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Where's the Value?


Relative value appears to be where the most risk is.


Inquiring minds just might be asking "Where's the Value?"

I can't blame them either. Many who were recently "Seeking Alpha" (which by the way drove down risk premiums across nearly every asset class), are now concerned more about Safety and less about Alpha. Things have dramatically changed in one month flat. Let's call this sudden change in sentiment "Seeking Value".

So where's the value? That's clearly a good question so let's explore some potential answers.

The cynical might suggest "There's no value anywhere," and while I can certainly make a case for that, that does not give any hints whatsoever about what to do or where to go.

So let's change the question to "Where's the Relative Value?" That is clearly more fertile ground for intelligent discussion. Some might see the answer in energy, others tech stocks like Broadcom (BRCM), Apple (AAPL), Google (GOOG) or eBay (EBAY) as referenced in 21 Bullish Predictions For Tech, still others see gold, silver, and precious metals as the answer, even if still others within the precious metals sectors are looking for a A Safe Way to Own Gold and Silver.


Not wanting to get into a massive debate about sectors (can you blame me?) let's instead take a look at the bond market. An interesting thing happened on Thursday, and captured for posterity in the following chart.

Yield Curve as of 2007-08-23

Click here to enlarge.

What's interesting about the above chart is we are seeing a rally in yields at the short end of the curve, and a decline in yields at the long end of the curve. The pivot point is easy to see as depicted by the dotted line at 4.4%.

Is there any value at the short end of the curve? I think not. On Monday, in a Flight to Safety, I noted:

"The yield on the one-month Treasury bill fell 160 basis points to 1.34 per cent in early trading. The yield on three-month Treasury bills tumbled to 2.51 per cent, 123 basis points below Friday's close – a sharper fall than during the October 1987 stock market crash."

There is simply no value at yields of 1.4%.

With the Fed Funds rate at 5.25% inquiring minds are asking "Is there any value anywhere?" Well the answer depends on where we are headed. If for example the curve flattens and the pivot point stays where it is, then there is indeed value on the right side of the pivot point. The entire curve could also shift lower in which case there is also value on the right side of the pivot point.

Only if there is a bond market revolt when Bernanke cuts rates (and he will) is there no value on the right side of the pivot point. So now the question becomes "Value" versus "Safety". Safety (but not value) increases left of the pivot point. Relative value (but not safety) increases to the right of the pivot point.

This seems to be a strange dichotomy. Relative value appears to be where the most risk is. When is the last time we have seen that?

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No positions in stocks mentioned.
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