Buy bonds? Yes, 2 to 1

The Ticker

November 08, 1990|By Julius Westheimer

As recession looms, two Wall Street observers strongly recommend buying bonds, whereas one warns against them. The Dick Davis Digest, Nov. 5, says, "Buy Bonds and Stay With Stocks" and Jack Egan in U.S. News & World Report, Nov. 12, shouts, "Boom Times for Bond Investors!" Excerpts:

Dick Davis Digest: "Overall, increasing deflationary signals justify a positive stance toward bonds. Downside risk in high-quality bond prices is very small compared with potential 12-month gains. Short-term rates typically plummet during recessions, the decline averaging 37 percent in eight postwar cycles, and a similar decline in this cycle would lead to a 5 percent Treasury NTC bill rate in 1991. Long-term Treasury bonds are now undervalued, and we could see a mad scramble into such quality assets."

U.S. News & World Report: "Investors can look to one safe haven that offers handsome profit potential: top-quality bonds, preferably governments. As interest rates fall -- typical behavior at the start of a recession -- bond prices rise. Economist Henry Kaufman predicts that high-grade bond yields will fall slowly at first, then dramatically. He adds that long-term bond rates, now around 8.7 percent, could drop by two percentage points. Now is the time to move from T-bills to longer-term governments."

But Ashby Bladen, author of "How to Cope with the Developing Financial Crisis," writes in Forbes, Nov. 12, "The overborrowed, overleveraged U.S. financial system has been on the path to disaster for a long time, and this time I do not see how it can avoid going right over the cliff. Our political leaders' incredible irresponsibility over the federal budget makes disaster imminent. The long-term bond market will be the next casualty of the current financial crisis, and ahead of us lie record high interest rates. A bond market crash is the time bomb that has not yet exploded."

Regarding the above, I suggest: young people, 75 percent stocks, 25 percent bonds; middle-aged persons, 50/50; elderly people, 75 percent bonds, 25 percent stocks. Bond maturities should be staggered, 1 year through 10. Your tax bracket determines whether to buy governments or tax-frees, with the 28 percent bracket the approximate dividing line. See your accountant for your personal situation.


The Kiplinger Washington Letter, Nov. 2, feels that postponing income from 1990 to 1991 is advisable for many people, as taxpayers in mid- and upper-income brackets pay a lower tax rate in 1991. Those at a 33 percent rate in 1990 will generally pay 31 percent next year. Top bracket people will pay more, as their marginal rate climbs to 31 percent from 28 percent in many cases . . . "Employees who pay their own business expenses and then claim a tax deduction may be forced to tell the IRS that their bosses are stingy. The Internal Revenue Service says you can deduct only those expenses that your employer specifically refuses to pay." (U.S. News & World Report, Nov. 5)


"In my 50 years in the business, I have never seen so many stocks undervalued." (John Templeton, Business Week, Nov. 5) . . . "It took Sadaam Hussein to make people realize we've been in a bear market for a year; get ready for the next bull market." (Kenneth Fisher, Forbes, Oct. 29) . . . Legg Mason's Gerald Scheinker (486-8010) will send his firm's latest comments on MNC Financial (Maryland National Bank) . . . A Mount Washington woman threw away a $10,000 Maryland tax-free bond "because all the coupons were gone." . . . "Next round of job cutbacks will be in financial firms, law offices, accounting firms, stores, hotels, hair salons, yogurt shops."(Changing Times, Nov.) . . . Please contribute to Our Daily Bread Building Fund, 200 W. Franklin St., Balto., Md. 21201; this soup kitchen now feeds 700 hungry people a day and needs larger quarters . . . A returning traveler told me she paid $8 for a cup of coffee in Paris . . . Every year, American households receive 17 pounds more direct (junk) mail than in the previous year. (CNN News).

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