An 800-Year-Old Clue for Stocks


Investors who are conscious of value, rather than price, can learn something from savvy investors with a longer-than-average time horizon. So when an institution taps the bond market for funding for the first time in 800 years, it's one clue that something unusual is going on. Yesterday, Cambridge, Britain's richest university, sold a 350 million pound 40-year issue priced to yield 60 basis points (one basis point equals one-hundredth of a percentage point) over U.K. government debt, or roughly 3.86%.

The chief investment officer of one hedge fund commented to Bloomberg: "I like its rarity value; it will become a museum piece." He's spot-on -- if you're in the habit of assessing your investments on aesthetic grounds.

Cambridge's bond issue is a manifestation of the phenomenon PIMCO CIO Mohamed El-Erian warns against in a comment posted on the Financial Times' website yesterday titled "Beware the central bank put bubble." I suspect that El-Erian did not select this title; in fact, on the PIMCO website, the article goes by "Investing in an Age of Unusual Fed Activism." However, the central-bank put is real, and so are its distortionary effects. How else can one explain that the average yield on senior eurozone bank bonds has now fallen back below that on investment-grade corporate?

What does any of this have to do with stocks? The distortionary impact of the central-bank put is not limited to bonds. Stocks rallied hard this summer, and the S&P 500 (INDEX: ^GSPC) is up 13% year to date, even as the recovery remains absolutely anemic. It looks like it's "risk-on" today, with the S&P 500 up 0.6% and the Dow Jones Industrial Average (INDEX: ^DJI) up 0.4% as of 10:15 a.m. EDT. In this environment, it'll pay to remain intensely focused on company fundamentals and share valuations -- the same approach that led one of The Motley Fool's top analysts to zero in on the three Dow stocks dividend investors need. Click here to learn more about these wealth-creation juggernauts.

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Alex Dumortier, CFA has no positions in the stocks mentioned above; you can folow him @longrunreturns. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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