Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Why Debt is Now Best Bet


Finally: Market again rewarding risk-takers.

Editor's Note: The following piece is a collaboration with Minyanville professor Rob Roy.

When the world is running down
You make the best of what"s still around
When the world is running down
You make the best of what"s still around
The Police, "When the World is Running Down"

"The national budget must be balanced. The public debt must be reduced. The arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced. If the nation doesn"t want to go bankrupt, people must learn to work, instead of living on public assistance."
Cicero, 55 BC.

Is Debt The New Equity?

I have been negative on credit for what seems like an eternity now. If you aren't being compensated to take risk -- particularly credit risk -- don't take it." For a long time we have been void of credit risk and to be frank, remain so. But for those that must take risk, the credit market is starting to seem like a far better bet than do equities.

Before the equity market began its descent this spring, I believed that the credit market was
sniffing out something that the equity market was not. (For more on this, please see A Tale of Two Markets.) When asked why I believe the stock market has corrected so swiftly, my answer has been: "Because it had a lot of catching up to do."

The big question on my mind these days is whether or not the equity market has corrected enough in order to make it cheap relative to other asset classes, particularly credit. In short, my answer is a resounding no.

I have stated, and I still believe, that we're in a secular bear market in equities that will not end until 16 year trailing returns for the Dow Jones Industrial Average and S&P 500 is in negative territory. In other words, this would mean that when we mark the high for S&P in March of 2000 at approximately 1500, a secular bear low assuming a -4% annualized trailing return for 16 years would place us at around 795 in 2016. Pretty sobering, right?

Looking at the graph below, courtesy of Ned Davis Research, we can see that secular lows have been established in the DJIA when the 16 year trailing return range is between -4% and 0%. Considering that the secular bull market party that went from 1982-2000 was the greatest on record, one must expect the secular bear to accompany it to be the nastiest on record as well.

Annualized 16 Year Trailing Returns for DJIA since 1916

Click to enlarge

Notably, in the secular bear market lows stemming from the Great Depression (the most similar pattern I can come up with for the mess we face today, 16-year annualized trailing returns in the range of -4% seem to be the most appropriate level to use.

Since this credit Unwind may actually be more painful this time around, I think that is the best we can hope for. So while equities may seem "cheap" to most, I can accept that they will rally from time to time, perhaps fiercely, but the sad truth is that the "buy and hold" approach that has scorched so many over the past 8 years is still not the best risk/reward proposition. This leads me to what is the better proposition.

Debt. Yes, that 4-letter word I have been avoiding for so long.

Click Here to Purchase "Bond Basics: A Q&A with Bennet Sedacca"
< Previous
Positions in mortgage-backed securities

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos