Dec 30, 2008 @ 09:28 am
Sometimes it seems there's just no light at the end of the tunnel. Even those of us who try to look at the bright side of things are getting worn down a bit. On the surface, it seems like there is nothing good coming around the corner.
Housing prices continue to drop. Commercial real estate prices are catching up fast. State budgets are facing deep deficits and a couple of them (Michigan for sure) are headed for bankruptcy. Retailers are cannibalizing each other by slashing prices just to get any sales at all (ain't capitalism grand if you're prepared?).
To top it all off, the next round of unemployment data is just days away. When you consider almost two million jobs have been lost so far in 2008 and about 60% of those in just the past three months. Unemployment is accelerating and December's job report could be the worst yet. It'll be almost impossible for a sustainable economic recovery to occur without consumers feeling confident they'll still have a job in six months.
The report might be bad, it may be horrible. Either way, the report will force the markets to do a reality check. And reality is the last thing bulls want the markets to focus on.
Despite it all, you should be getting excited about 2009.
You see, the markets have made a complete 180 degree turn in the past few months. "Safe" assets like U.S. treasury bonds are sitting at multi-decade highs. Safe stocks are fetching a premium. For instance, Wal-Mart (NYSE:WMT) has been one of the best performing stocks of the year.
Safe is in and risk is out. That means safe things are expensive too expensive in many cases, and risk is cheap. For instance, as we looked at the other day, convertible bonds are as cheap as they have been in nearly three decades.
Convertibles are risky because they are only issued by companies who are truly desperate for cash. They have to offer investors the security of a bond and all the upside of a stock just to get the capital they need.
On top of that, high-grade municipal bonds, issued by states and local municipalities, are yielding 5% or 6%. Yields this high would have been unthinkable just a few years ago.
Here's the thing though, since risk is so cheap, the amount of risk has actually been reduced. Meanwhile, the upside potential has increased exponentially.
The perfect example is in the riskiest of all assets, the TSX Venture Exchange. The Venture Exchange is home to all of the penny mining stocks and other venture stage companies which are the most speculative investments (a.k.a. the most likely to fail miserably) you can make. It's one of the few places you can earn quadruple-digit returns if you're holding the right lottery ticketerrshares of the right company.
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