Posts Tagged ‘trend change’

Moving Ahead

August 3rd, 2017 by Kurt L. Smith

Narratives make great stories, coaxing investors to invest but rarely the impetus to sell. Narratives, the stories about why the market is behaving this way or that, add fuels to the fire of salesmanship and lines up well for the growing herd, the multitude of trend followers.

The great narrative of the past few years has been yields are (and will forever be) low, so you should add riskier assets to your portfolio. This narrative has been in place so long ( for years) it appears it will never change.

Our approach shows otherwise. In the incredibly unique world of municipal bond investing, opportunities have existed in high quality credits that are not available in any other asset class. In a world focused on scale, size, generic products and spread, the municipal bond market offers this as well as alternatives to this. (more…)

The Plan Unfolds

July 13th, 2017 by Kurt L. Smith

It has been twelve months since the end of the hockey-sticked shape mania of long-term bond prices. Markets don’t trend in straight lines, so over the past twelve months I have used this letter to help you navigate where we are on the journey towards a collapse in long-term bond prices.

The July 2017 letter called the top in long-term bond pricing while subsequent letters followed the initial move to December lows and last month’s call that the correction was over. After a correction price high on June 12^th, long-term bonds have declined in price for the past twelve trading days (as of the writing of this letter).

Of course it may be better to be lucky than good, but I will accept any good fortune that comes our way. This letter provides me the opportunity to put forth my opinion, however much in the minority it may be, and I intend to take the opportunity because I believe it is quite important when a collapse in the long-term bond market is involved. (more…)

It Only Takes One

April 10th, 2017 by Kurt L. Smith

After four months of sideways price (yield) action in bonds, one might tend to believe nothing has changed or nothing is happening. Thankfully the municipal bond market offers us tens of thousands of unique opportunities over a similar timespan.

Ten year treasury notes doubled in yield from 1.32% to 2.64% in the second half of 2016, but for 2017 the market has traded in a narrow range. This corrective phase may already be complete or we may have more time to diddle. The important takeaway is that I believe the market for longer-term bonds will resolve into much higher yields and much lower prices. (more…)

Municipal Bonds Are Different

February 3rd, 2017 by Kurt L. Smith

While technically all municipal bonds are government bonds, municipal bonds represent a subset of government bonds. Unlike the behemoth debt associated with almost all countries on the planet, including ours, municipal bonds are, well, usually smaller and sometimes just small.

Size matters, except when it comes to debt, bigger usually is not better. This is a qualitative difference where municipal bonds have the ability to shine. Unlike the debt upon debt upon debt of most government debt today, municipalities have the ability to truly be unique in their amount of leverage.

All five year bonds are five year bonds. And almost every five year government bond will be repaid because the government has promised to repay it. These government bonds carry the “full faith and credit” of their issuer to be repaid and are known as general obligation bonds.

When it comes to general obligations, bigger can indeed be better. Larger governments usually have more resources and usually are viewed as being less risky, or even safe or without (credit) risk as United States treasury bonds were viewed. (more…)

The Wait Is Over

December 7th, 2016 by Kurt L. Smith

I love it when a plan comes together. The August letter, First Bonds, Now Stocks, could not have been more spot on. The latest rally in Bonds began to reverse in July and it appears the first move towards a Bond Bear Market is now in place. And indeed the excitement the markets reserved for Bonds earlier this year did indeed move to Stocks with a recent exclamation point capping a three thousand point move up in the Dow that began in February.

For those of you reading the press clippings of these latest moves, please remember the narratives are worthless. Trends do not extend forever and long-time readers of this letter know I have been preparing for a change in the long-term trends of Stocks and Bonds for some time.

My excitement that my long wait may finally be over is based on the excitement both the Stock and Bond markets registered in 2016. Soaring prices, plunging and even negative yields, characterized the Bond market all spring long. Prices topped (and yields bottomed) in July with the bellwether thirty year US Treasury bond at 2.08%; by the first of December it was over 3.08%, an almost 50% jump in yield and 19% plunge in price. (more…)

The Coming Change

October 15th, 2016 by Kurt L. Smith

If you frame the world in the context of long-term financial trends, you may see a world without change. Thirty five-plus year bull markets for stocks and bonds are where we have been and where we currently are. Not only have interest rates fallen from all-time record highs in the early 1980’s to all-time record lows lately, but the prospect for lower interest rates longer is the consensus for as far as the eye can see.

Market moves of this historic magnitude are what books are made for, not a monthly letter. After thirty five-plus years, what’s another one year, or five years? The consensus is lower longer. In other words, the consensus is for no change.

Yet the conditions for change continue to swell. Some people are angry, very angry, about our economic situation. Sure we have had one of our worst rebounds from a recession possibly ever. Some young people are asked to assume more and more debt while facing an insecure economic time. But angry? We are discovering the business model for pension funds is not working. Older workers, increasingly teachers, police, firefighters and other municipal workers are becoming increasingly aware how the ongoing lower longer outlook will impact them dramatically. (more…)

What? Municipals on Top?!

January 15th, 2016 by Kurt L. Smith

Happy New Year! Municipal bonds were one of the best performing asset classes for 2015*. That doesn’t happen often (ever?)! Municipal bonds didn’t post stellar returns but compared to the sub-par performance of almost every other asset class, municipal bonds came out on top.

Obviously we don’t invest in municipal bonds because we think they will be the top performing asset class each year. We like the income, particularly tax-free income. Municipal bonds may not have the sex appeal of other, perhaps higher yielding investments but they also do not have some of the risks. In this era of low (to no) interest rates we have seen others chasing yields in all kinds of asset classes from master limited partnerships (MLPs) to high yield junk bonds and even in higher dividend stocks.

2015 saw some investments for yield really take it on the chin. According to The Alerian MLP Index, Master Limited Partnerships (MLPs) as an asset class lost about forty percent of their value last year.** Forty percent is enough to whack off many years of projected income and price fluctuation is but one of the risks associated with MLPs. Sure the yield (income) investors were hoping to grab is still there…unless the MLP cuts the dividend rate, another risk associated with MLPs. No doubt MLPs performed well for many years prior to 2015, but then, bam, the trend moves in another direction leaving MLP investors to try and salvage their investment. (more…)

High Prices Good!

December 16th, 2015 by Kurt L. Smith

One of the lasting lessons learned from the financial crisis is how much better the world seems to be when asset prices are high(er). Balance sheets are strong when prices are strong. Loans look better when collateral prices are higher. As we saw in 1999 and again in 2007, higher prices make for a wonderful investor world. (more…)

The Trend Is Not Your Friend

November 11th, 2015 by Kurt L. Smith

Investors look to the Federal Reserve for economic leadership. Looking backward, one might say the Fed helped get the economy back on track with lower interest rates, higher asset prices and lower unemployment. Looking forward, the Fed continues to feed us the line that next month or next quarter will be better. (more…)

We Live In Interesting Times

September 1st, 2015 by Kurt L. Smith

While waiting for the next move higher in long-term interest rates, the Dow decided to shed 1000+ points. And that was only in the first eight trading days following the publication of the August Letter. (more…)

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