The only transactions being performed so far this year has been the accumulation of relatively illiquid warrants (over the past two months I have single-handedly been about 30% of the volume in this market) that give you the right to purchase the underlying shares at a strike price significantly in-the-money and the current market value of such securities is still trading under the tangible book value of the corporation (i.e. I expect further and significant price appreciation). In other words, the warrants are a leveraged free-ride compared to the common shares and the history of its management has been appreciation through buybacks rather than dividends.
My leverage fraction is somewhat higher than I am normally used to, but despite the scare tactics that the market will be employing over the next little while to shake soft money out of equities, the trend is indeed up. Too much cash out there is chasing an inadequate amount of yield, and fund managers will need to continue taking more risk in order to reach their required levels and this means equity investment.
With US 10-year bond yields at 1.85% (Canada is 1.94%), pension managers will not be getting these returns out of AAA-rated securities. They must take more and more risk to get their yield.
The most damaging thing I can do at this point is exit. There will be a time to exit, but it is too early. Sentiment is still very damaged by the US fiscal situation and people still think bonds are a safe investment, which they are not.
“people still think bonds are a safe investment, which they are not.”
Why not? Because interest rates ‘must’ rise?
It’s important to think about the order of events. I.e. what will cause interest rates to (sustainably) rise. Improvement in overall economic conditions – nothing more, nothing less.
http://goo.gl/Cl31u
Not because of the inevitable (decade-away) interest rate rise, but rather the poor risk/reward ratio – very low reward and moderate risk.