Correction Highs (And Lows)

For the past several months we’ve seen giddy up; now we are left only with giddy. Be it Stocks, Bonds, or even Gold, asset prices have generally had a nice 2019 bounce. To a large extent asset prices have peaked together. Unfortunately the rallies appear to be over, meaning lower prices from here.

How can that be? The news is great, prices are rallying and even the Federal Reserve appears poised to lower interest rates as yields have shriveled as US Treasury note and bond prices have jumped. The trend should be our friend and the trend is up, across the board for assets, right?

Wrong! The trend is not up. Despite nice gains for this year, assets are in the midst of finishing upward corrections. Gold, which peaked in September 2011 at $1921, bottomed in December 2015 at $1047 where it began a rally that may have recently ended at $1440 last month (all asset prices and dates per Bloomberg). While an additional advance may unfold, the next major move in my opinion is lower, to new lows rather than new highs.

Asset prices follow market paths, not straight up or straight down. So while excitement for Gold may be accelerating, the upward move is merely correcting Gold’s 45% decline from 2011 to 2015.  Excitement, or even greater confidence or conviction, doesn’t dictate future prices; the ebb and flow of the market does.

Likewise for Bonds. Interest rates bottomed in 2012 where I drew my line and called an end of the thirty-year-plus bull market in bonds. Shorter term U.S. Treasury notes, such as the two year note, bottomed at .14% in September 2011, rising to 2.97% in November 2018. Do markets move in a straight line? No. The two year note recently traded at a low of 1.70%, a nice pull back that sets the stage for its next move to even higher yields than last year.

Longer term bond yields are behaving similarly. While some long-term bond prices set new highs after 2012, such moves were spikes and short lived. Notably, the bellwether U.S. Treasury thirty year bond spiked in July 2016 to an all-time low of 2.09%, below 2012’s low of 2.44%. Such low yields (and high prices) reversed to November 2018’s high yield of 3.46%. Using the similar US Treasury Long Bond futures contract to track prices, the long bond contract fell from an all-time high of over 177 in 2016 to 136.5 in 2018 for a 23% price decline.  It is this downward move in prices that is being corrected in 2019. Last week the yield on the bellwether was down to 2.45%, in a range similar to the “topping” range of 2012. Again, I look for this year’s action to lead to fresh lows down the road for longer-term bond prices.

Which leaves us Stocks. But wait, haven’t Stocks hit new all-time highs? Isn’t that the definition of an ongoing bull market? Perhaps. But I will submit Bonds as Exhibit A. I drew my line in the sand in 2012 and for many notes and bonds, particularly the shorter-term maturities, yields, have never been lower (nor prices higher). That’s my definition of the end of a  bull and beginning of the bear.

But we know longer-term bonds have seen periods of yields lower than 2012 (and prices higher). Those periods have been brief, while in the meantime prices declined 23% from the 2016 high to the 2018 low. This market action cannot be ignored…any more than the decline in stock prices from 26,616 in January 2018 to 21,712  in December 2018 vis-à-vis the Dow Jones Industrial Average.

Yes prices have been higher than 26,616 (or 2873, the S&P 500’s 2018 high) but like we have seen over the past seven years with long-term bonds, they haven’t been there very long. You cannot ignore prior price action of down 22% in bonds or down 18% in the Dow.  This is how long term bull markets roll over.

I expect prices of Bonds, Stocks and Gold to soon complete this upward move of 2019. How high is high in the meantime (or how low for yields) is not relevant. What is relevant is the brief remaining portion of these rallies and of course the coming price declines of these assets.

Once again, you have another opportunity to sell these assets as their next move will soon be lower.

Mont Belvieu, TX Certificate of Obligation

Moody’s Rating: Aa2 (Underlying)

Due 8/15  Dated 7/1/19  Maturity 8/15/39 Sale Amount $27,115,000

Year Maturity Coupon Yield*

• 1     2020      3.00%     1.30%
• 2     2021      3.00%      1.32%
• 3     2022      3.00%      1.39%
• 4     2023      3.00%      1.40%
• 5      2024      3.00%     1.45%
• 6      2025    3.00%      1.53%
• 7      2026     3.00%     1.60%
• 8     2027      5.00%     1.70%
• 9     2028**   5.00%     1.80%
• 10    2029**     5.00%     1.90%
• 11   2030**     4.00%     2.00%
• 12   2031**     4.00%     2.10%
• 13   2032**     3.00%     2.50%
• 14   2033**     3.00%     2.60%
• 15    2034**     3.00%     2.70%
• 16    2035**     3.00%     2.80%
• 19    2038**     3.00%     3.00%
• 20   2039**     3.00%     3.03%

*Yield to Worst (Call or Maturity) **Par Call 8/15/28

Source: Bloomberg

This is an example of a new issue priced the week of 7/8/19

Prices, yields and availability subject to change