There are some interesting companies available that do not give out dividends.
I’ve started to build a position in a company that is another leader in its niche, in the $500-$1B market cap range, enterprise value roughly equivalent to its revenues. It is seemingly a bit expensive, trading at about 25 times projected 2012 earnings, but it is in a sector where it will obviously be a growth industry and likely they will be able to increase such earnings over the long run.
The most dangerous investment right now appears to be locking your money up at 2% for 10 years in government bonds. Even cash seems to be better than this.
“The most dangerous investment right now appears to be locking your money up at 2% for 10 years in government bonds…”
This is an interesting contention. What are the main factors causing you to arrive at this conclusion?
I’ll ask the following math question (which I have the answer to, but will leave it as an exercise to the reader):
Let’s say you short a 10-year bond, at a 2% YTM. The next day, the bond trades at a 0% YTM. You swear at your computer screen and cover your short. What percentage capital did you lose?
By my calculations, you would lose -19.9% of your capital.
Here were my inputs: 10-yr UST currently at 100 3/32 (yields 2.0%) would have to trade to 120 in order to yield 0.0%.
This would come out to a pretty solid annualized clip of -7000+%, if I am calculating correctly.
The math is doesn’t involve using a bond calculator. It would be 20% even. Short a $100k bond at par with a 2% coupon and 10 year term, if YTM goes to 0%, then suddenly you’ll be asked to pay all the future coupon payments into one convenient present value payment at $120,000.
So every investment banker on this planet is thinking to themselves, if you shorted a 10-year bond and “paid up” your 2% effective coupon rate, can you out-do the market over a 10-year interval?
Yields could go to 1.5% or even lower, but the penalty for this happening is relatively low compared to what else you can dump that capital into.
The risk/reward for shorting bonds appears to be out of proportion. Of course, analysts have been saying that for a long time, and those that shorted at 3% got their rear ends handed to them!
“The risk/reward for shorting bonds appears to be out of proportion.”
How so? I don’t really see how your example demonstrates that.
If it can go to 120, why can’t it go to 140?
Who would pay a negative yield to maturity on a government bond?
Not sure, but maybe the same people who would pay a 0% YTM on a 10 yr gov’t bond.
I guess I’m saying the example seems so far-fetched that I don’t see how it proves anything.
I guess what I’m trying to say is that the maximum risk of shorting a government bond, assuming no negative yield to maturity, is defined, and that number at present appears to be low.
I don’t know what the reward side of the equation is.