Merely Gaining Steam

Last month I discussed whether the bond bear market had finished its first leg down or was it merely gaining steam. Over the past few weeks, we got an answer to that question.

I also discussed the importance of stocks moving to new highs or there is a risk for a larger correction. What is a larger correction? I believe we can place Netflix (NFLX – NASDAQ) as the new poster child for the definition of larger correction. At its recent price of $193.50 on April 27, 2022 (all prices and yields per Bloomberg), Netflix is down 72% from its all-time high of $700 set just five months earlier on November 11, 2021. Again, merely gaining steam.

The “What, me worry?” crowd continues to fiddle while Rome burns. The losses in bellwether US treasury notes and bonds over the past several months is unprecedented. The losses in the NASDAQ for April 2022 may be among the worst months ever. 3% mortgages are now 5% mortgages and inflation is, pick a number, 8%?

My get-out-of-bonds mantra for the past two years has now morphed into get-out-of stocks. Normalcy was exceeded months ago and is now moving toward extreme, yet capitulation evades us. Instead, we are looking at wave after wave of continued downward prices for financial assets.

Of course, there is another side to this narrative. In fact, there is only the other side of this narrative and that is because there is so much money in this behemoth financial industry of ours to ever talk about corrections.

It is just downright un-American to think financial asset prices might trend downward. Sure, bad things happen to good people. I mean good stocks (NFLX?) suffer corrections (dips to buy?), but they may will be back (right?). Rising assets is our destiny because we own them. These are the stories we tell ourselves because they fit the past as well as our outlook for the future

Unfortunately, markets do not care about the narrative. Upward trends correct and decades long trends may correct the decades long move. This is the risk of a stock market that no longer is moving higher.

The bond market contains lessons for us. Like stocks, bonds had trended higher for decades from double digit yields and low prices in the early 1980s to almost no yield and ridiculously high prices in the early 2020s. That is 40 years, give or take a few months.

I was not alone in calling March 2020 the high for bonds and the beginning of the bond bear market, but few cared or paid attention. Low yields (high prices) were still low yields (high prices) no matter what the actual interest rate. But here we are, two-plus years later, so let us look at the damage so far.

Our ten-year US treasury note, the 1.50% of February 15, 2030, sold at .31% yield (111-19 price) on March 9, 2020, and 89-21+ last week to yield 2.99%. We are now at a 20% loss on the ten-year treasury. For the thirty-year bellwether, the 2.375% of November 15, 2049, it sold at .70% (140-17) on March 9, 2020. Last week the bond sold at 87-06+ for a 53-point loss or 38% of value. And so it goes…slowly gaining steam.

How much pain should a long-term investor in Netflix take? How much pain should an investor in bond mutual funds take? None would be my answer. I know bonds but these are the decisions you, as an investor in stocks now face. Sure, bond investors have taken quite a haircut that keeps getting worse, but this may be the new reality for stocks. If so, are you prepared to handle it?

I suggest you think for yourself. Our behemoth financial industry will spend billions to convince you all is well. We used to only suffer through car and beer ads while we watch our favorite sporting events. Now we have a QQQ commercial at every other time out it seems. The insurance and bank ads are just as ubiquitous but somehow, I can tune them out through years of practice.

No, things do not look good when you look at let the market how the market is behaving. Unprecedented in the poor performance column is not the adjective any investor wants to see. I take it as a warning, a further warning of unprecedented events coming.

You know you have an alternative and it is a good alternative in my opinion. Do not be fooled by advisers or advertisers trumpeting there is no alternative. You know otherwise. You have experienced it.

Frisco Independent School District, TX

Unlimited Tax School Building Bonds, Series 2022

Aa1 Moody Underlying AA+ S&P Underlying

Aaa/AAA/NR on PSF Guarantee

Due 2/15   Dated 5/1/22 Maturity 2/15/52

$140,085,000 Sold

Years   Maturity           Coupon      Yield*

1         2023             5.00%           1.91%

2         2024             5.00%           2.21%

3         2025             5.00%           2.36%

4         2026             5.00%           2.44%

5         2027             5.00%           2.49%

6         2028             5.00%           2.57%

7         2029             5.00%           2.65%

8         2030             5.00%           2.74%

9         2031            5.00%           2.80%

10       2032             5.00%           2.86%

11       2033**          5.00%           2.92%

12          2034**        3.35%           3.28%

13          2035**        3.45%           3.38%

14          2036**        3.50%           3.49%

15          2037**        3.50%           3.58%

16          2038**        3.65%           3.62%

17          2039**        3.65%           3.64%

18          2040**        3.70%           3.66%

19          2041**        4.00%           3.43%

20          2042**       4.00%           3.45%

23          2047**       4.00%           3.54%

30          2052**       4.00%           3.68%

*Yield to Worst (Call or Maturity) ** Call 2/15/32

Source: Bloomberg

This is an example of a new issue priced the week of 4/18/22

Prices, yields and availability subject to change