Corporate yields are sky-high, and if you pick the right paper you won't get burned. Better get some gold too.
The early-January euphoria in the stock market tells me there is still a high degree of enthusiasm and risk taking spirit in the market. Income investors have even more reason to expect good things in 2009 given the major turnaround in yields that took place in December.
The last three months had roller coaster-like swings in yields as investment grade bonds rated A rose 136 basis points in October and then fell 91 and 125 basis points in November and December to finish at 7.44%.
Junk bonds had even a wilder ride, with B-rated issues rising 461 and 179 basis points in October and November, only to rise 247 points in December to finish at 18.12%. The latter yield looks attractive but don't be fooled: The default wave of such bonds is barely under way, so the time to dive in is probably a year or so away.
Tallying up the year-end results for Forbes/Lehmann Income Securities model portfolios shows disappointing results. The low-, medium- and high-risk portfolios finished down 17.86%, 28.94% and 40.08%, respectively. These results compare favorably only to the stock market indexes, with the Nasdaq, the S&P 500 and the Dow Jones industrial average down 40.54%, 38.49% and 33.84%, respectively. Small solace here, but that's the kind of year it was.
Looking into 2009, we see good prospects for yields to come down given the low inflation and even deflation in the economy. With investment-grade corporate bonds and preferreds yielding 5% to 9%, the expectations for price appreciation are quite good, especially when compared with the outlook and uncertainty in the stock market.
As I have pointed out before, the steep decline in our recommended preferreds was due to the thin depth of this market and the tendency of small investors to panic more quickly than the institutional investors who dominate the bond market. This value erosion will reverse as confidence comes back, and therefore, the preferred market has more turnaround potential than exists in the bond market.
In any case, the chances for a full recovery of 2008 losses in fixed income will not be hurt by the poor economic outlook, something that cannot be said for the stock market.
As in years past, we have developed new model portfolios to reflect the current market situation and outlook. As before, we have low-, medium- and high-risk portfolios as well as a blended portfolio, which represents my preference in diversification as to income sources and levels of risk. Our aim is to diversify risk while still reaping the benefits of a major turnaround.
We do not feature a convertible portfolio for 2009, since I believe the stock market is not the place to make a major fund commitment today. This may change by year-end, but not before the debt markets have recovered.
Major investment ideas for 2009 include converting your traditional IRA into a Roth IRA. Chances are your IRA has suffered a major decline in 2008 and faces a significant recovery in 2009.
If your principal concern is asset protection and not income, consider buying Treasury Inflation-Protected Securities. Their current yield, plus inflation adjustment, has not been this good for several years, and with the projected stimulus spending, future inflation is not only likely, it may well become a matter of government policy.
An allocation into a gold--SPDR Gold Shares (nyse: GLD - news - people )--or platinum--Platinum Group Metals (amex: PLG - news - people )--exchange-traded fund should also be considered.
Canadian oil trusts have cut their dividends about 29% to reflect the lower oil prices, and yields are still in the 15% range. They are buys at these price/yield levels. Banks bailed out by the government still yield in the 8% range. They won't fail, and that yield won't last.
As for the General Motors (nyse: GM - news - people ) bailout, its debt is worth at least 30 cents on the dollar, but currently trades at 16 cents on the dollar and yields 50% while you wait for it to structure a pre-packaged bankruptcy. The unions have equal standing with bondholders and more to lose here. It's hard to see Congress shorting the unions. The big losers here will be current equity shareholders.
The early-January euphoria in the stock market tells me there is still a high degree of enthusiasm and risk taking spirit in the market. Income investors have even more reason to expect good things in 2009 given the major turnaround in yields that took place in December.
The last three months had roller coaster-like swings in yields as investment grade bonds rated A rose 136 basis points in October and then fell 91 and 125 basis points in November and December to finish at 7.44%.
Junk bonds had even a wilder ride, with B-rated issues rising 461 and 179 basis points in October and November, only to rise 247 points in December to finish at 18.12%. The latter yield looks attractive but don't be fooled: The default wave of such bonds is barely under way, so the time to dive in is probably a year or so away.
Tallying up the year-end results for Forbes/Lehmann Income Securities model portfolios shows disappointing results. The low-, medium- and high-risk portfolios finished down 17.86%, 28.94% and 40.08%, respectively. These results compare favorably only to the stock market indexes, with the Nasdaq, the S&P 500 and the Dow Jones industrial average down 40.54%, 38.49% and 33.84%, respectively. Small solace here, but that's the kind of year it was.
Looking into 2009, we see good prospects for yields to come down given the low inflation and even deflation in the economy. With investment-grade corporate bonds and preferreds yielding 5% to 9%, the expectations for price appreciation are quite good, especially when compared with the outlook and uncertainty in the stock market.
As I have pointed out before, the steep decline in our recommended preferreds was due to the thin depth of this market and the tendency of small investors to panic more quickly than the institutional investors who dominate the bond market. This value erosion will reverse as confidence comes back, and therefore, the preferred market has more turnaround potential than exists in the bond market.
In any case, the chances for a full recovery of 2008 losses in fixed income will not be hurt by the poor economic outlook, something that cannot be said for the stock market.
As in years past, we have developed new model portfolios to reflect the current market situation and outlook. As before, we have low-, medium- and high-risk portfolios as well as a blended portfolio, which represents my preference in diversification as to income sources and levels of risk. Our aim is to diversify risk while still reaping the benefits of a major turnaround.
We do not feature a convertible portfolio for 2009, since I believe the stock market is not the place to make a major fund commitment today. This may change by year-end, but not before the debt markets have recovered.
Major investment ideas for 2009 include converting your traditional IRA into a Roth IRA. Chances are your IRA has suffered a major decline in 2008 and faces a significant recovery in 2009.
If your principal concern is asset protection and not income, consider buying Treasury Inflation-Protected Securities. Their current yield, plus inflation adjustment, has not been this good for several years, and with the projected stimulus spending, future inflation is not only likely, it may well become a matter of government policy.
An allocation into a gold--SPDR Gold Shares (nyse: GLD - news - people )--or platinum--Platinum Group Metals (amex: PLG - news - people )--exchange-traded fund should also be considered.
Canadian oil trusts have cut their dividends about 29% to reflect the lower oil prices, and yields are still in the 15% range. They are buys at these price/yield levels. Banks bailed out by the government still yield in the 8% range. They won't fail, and that yield won't last.
As for the General Motors (nyse: GM - news - people ) bailout, its debt is worth at least 30 cents on the dollar, but currently trades at 16 cents on the dollar and yields 50% while you wait for it to structure a pre-packaged bankruptcy. The unions have equal standing with bondholders and more to lose here. It's hard to see Congress shorting the unions. The big losers here will be current equity shareholders.
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