“We have to see an uptick in economic activity,” says Steven Boyd, principal at Halyard Asset Management, who thinks bond yields are too low.
“I think we will see a bounce back in the economy. If we don’t, then the bond market will be proven right.”
“If we see the economy bounce back and grow near 3 per cent, the S&P can rise further,” said Steven Boyd, principal at Halyard Asset Management. He said the greater use of margin debt was a sign of confidence that the recent soft tone in data are attributable to cold weather and that pent up demand will drive a rebound in the coming months.
Mr Boyd said the record use of margin would be a concern if valuations for the S&P were around a forward earnings multiple of 20 times, rather than the current 17 times.
“Stocks have been under pressure this month and there is a feeling that as goes January, so goes the year,” says Michael Kastner, managing principal at Halyard Asset Management. “I think both stocks and bonds are getting it wrong here, yields should be higher and I suspect investors like last year will be rewarded for buying stocks as they pull back.”
“It’s a contrarian play out of the gate as the year begins,” said Michael Kastner, managing principal at Halyard Asset Management. “The change in the calendar can be a good time to make portfolio changes.”
“For the time being the Fed is doing a good job with its forward guidance but if the economy cranks up, they will look foolish saying rates will stay low for longer,” says Michael Kastner, managing principal at Halyard Asset Management. “No matter what the Fed may say, the market will price in a closer start date for rate hikes if the data warrants that reaction.”
Michael Kastner, managing principal at Halyard Asset Management, plays down the likelihood of a taper decision next week but adds: “The Fed has been so wishy-washy about the taper this year, you can’t rule out a December taper.”
“The current rally has robbed a bit of next year’s performance,” says Michael Kastner, managing principal at Halyard Asset Management.
Mr Kastner says: “We seem to have moved from investing under sensible valuations to one of the greater fool theory, hoping there is another buyer willing to pay a higher price at these extended levels.”
“When I consider buying a bond, it is important to have some degree of comfort the issuing entity will pay some of my money back even if it goes into default,” said Michael Kastner, a principal at Halyard Asset Management. “The coco structure defeats that purpose.”
Such criticism has not deterred banks as demand has been buoyed recently by yield-hungry investors and global investors who can snap up cocos with borrowed money, bolstering their returns.
“There are always investors out there willing to turn a blind eye to weaker credit quality or higher risk in order to capture more yield,” said Mr Kastner.
“This is a critical period of the year for the economy and the last thing you want to see is business and consumers retrenching spending,” said Michael Kastner, principal at Halyard Asset Management. “As we have seen in the past, equities can take quite a hit when Washington’s battles turn ugly.”
“Given the size of this deal and in order to attract a large pool of investors, concession may have to be such so that these bonds have to become profitable pretty soon,” said Michael Kastner, principal at Halyard Asset Management.