Ready for a bear market in bonds?

As the bond market shows initial signs of finally choking on the Fed's easy money policy, it's time to be vigilant. Plus: Why the upbeat jobs numbers aren't believable.

Federal Reserve Chairman Ben Bernanke's prepared comments for the House Budget Committee on Feb. 2 were not at all earthshaking, and I must admit I had the stomach to listen to only a small snippet of the Q&A.

Yet one bit of his testimony that I did see said it all -- that the Fed might "bring inflation up to target" if necessary. That implies not only that the Fed knows what the right target is for inflation, but that it can hit said target.

Past performance no guarantee of . . . oh, never mind

However, if you take a step back and examine all the things that Fed leaders have gotten wrong, then consider the idea that they think they can thread the needle precisely enough to fine-tune the exact inflation rate (which is all the more humorous because inflation data are completely bogus), you can quickly see how big of an opinion they have of their own opinion.

I continue to find the Fed's arrogance rather amazing. If you read Bernanke's statements from 2004 to 2006, you will realize he was completely clueless about the housing bubble -- and, of course, he certainly doesn't believe that the Fed caused it.

Thus, for a guy who did not even see the most obvious bubble in the history of the world, it strikes me as the height of hubris for him to think he can pick not just the right interest rates (since they are essentially at zero now) but the right inflation rate to target in order to make the world hum the way he likes.

Bill Fleckenstein

Of course, to repeat something I have been saying for almost 20 years, the Fed is the problem because it continually picks the wrong interest rate -- always too low -- which leads to a train wreck. Then it comes back and prescribes more of the same medicine. Now that rates are near zero, and the Fed has committed to keeping them there for a few more years (read "All roads lead to inflation" for more on this decision), the only medicine it has left is goosing the money supply through bond buying, i.e., quantitative easing.

I believe we are headed to the next phase of this process, whereby the bond markets of the world are going to demand more in the form of interest rates than the central bankers want to give them, because the fears of a deflationary misstep will likely abate. Though that is not yet today's business, it looks to be where we are headed.

How the Fed controls interest rates

Liquidity hogs turn up noses at money trough

On the subject of bonds, I noted that in the wake of Tuesday's promise of continued liquidity (by Bernanke, this time testifying in front of the Senate), which aided stocks and commodities, bonds were hit hard. That is not a development we have seen very often, as the liquidity hogs in the bond market have typically lapped up any news regarding the Fed's easy-money policies over about two decades now.

I certainly don't want to make too much of one day's action. But if we get into a period where the bond market routinely sinks on the notion of more liquidity, or a lack of potential deflationary disasters, we may, in fact, finally be in a secular bond bear market, following the 30-year secular bond bull market.

I don't think we can draw too many conclusions until we see how markets behave after the next round of money printing (sorry, I mean "long-term refinancing operations") by the European Central Bank later this month. But if the Europeans manage to take worries about a deflationary accident off the table, and kick the can down the road, I can't imagine the bond market staying where it currently is.

Thus, it may pay dividends to follow the bond market action closely a few weeks from now, and I intend to be alert to the possibility of a nasty sell-off in bonds, and potentially the start of a bear market in them.

In my opinion, that would be the catalyst for true bond vigilantes to take the printing press away from the central bankers, which would mark the end of the all-paper reserve currency (i.e., dollar) experiment begun in 1971. (Find out more about the so-called "Nixon Shock" of 1971 here.)

That will mean a difficult period, but it would give us the chance to pursue sound economic policies for the first time in about 50 years (excluding the Paul Volckerperiod of 1980-87.)

Back to work, or back to the drawing board?

I was surprised at the enthusiasm with which writers greeted the employment data that generated so much discussion on Feb. 3.

While it is clear that the report was an improvement over what we have seen, there are enough questions that it is not possible to draw conclusions about the validity of the strength.

My suspicion is that the jobs market is not as strong as that report would have us believe, but we are simply not going to be sure until we see what the next couple of months bring. Certainly, those who are already enthused about the real-estate markets are getting ahead of themselves.

One research service I subscribe to spent a good deal of time and effort looking into the employment data in a recent letter to clients, and the most salient point was the fact that in January we had an actual loss of 62,000 manufacturing jobs, which turned into a gain of 50,000, thanks to seasonal adjustments. Of course, to think that we actually lost 62,000 with the weather as warm as it was shows just how weak the underlying economy is.

My buddy, tech stock guru Fred Hickey, lent support to this view as well. He pointed out that the knuckleheads onBubblevision have recently been positively salivating over the strength of the economy, even though virtually all of the major tech companies reported revenue problems as of December, including International Business Machines (IBM -0.37%, news), Intel (INTC -0.61%, news), Microsoft (MSFT -0.89%, news), Juniper Networks(JNPR -1.98%, news)and especially Google (GOOG -0.91%, news)and Amazon.com (AMZN +0.30%, news). (Microsoft owns and publishes MSN Money.)

Thus, there is not much chance that anomalous "good news" like the January jobs data will divert Bernanke from the path he is on. Even if the Bureau of Labor Statistics decides to get even cleverer, voters are still going to know that if somewhere between 9% and 15% of the population is unemployed, or underemployed (as is the case currently), it doesn't really matter what the official rate is.

8 stocks with growing dividends

Investing in companies that regularly raise their payouts provides security in an uncertain market -- and means fatter returns ahead.

Thanks to two catastrophic bear markets over the past dozen years, the strategy of buying stocks and holding them forever has fallen into disfavor. But that doesn't mean a buy-and-hold investing strategy is all bad; it just needs some tweaking. So in that spirit, allow us to introduce a variation that we think makes a lot of sense. Call it "buy and hold and collect and grow," or BHCG for short.

The strategy is simple: You buy stocks that regularly boost their dividends and hold for the long haul. By doing so, you hitch a ride with cash-rich businesses that generate higher revenues, profits and cash flow year after year. The best of these companies are committed to boosting their dividends by double-digit percentages in all economic and market cycles.

BHCG stocks don't necessarily pay superhigh dividends, as doesAT&T (T -0.98%, news), with its lavish 5.9% yield. But current income isn't the point. Rather, the idea is to target companies whose share prices rise steadily along with their dividend streams. If the strategy works as expected, you earn a handsome yield based on the price of your initial purchase.

Some experienced investors believe BHCG offers the best mixture of safety and opportunity. One of them is Tom Cameron, who entered the investment business in 1953. Now head of Dividend Growth Advisors, in Ridgeland, S.C., and a co-manager of the Dividend Growth Trust Rising Dividend Growth (ICRDX -0.55%) fund, Cameron requires any stock he buys to have annualized dividend growth of at least 10% over the previous 10 years. When he talks with company bosses, Cameron says, he makes sure big dividend increases are "part of the culture." He immediately boots out any company that cuts its dividend. In 2008, Cameron, 84, dumped all of his shares of Bank of America (BAC -0.14%, news) after the company halved its quarterly payout. B of A shares traded at $28 at the time. They now fetch less than $7.30.

To see how dividend growth and share-price appreciation work in tandem, study McDonald's (MCD -0.49%, news). In 2001, Mickey D's paid out 23 cents a share in dividends on a stock that averaged about $30 a share, for a yield of 0.8%. In 2002, McDonald's raised its annual dividend to 24 cents. Then the company's fortunes improved, and McDonald's decided to give more generously to its shareholders. By 2006, the rate was $1 a share. After a 15% boost in November 2011, the Golden Arches now pays at a rate of $2.80 a year. That's a 1,100% increase since 2001, or 28% annualized.

Dividend growth magic

Order some McDonald's stock today and you'll pay $99 a share. That puts the current yield below 3%, which isn't life-altering if you depend on dividends to supplement your income. But, remember, BHCG is a long-term plan, and the real story is the progression of the yield over time. If you paid $30 a share for McDonald's in 2001, your current yield on that original purchase works out to a lusty 9.3%.

And what does the future hold for McDonald's stock? Market volatility has been off the charts lately, and traders sometimes ignore company fundamentals. But over a decade or more, the market won't let a stock languish if a company relentlessly raises its cash payout. Over the past five years, McDonald's has generated growth in earnings and free cash flow (the source of money to pay dividends) of 15% to 20% a year. It's hard to imagine a company as large as McDonald's generating such rapid growth indefinitely. But low-double-digit growth should be within reach as McDonald's continues to benefit from growing consumer spending around the globe, especially in emerging markets.

Stocks with the highest dividends

Still, past performance is not always a harbinger of future results. A company can have a robust dividend-growth record but come with flaws that make it a risky investment. The most significant omen: when free cash flow doesn't support an expansive dividend policy. Rather than bottom-line earnings, free cash flow -- earnings plus depreciation and other noncash charges, minus the capital expenditures needed to maintain a business -- is the source of the money a company can use to disburse dividends. If a company promises more dividends than it generates in free cash, it needs to borrow money, starve the business or gradually liquidate itself.

Meridian Bioscience (VIVO -1.60%, news), which makes test kits for diagnosing diseases, is an example of a company that is no longer able to cover its payouts. Meridian has a history of big dividend hikes -- 21% annualized over the past 10 years. But it finally froze its payout rate in 2011. This once-great stock has been awful since 2008, and its prospects are gloomy with the dividend engine in the repair shop.

EURUSD has moved below the 1.2661-65 level on Italy rumored two notch downgrade

Written January 13, 2012 at 1:19 PM EST by Greg Michalowski 

The EURUSD has moved back below the 1.2661-65 level (lows for the week before today).  The two notch downgrade of Italy which would put the nation at BBB+, has been the catlyst for the dip below. The market low for the day has come in at the 1.2623 level. There is a trendline on the daily chart which comes in at the 1.2638 level.  In the quiet afternoon trading, stay below 1.2665 and there could be another run at the lows.

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