With so many qualified candidates, the challenge is to narrow down to our ten least-favorites, but here goes:
10. VelocityShares Daily Inverse VIX ST ETN (XIV) – Volatility measures such as the VIX are at their lowest levels since the top of the 2007 credit bubble. This ETN is short.
9. PIMCO California Municipal Income Fund II (PCK) – The bonds in this closed-end fund yield a tempting 6.8% for a reason: California is a fiscal mess. Even worse, yield-chasers bid the fund’s shares to a 20% premium over net asset value.
8. iShares iBoxx $ Invest Grade Corp Bond ETF (LQD) – With an average yield of 3.79% and weighted average maturity of 11.8 years, this ETF offers what Jim Grant derides as “return free risk.” Worse, one-third of the portfolio is invested in bonds of financials: mostly mega-banks and investment banks. LQD has attracted nearly $8 billion in inflows the past 2 years.
7. iShares Dow Jones US Real Estate ETF (IYR) – Powered by investors reaching for yield, this ETF boasts a total return of 25.9% per year over the past 4 years. Unfortunately, valuations are stretched: current yield is just 3.2% and REITs typically trade at 20 x FFO (funds from operations), at the high end of their range. Worse, access to cheap capital has translated into acquisition binges at some of the portfolio companies.
6. 30-year U.S. Treasury bonds – When entitlements are included, the U.S. government’s debt/GDP is estimated at over 600%, in all likelihood the highest in the world. For this elevated risk, bondholders are locking in all of 3.18% interest for 30 years. A default is coming within the next 5 years, either openly by default or insidiously via the printing press.
5. PIMCO High Income Fund (PHK) – The current yield is 11.5%, but a good chunk of this is being paid out of principal as high yield bonds yield close to 5%. The portfolio is loaded with financial and mortgage-related paper. For this, closed-end investors are paying a 45% premium to NAV.
4. iShares FTSE China 25 Index Fund (FXI) – Call us skeptical of the Chinese miracle with its central planning, cronyism, loose lending, artificial booms in housing, infrastructure and commodities, empty cities, rampant waste, and conspicuous consumption. This popular ETF has a 57% weighting in financials, mostly large domestic banks.
3. PIMCO Global Stocksplus & Income Fund (PGP) – This closed-end fund boasts a seductive 10.7% current yield and 30.8% compounded annual return over the past 4 years. Investors may or may not realize returns have been turbo-charged with 50% leverage coming from S&P 500 stock index futures. Either way, they don’t seem to care, bidding up the shares to a 58% premium over NAV.
2. Global “Too Big to Fail” bank/investment bank stocks – Fractional reserve banking + moral hazard of TBTF = toxic combination. The 2008 meltdown claimed its share of these political capitalists always teetering on insolvency (Bear Stearns, Lehman, Citigroup, et. al.). What sins have the survivors committed during this epic stimulus/sovereign debt/reach-for-yield bubble? We’re about to find out.
1. 10-year Japanese government bonds – Japan has the second highest debt in the world behind the U.S. with an economy one-third the size. Debt/GDP is the highest in the world at over 220%, well ahead of #2 Greece and #3 Zimbabwe. Thanks to the kindness of domestic savers (burned by the bursting stock bubble of the late 1980s), the 10-year yields just 0.83%. In an effort to stimulate its economy, the Bank of Japan is hell bent on creating 2% inflation. (We’re guessing they’ll succeed.) So far, selling by bondholders planning for their golden years has been orderly. As the government strains to meet higher interest payments, these patriotic creditors could turn tail and run.
Let the race to the bottom begin!