GM, Fed, Treasuries

This week my top 3 stories are: bankruptcy of GM, message from Ben Bernanke - Federal Reserve Chair, and Treasury bill and bond yield rates. The story that got the most press was GM.

The new GM will be a great company to invest in whenever the new shares are issued in 2010 or 2011. It has most of the debt and pension obligation responsibility removed. It is important to keep track of the winners and losers in this bankruptcy as it gives insight into fiscal policy. The winners are the members of UAW and banks who are kept essentially whole while the losers are bond holders and tax payers who get about $0.50 per $1.00 invested. This means that the administration has placed a priority on the UAW and bank returns over private investors and taxpayers. This means that the investing climate is favorable for banks and not favorable for buyers of corporate bonds. If you as a citizen want to get the rest of your money, you will need to buy some shares of the new GM.

Ben Bernanke made a statement this week that the government needs to have fiscal restraint which means that the Congress and the President should stop passing spending bills. He viewed the stimulus bill and future spending plans as being fiscally irresponsible because the interest payments will become a huge financial burden and the printing of money to fund additional spending will lead to higher inflation and higher prices for imported commodities like oil. The long term impact of living beyond your means is always bad for an individual, a business, and our government. It appears that he made this statement so that people would remember that the Fed makes monetary policy and has nothing to do with fiscal policy and wants to disconnect from the current direction. As an investor this means that the current investing strategy of being in the stock market and having mutual funds that emphasize commodities and avoiding long term treasury bonds makes great sense.

The statement from Ben Bernanke fits well with the next topic, treasury bill and bond yield rates. From an investment perspective, the important news that got very little press was the steepening of the treasury bond curve. Longer term bonds continue to get higher and higher in yield while the yield on short term bills stay very low. Banks really like this environment since they pay little interest on savings accounts and make loans at higher interest rates. The current return for an investor on a 3 month treasury bill is about 0.19%. With the increasing 10 and 30 year treasury bond yield rates investors who are holding them are losing money, about 27% so far this year for the 30 year treasury bond. The reason long term bond yields are going up is an indicator for higher inflation.

The US stock market continues to go up in value while employment rates get worse, does this make sense? Losing a job is terrible for the person and their family. From an investment viewpoint, with the economy improving and companies reducing cost, this will resu;t in higher productivity with higher revenues and higher earnings per share in the future compared to last quarter. Yes it continues to make sense to buy stocks of US companies.

Summer is upon us. Enjoy the good things of life.