Current Portfolio Views

I just created a page with my portfolio returns.  Over the past few years I have benefitted mostly from making a bet on TIPS, municipals and corporate bonds.  My thesis has been, and continues to be, that we are in a protracted neutral environment.  The impact on company earnings due to the poor economic state has been offset by improvements in corporate efficiency -i.e. layoffs and better capital/technology use. As a result, I have felt that corporate bonds, be they high grade or "junk" are good bets.  Municipal bonds are good bets as well.  I believe that the "government" will not let a large municipality default.  Municipalities have a long road to hoe but I believe they will muddle through.  Long dated TIPS are still good value with real yields in the 1% area with the potential of a move to the 0.5% level.  The middle of the curve, however, is fairly priced.  Real yields in the 10 yr maturity area are negative and I expect them to not move too much.  At some point, sooner, rather than later, rates will move up and I think the likely reasons are going to be rising inflation expectations which would be good for TIPS.  Other reasons for yields moving up would be a lower risk premium for US bonds or rising real return expectations due to renewed growth.

While I am still comfortable with continuing the credit bet, I have started hedging out my risk to the absolute level of interest rates.  With the 10yr in the low 2's I don't feel there is a lot of risk to be short the government bonds in that maturity.  If I am wrong and bond yields do go lower, I feel that the yield curve will flatten (longer term yields will go down more) so my bond exposure is tilted toward the longer maturity spectrum.

Higher growth expectations could lead to a rise in rates but that would be good for stocks.  At current levels of interest rates and stock earnings yields, stocks are cheap (see previous posts). Solid companies with good dividend histories are good investments.  "Growth" companies are more speculative.  I have missed the Apple boat despite my feeling they are one of the best companies in the world.  I have difficulty buying the stock at this stage but I have not put it out of the realm of possibility.  Google is another speculative name that is probably a reasonable bet.  Despite their high prices, these two companies valuations are not over-inflated.

Buying stock exposure with call options is a good way to go right now as the market is not putting a big premium on options.  It is important when you do buy options that you buy strikes that are in reasonable range.  I would rather spend my option premium on fewer at-the-money options than a larger quantity of options that have a very low likelihood of paying off.  In addition, I would stick to the simplest options you can find.  Higher levels of complication add to the cost paid to Wall Street.