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You would probably not be surprised if I said the rewards do not even come close to overcoming the risks. I believe the time is now to take the lead and move to Cash, protecting what you have rather than risking it for continued incremental gains.

Buy The Euro; Enjoy Your Trip

February 6th, 2015 by Kurt L. Smith
  • Hot on the heels of a plunge in oil prices, the Euro has quickly reached a twelve year low. From 140 in May 2014 to 111 last month, like the price plunge in oil from $107 in June 2014 to $44 last month, we have no idea of the economic disruptions that are now under way.

    Buying the Euro now would likely be better than buying the nearly half trillion Euros the Swiss National Bank has bought since 2010 trying to stem the rise of the Swiss franc and help keep Swiss businesses competitive. Suffering a 25%+ loss on half a trillion anything would probably cause any one, even a central bank, to yell uncle. Yes, central banks can and will change their mind, particularly when facing seemingly insurmountable market forces.

    The reason I write about Oil and Euros (and previously about Gold) is to remind you that you are investing in markets. Markets do not move in one direction forever even though all three of these markets had moved higher for ten plus years or more. Markets can and will change directions and the change can happen swiftly and dramatically as these three assets reveal.

    Having your portfolio in multiple baskets may only mean you suffer losses in many baskets. As asset class after asset class currently is trending lower, we are now left with just two trending higher…Stocks and European government bonds.

    For those of you that are diversified, I believe you should be asking the question: Why am I invested in so many areas in which the trend is lower? If the lessons in Gold, Oil and now the Euro tell us anything, it is that asset classes trending lower can quickly accelerate into a price plunge.

    As almost no one predicted the price plunges in Gold, Oil and now the Euro, what does this say about Stocks? Some say the stock market discounts all that is known, but there sure seemed to be a lot of unknown that has hurt, severely, investors in those assets.

    Now the time has come to say the rewards do not exceed the risk of investing in Stocks. You would probably not be surprised if I said the rewards do not even come close to overcoming the risks. I believe the time is now to take the lead and move to Cash, protecting what you have rather than risking it for continued incremental gains.

    Mario Draghi, President of the European Central Bank (ECB) was (finally) able to convince his member European countries to approve a plan to buy government bonds and begin a European quantitative easing program. It certainly helps that European government bonds are one of the only asset classes that are trending to higher prices. However, the prices of some European government bonds are so high the yields are negative! The prices are also so high the quantitative easing program comes with a plan to distribute losses. One must believe in the omnipotence of central banks to believe European quantitative easing will work. Just ask the Swiss about omnipotence!

    Markets move and central banks follow…not the other way around. The Swiss National Bank (SNB) bought nearly half a trillion Euros (through November 2014 per the SNB’s website) in an attempt to keep the Swiss franc competitive and at the end of the day (three years) they gave up. What are they left with? A half trillion Euros deeply underwater for the three years of time they bought.

    How much time is Draghi buying? I have no idea but I am betting the market will win, as it always does.

    Last month I believed the interest rate on the ten year US treasury note would begin to rise. It did not. Instead, prices continued to rise (and yields fell). My thesis however is intact: the ten year note is in a bear market that began in June 2012 and this current move is the end of the upward correction that began thirteen months ago. As ten year European bond prices continued to move higher in anticipation of Draghi’s announcement, interest rates (according to the NY Times) moved to ridiculously low levels: Germany .45%, France .62%, Spain 1.41% and even Italy 1.55%. With the US treasury note at a relatively stratospheric 1.88%, it would appear to be a lock to also move lower. I could not disagree more!

    The current high price (and low 1.88% yield) on the US ten year note, I believe, may be similar to the $107 price for oil just this past June. Almost no one saw the coming carnage in oil prices and similarly almost no one sees much higher interest rates (and much lower prices) for bonds. Yet this is how markets sometimes work.

    After one price plunge after another I believe we should be on notice for each and every basket of assets we currently own. I continue to believe Cash and short-term alternatives are worthwhile for a strategy that believes protecting one’s assets is becoming more and more important. As investors in Gold, Oil and Euros can attest, selling is difficult to do, until it appears to be too late. Now you might want to buy some Euros and take that trip knowing full well how much smarter you are than the Swiss National Bank. You might even want to buy some extra Euros as now may be a good time to buy the Euro as almost no one believes it can go up again. Again, this is how markets work.

     

     

    Northwest Independent School District, TX Refunding

    Moody’s Aaa (Aa2 Underlying) Fitch: AAA (AA Underlying)

    Permanent School Fund Guaranteed Due 2/15 Dated 2/1/15 Maturity: 2/15/2032

    Sale Amount: $83,565,000

    YEAR MATURITY COUPON YTM*
    0 2015 2.00% 0.20%
    3 2018 5.00% 0.75%
    4 2019 5.00% 0.97%
    5 2020 5.00% 1.17%
    6 2021 5.00% 1.39%
    7 2022 5.00% 1.60%
    8 2023 5.00% 1.78%
    9 2024** 5.00% 1.94%
    10 2025** 5.00% 2.07%
    11 2026** 5.00% 2.18%
    12 2027** 5.00% 2.28%
    13 2028** 5.00% 2.37%
    14 2029** 5.00% 2.45%
    15 2030** 5.00% 2.50%
    16 2031** 5.00% 2.55%
    17 2032** 5.00% 2.60%

    *Yield to Worst (Call or Maturity) **Par Call: 2/15/2025

    Source: Bloomberg

    This is an example of a new issue priced the week of 1/26/15

    Prices, yields and availability subject to change

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