Bear Markets, Runaway Real Estate And The Latest Fed-Induced Implosion

Our 32nd President, Franklin D. Roosevelt, provided the best public speaking advice on record: “Be brief; be sincere; be seated.”

And that’s precisely what I aim to do today, as I usher in another set of charts.

For the newbies in our midst, each Friday I handpick a few graphics to convey the most important economic and investing insights for the week.

Today, I’m dishing on the specter of a bear market, runaway real estate prices and the most dangerous income investment in the world.

So let’s get to it…

No Bear Sightings Here…

Here’s more proof that we should shrug off the recent market volatility and just keep calm and carry on.

In each of the last four years, we’ve experienced momentary pullbacks. And each time, the market ultimately resumed its upward trajectory.

I expect this go-round to be the same.

In other words, it won’t be different this time. (Is it ever?)

The Roof, the Roof…

The roof is on fire!

On Tuesday, the latest reading of the S&P/Case-Shiller Home Price Indices was released.


Year-over-year, home prices surged 12%. That’s the fastest growth witnessed in over seven years.

But we don’t need no stinking water to put out this blaze.

Like I’ve shared before, the rapid run-up in prices is a low-inventory phenomenon. And the market will naturally correct itself.

As home prices keep increasing, more homeowners will be convinced to put their houses on the market. Couple that with the almost-instantaneous 1% surge in borrowing costs we’ve witnessed, and voila!

More supply and less purchasing power will help keep a lid on prices – and, in turn, the recovery should continue unabated. Bet on it!

Junk in the Trunk
Back in October 2012, and then again in November 2012, I warned yield-hungry investors about the dangers lurking in high-yield bond funds.

In fact, I pegged them as “the most dangerous income investment in the world.”

I told you to specifically steer clear of the SPDR Barclays Capital High Yield Bond Fund (JNK) and the iShares iBoxx $ High Yield Corporate Bond Fund (HYG).

Well, I finally feel vindicated. Because the exodus has begun!

And all it took was the hint of an interest rate increase from the Fed.

Of course, the Fed’s comments also spooked bond investors of every stripe and color.

The latest mutual fund flow data reveals that investors yanked a record $61.7 billion out of bond funds this month. That’s almost $20 billion more than the previous record hit in October 2008.


Talk about a dramatic about-face. Before this month, bond funds posted inflows for 21 consecutive months, according to David Santschi, Chief Executive Officer of TrimTabs.

Even the world’s best (and biggest) bond fund manager, Pimco’s Bill Gross, suffered withdrawals. Investors withdrew just over $1.3 billion from his flagship Pimco Total Return Fund (PTTRX) in May.

Yet in his latest note to investors (see here), he’s urging them to stay the course.

“And not because we want to keep you on board [as clients],” says Gross.

Sure it’s not, Mr. Gross.

Add it all up, and at the very least, you need to get the junk out of your portfolio’s trunk if you haven’t done so already. And be very, very careful putting any new money to work in bonds right now. Stick to short-term maturities.

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