"Stocks are Dead!"

In section C of the Wall Street Journal on Wednesday, August 1st, the headline read: "Bill Gross: Stocks are Dead and Operate Like a 'Ponzi Scheme'”. It notes that Bill Gross is co-founder and co-chief investment officer of Pacific Investment Management Co., or PIMCO, the largest bond fund in America. His belief is that the rates of return seen with stocks cannot continue and in the long run will come down. At the time this was reported, the 10-year Treasury bond was yielding about 1.5%. As of today, the same bond is yielding 1.84%. While this may not seem like much of a change, it means that the 10-year Treasury bond has decreased in value in a matter of 17 days. With bonds, when the yield rises, the value of the bond declines. Putting it in dollar terms, if you hypothetically purchased $100,000 of 10-year Treasuries at the beginning of the month, the value of your money would have decreased about $2,800 by last night. Because Treasuries impact most bond yields, we have also seen similar drops in value for most bonds. During the same period, the S&P 500 has risen 36 points for a 2.6% increase. If you had hypothetically purchased $100,000 of the S&P 500 Index, your money might have increased by about $2,600. Trying to guess the direction of the stock market or bond market over short periods of time is futile. I do believe there are long term trends that need to be watched, as well as short term events that must be taken into consideration. For bonds, with the long term trend from 1981 until now, we have seen interest rates continue to fall and as they fell, the value of bonds increased. Will this hold for the future? I don’t think it will. I believe bonds must ultimately begin to have increasing interest rates and reductions in value. The reason for holding bonds now is because of the uncertainty in the U.S. and the world, and the long term stability of bonds is because of the priority in payment, both interest and principal, of bonds over preferred and common stock. As greater stabilization comes to the U.S., and the world situation plays out, the benefits of stocks, dividends and growth, will be more likely to outweigh the stability of bonds. The ultimate answer to our current situation and long term investing is diversification. Bonds go up and down, stocks go up and down, real estate goes up and down, currencies go up and down and commodities go up and down! These changes happen because of economic trends but also because of human emotion. The three rules of investing are: Diversify, Diversify, Diversify! Have a great weekend! Ed