In the early 1930’s, after the 1929 crash, Wall Street could not get nervous investors interested in stocks again. However, with interest rates dropped to extreme lows in the Great Depression, those who still had money were eager to invest in something that would provide more income than they could receive on savings accounts. As a result Wall Street had no trouble selling them bonds.

It was later said to have been a slower disaster than the stock market crash, but almost as devastating. Bonds decline in price when interest rates and yields rise. Over the next two decades interest rates began to rise from their extreme lows, and the price of bonds declined. Investors new to bonds discovered it was not a safe haven to be receiving 4% annual interest on bonds if the bonds were dropping 10% in price annually due to rising interest rates.

I bring that up because of reports this week that the major U.S. banks are on a tear to raise huge amounts of low cost capital by issuing bonds while rates are at record lows, and while investor demand for higher returns is on the rise as an alternative to stocks. Some of the low cost capital being raised is being used to pay off the higher cost bonds and debt on their books. Moody’s estimates that U.S. banks have already refinanced $200 billion of the $372 billion in debt that is coming due in 2010.

The Financial Times quotes an executive with one of the big banks as saying, “There’s a bit of a food fight among investors to get hold of paper from U.S. banks.” (It’s not the same situation in Europe where banks need to raise capital but are struggling to issue new debt in the midst of the Eurozone debt crisis).

The large U.S. banks are not the only corporations having an easy time issuing new bonds, benefiting from the flight to safety. Investors have been piling into corporate and treasury bonds for quite some time, and it continues. The Investment Company Institute, which tracks money flows in retail mutual funds, estimates that individual investors pulled another $9 billion from U.S. stock funds in the first three weeks of July, even as the stock market was rallying again, and poured $20 billion more into corporate and government bond funds.

Tom Lee, chief U.S. equity strategist at JP Morgan Chase, speaking at the Reuters Investment Outlook meeting in New York on Wednesday said that, “Retail investors buying bonds today, at a time when the supply of corporate bonds is shrinking… they’re chasing a bubble.”

Assuming the issuer does not default on its bonds, an investor will not lose money on individual bonds if they are held to maturity, when the issuer returns the borrowed money to the investor. However, holding to maturity may be difficult, as bond investors discovered in the late 1930’s and 1940’s, once stocks begin producing 10% to 25% in some years, while the 20-year corporate bond will continue to pay only 4.5% or whatever annually to maturity (and meanwhile may be significantly underwater until maturity due to rising interest rates).

As Tom Lee of JP Morgan also said Wednesday, “Have Americans ever been satisfied with earning a steady but low rate of return? What we have in American history is rolling from bubble to bubble, whether it’s stocks, real estate, commodities, emerging markets, time shares… when one bubble bursts they are moved to the next one.” Lee implies that the bubble currently forming is in bonds.

But it should be okay as long as the Fed holds interest rates at record low levels near zero for “an extended period of time” as they say they will, and particularly if the stock market has another leg to go on the downside (keeping the appeal of safe havens alive). But investors probably need to be aware of the potential that it is a bond bubble, and be prepared to bail out early when rates and yields begin rising, or if the stock market bottoms and begins a new leg up. With so much money in bonds and bond funds, the exit doors will be crowded when the time comes.

Sy Harding is CEO of Asset Management Research Corp., author of 1999’s Riding the Bear and 2007’s Beat the Market the Easy Way. Sy Harding is editor of http://www.StreetSmartReport.com, and the free daily market blog, http://www.streetsmartpost.com.

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Risky assets were higher following the initial results of the European bank stress tests, in which all but seven banks passed, but traders are waiting until Monday to take a stronger view of the eurozone’s future

Resource groups and banks claw back some of their recent losses, looking past disappointing revenue growth at top US technology companies and worrisome housing data

The whole subject of whether or not you should employ stop losses is one that divides a lot of people. Some people swear by them, whilst others will either begrudgingly use them or not bother using them at all. So should long-term investors employ a stop loss or not when investing in stocks?

Well in my opinion it all depends on what kind of stocks you like to invest in. For instance if you are a speculative investor who likes to invest in bombed out stocks that may potentially recover in years to come, then it’s probably best to take your chances without a stop loss. This is because even if a few of these companies went bust, you can still make excellent returns if you manage to find a few stocks that end up multi-bagging, ie where the share price goes up 2, 5 or 10+ times higher than the price you paid.

If, however, you like to invest in mid or large cap stocks, then I think it’s imperative you use a stop loss. The fact is that even the largest and most well-known of companies can see their share price plunge very quickly when the wider market starts to head downwards. Just look at the share price of many of the leading banks in recent years.

So because of this, you really do need to protect your capital by having some kind of stop loss in place. It’s always better to take a small loss and come back to fight another day than to keep holding on to to falling stocks in strong downward trends in the hope that they will eventually bounce back.

You don’t necessarily have to set stop losses with your broker for every stock you hold. I personally set mental stop losses of around 20% and will close out a trade myself if the price of one of my holdings ever falls this much. It’s actually very rare for one of my shares to fall this much because I try to buy high quality stocks at the bottom of a cycle, but on the rare occasions they do fall this much, I will always sell them because it often means there is something fundamentally wrong with the company, and therefore the stock price is likely to continue falling.

So to sum up, I would say that if you have a sizeable share portfolio and like to manage your own money, then you need to protect this capital by managing any losses that you may incur. If you don’t, then there is always the chance that a few of your holdings could fall 40 or 50%, for example, or even go bankrupt in extreme cases, destroying your share portfolio in the process. If you take a loss of 10, 15 or 20%, however, it’s a lot easier to bounce back. Plus of course you can always buy back into these stocks if they start to recover.

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Article Source: http://EzineArticles.com/?expert=James_Woolley

Investors welcomed the delay to the implementation of tough new rules to regulate banks following a meeting of world leaders over the weekend