Rotations and Bubbles – Van Eck Market Update for 2/25/13

February 25th, 2013 by

Municipal Market Strategist James ColbyThe following commentary is written by James Colby, Senior Municipal Strategist for Market Vector’s non-taxable exchange-traded funds, and provided courtesy of Van Eck

Many portfolio manager commentaries from large, well-known investment companies have, over the past several weeks, generated thoughts about the murky future of the markets and economy. Several appear to lead with the suggestion that an unseen hand is poised to pull on a figurative lever to categorically change broad strategy (asset allocation) from bonds to stocks; this would be called “The Great Rotation.” Others offer suggestions that the current strategy of asset allocation, which has taken us to significant returns over the past 24 months, is about to combust; this would be called “Bursting the Bubble.” Because of the eye-catching phraseology involved, I fear that readers may feel that these potentialities arefaits accomplis.

The Great Rotation, or change in asset allocation from bonds to stocks, is a discussion worth having for those investors and managers who are actively managing assets and trying to generate alpha or returns significantly higher than median. Given that, at some point, it is not unreasonable to expect that stimulative efforts of the Federal Reserve will induce growth and inflation, I believe that we will likely see interest rates rise and turn the favor of investors toward equities. We just don’t know whether this turn will happen during this calendar year.

Bursting the Bubble relates to the possibility that an overreliance upon bonds as an asset allocation will lead to damaged returns if and when rates do begin to rise. A reasonable definition of the term “Bubble Theory” reads as follows: “A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these bubbles are easily identifiable.”*

I offer up this comment to suggest that while these terms have merit, I believe that there is danger in accepting the face value of these concepts, especially out of context of the longer view of an asset allocation strategy using tax-exempt bonds. For investors in tax-exempt products, one must remember that since personal income taxes have risen, the value of the exemption might mean more now than it did when purchased over the past several years. Furthermore, the debate should, in my opinion, focus less on whether prices have truly risen “far beyond their true values” and focus more on the fact that this asset class delivers what I consider a greater benefit of credit quality and stability in an increasingly volatile marketplace.

Important Disclosure

Van Eck Associates Corporation does not provide tax, legal or accounting advice. Investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service.

Please note that the information herein represents the opinion of Jim Colby and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Global. © 2012 Van Eck Securities Corporation. MUNI NATION is a service mark of Van Eck Associates Corporation.

All indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made.

Any discussion of specific securities mentioned in the commentary is neither an offer to sell nor a solicitation to buy these securities.

Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.

The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may be subject to alternative minimum tax.

Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 888.MKT.VCTR | 888.658.8287. Please read the prospectus and summary prospectus carefully before investing. 

Not FDIC Insured — No Bank Guarantee — May Lose Value

Van Eck Securities Corporation, Distribution
335 Madison Avenue, 19th Floor
New York, NY 10017
888.MKT.VCTR | 888.658.8287

Print Friendly
Please Share!