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Macro Markets the Place to Be


Minimizing company-specific risk.


One of the few things I'm certain of for 2009 is that gauging the numbers of individual companies is virtually impossible.

Don't believe it? According to the sharp eyes at Bespoke Investment Group, the 2008 year-end target guesses on the S&P 500 by strategists from 11 large investment firms were all bunched within 175 points - and all wrong by about 50%. The high-low spread by those same folks for 2009 year-end guesses is an eye-popping 425 points - more precisely, S&P from 875 to 1300.

Now, assuming stock prices are tied to earnings, such dispersion of views means that, in the aggregate, 11 very sharp minds with the most sophisticated resources available don't have a clue as to where earnings are headed. For my money, just knowing these people are clueless is the most useful information they could've provided me with - because if they can't figure it out, I shouldn't even try.

Thanks for reading, and I'll see you in 2010.

Just kidding. But the point is, unless you have something akin to "inside" information, stock-picking this year is likely to turn into a game of Russian roulette, with the added excitement of playing with 3 bullets in a 6-chamber drum. Hence I'm nursing a very real temptation to jump to the macro side, and/or where I can get paid for not being right.

The latter place is corporate bonds. It's no great secret that there are some very juicy yields out there, and to get paid, one only has to correctly guess that the debtor company won't go bankrupt. No issues with margins, penny misses, pre-announcements, multiples, revenue growth, etc. There are plenty of companies that will pay you double digits just for not going bankrupt. As always, there are several catches in that seemingly simple idea:

  • Pricing: The bid/ask spread is often a year's worth of returns - and that's before you try to hit the price, only to find out that they've faded it another 5%.

  • Liquidity: If you think you'll need to sell, don't buy; forced selling in the corporate bond market equals a margin call on steroids.

  • Mark-to-market valuation: If you must explain to your clients why their investments are marked 25% to the bad after 3 days, you're basically hitching your business to the whims of "Vinnie the Dealer" and his daily practice of making offers you may as well refuse to the next poor bastard who needs to get out of a position.

  • If you think you can get around the first 2 bullets by using a mutual fund, pause and consider. Your fund may be the one who gets its face ripped off in order to meet redemptions.

  • A closed-end fund? Good idea - until it gets a margin call on the leverage it uses to juice up the yields, or day-traders get ahold of your ticker - then you get this kind of stuff and cry.

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No positions in stocks mentioned.
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