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Stocks continued to move up this week as money still has no other place to go. However, the rate of incline has slowed quite a bit causing the rally to look a little bit tired leaving the market vulnerable to a correction. That applies to a “normal” market, with “normal” asset classes, and places for traders to put money if they pull it out of stocks. One of the consequences of QE is we no longer have a “normal” market and there is nowhere else to go. We also continue to see massive inflows into equity mutual funds and ETFs from retail investors moving out of bonds or off the sidelines. As long as this continues it will be hard for any selloff to gain momentum.
Of course at some point the music will stop, everyone who was on the sidelines or in bonds will be in stocks and the Fed will end QE, but until then US stocks are still the place to be.
We added countertrend positions in small cap stocks in our Trend Aggregation Strategies today based on yesterday’s weakness. Our Momentum Strategies are as fully invested as they can be in stocks while our Trend Aggregation Strategies still have some cash based on the market being overbought in the short term. That cash will be put to use if we have any type of selloff.
Are Muni Bonds Worth the Risk?
Last week Detroit went bankrupt. Mayor David Bing said, “We may be one of the first. We are the largest. But we absolutely will not be the last.” Which begs the question, in this type of environment does it make sense to own Municipal Bonds?
Munis are one of those asset classes that have a set of ardent followers, they have always bought muni bonds and they will always only buy muni bonds. Over the past 30 years or so they have been richly rewarded as munis have done well during the bond bull market. That could be changing. According to Morningstar, the iShares S&P National AMT-Free Muni Bd (MUB) a decent proxy for the muni bond market as a whole, is down 4.91% year to date (as of 7/22/13) and down 6.19% over the past three months. That wipes out about three years or so of interest payments in three months. If you look at the returns of closed ended funds that invest in munis the results are a lot worse.
The muni lovers will argue that you should own munis because interest is tax free. That is a great benefit but it ignores the fact that tax planning is just one part of your overall financial picture. Too many times I see people make poor financial decisions that are solely motivated by taxes. Taxes should be considered but at the end of the day it is what you have in your pocket after capital gains, interest, and dividends, minus taxes, that matters.
Does this mean that muni bonds won’t turn around and go up from here? No, anything can happen, nobody can predict markets. Successful investing is not about predictions it is about probabilities and staying in harmony with market trends. The trend of munis is down while other assets are in an uptrend. You have a better probability of making money buying something in an uptrend than you do trying to call the bottom of the muni market.
Another important lesson is that you cannot fall in love with any asset class in particular (Gold, Apple Stock, etc). I like anything in an uptrend and I hate anything in a downtrend. Today I don’t like munis, if the trend reverses I will like them again.