Michael Belkin’s model points up for stocks

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Kate Welling of welling@weedon has just conducted another of her top-class interviews with Michael Belkin. Belkin is the author of The Belkin Report that I used to read regularly, but have had difficulty in obtaining over the past two years or so. He has a huge reputation among institutional investors and got his calls right more often than not when I still had access to his material.

Friend Barry Ritholtz (The Big Picture) provides some insight into Belkin’s latest thinking with the following excerpts from Welling’s report:

“Where my views are probably different to what some of the higher profile names are currently saying is that I’m not pointing to the equity market now as the source of a bubble or of malinvestment, in Austrian terms.

“If not the stock market, where are you pointing?

“At the bond market. Specifically, since the March 20, 2009 turning point in the equities market, if you look at the AMG weekly data on inflows into ETFs and mutual funds, bond fund flows have been positive every week and have averaged $4 billion a week. There hasn’t been a single down-week. But meanwhile, for equity funds, there’s been a completely different pattern. They’ve been down two weeks, up one week, then down, up four weeks, down five weeks – and the average inflow is only $500 million a week.

“Just barely positive?

“Yes, at last count only $24 billion had gone into all kinds of equity funds over this entire recovery rally, versus $178 billion into bond funds. I’ve been looking at this for quite a while and sort of scratching my head and wondering what was going on. But finally it just occurred to me. They’re buying bonds. It’s rather obvious. I think what has happened is that the public in previous cycles bought emerging-market funds or internet stocks or whatever, when the Fed would lower interest rates to an artificially low level, thereby penalizing people on their savings. So right now, for instance, I have friends who inherited a lot of money and I’m an informal advisor to them, not a paid advisor. They keep asking me, what do I do now? They were investing in CDs, which were parceled out to a lot of different banks on which they were making 2, 3, 4%. But now they’re maturing and the banks are offering, like, nothing. So they are asking, what do we do, what do we do? They need the yield; they need income; they don’t want to lose the nominal principal. What to do? What to do?”

“Belkin’s time series regression analysis is not only data driven, but he is also aware of historical predecessors. I find his argument that bonds are at greater risk than stocks to be very counter-intuitive, contrary – and compelling,” added Ritholtz.

belkin

Source: Barry Ritholz, The Big Picture, February 1, 2010.

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4 comments to Michael Belkin’s model points up for stocks

  • What to do, what to do. The question posed a different way should be, “how do I get a decent return of maybe 5% to 6% without putting my capital at risk?” There is a solution to this problem provided that you do not need to have access to your capital on the short term. What you do is find large cap stocks that always pay dividends, regardless of the economic situation. For example, many utilities, energy stocks, and consumer staples large caps went through 2008 and 2009 without lowing their dividends. Although their stock value might have gone down, when the market went back up, their stocks also rose with the market. Therefore, the stockholders that were counting on these stocks for dividends (income) only saw their balance sheet decrease, but not their income. Eventually, when all these stocks go back to where they were in 2007 (they are almost there today), these investors will have their capital back also. The key to this strategy is not having to have short term access to capital.

  • Dopey

    Prieur, did you actually read this cr*p before posting it?

  • Stevie b.

    “What to do, what to do. The question posed a different way should be “how do I get a decent return of maybe 5% to 6% without putting my capital at risk?””

    The question posed a different way should be “what not do do, what not to do?” And the answer is “everything: i.e. don’t do anything…in any sort of a rush”, including buying bonds at these levels. Forget about 5% and be happy for now just breaking even after any inflation. Preservation is the key. Perhaps easing into gold and farmland would make good hedges against cash holdings.

  • Daniel Mueller

    >Dopey says:
    >Prieur, did you actually read this cr*p before posting it?

    Dopey, the only cr*p I see here is your braindead comment. Or can you enlighten us, what exactly do you mean?

    To answer the question, you should try to assess the risks involved in each of the asset classes:
    – Bonds: I think rising interest rates are a serious medium to long term risk. Probability very high
    – Equities: In case risk aversion increases (sovereign debt crises), the P/E valuations might drop significantly (20%…50%). Probability medium. but equities are IMO the only way at this time to get some income!
    – Gold: As long as the central banks don’t come to reason, there’s little risk of gold dropping low.
    – Cash: There sure will be a lot of volatility between USD, EUR and JPY, but short to medium term I don’t see inflation endangering the value of cash. You will probably be better off in cash than in bonds.

    Summarized I see “everything but bonds” as the way to go.

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