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    Why Bonds Aren’t Overbought

    Wall Street doesn’t want you to own bonds. In fact, Wall Street really hates the whole idea of bonds when it comes to individual investors who are just trying to invest to pay for their retirements.

    Bonds force companies to actually pay investors and pay them on a very regular schedule. Unlike stocks (where dividends can be sliced, diced and even discontinued), bonds are genuine, legally binding contracts whereby comfortable overpaid CEOs actually have to send checks first to bond investors.

    Instead, the guys in the executive suites along with their pals in the investment banks and brokerages would much rather try to convince retirement investors to just trust them with dividends from common stocks.

    So the charades keep coming every quarter, and companies and analysts keep touting earnings and the huge dividend increases — sometimes amounting to 10 percent or more boosts in dividend yields. And that’s what gets the headlines, with the fine print saying just how much 10 percent means in real money.

    Even with all of the discussions by the talking heads on CNBC about how dividends heave really soared, the average rate for the 500 leading stocks that make up the usual suspects of the Standard & Poor’s 500 index is a miserly 2.1 percent yield.

    You can’t live on 2.1 percent, nor can you build a retirement portfolio that’s getting a dividend yield of only 2.1 percent. Even if all of the companies of the S&P 500 were to really boost the dividends by 10 percent that still would mean that the effective yield would still be only 2.31 percent.

    Furthermore, more and more investors are waking up from their Wall Street-induced trances as they’re learning that the general stock market hasn’t and won’t work for their retirement. And the bond market has been getting their attention.

    Wall Street wants to shut this down — quickly.

    But it doesn’t have much to work with. After all, the S&P 500 has just barely recovered its losses for the past 13 years — not something that proves the point that general stocks can be trusted. Meanwhile, even the most boring part of the bond market, U.S. governments, are up more than 142.7 percent for the same period.

    So Wall Street and the guys in the executive suites are trying to run a new playbook to con investors to come back to stocks and ditch bonds.

    The plan? Try to convince investors that the bond market is in a bubble that’s about to pop, then resume suckering them into buying stocks again.

    But there’re a collection of problems with this plan, and it won’t do anything but kill your chances for a successful retirement.

    First, if bonds are going to head south, then interest rates won’t be pretty for businesses. And if interest rates start to really indeed head north, don’t even think that stocks can survive.

    But the chances of higher rates are pretty low — especially as inflation is far from rearing its head.

    In fact, as we’ve seen in headlines, U.S. consumer inflation is running at only 2 percent annually — with core inflation running at similar annualized levels.

    And on the wholesale level, the Producer Price Index is running at a core rate of 1.7 percent.

    Of course, part of the plan is to tell us that low inflation is bad for the economy. Right.

    It’s why we also keep getting the ridiculous pitches that so-called deflation is ready to ravage the U.S. economy. Deflation? Impossible — especially given the continued surge in monetary and credit market conditions. You just can’t get true deflation with a positive growth in the gross domestic product and a continued surge in money and credit supplies.

    Disinflation? Yes. We can see prices falling where they need to fall based on true market conditions — such as in housing, technology and other markets — including lower value-added labor.

    But the pitch for a bond bubble moves on, as Wall Street tries to tell us that bonds have rallied so much that they can’t sustain their current prices.

    Sure, U.S. government bonds are indeed not just fully priced, but overpriced. That’s why I do not even remotely suggest buying Treasuries and I’ve never recommended them as part of any core retirement investing plan, especially not in Liberty Investor.

    Instead, I continue to recommend and own myself a collection of bonds that have performed in the past and that will keep paying investors to own them year after year, regardless of what happens with the U.S. government and Wall Street’s whining about bonds trumping stocks.

    Ironically, the same Wall Street guys that are pooh-poohing bonds are the biggest buyers, traders and owners of these same bonds.

    Look at any of the major holders of any corporate or international government bonds, and you’ll see the big names of Wall Street. From the big investment banks to the masters-of-the-universe traders and hedge fund giants, these guys eat and live off of the bond market — even as they and their peers tell you to avoid them.

    And while they make it hard for individual investors to play in their bond market sandbox, I keep showing Liberty Investor readers how to buy and profit from the best of the bond market.

    For example, there’s my favorite collection of global bonds from countries actually performing, including China, Brazil, Indonesia and plenty of others. An example is my closed-end investment company: the AllianceBernstein Global High Income Fund (AWF).

    This owns the same great performing bonds, but is easy for you to own — just like the big guys do.

    It pays more than 8.7 percent and has generated returns for the past decade (including the inflation years in the middle) of more than 289.7 percent. Yes, that number is right.

    And before you think that it’s too high to buy, nonsense. Despite the stellar performance, it has seen a bit of a pullback recently, giving you an opportunity to either reinvest or start buying for the first time.

    Or how about buying directly, as I’ve mentioned before when I recommended top-performing minibonds? These are real corporate bonds that trade on the New York Stock Exchange just like a stock; only they trade in my favorite part of the market: the less-touted “garage” of the NYSE annex, which I discussed last week in Liberty Investor.

    A great example can be found with the mega finance company Aon Corporation (AON).

    I’ve been recommending this since back in the depths of the markets in early 2009 to those who used to read my missives as well as listen to my talks. Since then, this bond has gained ground by doubling its value by 100 percent. Yes, that number is right.

    And you can buy it right now for the first time, still paying a tick or two less than 7 percent.

    Some bubble. More and more of Wall Street’s guys are watching their own paychecks disappear as retirement investors stop listening to them, ditch the usual-suspect stocks and demand to get paid for their retirement investments. That’s the only bubble in bonds that’s popping.

    — Neil George

    Neil George is the editor of By George, an investment advisory publication. George was the editor of Personal Finance for many years. In addition, he served as editor for a collection of other investment journals published in the United States, Germany and other selected nations. Prior to his career in media, George worked for more than two decades on six continents in senior positions with a select group of financial institutions in investment banking, bond trading, brokerage and asset management. The institutions included Merrill Lynch International Bank in Europe, Asia and the Americas, as well as U.S. Bank and British- and Chinese-based Investec PLC. In addition, George worked to build a collection of independent public and private brokerage and fund-management companies in Los Angeles and New York. He also currently serves as an adjunct professor and board member of Webster University's Walker School of Business and Technology. George earned an MBA in international finance from Webster University in Europe and a bachelor's degree in economics from Kings College.

    | All posts from Neil George

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