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How are you investing since Bernanke has set QE3 in motion?


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2012 Sep 18, 1:24am   12,365 views  24 comments

by American in Japan   ➕follow (1)   💰tip   ignore  

Are there any changes in your investment strategy? (more buying of stocks, selling off stocks...) I lack knowledge so I'm hoping to hear from some others out there.

I am mainly in cash now...

#investing

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4   American in Japan   2012 Sep 18, 1:23am  

Thanks for the comments so far!

I don't place much in most of these Yahoo articles, so take this one with a grain of salt...
http://finance.yahoo.com/blogs/breakout/post-qe3-sector-strategy-separating-haves-nots-131759056.html

5   Vicente   2012 Sep 18, 6:54am  

I've been 90% in bonds and dividend-yielding stuff for months now, and don't see any reason to change that strategy. NCO, NUC, STWD. Keep a 10% cash reserve for sniping and options trading.

Have a large holding of AAPL, that's 1 of my 2 tech holdings.

Have 100 shares of TiVo, that's my crazy "well it ought to pan out SOMEDAY" position.

6   uomo_senza_nome   2012 Sep 18, 7:35am  

all,

How does one invest in corporate bonds?

Here's a tweet from an FT Alphaville reporter.

SocGen: Beware credit Japanification: "The unlikely triumvirate of low growth, low rates, low yields hs become corporate bond mkt's friend"

7   EBGuy   2012 Sep 18, 10:11am  

usn said: How does one invest in corporate bonds?
Where indeed...
Due to a sharp increase in cash flow into Vanguard High-Yield Corporate Fund—more than $2 billion in the last six months alone—we've closed the fund to most new investors.

8   Patrick   2012 Sep 18, 10:20am  

uomo_senza_nome says

How does one invest in corporate bonds?

Schwab.com has a nice menu of corporate bonds. You just pick and pay and they're yours.

Of course "Uncle Chuck" will take his cut, but I've bought bonds there and it all worked OK. Other online brokers have similar things.

9   Patrick   2012 Sep 18, 10:23am  

E-man says

I'm clueless on how to play the Fed buying MBS.

In theory, that's easy: short US Treasury bonds.

In practice, it's hard to short Treasuries. Maybe you have to use the futures market, which is arcane, at least to me. Or maybe you can buy puts on them on the CBOE, but I haven't figured that one out either.

10   uomo_senza_nome   2012 Sep 19, 1:18am  

EBGuy -

LOL -- so all that yield is chased away there too then.

Patrick -

Thanks will check it out.


In theory, that's easy: short US Treasury bonds.

I don't know if it's that straightforward though. Why do you think US T-bonds will go toast?

Japan 10-year yields are so low, US T-yields can go low further. The economy is much more non-linear than we think.

11   Patrick   2012 Sep 19, 1:53am  

uomo_senza_nome says

Why do you think US T-bonds will go toast?

It's a bet that interest rates will shoot up at some point. As rates go up, bonds go down. That's just a mathematical relationship, nothing to do with psychology or politics. If someone owns a 10-year bond paying 1.78% but new 10-year bonds come out paying 3%, then the price of the old bond has to fall to make its own yield equivalent to 3%, or no one will buy it.

So if you are short treasuries and interest rates go up, the bond prices will fall, and you win.

If rates go down yet more, then you lose that bet. How much you lose depends on how exactly you bet against bonds. If you're short (having borrowed the bond) then you have to pay it back when it's more expensive, and it could be a lot more expensive in theory. But if you buy a put option on the bond, all you lose is the premium on that option.

So it's all a bet on interest rates.

12   uomo_senza_nome   2012 Sep 19, 2:17am  


It's a bet that interest rates will shoot up at some point.

What if they never shoot up?

I recommend you consider reading the below links.

There is no business like Bond business, still .

Front-running Fed buys .

If I were a large buyer (say like a primary dealer or some institution), then why can't I frontrun the Fed?

What this means is that there is risk-free profit to be made in the bond market as long as the Fed is there as the bidder with infinite capacity. The Fed can whip all the shorts out of the market with a single keystroke.

I think bond prices can continue to go up much longer than you think. You don't bet against the House. The House always wins.

13   coriacci1   2012 Sep 19, 2:31am  

E-man says

Common sense says buy precious metals. RE locally has inflated quite a bit in the last 9 months so I'm cautious on that front. I'm still 42% cash & 58% in mREITs and stocks in my IRA. Looking to buy some stocks on a pullback. :)

Learn from your victory. Prosper from your failure.

common sense? precious metals?
http://www.myfoxny.com/story/19578206/fake-gold-bars-turn-up-in-manhattan

14   uomo_senza_nome   2012 Sep 19, 3:38am  

coriacci1 says

common sense? precious metals?

If you are wealthy enough to buy 100 oz gold bars, then I'm sure you are prudent enough to check what you have is not fake. There are electronic testers out there.

But for the most part, people of lesser net worth will end up buying 1 oz. coins, where forgery is very less likely (not worth the cost).

15   zzyzzx   2012 Sep 19, 4:21am  

How are you investing since Bernanke has set QE3 in motion?

I haven't bought or sold anything since the QE3 announcement was made.

16   EBGuy   2012 Sep 19, 4:22am  

usn said: I think bond prices can continue to go up much longer than you think.
Inconceivable!

18   Patrick   2012 Sep 19, 5:13am  

uomo_senza_nome says

What if they never shoot up?

I recommend you consider reading the below links.

There is no business like Bond business, still .

Front-running Fed buys .

If I were a large buyer (say like a primary dealer or some institution), then why can't I frontrun the Fed?

Thanks, those are very good!

I can see that the Fed is a criminal racket to distribute money to certain large favored bond sellers (both Treasury bonds and mortgage-backed bonds), but I don't still don't quite get how buying bonds with newly printed cash can be deflationary.

Professor Fekete says that lowering interest rates does not necessarily help current debtors, who must keep paying at the old higher rate until they can refi.

But he doesn't clearly spell out how bond buying is deflationary. The Fed prints cash and distributes it to the favored few, but then doesn't that cash just go into the economy? If not, where does it go?

As most I could see it as a break-even thing, where you've removed $X of debt from the economy, but added $X of cash to compensate.

19   EBGuy   2012 Sep 19, 5:39am  

usn said: But for the most part, people of lesser net worth will end up buying 1 oz. coins, where forgery is very less likely (not worth the cost).
I'm sure everyone has heard of this guy already, but in case you haven't, it's hard to go wrong with gold (especially if nobody else knows about it).
A Carson City recluse whose body was found in his home at least a month after he died left only $200 in his bank account. But as Walter Samaszko Jr.’s house was being cleared for sale, officials made a surprise discovery: gold bars and coins valued at $7 million.

20   Vicente   2012 Sep 19, 5:52am  

EBGuy says

But as Walter Samaszko Jr.’s house was being cleared for sale, officials made a surprise discovery: gold bars and coins valued at $7 million.

Reminds me of Lucius Clay. Too many goldbugs are like that IMO.

http://en.wikipedia.org/wiki/The_Legend_of_Wooley_Swamp

21   uomo_senza_nome   2012 Sep 19, 6:08am  


but then doesn't that cash just go into the economy? If not, where does it go?

It just sits in a depository account at the Fed (only primary dealers are allowed to have an account with the Fed) as excess reserves.

There's also a concept called IOER - interest on excess reserves.
It is 0.25%. The Fed pays interest to the banks for holding those reserves at the Fed. My understanding as to why they do it is still very unclear. Money market funds aren't built to handle negative nominal rates, so if the Fed lowers IOER to zero -- there are risks such as run on money market funds or chaos in Treasury auctions.

If you want to dig deeper into IOER here's an article:

http://ftalphaville.ft.com/blog/2012/09/10/1134101/an-idea-better-kept-in-reserve/


but I don't still don't quite get how buying bonds with newly printed cash can be deflationary.

To answer this question, you have to consider the concept of economic resonance.

Normally in economic cycles, money funds oscillate between bond markets (risk off) and commodity/stock markets (risk on). By making the bond markets risk-free for speculation, the Fed is causing runaway vibration on this oscillatory cycle.

It is continuously destabilizing the system but we don't see it yet. Fekete compares it to the Tacoma bridge collapse. It's a very non-linear phenomenon.

http://www.youtube.com/embed/3mclp9QmCGs

22   American in Japan   2012 Sep 19, 5:43pm  

I like that Tacoma Bridge video!

The analogy is a great one.

23   uomo_senza_nome   2012 Sep 20, 8:09pm  

American in Japan says

The analogy is a great one!

cheers. Premature Obituaries is the full article, if you are interested.

Another PoV regarding what will happen to bond market is by analyst Eric Janszen. He has made some great calls over the years.

http://www.itulip.coms/content.php/210-Election-as-Forcing-Function-Part-I-On-Track-for-a-Bond-Market-Panic-Eric-Janszen

My theory is that there are two likely triggers for a bond panic. One is next to impossible to time and the other is not; the latter is a surge of inflation caused by a prolonged interruption in global oil supplies and the former is the Fed itself. At the end of Part II we conclude with these arguments.

I'm guessing he predicts the surge in inflation path.

The most convincing reason that I've seen as to why the Fed won't be the trigger is because, the Fed works for the banking class and the banking class wouldn't want to parasitically profit and destroy the system simultaneously. So in essence, the Fed won't self-destruct.

He also has great charts for home prices.

24   American in Japan   2012 Oct 5, 9:42pm  

"Man without a name" thanks for the graphs. BTW they did mention Eastwood's characters name in one of them. It was "Manko".

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