Dividend Stock Valuations

In a search for yield, investors have actively purchased dividend paying stocks. As a result, prices have risen (and dividend yields have fallen). The question has thus become whether these prices are too high. See article here, WSJ.

REITs Break-Out from Financials

REITs have historically been considered part of the financial sector. With its growth and relative importance, however, REITs have been carved out to create a new industry sector, the first in almost 20 years. See article here, Investment News.

Contrarian ETF

Contrarian investors seek to buy stocks that other investors are selling. An extreme example would be buying stocks that have high levels of short interest. A recently created ETF intends to do just that, with the goal of benefiting from potential price reversals, as well as from potential short squeezes that occur as short sellers rush to cover their positions. See article here, ETF.com.

Can We Rely on Accounting?

Determining firm value relies on estimating items such as cash flows and discount rates. Much of this stems from basic accounting statements. However, as a recent WSJ article  notes, the backward focus of accounting is often unreliable in predicting future values necessary for valuation.

Interest Rates and Intrinsic Value

In theory, the intrinsic value of a financial asset is simply the present value (PV) of its future cash flows. As in any PV calculation, the discount rate is determined by the market interest rate plus a risk premium. With lower interest rates, all else equal, PV is higher. Thus, if market interest rates rise, asset values (and associated market prices) could be set for a fall. See article here, WSJ.

Rate Increase Creates Risk for Both Bond and Equity Buyers

Long-term U.S. bonds continue to be in demand, even in the face of a potential increase in interest rates. Duration, which measures a bond's price sensitivity to interest rate changes, is higher for longer-term bonds, suggesting that buyers could be in for a big surprise if the Federal Reserve proceeds with the rate increase. See article here, WSJ. At the same time, equity markets fell with the renewed expectation of a rate increase. See article here, WSJ.

Yield Curve Flattens

The spread between short- and long-term government bonds has decreased, creating a so-called flatter yield curve. This move has been driven by two factors. First, there is an increased belief that the Federal Reserve will raise interest rates, which has driven up the yields on shorter-term bonds. Second, foreign buyers have been acquiring longer-term U.S. bonds as they have a higher yield than their home country offers. This has pushed down the yield of longer term bonds, creating the flatter yield curve. See article here, WSJ.