Author Topic: buy low, sell high: bonds low right now?  (Read 8136 times)

Stache In Training

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buy low, sell high: bonds low right now?
« on: December 18, 2013, 12:14:25 AM »
First off, yes, I understand never to try and time the market.  I dollar cost average.  But for huge swings in the market, it should be a bit easier to see, and right now, bonds are dropping, and stocks/equities are soaring.  So doesn't it make sense to maybe swing a bit more money towards bonds than stocks, right now?  It's not quite "timing the market" in the usual sense of the phrase, such as "I think pig skins are about to take off, buy pork!"  But rather just seeing the general trend, and trying to optimize.

And if that's true, wouldn't the same hold true for stocks?  To hold off extra money towards stocks, until the next crash?

Even MMM says stocks are on sale during a crash, so buy buy buy.  Isn't that technically what's happening in the bond market right now?

Just wondering on all of your thoughts on that.  Maybe this has already been talked about, and if so, you can just point me to that forum post, and I'll read that.  Thanks!

beltim

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Re: buy low, sell high: bonds low right now?
« Reply #1 on: December 18, 2013, 12:33:53 AM »
Bond yields are historically low right now, meaning that bond prices are actually pretty high.

Hamster

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Re: buy low, sell high: bonds low right now?
« Reply #2 on: December 18, 2013, 01:39:25 AM »
First off, yes, I understand never to try and time the market.  I dollar cost average.  But for huge swings in the market, it should be a bit easier to see, and right now, bonds are dropping, and stocks/equities are soaring.  So doesn't it make sense to maybe swing a bit more money towards bonds than stocks, right now?  It's not quite "timing the market"...
That is timing the market.
Check out this link about valuing bonds in the secondary market. 
https://www.mtholyoke.edu/courses/sgabriel/securities1/bond/value.htm
For you to expect bond prices to rise on the secondary market, basically means you are expecting interest rates to go down further, which is unlikely given historically low rates now.
And if that's true, wouldn't the same hold true for stocks?  To hold off extra money towards stocks, until the next crash?
That is also timing the market. Do you know when the next crash is coming and what will come after it?
Even MMM says stocks are on sale during a crash, so buy buy buy.  Isn't that technically what's happening in the bond market right now?
No. Bond yields are low. This is not the same thing as falling stock prices, and doesn't suggest that bonds you buy now will increase in value.

Besides, if I understand it, the efficient market hypothesis would suggest that there is no such things as stocks being "on sale", regardless of what MMM says. How do you know when something is on sale? That would imply you know better than the rest of stock investors what the appropriate present value is for those stocks.

Just for some historical insight: The Nikkei index in Tokyo was at 40,000 yen in January 1990, and down to 20,000 yen in Sep of 1990. Sounds like a great sale, right?

Today it is <16,000 yen. You only know if stocks were "on sale" in hindsight.

grantmeaname

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Re: buy low, sell high: bonds low right now?
« Reply #3 on: December 18, 2013, 05:40:58 AM »
Even MMM says stocks are on sale during a crash, so buy buy buy.
MMM says stocks are on sale during a crash so that you can avoid the behavior of not buying them, so that you will buy when prices go up as well as when they go down, so that you will stop market timing. He does not say to only buy during a crash, or buy more during a crash. He says to keep buying.

KingCoin

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Re: buy low, sell high: bonds low right now?
« Reply #4 on: December 18, 2013, 08:34:56 AM »
The OP is actually right. Bond prices have been dropping pretty precipitously since May. The long dated government bond ETF TLT has dropped from 123.5 to 102.75. The 10y yield has risen from 1.6% to 2.9%.

As others have mentioned, yields are still low on a historical basis. Maybe we hit an economic rough patch and bonds rally back. There are some signs that perhaps the bond sell-off is overdone and owning bonds is an interesting contrarian play. However, it's totally reasonable to assume the trend toward interest rate normalization continues and bonds keep falling. It's impossible to know for sure, and fairly pointless to try to call (unless you're paid handsomely to attempt such things).
« Last Edit: December 18, 2013, 08:38:44 AM by KingCoin »

Stache In Training

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Re: buy low, sell high: bonds low right now?
« Reply #5 on: December 18, 2013, 10:51:02 PM »
Ah, thanks for setting me right on what he means by "on sale."  I of course was simply talking on where to put extra money, not to stop the dollar cost averaging portion.

Thanks KingCoin.  At first, I was like, I know yields are low, but I've been seeing bonds drop like crazy since like June.  I thought I was crazy, and the only one seeing that.  I agree that I think they're still going to be falling more as interest rates normalize, and that it's beyond me (or most people), to try and make the call when it's going to bottom out. 

So yeah, I was just curious on what people thought about since bonds are dropping, that if it'd be good to put some extra money towards bonds, instead of stocks.  All of that is obviously keeping in mind your personal AA and still keeping your normal dollar cost averaging going.  Does that make sense?

KingCoin

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Re: buy low, sell high: bonds low right now?
« Reply #6 on: December 19, 2013, 06:40:06 AM »
So yeah, I was just curious on what people thought about since bonds are dropping, that if it'd be good to put some extra money towards bonds, instead of stocks.  All of that is obviously keeping in mind your personal AA and still keeping your normal dollar cost averaging going.  Does that make sense?

Yup. By re-balancing toward your target AA, you'll naturally be selling stocks and buying bonds (or just allocating new capital to bonds). No special market prognosticating required.

Khan

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Re: buy low, sell high: bonds low right now?
« Reply #7 on: December 19, 2013, 06:55:26 AM »
The OP is actually right. Bond prices have been dropping pretty precipitously since May. The long dated government bond ETF TLT has dropped from 123.5 to 102.75. The 10y yield has risen from 1.6% to 2.9%.

As others have mentioned, yields are still low on a historical basis. Maybe we hit an economic rough patch and bonds rally back. There are some signs that perhaps the bond sell-off is overdone and owning bonds is an interesting contrarian play. However, it's totally reasonable to assume the trend toward interest rate normalization continues and bonds keep falling. It's impossible to know for sure, and fairly pointless to try to call (unless you're paid handsomely to attempt such things).

The selloff may be overdone, but at a yield of 2.9% even... treasuries are still a terrible place to put your money. I seriously can't see why I'd want to own a treasury at those rates when KO yields the same % off the dividend alone, or one of a hundred other superb companies to own shares in.

KingCoin

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Re: buy low, sell high: bonds low right now?
« Reply #8 on: December 19, 2013, 08:28:10 AM »
The OP is actually right. Bond prices have been dropping pretty precipitously since May. The long dated government bond ETF TLT has dropped from 123.5 to 102.75. The 10y yield has risen from 1.6% to 2.9%.

As others have mentioned, yields are still low on a historical basis. Maybe we hit an economic rough patch and bonds rally back. There are some signs that perhaps the bond sell-off is overdone and owning bonds is an interesting contrarian play. However, it's totally reasonable to assume the trend toward interest rate normalization continues and bonds keep falling. It's impossible to know for sure, and fairly pointless to try to call (unless you're paid handsomely to attempt such things).

The selloff may be overdone, but at a yield of 2.9% even... treasuries are still a terrible place to put your money. I seriously can't see why I'd want to own a treasury at those rates when KO yields the same % off the dividend alone, or one of a hundred other superb companies to own shares in.

Treasuries will likely rally in another crisis, KO and other superb companies will be losers. The value of treasuries is mainly as a diversifier and a source of dry powder when things go south. Is 2.9% a great value? Probably not, but at least they're covering inflation now.

jamccain

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Re: buy low, sell high: bonds low right now?
« Reply #9 on: December 25, 2013, 11:33:44 PM »
It's a valuation question....and how that valuation contributes to risk and expected return. 

Bonds, despite a recent drop in prices as still overvalued.  Thus, your risk of a lower than expected return is high.  Stocks are in the same boat. 


grantmeaname

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Re: buy low, sell high: bonds low right now?
« Reply #10 on: December 26, 2013, 05:56:11 AM »
Only if you believe that 'overvalued' is a thing that can even happen, which the EMH gang does not.

jamccain

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Re: buy low, sell high: bonds low right now?
« Reply #11 on: December 26, 2013, 03:18:29 PM »
Only if you believe that 'overvalued' is a thing that can even happen, which the EMH gang does not.

Does the EMH gang still exist?  I thought they were disbanded after the IT and then housing bubble?  If not they surely will be after this QE bubble pops.  =)

the fixer

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Re: buy low, sell high: bonds low right now?
« Reply #12 on: December 26, 2013, 08:02:34 PM »
Does the EMH gang still exist?  I thought they were disbanded after the IT and then housing bubble?  If not they surely will be after this QE bubble pops.  =)
That's been said after every crash: the 20s stock bubble, the 50s Nifty Fifty, the 60s value stock craze, the "tronics" boom, and so on. There are reasonable counterarguments. The latest bubbles offer no unique data to add to the pile.

beltim

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Re: buy low, sell high: bonds low right now?
« Reply #13 on: December 27, 2013, 07:36:30 PM »
Does the EMH gang still exist?  I thought they were disbanded after the IT and then housing bubble?  If not they surely will be after this QE bubble pops.  =)
That's been said after every crash: the 20s stock bubble, the 50s Nifty Fifty, the 60s value stock craze, the "tronics" boom, and so on. There are reasonable counterarguments. The latest bubbles offer no unique data to add to the pile.

I thought the efficient market hypothesis was invented in the 60s.

grantmeaname

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Re: buy low, sell high: bonds low right now?
« Reply #14 on: December 28, 2013, 07:15:07 AM »
It's been said of every crash if you really want to nitpick.

beltim

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Re: buy low, sell high: bonds low right now?
« Reply #15 on: December 28, 2013, 09:01:35 AM »
It's been said of every crash if you really want to nitpick.

Fair enough.  For my personal edification, do you have any good places to read up on the reasonable counterarguments alluded to above?  I've never really bought into the stronger forms of EMH and am curious how they address market crashes and panics.

kyleaaa

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Re: buy low, sell high: bonds low right now?
« Reply #16 on: December 28, 2013, 09:13:31 AM »
"Yes, I know I should never time the market. Market timing doesn't work. However, just this once I want to time the market. Should I?"

Hamster

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Re: buy low, sell high: bonds low right now?
« Reply #17 on: December 28, 2013, 09:27:32 AM »
It's been said of every crash if you really want to nitpick.

Fair enough.  For my personal edification, do you have any good places to read up on the reasonable counterarguments alluded to above?  I've never really bought into the stronger forms of EMH and am curious how they address market crashes and panics.

Here is an article on EMH and financial crises by Malkiel from 2011
Quote
EMH does not imply that asset prices are always “correct.” Prices are always wrong, but no one knows for sure if they are too high or too low. EMH does not imply that bubbles in asset prices are impossible nor does it deny that environmental and behavioral factors cannot have profound influences on required rates of return and risk premiums. At its core, EMH implies that arbitrage opportunities for riskless gains do not exist in an efficiently functioning market and if they do appear from time to time that they do not persist.

KingCoin

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Re: buy low, sell high: bonds low right now?
« Reply #18 on: December 28, 2013, 01:12:21 PM »

Quote
EMH does not imply that asset prices are always “correct.” Prices are always wrong, but no one knows for sure if they are too high or too low. EMH does not imply that bubbles in asset prices are impossible nor does it deny that environmental and behavioral factors cannot have profound influences on required rates of return and risk premiums. At its core, EMH implies that arbitrage opportunities for riskless gains do not exist in an efficiently functioning market and if they do appear from time to time that they do not persist.
[/quote]

Yes, the idea is that you can't use public information to consistently profit in stocks, not that current stock prices represent a fair NPV of future cash flows.

Does the EMH gang still exist?  I thought they were disbanded after the IT and then housing bubble?  If not they surely will be after this QE bubble pops.  =)

Bubbles are always oh-so-obvious in hindsight, but I'm guessing you're not writing these comments on your yacht anchored off of St. Barts. Why not when you could have bought some homebuilder puts for a song to profit immensely when the obvious housing bubble popped?

Jamesqf

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Re: buy low, sell high: bonds low right now?
« Reply #19 on: December 28, 2013, 03:04:01 PM »
Bubbles are always oh-so-obvious in hindsight, but I'm guessing you're not writing these comments on your yacht anchored off of St. Barts. Why not when you could have bought some homebuilder puts for a song to profit immensely when the obvious housing bubble popped?

Because I didn't have enough capital to invest after the bubble popped?  But I will note that the - oh, say about $30K - that I directed into stocks (instead of home remodel or general recreational spending) after the '08 crash is now worth about $70-80K.  Likewise, NOT putting much into stocks in the '07-08 period avoided some losses.

beltim

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Re: buy low, sell high: bonds low right now?
« Reply #20 on: December 28, 2013, 04:45:03 PM »

Does the EMH gang still exist?  I thought they were disbanded after the IT and then housing bubble?  If not they surely will be after this QE bubble pops.  =)

Bubbles are always oh-so-obvious in hindsight, but I'm guessing you're not writing these comments on your yacht anchored off of St. Barts. Why not when you could have bought some homebuilder puts for a song to profit immensely when the obvious housing bubble popped?

Knowing that a bubble exists doesn't give you any information on when it will pop.  And unfortunately, puts require knowing both when and how much a bubble will pop.

For example, I know with near-certainty that Amazon.com is in bubble territory.  It's a marginally profitable company that grows sales at the expense of profits.  Great for consumers, terrible for investors.  Eventually investors will realize this and the stock price will fall down to Earth.  However, I know neither when this will happen nor how far it will fall, both of which are necessary to maximize profits by buying puts on Amazon.

As Keynes wrote, the market can remain irrational far longer that you and I can remain solvent.

KingCoin

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Re: buy low, sell high: bonds low right now?
« Reply #21 on: December 28, 2013, 09:53:47 PM »
Knowing that a bubble exists doesn't give you any information on when it will pop.  And unfortunately, puts require knowing both when and how much a bubble will pop.

Even presuming this is true, this just bolsters the EMH. That is, even if you KNOW FOR A FACT that something is a bubble, it's not necessarily possible to profit.

For example, I know with near-certainty that Amazon.com is in bubble territory.  It's a marginally profitable company that grows sales at the expense of profits.  Great for consumers, terrible for investors.  Eventually investors will realize this and the stock price will fall down to Earth.  However, I know neither when this will happen nor how far it will fall, both of which are necessary to maximize profits by buying puts on Amazon.

As Keynes wrote, the market can remain irrational far longer that you and I can remain solvent.

Keynes didn't have listed options to trade. You don't really have to put your solvency at risk to play an AMZN bubble. You can buy Jan 2016 175 puts for only $5. Pretty darn cheap if AMZN is truly a "bubble". You'll multiply your money 25x if AMZN drops to $50. You can thank me for the tip from your yacht anchored off of St. Barts.

beltim

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Re: buy low, sell high: bonds low right now?
« Reply #22 on: December 29, 2013, 07:28:58 AM »
Knowing that a bubble exists doesn't give you any information on when it will pop.  And unfortunately, puts require knowing both when and how much a bubble will pop.

Even presuming this is true, this just bolsters the EMH. That is, even if you KNOW FOR A FACT that something is a bubble, it's not necessarily possible to profit.

For example, I know with near-certainty that Amazon.com is in bubble territory.  It's a marginally profitable company that grows sales at the expense of profits.  Great for consumers, terrible for investors.  Eventually investors will realize this and the stock price will fall down to Earth.  However, I know neither when this will happen nor how far it will fall, both of which are necessary to maximize profits by buying puts on Amazon.

As Keynes wrote, the market can remain irrational far longer that you and I can remain solvent.

Keynes didn't have listed options to trade. You don't really have to put your solvency at risk to play an AMZN bubble. You can buy Jan 2016 175 puts for only $5. Pretty darn cheap if AMZN is truly a "bubble". You'll multiply your money 25x if AMZN drops to $50. You can thank me for the tip from your yacht anchored off of St. Barts.

Again, that assumes you know the date when Amazon will fall.  I don't.  And bubbles can last far longer than a few years, making LEAPs not useful for that purpose.

KingCoin

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Re: buy low, sell high: bonds low right now?
« Reply #23 on: December 29, 2013, 08:24:23 AM »
Again, that assumes you know the date when Amazon will fall.  I don't.  And bubbles can last far longer than a few years, making LEAPs not useful for that purpose.

Right, but most bubbles last less than a few years. You could always just roll the trade over time without paying too much extra premium since the puts cost so little as a percentage of notional. Yeah, it could "pop" 6 years from now, but then I'm not sure it would have really been a "bubble", but rather a valuation thesis that didn't play out.

prestojx

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Re: buy low, sell high: bonds low right now?
« Reply #24 on: December 29, 2013, 01:56:40 PM »
Even presuming this is true, this just bolsters the EMH. That is, even if you KNOW FOR A FACT that something is a bubble, it's not necessarily possible to profit.

So true!