Global Market Comments
February 16, 2015
Fiat Lux
Featured Trade:
(FEBRUARY 18 GLOBAL STRATEGY WEBINAR),
(WHY ARE BOND YIELDS SO LOW?)
(TLT), (TBT), (LQD), (MUB), (LINE), (ELD),
(QQQ), (UUP), (EEM), (DBA)
(BRING BACK THE UPTICK RULE!)
iShares 20+ Year Treasury Bond (TLT)
ProShares UltraShort 20+ Year Treasury (TBT)
iShares iBoxx $ Invst Grade Crp Bond (LQD)
iShares National AMT-Free Muni Bond (MUB)
Linn Energy, LLC (LINE)
WisdomTree Emerging Markets Lcl Dbt ETF (ELD)
PowerShares QQQ Trust, Series 1 (QQQ)
PowerShares DB US Dollar Bullish ETF (UUP)
iShares MSCI Emerging Markets (EEM)
PowerShares DB Agriculture ETF (DBA)
Investors around the world have been confused, befuddled and surprised by the persistent, ultra low level of long term interest rates in the United States.
At today?s close, the 30 year Treasury bond yielded a parsimonious 2.01%, the ten year, 2.62%, and the five year only 1.51%. The ten-year was threatening its all time low yield of 1.37% only two weeks ago, a return as rare as a dodo bird, last seen in August, 2012.
What?s more, yields across the entire fixed income spectrum have been plumbing new lows. Corporate bonds (LQD) have been fetching only 3.29%, tax-free municipal bonds (MUB) 2.89%, and junk (JNK) a pittance at 5.96%.
Spreads over Treasuries are approaching new all time lows. The spread for junk over of ten year Treasuries is now below an amazing 3.00%, a heady number not seen since the 2007 bubble top. ?Covenant light? in borrower terms is making a big comeback.
Are investors being rewarded for taking on the debt of companies that are on the edge of bankruptcy, a tiny 3.3% premium? I think not.
It is a global trend.
German bunds are now paying holders 0.35%, and JGB?s are at an eye popping 0.30%. The worst quality southern European paper has delivered the biggest rallies this year. Portuguese government paper is paying only 2.40%, and is rapidly closing in on US government yields.
Yikes!
These numbers indicate that there is a massive global capital glut. There is too much money chasing too few low risk investments everywhere. Has the world suddenly become risk averse? Is inflation gone forever? Will deflation become a permanent aspect of our investing lives? Does the reach for yield know no bounds?
It wasn?t supposed to be like this.
Almost to a man, hedge fund managers everywhere were unloading debt instruments in January. They were looking for a year of rising interest rates (TLT), accelerating stock prices (QQQ), falling commodities (DBA), and dying emerging markets (EEM). Surging capital inflows were supposed to prompt the dollar (UUP) to take off like a rocket.
It all ended up being almost a perfect mirror image portfolio of what actually transpired since then. As a result, almost all mutual funds are down so far in 2014. Many hedge fund managers are tearing their hair out, suffering their worst year in recent memory.
What is wrong with this picture?
Interest rates like these are hinting that the global economy is about to endure a serious nose dive, possibly even re-entering recession territory?or it isn?t.
To understand why not, we have to delve into deep structural issues, which are changing the nature of the debt markets beyond all recognition. This is not your father?s bond market.
I?ll start with what I call the ?1% effect.?
Rich people are different than you and I. Once they finally make their billions, they quickly evolve from being risk takers into wealth preservers. They don?t invest in start-ups, take fliers on stock tips, invest in the flavor of the day, or create jobs. In fact, many abandon shares completely, retreating to the safety of coupon clipping.
The problem for the rest of us is that this capital stagnates. It goes into the bond market where it stays forever. These people never sell, thus avoiding capital gains taxes and capturing a future step up in the cost basis whenever a spouse dies. Only the interest payments are taxable and that at a lowly 20% rate.
This is the lesson I learned from servicing generations of Rothschild?s, Du Ponts, Rockefellers, and Getty. Extremely wealthy families stay that way by becoming extremely conservative investors. Those that don?t, you?ve never heard of, because they all eventually went broke.
This didn?t used to mean much before 1980, back when the wealthy only owned 10% of the bond market, except to financial historians and private wealth specialists, of which I am one. Now they own a whopping 23%, and their behavior affects everyone.
Who has bee the largest buyer of Treasury bonds for the last 30 years? Foreign central banks and other governmental entities, which count them among their country?s foreign exchange reserves. They own 36% of our national debt, with China in the lead at 8% (the Bush tax cut that was borrowed), and Japan close behind with 7% (the Reagan tax cut that was borrowed). These days they purchase about 50% of every Treasury auction.
They never sell either, unless there is some kind of foreign exchange or balance of payments crisis, which is rare. If anything, these holdings are still growing.
Who else has been soaking up bonds, deaf to repeated cries that prices are about to plunge? The Federal Reserve, which thanks to QE1, 2, and 3, now owns 22% of our $17 trillion debt. Both the former Federal Reserve governor Ben Bernanke, and the present one, Janet Yellen, have made clear they have no plans to sell these bonds. They will run them to maturity instead, minimizing the market impact.
An assortment of other government entities possess a further 29% of US government bonds, first and foremost the Social Security Administration, with a 16% holding. And they ain?t selling either, baby.
So what you have here is the overwhelming majority of Treasury bond owners with no intention to sell. Only hedge funds have been selling this year, and they have already done so, in spades.
Which sets up a frightening possibility for them, now that we are at the very bottom of the past year?s range in yields. What happens if bond yields fall further? It will set off the mother of all short covering squeezes and could take ten-year yield down to match the 2012, 2.38% low.
Fasten your seat belts, batten the hatches, and down the Dramamine!
There are a few other reasons why rates will stay at subterranean levels for some time. If hyper accelerating technology keeps cutting costs for the rest of the century, deflation basically never goes away (click here?for ?Peeking into the Future with Ray Kurzweil?).
Hyper accelerating corporate profits will also create a global cash glut, further levitating bond prices. Companies are becoming so profitable they are throwing off more cash then they can reasonably use or pay out.
This is why these gigantic corporate cash hoards are piling up in Europe in tax free jurisdictions, now over $2 trillion. Is the US heading for Japanese style yields, or 0.39% for 10 year Treasuries?
If so, bonds are a steal here at 2.55%. If we really do enter a period of long term -2% a year deflation, that means the purchasing power of a dollar increases by 35% every decade in real terms.
The threat of a second Cold War is keeping the flight to safety bid alive, and keeping the bull market for bonds percolating. This could put a floor under bond prices for another decade, and Vladimir Putin?s current presidential run could last all the way under 2014.
All of this is why I?m out of the bond market for now, and will remain so for a while.
Why Are They So Low?
Global Market Comments
February 13, 2015
Fiat Lux
Featured Trade:
(FEBRUARY 18 GLOBAL STRATEGY WEBINAR),
(THE CASE FOR EUROPE),
(FXE), (HEDJ), (RSX), (GREK), (GLD), (TLT), (SPY)
(OPTIONS FOR THE BEGINNER)
CurrencyShares Euro ETF (FXE)
WisdomTree Europe Hedged Equity ETF (HEDJ)
Market Vectors Russia ETF (RSX)
Global X FTSE Greece 20 ETF (GREK)
SPDR Gold Shares (GLD)
iShares 20+ Year Treasury Bond (TLT)
SPDR S&P 500 ETF (SPY)
Global Market Comments
February 12, 2015
Fiat Lux
Featured Trade:
(HITTING TWO HOME RUNS IN ONE DAY),
(FXY), (GILD),
(THE NEW COLD WAR),
(THE HISTORY OF TECHNOLOGY)
CurrencyShares Japanese Yen ETF (FXY)
Gilead Sciences Inc. (GILD)
Those of you who are paid subscribers have the good fortune of waking up to a bounty of riches this morning.
Both Gilead Sciences (GILD) and the Japanese yen (FXY) have made gap moves in your favor overnight. Your long position in (GILD) saw a nice little $2 pop to the upside, and your short in the (FXY) just got whacked in the knees, down a full $1.
As a result, the Trade Alert model-trading portfolio is now up +4% on the year. It?s not exactly knocking the ball out of the park, but should be enough to keep you in fine Chardonnay for the rest of the year. And compared to most other suffering, money losing hedge fund traders, it is more than adequate.
If you followed my advice, your existing positions in these two securities are now close to their maximum expiration value. However, as is so often the case with deep in the money options with only days to expiration, they have become highly illiquid.
For example, the February (FXY) $87 puts are trading at $6.00-$6.90 on the screen, against an intrinsic value of $6.22 ($87 - $80.78 in the cash market = $6.22). So a market order to sell would most likely wipe out your entire profit.
So I am going to run my positions into expiration, given that we only have six trading days to go. These are my last two positions, so I also have an excess of dormant, unused cash.
I am trying to maintain some discipline here and restrict myself to only buying low and selling high. I know this sounds revolutionary, but it should work. Like you, I am not paid according to the volume of Trade Alerts I issue, only on their end results.
However, this market has shown a pronounced tendency to Giveth, and then abruptly Taketh Away. So, if you don?t want to wait until next week to collect your winnings and free up margin, you can put in some high limit orders to sell.
The Gilead Sciences (GILD) February, 2015 $35-$37 in-the-money bear put spread has an intrinsic value here of $5.00, so you can probably get a $4.95 offer done.
The Currency Shares Japanese Yen Trust (FXY) February, 2015 $84-$87 in-the-money vertical bear put spread has an intrinsic of $3.00, so $2.97 probably gets executed. If it doesn?t just re-enter the order tomorrow and try again, or lower your limit by a penny.
Congratulations, and on to the next one.
For me that is going to be an opportunistic short term long position in the S&P 500 (SPY) February 20 expiring options.
It?s rare to see an options spread with only six trading days to expiration offering so much money. But with the Volatility Index (VIX) holding in at a lofty 17.70%, we can take in a nearly 2% profit with a near strike that is a full 2% out of the money.
That means the S&P 500 (SPY) has to drop a hefty $4.60 by Friday next week for you to lose money on this position.
I know that?s not impossible in this uncertain environment. But I think that we are in nothing more than a long, sideways correction in a major long-term major uptrend, so this should work.
Traders are confused and disoriented, thanks to the massive one-way moves in oil and bonds in recent months. Many long tested models have blown up.
So rather than continue to hemorrhage money, they are giving up. The large intraday moves and sky-high volatility may continue. But I don?t expect any large sustainable net moves in the near future.
You are going to have to be especially vigilant with your stop loss on this (SPY) position, which I shall put at $202, as there is so little time left to expiration.
The 50 day moving average at $204 should give us plenty of support on the downside, and enough time to make it to expiration and get out whole.
Since this is a big contract and fairly close to the money, there should be plenty of liquidity right up to the last day, if we have to stop out.
Time for another Dose of Gilead Sciences
It?s All Over for the Yen
Global Market Comments
February 11, 2015
Fiat Lux
Featured Trade:
(WHO THE GRAND NICARAGUA CANAL HAS WORRIED),
(SCAM OF THE MONTH)
Global Market Comments
February 10, 2015
Fiat Lux
Featured Trade:
(WHY THE JANUARY NONFARM PAYROLL WAS A BIG DEAL),
(IWM), (DXJ), (HEDJ), (FXE), (FXY),
(THE BIPOLAR ECONOMY),
(TESTIMONIAL)
iShares Russell 2000 (IWM)
WisdomTree Japan Hedged Equity ETF (DXJ)
WisdomTree Europe Hedged Equity ETF (HEDJ)
CurrencyShares Euro ETF (FXE)
CurrencyShares Japanese Yen ETF (FXY)
Economists were blown away by the January nonfarm payroll numbers, announced on Friday.
Some 257,000 jobs were added the previous month, holding the headline unemployment figure at 5.7%. Far more important were the revisions for earlier months, which saw December increased to a robust 329,000 and November bumped up to a breathtaking 423,000.
These numbers are almost back to ?normal.? Are ?normal? interest rates to follow?
All told, the January report, the revisions and the additions to the work force means that 703,000 jobs were added to the economy, taking the year on year increase to a positively boom time 3 million. The last quarter has seen the fastest jobs growth rate since 1997. Yikes!
A major part of the new jobs were in retail, proof that our windfall tax cut in the form of falling gasoline prices is finally kicking in.
Needless to say, this is all a bit of a game changer.
It totally vindicates the high-end forecasts for the US economy of 3% plus I made in my New Year forecasts (click here for my ?2015 Annual Asset Class Review?).
The data confirms my thesis that investors are substantially underestimating the strength of the US economy. Furthermore, they have yet to understand the enormously positive impact of cheap energy prices.
It also means that the bull market in stocks is alive and well. It is only resting.
To understand why, let me highlight the major points brought to the fore by the Bureau of Labor Statistics report.
1) The US Economy Has Entered a Self Sustaining Recovery
The trend line for many economic data points are now moving so convincingly upward that they can no longer be treated as statistical anomalies. Nor can they be ascribed to temporary artificial overstimulation by the Federal Reserve in the form of quantitative easing.
Count on Treasury Secretary, Jack Lew, to announce ?mission accomplished? when he address congress later on this week (click here for my one-on-one with Jack, ?Riding With the Treasury Secretary?).
My bet is that this is not our last blockbuster revision. Next to come will be the Q4 GDP, from the just reported flaccid 2.6% annual rate back towards the red hot 5% seen in Q3.
2) The Date for the Next Fed Rate Hike has Been Moved Up
The bond market certainly believed this last week, giving up 9 full points in a couple of days, taking yields from 2.62% to 2.92% in a heartbeat.
I still think this is a 2016 story. The pernicious effects of deflation are still advancing, not retreating, and are not exactly an argument for raising interest rates. But there is no doubt that the desire among the Fed governors to return rates to normal levels is growing, especially if the impact on the economy will be minimal. So call the next rate rise an early, rather than a later, 2016 eventuality.
3) The Strong Dollar is Becoming a Factor With Earnings
The Euro (FXE) has depreciated 31% against the dollar from its 2008 peak, and the yen (FXY) 38% from its 2011 apex. Yet the impact on corporate earnings so far has been marginal at best.
Where will it really start to hurt?
When these currencies approach my final targets of 87 cents and 150, or down another 22% and 18%. It is safe to say that a strong dollar will command an increasing amount of our attention going forward.
This is the argument for investing in small cap US stocks (IWM), where the currency exposure is minimal. Hedge European (HEDJ) and Japanese (DXJ) stocks start to look pretty good too.
4) Wages May Finally Be Rising
The biggest structural impediment facing the US economy has been wage inequality, where virtually all of the benefits of growth accrue to the risk investors of the 1% at the expense of the working class. Hyper accelerating technology and dreadfully imbalanced tax policies are to blame.
January brought us an increase in wages that was miniscule, incremental and modest at best, but it was an increase nonetheless. Average hourly earnings fell by 5 cents in December and then rose by 12 cents the following month.
If this continues, consumer spending will see a big revival, giving us yet another leg to a rising stock market, and creating a win-win situation for all.
One can only hope.
5) More Americans Are Looking for Work
The really amazing thing about the January numbers that they occurred in the face of a large increase in the work force. The participation rate, which has been plummeting for a decade, rose smartly. Long-term U-6 unemployment stayed high, but is down a quarter from peak levels.
To me, this is all a warm up for my ?Golden Age? in the 2020?s. The best is yet to come.
Suddenly, the Line is Getting Shorter
Global Market Comments
February 9, 2015
Fiat Lux
Featured Trade:
(THE 12 NEW TRADING RULES FOR 2015),
(AN ENVIRONMENTAL ACTIVISTS TAKE ON THE MARKETS),
(DBA), (MOO), (PHO), (FIW)
(FRIDAY, APRIL 3 HONOLULU, HAWAII STRATEGY LUNCHEON)
PowerShares DB Agriculture ETF (DBA)
Market Vectors Agribusiness ETF (MOO)
PowerShares Water Resources ETF (PHO)
First Trust ISE Water ETF (FIW)
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