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Point/Counterpoint: Peter Tchir and Michael Gayed Frame the Debate for Stocks


Will there be a spring switch or not? Two Minyanville contributors lay out their arguments for both sides of the debate.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

MINYANVILLE ORIGINAL The notion of a "spring switch," or getting out of bonds and into stocks, is deeply ingrained in many investors' psyches. Will it or won't it happen this year? Two Minyanville contributors, investing veterans Peter Tchir and Michael A. Gayed, lay out their reasonings for both sides of the argument. You be the judge; take our poll.

Point: Peter Tchir Says Not to Expect a Rotation Into Stocks

Jobless claims were better-than-expected and back to levels seen earlier this year (after they were revised upwards). This data has been so consistently revised higher that the market is taking it with a grain of salt.

Spanish and Italian bonds are holding on to most of their earlier gains on the back of more auctions and the European Central Bank meeting. So far, Mario Draghi has had a very measured tone. If the meeting ends without a change in his tone, I would expect weakness to resume. The market has come to expect, and in fact depend on, central bank intervention. I don't see a natural buyer of the longer-dated Spanish and Italian debt without real hope of an aggressive ECB.

We get ISM Manufacturing numbers later this morning, but the market is really going to focus on Non-Farm Payroll data, or NFP, tomorrow. That is the key. Most data points to the likelihood of a significant miss, though the employment portion of ISM Manufacturing and today's jobless claims give hope to the bulls.

I expect a miss as so much of the earlier gains were just pulling seasonal jobs forward. Construction projects planned for April were able to start in February.

MAIN, IG, and HY CDS indices all tried to stage minor rallies this morning and have since drifted back to unchanged. Given the strength we have seen, particularly in IG, that is not surprising, but may be a sign that once again the market has reverted from being too bearish to overly optimistic.

The belief that "everything" is priced in is overwhelming. The only thing I hear more than that,is the view that decoupling is occurring, and not just with the US decoupling from Europe, but with different countries within the EU decoupling. That theory may or may not be correct (I don't think it is), but it certainly seems fully priced in. The divergence of markets in Spain and Italy compared to Germany and the US is huge. Option premiums also reflect that. I continue to look at buying the underachievers against shorting the "decoupled" markets.

Finally, on Bloomberg TV yesterday, I did a segment looking at fixed-income ETF flows. Within the ETF space, it was clear that high yield has been attracting money, over $6 billion year-to-date, and treasuries have had basically $0 flows. The theory that investors who have piled into bonds will revert back to equities seems wrong. They aren't moving into the "safety" of 2% 10-year treasuries; they are moving into junk bonds.

That makes sense as mediocre domestic growth is enough for most of those companies to avoid serious problems, and earning 6.5% to 8% of income while being senior in the capital structure offers a lot of appeal. I believe that appeal will be longer-lasting than those waiting for the rotation back into equities may realize.

It may be a subtle difference, but deciding to invest your "bond" money in high yield is very different than investing in treasuries. I believe active management is valuable here and that flows into traditional mutual funds and separate accounts are also strong, but I am focused on the ETFs, at least in part because the flow data is so much easier to get and to aggregate.

Counterpoint: Michael A. Gayed Says, Yes, the Spring Switch Will Happen

While I'm quite a fan of fellow Minyanville Professor Peter Tchir, I have to respectfully disagree with his recent statement "don't expect rotation into stocks." While Peter is correct that jobless claims, which were better than expected, tend to be revised upwards later on, the S&P 500 Index (^GSPC) does not care about jobs now.

The entire case for a "Great Re-Allocation" (a.k.a., the "Spring Switch") out of bonds and into stocks has to do with stocks' relative potential for capital appreciation versus bonds, which are at unprofitable levels when accounting for the Fed's inflation target of 2%. And while the ECB may not begin to proactively lower rates, maybe the recent trend of emerging market economies like India and Brazil lowering rates can do the heavy lifting in that regard.

Peter is also correct in being skeptical about the idea that "everything is priced in." I, too, am skeptical that everything is priced in.


Because what is not priced in by bearish investors and money flowing into bonds is the possibility that things will work out alright, and that reflation will persist. Evidence that this is not priced in can be seen in trading volumes, which should increase significantly as money gets excited again.

The observation that money is flowing into high-yielding junk debt is important. Junk debt within the bond market behaves most like stocks. As money chases stock-like high yield junk paper, it makes sense to think that the next step up is risk-taking then going toward stocks.

The dilemma for the bears right now is quite simple. If you believe that stocks will correct and risk assets are on the verge of another big decline, then you are assuming that bond yields both here in the US and in Germany will likely make even lower lows from these panic levels. The paradox then as that happens is that stocks become even more attractive relative to bonds.

Time will tell who is right.

Twitter: @Minyanville

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