Time to Switch From Bonds to Stocks?

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stocks and bondsWith bond yields spiking higher -- and predictions of further increases to come -- this may be the time to start moving investments from bonds to stocks.

The yield on the 10-year Treasury bond has increased to 3.467%, nearly 1 percentage point more than three months ago. Bank of America Merrill Lynch said in a report Tuesday that it expects the 10-year T-bond to hit 4% in 2011. As interest rates rise, the price of bonds goes down, lowering the value of the investment.

As a result, investors are beginning to flee the bond market. The benchmark Pimco Total Return fund suffered its first net withdrawals in two years last month, losing $1.9 billion of investor money.

What's an investor to do?

"Wait 30 Days, and Then Buy"


"The Fed chairman wants you to sell bonds and buy stocks," says Brian Kelly, president of Kanudrum Capital, referring to Fed Chairman Ben Bernanke's program of asset-buying known as quantitative easing. "What he's done is forced people out of less risky assets into risky assets, and by doing so he has boosted the stock market, which in turn boosts individual net worth," Kelly says.

Kelly says he's now short the bond markets and long stocks, particularly high volatility stocks like Apple (AAPL) and Freeport-McMoRan Copper & Gold (FCX).

Timothy Lutts, president of investment advisory firm Cabot Heritage in Salem, Mass., says stocks may not perform well in the very short term over the next month or so, but he thinks that after that they will. "Wait 30 days, and then buy," he says.

Be Careful With Dividend Stocks

Lutts says his firm sees the Dow with a potential upper range of 14,300 and lower limit of 9,500. So at its current 11,470, it's well below the midpoint of that estimate. "We're finishing a decade when stocks made no progress," Lutts says, adding that he thinks equities are entering a period of substantial upside returns.

But neither Kelly nor Lutts is a big fan of high-dividend-yielding stocks, which have been a haven for investors moving out of bonds because they have a relatively high yield in addition to possible appreciation.

Kelly says if you invest in dividend stocks to be sure that the payout is above 2% because Bernanke is targeting inflation at 2%. "If inflation is 2% and the yield is 2%, your real yield is zero," Kelly says.

Lutts says high-dividend stocks are simply a bad choice now because investors are attracted to better-performing growth stocks and are dumping high-yield equities, causing their prices to go down. Lutts says he favors growth stocks like Google (GOOG), Chinese search engine Baidu (BIDU) and Riverbed Technology (RVBD).

Kelly says he wouldn't be surprised if a brief sell-off of up to 5% hits the market in the next few days because of the recent gains. But he sees stocks as outperforming bonds overt he medium to long term. "Bernanke does not want you to be in less risky assets," Kelly says, "and you do not fight the Fed."


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Mike

Let's face it, Congress is extending tax cuts for only two years...what does that mean to the rich investor?....the one who will invest in a new shopping plaza or business (employing lots of people)? It means that once he has taken his money out of safe investment (CD & Bonds) and put it up a capital (what capitalists do) he will hope the business is successful (most fail within two years and they lose their money) that the gov. will take a bigger chunk of his earnings, (which he would like to use to grow the business more) and give it to his workers, rather than allowing him to do it. So, the capitalists runs out of money and the workers lose their jobs and no longer need a tax break because they have no pay check. When will the gov. learn that they must do everything to ENCOURAGE business growth, because they provide pay checks not unemployment checks!!

December 16 2010 at 7:31 AM Report abuse rate up rate down Reply
1 reply to Mike's comment
itacurubi

Nobody is going to make a business decision on the basis af whether the marginal personal income tax rate is a few percentage points higher ... in the real business world, the uncertainty surrounding business decisions is much greater than those few percentage points on one's individula income. Will Apple spend less on R&D simply because Steve Jobs has to pay 4.9% more income tax?

December 16 2010 at 11:55 AM Report abuse rate up rate down Reply
rwdvddndcrw

Barter and use cash for purchases, you'll profit on private non-taxed sales far more than in the stock market, and save your 40% tax liability. Hell, little old ladies profit more in bake sales than most do in stocks. Optimistic, check out "CBK", might be worth a run.

December 16 2010 at 6:22 AM Report abuse rate up rate down Reply
dterraman

worthless paper to worthless paper

December 16 2010 at 5:23 AM Report abuse rate up rate down Reply
bdyftns

Dow at 14,000 +. I think not. The Dot Com era is over and the bubble stocks were on up to 2007.....well, hopefully most have learned there lesson. When there's a bubble, it's going to burst.

December 16 2010 at 5:20 AM Report abuse +1 rate up rate down Reply
THER1929

I don't understand why companies have to change from bonds to dividends as they both are presentable for us who have bonds & dividends. Why do they try to mix up clients who have everything ok? This was amazing to confuse clients who are satisfied with their bonds & dividends. Bob Pisani of the SEC always says buy, hold & sell in other wise if your portfolio needs adjustment you can do this accordingly. Therefore there is no need for changes or otherwise we as clients may lose our money.

December 16 2010 at 12:22 AM Report abuse rate up rate down Reply
vlady1000

It was time a few months ago. My broker was suggesting buying bond funds 6 weeks ago, I said "no way, with rates at 60 year low, there is only one way for them to move, up"

December 15 2010 at 11:32 PM Report abuse rate up rate down Reply
fakeconomics1

I am excited because ---I cannot go down anymore---Bottomed out---

December 15 2010 at 9:11 PM Report abuse +4 rate up rate down Reply
fakeconomics1

75 to 80% of small investors are about to jump for stocks--

December 15 2010 at 9:10 PM Report abuse +2 rate up rate down Reply
fakeconomics1

There is some truth to these headlines------Many investors have been waiting for a long time----I see there is a window of three to four years-----stocks yes---I am in--

December 15 2010 at 9:08 PM Report abuse +2 rate up rate down Reply
howdy

thats correct folks.. dig up those rusty coffee cans in the back yard and buy some stocks over the next 2 years.. you will be glad you did. always wrap your paper money in freezer baggies for best results.

December 15 2010 at 8:24 PM Report abuse +1 rate up rate down Reply