BONDS VS STOCKS---

The bond yield vs stock purchase puzzle explained.

I was WRONG last week when I stated that the sideline money was coming into the market. It isn't. It is still scared. Partly because the people on the sidelines are people who hate and resent paying commissions, can't make their own decisions but eventually do anyway. Mainly they say they are "confused" by bonds.

Here's the deal. Treasuries are now paying 4.5% interest, never mind why. A ton of good stocks are paying better than 4%. There is "risk" in stock prices going down which negate any dividend gain. There is no risk at all of a Treasury Security going down once owned. Taxes on treasury yields are straight income, taxes on dividends are now 15%. So people who like to "study" and "analyze" get confused, poor babies. They have to sit around and figure and figure and figure.

1. A stock that yields 4% and rises in price gives a double kick. A rise of 5% plus a dividend yield of 4% at buy in price is 9% and the gain isn't paid until sold. BUT, oh my God, SUPPOSE the stock falls in price?

A QUICK BOND INTEREST RATE EXPLANATION: When bond prices rise---interest rates fall and vice versa. If you don't get it, here is what is what. PRETEND interest rates are at 5%. A $100 bond would then sell for $95 (making it simple here) allowing you to collect $5 on the coupon; you pay 95 to get back 100 GUARANTEED. Now if interest rates rose to 10% you would buy the bond for $90 (collect the $10 in coupon interest); you pay only 90 to get back 100 GUARANTEED. When rates rise from five percent to ten percent, the price you pay for the interest bearing note falls (you paid 95 when rates were 5% and 90 when they rose to 10%). What is happening in the market right now is that a lot of people are selling treasuries and presumably buying better yielding stocks. This selling is forcing treasury prices DOWN (too much selling meets too little demand) to the point where treasuries become attractive compared to alternative investments. So falling prices drive interest rates up. Personally, and I am just being personal, look for seniors seeking safety above all to buy bonds; treasuries are far above bank yields. This will boost prices (lower rates). The banks, never one to shun making a killing, can borrow from the Fed window at 1.5% and buy treasuries yielding 4.5%, a reason why bank stocks have soared. Again, a real Democratic Party would be all over this like bat shit on a cave floor, but they talk about abortion, sixteen words, and the economy.