People would rather overpay for bonds than underpay for stocks

Aug. 16 (Bloomberg) -- Investors are moving more money than ever before out of stocks and into bonds, widening a valuation gap and convincing JPMorgan Chase & Co. and BlackRock Inc. that now is the time to buy equities.

About $33 billion flowed out of funds owning U.S. shares this year even as the economic recovery sent free cash flow for American companies excluding banks to 6.8 percent of their market value. That’s the highest level compared with corporate debt yields since 1960, Credit Suisse Group AG data show. About $185 billion was sent to bond funds through July 31, the most on record, according to the Investment Company Institute.

The biggest money managers say concern the U.S. will slip into a recession is overblown and that individuals piling into fixed-income securities for their relative safety are making a mistake. David Kelly, who helps oversee $445 billion as chief market strategist for JPMorgan Funds, says record low yields show there’s too much demand for bonds and aren’t a sign the economy is headed for the second recession in three years.

“People would rather overpay for bonds than underpay for stocks,” Kelly said in an interview from New York. “It’s a reflection of an extraordinary prejudice. If people are at an emotional extreme, it means that at some point there’s got to be reallocation of cash away from the bond market toward the stock market. Ultimately, it’s bullish.”

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aRooQ_CS052M

 

I completely agree with mr. kelly eventually people will stray away from the bond market and reallocate their money towards the stock market and in time this proves 1. that certain stocks are underpriced not all however. and 2. that market is probably going to be bullish once this change happens.

 

Let me guess, JP asset mgmt are massively overweight equities and underweight bonds. Don't ask me how I figured that out, it's a secret

 

I think the argument that bonds are overpriced is better than the argument that stocks are underpriced. In fact, I would suggest the situation is different: if the bond market is correct and we're in for a lost decade, stocks are overpriced. If the bond market is wrong and we recover in the next 5 years, stocks may be right but bonds are overpriced. One or the other is too high.

So I'd say the trade is short bonds, short equities. You could replace the short bond leg with short dollars, or the equities leg with long dollars if you were so inclined.

 

the OP and the article writer are correct- but being right at the wrong time can be very costly.

We may still see 6 months to a year of bonds bubbling up while equities may falter lower...

 

Actually, both bonds AND stocks are overpriced.

During normal times only one of them was overpriced, so the other was underpriced.
These are no longer normal times, sh*t happens!

 

no one has any faith in the pricing of stocks, as well they shouldn't

i never did, so I didn't have to learn

30 year going to 200

 

Still avoiding my challenge cgarcia? You're still the most pathetic person on ET and that's quite an accomplishment given some of your competition!

 

Both are overpriced, all the intervention in the economy and worthless dollars being thrown around is keeping everything from being priced where they should be priced.

 

1 month yields : 0.15 %
3 month yields : 0.16 %
6 month yields : 0.19 %
1 yr : 0.25 %
2 yr : 0.51 %
5 yr : 1.40 %
10 yr : 2.58 %
30 yr : 3.72 %



Dividend yields :

http://indexarb.com/dividendYieldSorteddj.html

That´s the relative 1 yr performance of futures :

http://www.finviz.com/futures_performance.ashx?v=16

and than there is currency volatility and the gains in bond prices.

Question : how much lower can bond yields fall ?