If you have ever watched the Dragons’ Den on BBC, then you will get the humor in this. For those of you who have never seen it, the show features entrepreneurs pitching their business ideas in order to secure investment finance from a panel of venture capitalists. Think of it as a money version of American Idol.
The Stock Versus Bond Debate
The stock versus bond debate has been all the rage in the last few months. The battle can get heated as deflationists battle inflationists. The problem is that they are missing the forest for the trees. Bonds are not magic instruments. The current yield on a bond generally is very close to what you should expect as the total return for that investment:
Do you like the current yield of treasuries?
This means that if you want to hold onto bonds, you had better like the current yield to worst of the bonds that you are buying. At a 2.5% 10 year treasury yield and 4% investment grade 10 year corporate yield, I cannot say that I am thrilled. As an alternative we have the unloved equity market with a 10% earnings yield. If we want to be skeptical, then let us do some simple historical math comparing investment grade corporate bond yields to S&P 500 earnings yields:
Do you see an outlier?
Trading and investing are all about relative value. Whether you believe that earnings are going to persist or not, the value proposition in stocks is historically much greater than the value proposition in investment grade bonds. Why would you buy a 2.5% treasury when you can get 2% in dividends from the S&P 500? Volatility you say? Then sell at-the-money call options and get the yield on stocks up to 6% and greater. Likewise, switch to dividend paying stocks and cover them for a juicy 10% yield. I dare you to find a fixed income alternative that can with greater yields and less long term risk.
Posted in Derivatives, Economics, Markets, Trading Ideas.
– October 26, 2010
Worthless College Degrees
About a month ago I suggested that the costs of college tuition must come back to earth, but I never realized how many college educations never paid off at all! According to the Chronicle of Higher Education:
Over 317,000 waiters and waitresses have college degrees (over 8,000 of them have doctoral or professional degrees), along with over 80,000 bartenders, and over 18,000 parking lot attendants. All told, some 17,000,000 Americans with college degrees are doing jobs that the BLS says require less than the skill levels associated with a bachelor’s degree…This is even true at the doctoral and professional level—there are 5,057 janitors in the U.S. with Ph.D.’s, other doctorates, or professional degrees.
It seems that it is often not worth it to pay for the college experience. That means an online business administration degree would be just as useless. There are about 150 million workers in the United States, so over 10% of them paid for a college education that they may never use.
Posted in Markets.
Comments Off on Worthless College Degrees
– October 25, 2010
Noteworthy News – October 25th, 2010
Economy:
U.S. Economy: Leading Index Rises, Signaling Growth – Bloomberg
Retired and broke: Why retirees are declaring bankruptcy – Reuters
China’s Economy: Letting off steam – Economist
Markets:
70% Of All Stock Market Trades Are Held for An Average of 11 SECONDS – Washington’s Blog
Crude Oil Futures Surge the Most in Five Weeks in N.Y. as Dollar Tumbles – Bloomberg
What It Will Take to Keep Stocks Climbing – Barron’s
Insuring against equity loss is too dear – Financial Times
Politics:
Hey, Big Spender: Government Spending – The Big Picture
Fannie Mae, Freddie Mac bailouts could hit $363 billion, report says – LA Times
Banks:
Posted in Economics, Markets, Media, Politics.
Comments Off on Noteworthy News – October 25th, 2010
– October 24, 2010
After the Fall
Carmen Reinhart, coauthor of This Time is Different: Eight Centuries of Financial Folly, has released a paper titled “After the Fall”. Within the paper she suggests that we are in for a long slug of slow and grinding growth:
“Real per capita GDP growth rates are significantly lower during the decade following severe financial crises and the synchronous world-wide shocks. The median post-financial crisis GDP growth decline in advanced economies is about 1 percent….In the ten-year window following severe financial crises, unemployment rates are significantly higher than in the decade that preceded the crisis. The rise in unemployment is most marked for the five advanced economies, where the median unemployment rate is about 5 percentage points higher. In ten of the fifteen post-crisis episodes, unemployment has never fallen back to its pre-crisis level, not in the decade that followed nor through end-2009.“
It’s a good read to dampen any optimistic outlooks for developed economies. Read the full paper here:[Download not found]
Posted in Economics, Markets, Politics.
– October 21, 2010
