Value.able: Telstra
Telstra’s woes are unlikely to be cured by a multi-billion dollar novelty cheque. To prosper, the company must use the cash injection to build a valuable and sustainable competitive advantage. Read Roger’s article at www.eurkeareport.com.au.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Harley
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Roger, I always find it very interesting when you talk about topics outside of value investing alone. There is so much to learn.
In regards to your short position in 10 year T-notes, how do you view the next steps of the Fed following the end of QE2? Interest rates surely cannot rise substantially without significant negative impacts on the US so they are bound to introduce another measure, whatever form it takes. There have been suggestions that they will look to cap the 10 year, and Bill Gross recently said he thinks the follow up from QE2 will be rate caps on shorter term treasuries. Do you think this ‘manipulation’ is a risk to your position, as it may take a long time for the true economic condition of the US to be reflected in bond rates?
Also, why step in and short now, right in the middle of media attention on Greece and the likelihood of the flee to safety further pushing up US bonds? Is it simply a long term position that therefore deems exact timing as less important?
Thanks Roger
Roger Montgomery
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Yes I do. But it cannot last forever. The position may move against me for some time and thats ok. In terms of timing, it is always best to enter when things look bleakest for the position. Early is better than late. Of course there is no guarantee it will be profitable.
Chris B
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Yes interest rates might remain low, because as you rightly suggest increasing interest rates would hurt an already faltering economy. Remember, there is always the very real possibilty of a QE3! I wouldn’t discount this as being the feds way to try and stimulate the economy, again.
Some commentators are adamant there is no other option but to have QE3.
Warren buffet suggested bonds were in a buble a few years ago. Since then, bond prices have moved around a fair bit, but at present they are back near their highs. So it seems that the bubble persists.
Chris B
Roger Montgomery
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The reason I believe we will have a slowing economy in the US while we also get rising interest rates is because of the emerging market countries will seek monetary independence and so the accumulation of treasuries won’t be necessary. Foreign central bank support for US treasuries is already slowing because their balance of payments is moving towards balance. While surpluses remain, foreign central banks have little choice but to buy treasuries. Their buying of the most recent quarter’s issuance by Treasury was mid teen percentages and after QE2, when the Fed stops buying, that means the private sector would have to step up and buy 85% of the Treasuries issued. That has never happened before. Foreign central banks will only step in if they experience massive capital inflows that create balance of payments surpluses. So…..that may just mean higher rates – the upside for a short TBond/TNote position. The downside [for me] is not-much-lower-rates.
Ron shamgar
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In my opinion the upside may be short lived as QE3,4,5 etc. are coming soon. As long as bernanke is in control of the fed rates are not going anywhere. Will be interesting to see what happens though.
Chris B
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Hi Roger,
You mention that TLS has a bond like dividend yield, and yes it surely is an attractive 9.2% (when you gross it up your sitting on a 13% yield). That would be the yield IF you bought TLS around its current levels.
Many people however bought TLS above $7. These people have lost over 50% of their capital, and their yield on their initial investment is not 9.2%. Anyone who bought TLS at $7.00 or higher would have a dividend yield of 4% or less – not so attractive.
Speaking of yields and bonds, I thought I’d share with the blog an investment idea that goes a little beyond value investing in equities…U.S. Treasury notes.
The 10 year Treasury notes could, in my opinion, be a great way to play the probable continued rise in inflation.
Generally speaking, as inflation rises so do interest rates. And if interest rates rise, so to do the yields on t-notes. And given the inverse relationship between bonds yields and bonds prices, one can expect that as the yields of bonds rise, the prices of bond will fall.
10 year t-notes are trading close to their highest levels and they are yeilding only around 3%. Ask yourself, would you be happy with a 3% return when inflation is far greater than 3%.
A big UNANSWERED question at this point however is whether the Fed will go ahead with QE3??????
If the fed does print more money there is a good chance that BIG money will be moved out of bonds and into U.S equities – giving the American markets another shot in the arm.
If the Fed doesn’t print more money, we might expect to see the opposite.
Irrespective of what the fed does next month, at some point in time you would think that interest rates will have to go up. How long can they stay close to 0%.
I am not sure if right now is a good time to short 10 year t-notes, but I am confident that this will be an attractive proposition, sooner than later.
Finally, according to BIZ INDIA Magazine, the Chinese have already ‘dropped 97% of its holding in U.S. treasury bills’, possibly indicating that they are not comfortable holding huge amounts of U.S. debt. Could t-notes be next?
Do other bloggers have thoughts on bonds, and for thaty matter, stocks that have bond like qualities?
Chris B.
Roger Montgomery
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I am short 10yr T-Notes again as of last night. You can watch with interest. The interest rate currently reflected by US Bond’s is not reflecting the credit worthiness of the US or much else because 2/3rds of bonds are now held by ‘official holders’ – central banks etc. Interesting that Moody’s last week or the week before suggested they would downgrade the US if they didn’t borrow more money to meet their repayment obligations!!! This week Bernanke said that failing to raise the debt ceiling would cause “severe disruptions” in financial markets adding “we should avoid unnecessary actions or threats that risk shaking the confidence of investors in the ability and willingness of the U.S. government to pay its bills.” Implications for the US dollar? Implications for investments in gold and gold stocks?
Chris B
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Hi Roger,
Just as a Greek default threatens the Euro, the threat of a US default threatens the USD. And, if either one of these countries default (or indeed if both default) then the implications for gold can only be an appreciating gold price as people find safety in gold.
I am long gold (via futures), and have been for some time. It is interesting to note the divergance between the USD gold price and gold stocks listed on the ASX. But this is the market risk you speak of when buying commodity related stocks!
Would you be able to suggest some sources of information (available to retail investors) that provide up to date, reliable, no nonsense news on macroeconomic events, particularly in relation to commodities, equity markets, and the U.S eceonomy?
Thanks for providing this blog – I read it daily – enthusiastically,
Chris B
Roger Montgomery
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Hi Chris,
I subscribe to some very expensive research selected because the authors picked the tech wreck, the asian currency crisis, and the GFC. They don’t offer any free information that isn’t embargoed.
LukeS
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Did I read that right?
Moody’s will give the USA a lower rating if they don’t borrow more to pay off prior loans.
Has the world gone completely mad? It sounds like time to duck.
Roger Montgomery
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Word for word…
Matthew R
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Hi LukeS,
I thought so until I read this article.
If Roger can’t post this link try googling: fool 10 Quotes From the Past That Will Make You Feel Better About the Future
History repeats itself & we have been here before. I particularly like the last four words in that article. With that in mind, good quality companies at discounts to intrinsic value will see you through