Bonds should have little to no place in your portfolios

What I find very interesting is that over the past year, Energy, Materials, & Telecom Stocks (up 33%, 23%, and 25%, respectively) over the last 12 months, however, IT Stocks are up only 12%.  It appears that most of the excess capital poured into the market (QE2 and extremely low overnight rights) has gone towards stocks in the commodity linked sector such as Energy & Materials.

Much to my surprise, since corporations are still near all-time highs on Cash on their balance sheets ,that an increase in M&A, especially with IT like-kind acquisitions, and firms outsourcing, that equity prices have not been jumping in that sector.

From a Bond standpoint, I wouldn’t touch anything out there right now because spreads are way too tight due to the amount of liquidity in the market right now.  There’s WAY too much risk versus reward in many different scenarios.         

1)  Economy recovers & Unemployment decreases:  Fed tightens, demand shock upward, and yields rise.  Given all the mass inflows over the past 3 years (mutual funds, institutions, endowments) in fixed income, a way of sell offs will begin.  I’m not thinking defaults will be the case however demand will cause a drop in value

2) Economy continues to decline:  Unemployment worsens:  Fed will instill QE3 and rush to Treasuries will widen spreads even more.  The current 50-75 bps spread to take for corporates don’t make any sense.  If you want fixed income & bearish on the economy, Treasuries are the way to go.  Volatility will increase and correlation will go to 1.00.

3) Economy stays sluggish and we see stagflation:  Given the upside down yields (dividends higher than bond yields), investors forecasting a sluggish market for years to come will seek for high-quality cash flow intensive (& dividend paying) securities to invest in going forward.

Current P/E Ratios (trailing 12 months) in the S&P 500 are still well-below 20 which tends to be an indicator for increased equity prices, given historical prices in similar interest rate environments.  The yield curve is still steeply sloping and that trend doesn't look to be changing fast enough.  Lastly, cash on corporate balance sheets (non-financial corporations) are still near all-time highs which states demand is still pent up as corporations will eventually start to either a) payout to shareholders to spend b) increase in M&A or c) increase Cap Ex which may lead to job growth.

All in all, my thesis states that equities ( I like IT stocks the most) will be much more favorable for the next 12-18 months.

take care and avenge!