TIPS Wipeout Signals Fed Losing Fight Against Disinflation – Bloomberg 12-16-13

Salient to Investors:

TIPS have plunged 8.8 percent in 2013, the most since their debut in 1997, as consumer prices in the US rose 1 percent last month, the smallest increase since 2009.

Peter Fisher at BlackRock said the idea that central banks can always get the inflation rate they want will vanish – we could be at a 1 percent inflation rate for a long time unless we get some pick-up in wage expectations.

US companies are finding ways to expand without hiring more workers and wages are mired in the weakest period of growth in at least five decades.

Morningstar said the 10 largest inflation-indexed mutual funds have lost 36 percent of their assets since the start of May.

Gary Pollack at Deutsche Bank said TIPS are not a great investment vehicle when inflation is falling or extremely low, and does not see an inflation issue over the next three to six months.

The gap between yields on TIPS and fixed-rate Treasuries show that traders anticipate inflation will average 1.75 percent in the next 5 years.

Economists expect cost-of-living increases will average 1.5 percent in 2013, the second-lowest reading since 1963.

William Irving at Fidelity Investments said inflation will accelerate over time as QE spurs more growth, indicating that TIPS are attractive after the rout because the market is not pricing in any risk premium for inflation Irving said that the Fed is so accommodative and prefers inflation to be higher rather than lower means it is a good time to own 10-year TIPS.

The Bureau of Economic Analysis said companies increased spending on software by 19 percent since the 2007 business-cycle peak. This may be one reason why it has taken more than 4 years since the end of the recession to bring the unemployment rate down to 7 percent from 10 percent in 2009.

Dan Heckman at US Bank Wealth Mgmt is avoiding TIPS and said the lack of wage growth will damp consumer spending and keep retailers from raising prices, and he sees no kind of inflation pressure.

Wages have increased less than 3 percent in every month since June 2009, the longest stretch since the government began releasing the data in 1965.

US retailers suffered the first spending drop on a Black Friday weekend since 2009.

Bank of America said inflation-linked bonds globally have fallen 4.4 percent and are poised for the first annual loss on record.

Mitchell Stapley at ClearArc Capital said he has reduced TIPS holdings by 80% because there is not the concern about the inflationary backdrop that you need to drive demand for TIPS.

The US dollar is forecast to strengthen against all 9 other G-10 currencies in 2014: by 4.4 percent versus the yen and 6.9 percent against the euro.

34 percent of 34 economists expect tapering to begin in December, 40 percent in March, 2014.

Wan-Chong Kung at Nuveen Asset Mgmt said the temporary jump in inflation expectations as Yellen became the favorite to head the Fed demonstrates the danger of anticipating price gains before they actually emerge. Kung began buying TIPS in September but has since pared those holdings and returned to being skeptical of their value.

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The 2014 Contrarian Investment Tour, From Rupees to Copper – Bloomberg 12-10-13

Salient to Investors:

Lewis Braham writes:

Contrarian funds can be a hedge of sorts, though a potentially volatile one as out-of-favor sectors tend to be cyclical and prone to booms and busts. Shorting is inherently dangerous as markets have been trending higher.

Brian Singer at William Blair Macro Allocation Fund said currencies help diversify portfolios because they behave very differently from stocks and bonds. Singer recently put 19 percent of the fund in the Indian rupee which he says is undervalued by as much as 70 percent and India’s new central bank governor has already taken actions to stabilize it by raising interest rates. Singer uses financial derivatives to earn a 6 percent yield on the equivalent of a bank deposit. Individual investors can buy currency CDs – a 3-month FDIC-insured rupee CD from Everbank yields 7.25 percent. Singer is short the iShares Russell 1000 Growth ETF and long the iShares Russell 1000 Value ETF  and says people believe the US is the only source of growth and stability in the world but will be surprised in 2014 at how volatile growth stocks can be.

Don Hodges at the Hodges Pure Contrarian Fund is betting on coal, iron and copper mining stocks and said a recovery in the sector will begin when the Chinese work off their commodity inventories and begin buying again.

Jason Hsu at Research Affiliates said emerging market stocks are at a tremendous discount to US stocks. Hsu said the Shiller PE ratio for the S&P 500 is 24 versus its 16.5 average, versus 13.5 for emerging markets. Hsu is buying TIPS – TIPS with maturities of more than 20 years are yielding 1.5 percent over inflation, and is betting on a decline in large US stocks as well as on improved prospects for high-yield and emerging market bonds.

The BlackRock Municipal Target Term Trust trades at an 11.5 percent discount to portfolio value and yields 6.73 percent on a tax-free basis.

Rudolph Riad-Younes at RSQ International Equity Fund does not like gold because it trades closer to 20 percent above its cost of production versus 10 percent to 15 percent historically, and that cost will fall in the next 5 years, further driving down gold prices.

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