Well, it’s the new year, and the traditional sector rotation is underway. Basically, everybody’s buying the beaten-down stuff from last year in search of “value” and shorting anything that worked last year (i.e. Treasurys). I happen to believe that shorting Treasurys will work out but probably more so in 2010-2011–it’s a little early for the trade, but if you have a longer-term time horizon, by all means…I prefer TBT (ultrashort 20+ Treasury ETF, PST is the ultrashort ETF for shorter-duration Treasurys), but one could also short the long ETFs for Treasurys. As for beaten-down stuff from last year, my buy list (on the left) is still on my mind, and I continue to buy the best values. Looking further, I’m a fan of junk bonds, but again, this trade could get uglier before it gets better (again, more likely in 2010-2011), and use the HYG ETF as my trade. While munis are popular, I’m actually somewhat more worried about them than junk bonds, as state/local budgets continue to get shredded, and will for longer than people think. Local budgets need to cram down salaries, benefits and STILL they need to re-assess declining property values, vacant stores etc, and this is a longer process than 1 year. In other words, it’s easy to deal with a company and its bonds/capital structure relative to municipalities’ deteriorating balance sheet.
So, I’m somewhat with consensus that decent values can be picked out of the stock market (clean balance sheet stocks that are undervalued even with massive sales drops), Treasurys can be shorted here, and junk bonds are worth a look. I’m against consensus in that I do not feel investment grade bonds offer an appropriate risk reward, and I’m suspicious of munis due to local balance sheet issues.
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