Jeremy Siegel: Treasury Bonds Today Are a Sucker Bet
by Alexander Green, Chief Investment Strategist
Monday, August 30, 2010: Issue #1334
The investment advisory industry is full of gurus – and various charlatans – claiming that they made incredible stock market calls.
But Wharton Professor Dr. Jeremy Siegel made perhaps the greatest call of all time at the right moment and for the right reasons. Those who listened to him saved themselves many thousands of dollars – and untold agony.
Now Dr. Siegel is making another bold prediction. You can only ignore it at your peril. Here’s why…
Siegel Shocks the Market
On March 13, 2000, The Wall Street Journal ran an op-ed piece from Dr. Siegel entitled “Big-Cap Stocks Are a Sucker Bet.” The column shocked the investment community.
Here was the man, author of the investment classic Stocks for the Long Run and who provided the intellectual underpinnings of the greatest bull market in history, claiming that the greatest stock market darlings weren’t just overvalued. They were a “sucker bet.”
Siegel focused on the 33 largest firms based on market capitalization – those with values greater than $85 billion. Of these, 18 were technology stocks. He noted that their market-weighted P/E equaled 126. What’s more, he pointed out that half of the large-cap technology stocks had P/Es over 100. For these stocks, the market-weighted P/E was 208.
These prices were totally unjustifiable. There was no way that these companies could grow fast enough to support such insane valuations.
Are You Heeding Siegel’s Current Warning?
That month, the Nasdaq – home to these tech giants – hit its all-time high of 5,132. From there, it imploded. Many of the stocks he singled out in the column – like Yahoo! (Nasdaq: YHOO) and JDS Uniphase (Nasdaq: JDSU) – plunged over 99%.
Even today – more than 10 years later – the Nasdaq is 60% below its high.
It’s great when a knowledgeable analyst like this rings a clear warning bell at the top. So understand that he’s doing it again today.
Earlier this month, he wrote another Wall Street Journal op-ed piece. This one is called “The Great American Bond Bubble.”
Siegel says: “What is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.”
As a result, they’re plowing money into Treasuries and Treasury mutual funds.
This will almost certainly end badly.
Unless we have a full-blown deflationary depression, these bonds are a horrible bet, offering minuscule yields and huge downside risk. Many investors don’t realize how badly they can get clobbered in super-safe Treasuries when the bond market turns down. (And those holding leveraged bond funds could see 40% or more of their principal vanish in a matter of months.)
As Siegel concludes: “Those who are now crowding into bonds and bond funds are courting disaster… The possibility of substantial capital losses looms large.”
What does Siegel propose that income investors hold instead?
Don’t Be a Sucker: Invest in This Asset Class Instead
Large-cap dividend stocks.
He points out that the 10 largest dividend payers in the United States are:
AT&T (NYSE: T)
Exxon Mobil (NYSE: XOM)
Chevron (NYSE: CVX)
Procter & Gamble (NYSE: PG)
Johnson & Johnson (NYSE: JNJ)
Verizon (NYSE: VZ)
Phillip Morris (NYSE: PM)
Pfizer (NYSE: PFE)
General Electric (NYSE: GE)
Merck (NYSE: MRK)
And together…
- They sport an average dividend yield of 4%, substantially more than what 10-year Treasuries are paying.
- Their average P/E ratio is 11.7 versus 13 for the S&P 500.
- Aside from the mountain of cash they’re sitting on, their prospective earnings will cover their dividends by more than 2 to 1.
Despite fears of another stock market dip, income investors are wise to switch from Treasuries to high-dividend stocks. It might not feel like the right thing to do, but neither did buying stocks at the market low 17 months ago.
In short, I couldn’t agree with Dr. Siegel more. Treasury bonds today are a sucker bet.
Good investing,
Alexander Green
Related Investment U Articles:
- Long-Term Treasury Bonds: Consider Yourself Warned…
- How to Hedge Against Treasury Positions
- Three of the Best Dividend Investments in the World
- These Investors Are About to Get Slaughtered
- U.S. Treasury Bonds: Why the Safest Investment is Now One of the Riskiest
11 Responses to “Jeremy Siegel: Treasury Bonds Today Are a Sucker Bet”
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Alexander Green is the Chief Investment Strategist of Investment U. A Wall Street veteran, he has more than 20 years of experience as a research analyst, investment advisor, financial writer and portfolio manager.
Is there a funds that represents these stocks
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I have been tracking the mega cap high dividend payers such as those cited in this article. They have moved pretty much with the market meaning that in a market decline they will likely drop off about 80% of whatever the market indices decline. I believe this is because these stocks make up the large index ETF’s which are heavily traded by the hedge funds and are the primary movers of the market overall. Yes, they will be able to pay their dividends but their market loss will more than offset the dividend income. Better to buy quality stocks in defensive sectors like utilities, telecommunications, medical services/pharmaceuticals and tobacco yielding 5% or better.
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G.E. They’re bankrupt aren’t they?
(only they don’t know it)
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Great stock ideas!!I own 4 of them…but you failed to mention that GE(purchased above 20.00 recently) cut its dividend & lost me $$. I will make a prediction !! the MARKET will recover in 18 months to a DOW of 12,000 PLUS…If I’m right, then I’ll start a news letter….If not, well I’ll forget the whole thing…….Please show ALL your stock tips! So we can really evaluate your record…
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Great advice!
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This makes me wonder about two parts of my “Gone Fishin” portfolio balance. They contain bonds!
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I could not agree with you more. With such incredible increases in the money supply, and inflation surely a result, bond holders will get burned. Of course such cheap, low interest bonds might be a boon for corporations lowering their capital costs. Nonetheless, bondholders will take a hit, if for no other reason than returns lower than the inflation rate. There is an underlying fear prevalent in the economy.
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Thanks for enlightening article. In fact I am very happy to know that famous investment experts, both Dr. Jeremy Siegel and Dr.Alexander Green, have shed more light on the concern about US bond bubble which I had pointed out in my tweet a couple of weeks back on twitter. Thanks again
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In recommending these dividend payers vs. the risky trend to treasury bonds, why does he not discuss other bond types, such as Pimco funds, that reflect these cash rich companys he talks about? Are these seen as exploding downwards also?
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Perhaps my eyes are broken, I’m sure I saw GE on
that list of stocks apparently sitting on a
mountain of cash. I read recently that GE have a
Mountain of debt. Which one is correct?
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HAS ANYONE CHECKED INTO WHAT MR OBAMA AND FRIENDS ARE PLANNING TO DO WITH TAXES NEXT YEAR RELATIVE TO DIVIDENDS??
AS I READ IT TAXES ON DIVIDENDS WOULD RISE TO APPROXIMATELY 36 TO 39% BASED ON INCOME–WITH THE DOWNSIDE THREAT TO PRICE ON THESE STOCKS IS THIS RECOMMENDATION REALLY A GOOD IDEA?????
SEEMS A BIT OF A CHANCY RECOMMENDATION TO SAY THE LEAST
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