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Posts Tagged ‘high prices’

An Ever Changing World

April 22nd, 2021 by Kurt L. Smith

High prices may be a time to celebrate, but they may also be a time for decision making. Nothing illustrates this better than the market for the U.S. Treasury bond bell whether trading at the highwater mark of highwater marks last year and losing all its gains since.

Last month we discussed the bellwether bond, the 2.375% of 2049 losing it’s 140 price premium, selling at a discount one year later in March 2021. For owners of this bond, it may be a case of easy come, easy go or we may hear “I bought it for the yield (seriously?)” as they continue to own the asset.

All owners of stocks should take notice. Gains do disappear, though stock investors also may take comfort in making the statement “I bought it for the yield” and continue to buy and hold. Everybody wanted to (and seemingly did) own General Electric, the darling of the 1980’s and 1990’s bull market, but then life happened, and it was not pretty.

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We Are All Traders Now

September 23rd, 2020 by Kurt L. Smith

Over the past couple of months, we have witnessed what it is like to be winners. Investors of stocks and bonds have watched their portfolios move higher with interest rates at or near historic lows, bond prices are unbelievable high. And the effects of high bond prices have reverberated across asset classes.

I pick on bonds because they are “fixed income”. There is only so much income a bond generates (it’s coupon amount) and for only so long (it’s maturity). So, when interest rates are near zero, the price of the bond is approximately, or near, the sum of all of its cash flows (coupons plus maturity or par amount).

A 1% ten year noncallable bond that sold at 100, would be priced at 110 if interest rates moved to 0%. At .50%, the bond would be priced at approximately 105, still a nice 5% gain from no-or-low interest rates to even lower rates.

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Protect Yourself

July 15th, 2020 by Kurt L. Smith

In my opinion, markets perform like markets. Narratives may try to explain them, but the narrative is a lie. The market did not go up because of ‘X’ or ‘Y’, the market just went up.

For the past several years I have been writing about the end of something, specifically the end of asset (stock, bonds, gold) prices rising trend. This was the case at the beginning of the year, as well, before we learned to spell corona.

Six plus months into this lousy year, just where are we? Let’s start with bonds because it is easier, or should be, to recognize a top or the top in bond prices when the price of a bond is just about the sum of all cash flows to be received throughout the life of the bond because the yield isn’t worth noting as a discount.

Look at this month’s bond sale from Tarrant County College District, Texas (below). Are those yields just not ridiculous? Would you entrust your money to a governmental entity for any length of time at those low (no) yields?

As discussed in my March 6th letter, earlier this year, whether you buy these yields or not is irrelevant. What is relevant is these are the yields that are used to price mutual funds and other portfolios of bonds. These low (no) yields, along with their treasury and corporate counterparts mean tens of trillions of dollars of fixed income portfolios are priced so fully as to negate future upside.

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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…)

My Daily Travels

November 4th, 2016 by Kurt L. Smith

Working in the municipal markets on a daily basis is like having the opportunity to travel the country each and every day. I visit California and Texas most often as they are big states with numerous debt issuers. But by the end of each day I have generally made a wide swing across many states and then tomorrow I will get up and do it all again.

Change doesn’t occur rapidly across the country but change does occur. Growing areas, primarily the biggest cities along the east and west coasts and in Texas, continue to grow. Everywhere else, and that’s a lot of everywhere else, seems to be doing a lot of nothing.

If municipalities were stocks, odds are you would only buy the top five or so. Think of them as the Apple, Amazon, Facebook or Google of municipalities. That’s how few areas of the country are growing. Not that growth solves all problems, but lack of growth, particularly if you were counting on it, can add unforeseen risk to the situation. (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…)

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…)

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