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Posts Tagged ‘liquidity’

Now It Gets Interesting

February 17th, 2022 by Kurt L. Smith

Long-term investors, I mean old investors, have experienced market reversals. As night becomes day, market selloffs lead to new, higher prices. This law of nature does not apply to markets, though one’s experience tells one otherwise.

Over the last 40 years we have seen downdrafts leading to new highs. You remember the dates: 1987, 2000, 2007, and lately, 2020. What you may not be aware of is the same dates also saw similar action in bonds. The long-term bull market for stocks was mirrored by bonds. Bond and stock performance marched ever upward, together…until they did not.

I have worked hard to let you know the bull market in bonds is over. Yields traded at such a next-to-nothing interest rate in March 2020 resulting in record high bond prices. Compared to the double-digit yields of the early 1980s, which equated to record low bond prices, I believe the bond market has completed its long bull market journey. The bond bull market is over, and you should not own bond mutual funds.

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Be Prepared

February 24th, 2021 by Kurt L. Smith

The past week has been a tragedy down here in Texas. One crisis morphed into another leaving dozens dead and tens of billions in destruction. Simply terrible and preventable.

As a Texas native, ridiculously cold weather for a ridiculously long (for us) time is not a once in a century experience. Every decade or so it happens. But Texans are not all native Texans now (or ever). Texas has been growing by transplants forever and their expectations eventually collide with a horrible reality.

A gardener prepares his garden in the winter. A homeowner prepares her pipes before they freeze. An investor prepares for the downturn as the market moves higher. There is time for celebration but there is also time for work, the preparation what comes next.

Last month we focused on the ten-year Treasury note and long bond. Friday, February 19th, those sold at new low prices (high yields). The long Treasury bonds has now lost 35 points in value from March 9, 2020 at 140.17+ to 105.05+ Friday (all prices from Bloomberg). One of the recently sold ten-year Treasury notes, the .625% of August 15, 2030, has now lost more in price that it ever promised to pay investors in interest over its ten-year life, trading at 93.6875.

These treasuries are, of course, the favorite investment for the Federal Reserve Bank. Their appetite for all treasury securities has grown on their balance sheet from about $2.5 trillion a year ago to $4.8 trillion now (per Bloomberg). All the while, their price continues to fall.

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Never Sell Anything

December 16th, 2020 by Kurt L. Smith

Years ago, and I mean many years ago, it became apparent that bond portfolio managers rarely sold bonds in their portfolio. Sure, active managers might sell something to keep their active manager label active, but rarely did a bond manager sell bonds in the portfolio to meaningfully move the needle on their holdings. If a manager did not like the market, she could enter a derivatives trade to place her bet instead.

Another reason for the never sell mentality in bonds was the fact that more money usually came in the door. When bonds perform well, investors tend to stick with it or even add funds. Combine all this with the other fact that bonds do mature, and bond portfolio managers are usually in the position of deciding where to invest cash rather than the prospect of selling bonds to raise more cash.

This has been the case for decades, though there may have been some managers slow in the 1980’s and early 1990’s to warm up to the fact that we were in what would become a multi-decade bond bull market. While the rise in the bond market has not been straight up, I would argue, from a portfolio management standpoint, it might as well have been. Bond portfolio managers have largely been reluctant to sell even prior to the large swoon in the financial crisis of 2007. If anything, the recovery since has largely reinforced the idea of never sell anything.

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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…)

Scratching & Clawing

April 8th, 2014 by Kurt L. Smith

My firm belief that market conditions will (eventually) change gives me the optimism to approach each day as if today is that day.  Then comes my monthly Municipal Market Letter writing day and of course it seems as if nothing has changed…ever.  The first quarter of 2014 is gone and what has changed?  While I know that this is not altogether true, the mileposts seem to be moving hardly at all. (more…)

Great Success

November 11th, 2013 by Kurt L. Smith

The financial markets spent most of October peaking so why should I add my usual dose of downer?  Instead, in the spirit of thanks and Thanksgiving, why not look back at some of our successes and revisit why we choose the path we do. (more…)

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