

Warren Buffett's 2017 letter to Berkshire Hathaway shareholders : http://www.berkshirehathaway.com/letters/2017ltr.pdf

After our purchase, however, some very strange things took place in the bond market. By November 2012, our bonds – now with about five years to go before they matured – were selling for 95.7% of their face value. At that price, their annual yield to maturity was less than 1%. Or, to be precise, .88%. Given that pathetic return, our bonds had become a dumb – a really dumb – investment compared to American equities. Over time, the S&P 500 – which mirrors a huge cross-section of American business, appropriately weighted by market value – has earned far more than 10% annually on shareholders’ equity (net worth). In November 2012, as we were considering all this, the cash return from dividends on the S&P 500 was 21⁄2% annually, about triple the yield on our U.S. Treasury bond. These dividend payments were almost certain to grow. Beyond that, huge sums were being retained by the companies comprising the 500. These businesses would use their retained earnings to expand their operations and, frequently, to repurchase their shares as well. Either course would, over time, substantially increase earnings-per-share. And – as has been the case since 1776 – whatever its problems of the minute, the American economy was going to move forward. Presented late in 2012 with the extraordinary valuation mismatch between bonds and equities, Protégé and I agreed to sell the bonds we had bought five years earlier and use the proceeds to buy 11,200 Berkshire “B” shares. The result: Girls Inc. of Omaha found itself receiving $2,222,279 last month rather than the $1 million it had originally hoped for

<Snip>

Protégé and I, meanwhile, leaning neither on research, insights nor brilliance, made only one investment
decision during the ten years. We simply decided to sell our bond investment at a price of more than 100 times earnings
(95.7 sale price/.88 yield), those being “earnings” that could not increase during the ensuing five years.
We made the sale in order to move our money into a single security – Berkshire – that, in turn, owned a
diversified group of solid businesses. Fueled by retained earnings, Berkshire’s growth in value was unlikely to be less
than 8% annually, even if we were to experience a so-so economy.
After that kindergarten-like analysis, Protégé and I made the switch and relaxed, confident that, over time, 8%
was certain to beat .88%. By a lot.

[specuvestor]

Goldman say stock plunge 25% if 10 year go 4.5%.....

If the 10-year U.S. Treasury yield hits 4.5 percent by year-end, the economy would probably muddle through -- stocks, not so much, according to Goldman Sachs Group Inc.

Goldman’s base-case scenario calls for a 10-year yield of 3.25 percent by the end of 2018, though a “stress test” out to 4.5 percent indicates such a move would cause stocks to tumble, economist Daan Struyven wrote in a note Saturday. He also said the economy would probably suffer a sharp slowdown but not a recession.

“A rise in rates to 4.5 percent by year-end would cause a 20 percent to 25 percent decline in equity prices,” the note said.

https://www.bloomberg.com/news/articles/...d-hits-4-5

But put in another way.... if 30 year long bond hit 4.5% it will trade 75cts to the $... age of cheap perps issuance is over

[HitandRun]

Protégé and I, meanwhile, leaning neither on research, insights nor brilliance, made only one investment
decision during the ten years. We simply decided to sell our bond investment at a price of more than 100 times earnings
(95.7 sale price/.88 yield), those being “earnings” that could not increase during the ensuing five years.
We made the sale in order to move our money into a single security – Berkshire – that, in turn, owned a
diversified group of solid businesses. Fueled by retained earnings, Berkshire’s growth in value was unlikely to be less
than 8% annually, even if we were to experience a so-so economy.
After that kindergarten-like analysis, Protégé and I made the switch and relaxed, confident that, over time, 8%
was certain to beat .88%. By a lot.

Call me pedantic but did someone ask Buffet why the timing? 

Since his assumption is 8% earnings till the end of time, why sell only when it was 95.7 and not 95, 94 or 93? 

I suspect WB isn't really very upfront about ALL his thought / decision making process.....

[specuvestor]

I agree that his decision making process is not revealed completely, and usually nuggets here and there to piece together. Neither do I agree with him that stocks are just pieces of a business without consideration of the "structure" / "wrapper" of the business to OPMI

But the context is probably also the 10 year yield was around 4% ie 25X GUARANTEED earnings 10 year ago and arbitrarily 5 years ago in the mid point they decide to switch the now 5 year bond yielding 0.88% (from 4%) to Berkshire stock because he was bearish bond. It was probably not timed per se.

Why I highlight GUARANTEED is because the 5 year deal include Buffett guaranteeing the $1m payout even if Berkshire cant meet the target return. So swapping to equity is not a sure win deal but over time the probability is very favourable. Like I wrote in another thread, the biggest killer is always when we are forced out of a position, either by calamity, cashflow needs, margin call etc. Hence if there is a projected use of cash eg pension or retirement, trying to use equities to project returns is foolhardy, unless of course your lifestyle and consumption can adjust flexibly.

[Behappyalways]

The Global Economy's Wile E. Coyote Moment
https://www.bloomberg.com/view/articles/...ote-moment

[Big Toe]

I love Wile EE. Coyote. The character does not make any sense and that's what cartoons should be.
Why would he chase a bird with no meat? In investments, I would not chase anything with no meat.

Similarly Singapore Bonds have no meat, much like the fixed Ds.
US stocks in general are richly valued now supported by a generally strong and growing economy, not sure how long it can last.
Singapore stocks are generally fairly valued but with quite a number which are turning around and growing their earnings, increasing their dividends. The smaller to mid caps especially will probably be a better bet this year even though the Large Blue chips ie banks will do well.

Residential property is tricky. Quite a bit of demand is created by optimism, which translated to higher en bloc activities and prices, which translated to higher replacement demand. But the rental side of it is still very weak and yields very low. Commercial property wise, office is starting to look good, industrial/retail is still very weak. But I would want industrial properties in strategic locations and wait for the upturn which may happen with a longer time horizon of 3-5years. Retail properties I would not touch even with a long stick, cant afford the good ones anyway.

That sums up what I think. Bright spot would be boring small-Mid caps with a good dividend yield and a stable/growing business.
Seems that is most attractive to me now and can look into our own backyard SGX. Good chance that prices would move higher along with fundamentals. More certainty and pays a better yield.

[Behappyalways]

Bigger Than Any Past Bubble: Beware of Soaring Household Assets
https://www.bloomberg.com/view/articles/...old-assets