Among S&P’s reasons for downgrading the stock was concern that the company was too dependent on insurance operations for income, particularly the whims of regulators in the company’s (and Buffett’s) home state of Nebraska. The regulatory risk has been a primary concern in the insurance world since Obama’s Affordable Healthcare Act (Obamacare) passed, with the concern that this could depress insurance revenues in favor of lower medical costs to the bulk of Americans.

Concerns with Insurance Dividends

The target of insurance dividends goes much deeper than the politically charged and headline-grabbing concerns with Obamacare, of course. The fact is that, in the U.S., insurance dividends are on the decline.

Take a look at this table:

Except for Safety Insurance, which bucks the trend of the rest, these are large-cap, blue-chip, dividend-yielding stocks that are considered reliable and dependable companies that dividend investors can turn to in thick and thin. This reliability has made it appealing to investors, which paradoxically has made them less desirable over time.

Here you see that, even with dividend growth, dividend yields are down. This is because the price of these companies is going up. Allstate (ALL) is up over 50% from a year ago. Travelers (TRV) is up 37% and Progressive (PGR) is up 22%, even with a steep dividend cut in 2013 (for the purposes of this comparison, we’ll ignore special dividends).

This means that, over time, the insurance companies are a less desirable source of income because their stock price is going up faster than their dividend income can grow, due to a desperate search for yield amongst investors, which has made large-cap dividend yields go down as prices go up in recent years.

While this sounds good–and it is, from one perspective–it is also a problem for value investors like Buffett who look to buy undervalued companies to get maximum dividend yields. These companies are overvalued because of the flight to safety caused by economic uncertainty that has dragged dividend yields down since the market’s lowest touch point in 2009. This has happened to large-cap stocks besides insurance companies.

As a result, opportunities to profit from reinvesting profits in dividend-yielding companies are diminishing, in turn hurting value investors’ ability to profit. Thus Buffett’s credit rating dips slightly.

Institutional investors, at least judging by inflows, remain on the whole optimistic. Hedge funds and institutional investors are not selling off en masse, at least according to their 13F filings. While some reallocations are occurring due to fundamental changes in prices and earnings, money is not being put on the sidelines–while money that has been outside of the market is slow to return, due to fears of a calamity or downturn hitting the market.

But 2013 certainly feels different, so what chance is there that there will be a dip and entry point opportunity for those out-of equity dollars? Let’s take a look at some macroeconomic indicators and their recent trends to see.

Employment

Since 2008′s collapse, a core concern for investors has been the shaky labor market in the developed world, which has been hit year after year amidst company downsizing, declining wages, and an overall weakening of labor’s economic clout. This has meant less money from consumers to spend on stuff, and less revenue for companies. The lower revenues, in turn, have forced employers to find ways to lower expenses and raise earnings to keep investors happy, and in many cases
this has meant a hit to employees’ wages or job satisfaction.

This vicious cycle has not gone away, but signs are there that it is less vicious than it has been. Last Friday, the BLS announced that unemployed fell to 7.5%, and many analysts saw this as a turning point that could mean less and less unemployment in the future.

One worry is that job openings in March 2013 were down slightly (3.8 million compared to 3.9 million), possibly a sign that the employment market is not recovering faster. More worryingly, year-over-year numbers were down. In March 2013, there were less job openings and hires than in 2012.

The market has not yet responded negatively to this, but it may if more bad news about the employment market comes out in the coming weeks.

Japan

One of the unsung heroes of 2013 is also one of the most unsuspected: Japan’s aggressive monetary policy was squarely aimed at providing liquidity and fighting deflation at home. In short, the Bank of Japan began buying assets at a tremendous rate, and the Yen weakened relative to the US Dollar. At the beginning of the year the exchange rate was around 86; now it’s at 98 and fighting the 100 resistance level.

This flood of new yen into the market has sought a home, and while it has helped Japanese stocks see a tremendous rally (the Nikkei 225 is up over 37% YTD, a rally unimaginable for nearly a decade), it is also helping U.S. stocks too, as yen-based investors seek to diversify into American markets.

If Japan tightens the tap on the flow of yen, even just a little, it could cause equities to falter, but there is no sign of that just yet. Still, it’s an important systemic issue that investors should look at closely.

Europe

Then there’s Europe, a complex and troubled continent that caused scandal and fear when Cyprus accountholders were told they faced a haircut. Still, EU economic commissioner Olli Rehn has pointed to America as a model for Europe, with the focus on improving employment and thus rebuilding the economy from the bottom up as a strategy going forward.

While European leaders have previously ignored employment, it is suddenly becoming a main focus. If they succeed in improving the job prospects of Europeans, it could result in more consumer spending, and thus better revenue for U.S. companies that sell in Europe. Of which there are many.

For now, the signs in Europe are optimistic, leading many investors to stay in the game instead of triggering that seasonal sell-off that was a main talking point just a few weeks ago.

Timing Tomorrow’s Trades

So how should investors act tomorrow? It all depends on the results of the weekly jobless claims, which will be announced tomorrow an hour before the opening bell in New York. Analysts are projecting a 3.3% weekly increase, a modest and by no means alarming rise. If the claims meet that number or fall below, you could find a big rally tomorrow. A higher number could erase much of this week’s gains.

Traders will have plenty of time to plan trading strategies for the day, and there are many proprietary formulas out there for how to make a short-term capital gain both on good and bad news. For more longer-term investors, a surprise decrease in jobless claims could raise conviction of a strengthening U.S. economy and result in a fourth consecutive day of gains, with the potential for a new record high in both the S&P 500 and the Dow Jones Industrial indexes.

Most bonds offer a set return on investment with price fluctuations dictated by the market but, for the most part, are limited to the value of their coupon rate. Some bond or bond-like investments, such as convertibles, preferred stocks, and mezzanine loans, can offer a low-risk opportunity to capitalize on a company’s growth while also giving a reliable investment income.

Preferred stock ETFs like PFF and PGX offer investors the opportunity to buy into the preferred stock world, even if most of these investments are not usually sold on the open market.

The Total Return Fund
For more conventional, non-convertible bonds, there are a number of funds that focus on short-term, medium-term, and long-term bonds, and these can be used to bet on the dynamics between capital flows to stocks and bonds as well as a nation’s ability to repay its debts and the value of its debts going forward.Alternatively, investors can bet on the overall U.S. bond world with the Vanguard total bond fund (BND), which invests in a variety of bonds with different durations to allow investors to bet on the total bond market. The fund is near flat YTD for 2013 and trades in a very tight range, with about a 2.5% yield.

In general, bond funds go up in value as stocks go down, because investors sell the stock market and buy into the bonds. Bond funds can be used in pair-trading strategies in tandem with stock funds to capitalize on market swings, or they can be used to hedge risk. Interestingly, the beginning of 2013 saw a steep rise in stocks but did not see a comparable decline in the biggest bond funds (TLT, BND, INY, BIV, BSV). There are a number of possible reasons, but most likely this is because the drive in stock markets is not due to capital flowing into stocks from bonds, but capital coming from other sources (from abroad, from Central Banks, from commodities sell-offs, etc.)

Municipal Bonds
Like U.S. bonds, municipal bonds are an investment in a government entity and a bet on a city, state, or county’s ability to pay back debts. There are hundreds of municipal bond funds out there and thousands of municipal bonds on the market.

Municipal bonds offer a variety of yields depending on their credit ratings, but most investment-grade bonds will range between 3% and 6%. Because we live in a low-yield world and a near-deflationary macroeconomy with persistent fears of risk in equities and other investment opportunities, municipal bonds have exploded in popularity and many municipal bond funds are trading at high premiums. While a higher-yielding low-risk option, many analysts have seen greater risk in municipal bonds because of capital inflows inflating prices.

Corporate Bonds
The highest risk bonds on the market are corporate bonds, whose high risk has resulted in the nickname “junk bond” for many of these assets. The nickname has even been co-opted by SPDR for their high-yield bond ETF (JNK). These bonds usually offer yields in excess of 5%, which some very creditworthy large-cap companies offering bonds with yields below 5%.

In the search for yield, corporate bonds have become more popular in recent years, with some corporate bond funds charging very high premiums. Indexed bond funds like JNK try to track the overall corporate bond market through diversified investments, and are lower risk than specialist bond funds or buying bonds individually. JNK, for instance, has a positive total return and a price decline of 9% in total (not annualized) for the past 5 years, on top of a current dividend yield of 6.35%.

Federal Reserve’s Future Movements
Retirees like bonds because they offer a steady flow of income at low risk, and investors like them because they offer relative stability to stocks and a hedge against bear crashes like what happened in late 2008. Crashes like that are actually good things for bonds and bond funds, because the capital inflows skyrocket and prices go through the roof. For instance, TLT went up 31% in the second half of 2008 as the market plummeted.

Different types of bonds are impacted differently by the Federal Reserve’s monetary policy, but in general bonds are a good investment in deflationary times and when there is market uncertainty. However, bond funds can go down sharply in periods of equity rallies and when the Federal Reserve raises interest rates, because it lowers the value of older bonds.

Bond funds are at all-time, historically unprecedented highs and demand for bonds has been incredibly strong since 2008. Some analysts have even said that a bond bubble has been forming. This means that bonds are now a higher risk investment than they have ever been, but that has not kept investors from seeking these lucrative sources of passive income with zeal.