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Posts Tagged ‘trend change’

It’s A Bull, Bull, Bull World

November 30th, 2022 by Kurt L. Smith

After forty years of bull market in financial assets, one can only imagine how difficult a change in trend may be to recognize. We live in a bull market world, enjoy the bull market experience and we have been doing so, for so long, we believe it is just the way things are.

The bull market has existed for both stocks and bonds for decades. Rather than serve to diversify one’s portfolio, stocks and bonds have been in a tortoise/hare race to the top. Unlimited optimism, or even abundant optimism, can only push bond prices so high, but for stocks, truly the sky was the limit.

So, it might make sense that the bond market might be the first to signal the bull market is over. The bond market performance story for 2022 has not yet been fully written, but unprecedented, the word used in these letters over the past several months, will surely be included.

Yet despite a treasury bond trading at half its value over a two-plus-year span, you would think investors would recognize this as a bond bear market. Staring at not only the worst bond market return in decades, but perhaps ever, we saw bond prices soar in November with Bloomberg saying last week “municipal bonds are having their best month in almost four decades.”

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Streaks End

November 30th, 2021 by Kurt L. Smith

Streaks don’t last forever. This past weekend in college football proved that. The college football playoffs this year will not include Clemson, Ohio State or Oklahoma. Despite all reason, the best talent, and the fact we all love winners, the playoff runs for these schools has ended. Only Alabama’s hope remains. 

Time will tell whether this is but a minor setback for these perennial powerhouses or one of long-lasting stature. I know the differences. I am a (now) long suffering Texas Longhorn fan. 

I also called the end of the bond bull market as March 6, 2000. An almost forty-year winning streak for the bond market is now over, yet many do not share my certitude, even after twenty-one ridiculously long months. 

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Why Municipal Bonds?

June 23rd, 2021 by Kurt L. Smith

The obvious answer to the question “Why municipals?” is they are tax-free. That is a good reason, especially if the benefit is greater than the alternatives. From the days of double-digit yields of the early 1980’s the added benefit of the tax-free feature has almost always been worthwhile to investors in the highest tax brackets.

Of course, an almost forty year bull market for bonds helps as well, but that is over. Bond performance no longer has the wind to its back; bond performance now faces many headwinds. Selection is key no matter the market, but in today’s new bond market, selection is paramount.

The final stages of the bond bull market have wreaked havoc with investment managers and their investor clients. Where is the yield and what has performed well in these final throes of the bull? You know it is junk, or high yield. For municipals this means prisons, nursing homes, dormitories and other housing or land-based, new projects. For corporates, well you can find lower rated credits across industries.

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Return To Normal?

May 25th, 2021 by Kurt L. Smith

Vaccines are wonderful and it is great to get together with friends and family again. The feeling of hope and sharing good times are wonderful.

Last week we vacationed with the family in the mountains of North Carolina. Beautiful mountains, near the Appalachian Trail and, oh yeah, without any gasoline. Someone at the Colonial Pipeline thought it would be a good idea for a sixty-year-old pipeline to be on the internet. A group of Russian hackers looking to make an easy $5 million dollars agreed.

Before we left North Carolina we were re-routed off Interstate 40 in Memphis because the bridge across the Mississippi River was discovered to have quite a crack. I guess we were just lucky to make it across the bridge just a few days earlier on our way to the gasoline desert of North Carolina.

My February letter led off with the tragedy Texans faced losing electricity and later water service. While the cause was not Russian hackers, it might well have been. At least the Russian hackers apologized for their actions regarding the pipeline. Texans on the other hand, got to see their state legislature in action (yes, inaction).

Our infrastructure sucks. You do not have to be in the infrastructure business (like municipal bonds) to know this. We get to experience it…regularly. This is nothing new.  No one wants to be responsible and yet we are all responsible. We like to think we are immune here in Texas because so much of what we have is new: new highways, new airports, or at least terminals all over the state.  Yes, growth is better than the non-growth I see across the country but, as we experienced in February, we are not immune to infrastructure problems.  We are not even lucky.  Texas is a great place to be if you do not want to be responsible. Companies are moving here in droves as a result.

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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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Prepared?

March 5th, 2020 by Kurt L. Smith

From record high to worst week since the financial crisis in October 2008, stocks ended thirty-plus years of bull in dramatic fashion. The top bull in the better than best of recent asset pricing is taking the leadership role in the great deflate.

From a high of 29,568 on February 12 to an end of month low of 24,681, the Dow Jones Industrial Average has lost over 4,000 points with 3,600 of it in one week (source: Bloomberg). This is not your normal pull back. This is not the buy the dip (one more time!). This is the end we have been talking about since November 2017 in my letter, Top of Tops. In that letter I noted 23,500 as the all-time high turning point for stocks. The extra run since then was a bonus.

You all know I have been writing about asset prices being at the end of something. From the depths of the financial crisis in March 2009 to February 2020, it was quite a ride. A ride I believed would be over (in November 2017) but continued through Groundhog Day (after Groundhog Day) 2020.

Consequential? Unbelievably so. This isn’t even the worst part. From my point of view stock investors “haven’t lost anything” as they are still ahead of November 2017. No, the worst part is ahead of us because it involves the bond market.

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The Bigger Picture

October 15th, 2019 by Kurt L. Smith

Summer was extended down here in Dallas. Ninety-plus degree days almost every day in September. Seemingly the same thing every day, like the markets these past many months. Change will happen, though it seemingly hasn’t yet.

When we drew our line in the sand, almost two years ago, that the next move for stocks would be down, little did we know how long the wait might be. Obviously I stand by my call because I bring it up often. More importantly it still holds up well. What have you missed in stocks?

But if you haven’t sold some of your stocks you haven’t built up your cash and you haven’t increased your commitment to The Select ApproachTM. Unlike every other investor, you have The Select ApproachTM as an alternative to stocks, bonds, gold, commodities, real estate, private equity and whatever other mash up you may or may not have tried.

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Markets Move, Not In A Straight Line

January 3rd, 2019 by Kurt L. Smith

If the stock market is reflective of social mood, and I believe it is, then we have experienced quite a mood change in the fourth quarter of 2018. From all-time stock market highs to the lows of the year, to what may be the worst December stock market since the Great Depression, the market, and mood, has changed.

Your mood may have changed as no one likes to see gains evaporate, particularly at historic clips. Markets, as I have preached for years, do go up and down after all, so this must be a part of it. Yes they do, but ups and downs do not reflect the true risk with this market.

The reason I find it important to forecast and call changes in trend is because with each later stage of the thirty-plus year (if not ninety year) bull market, I see the risks inherent in subsequent turns as much greater than we have previously experienced. We therefore should not be surprised when the unusual or extreme occurs because, like prior downturns, we are aware the surprising will probably occur.  Or in this case, take December as an example. (more…)

Treasuries Tank; Any Followers?

June 1st, 2018 by Kurt L. Smith

When it comes to interest rates you know we rejected the “lower rates for longer” mantra from the beginning. Largely this was due to the fact that we believed interest rates were bottoming and the new long-term trend of ever increasing rates, which we called in November 2012, was just beginning.

The chart below details significant interest rates over the past five-plus years of our journey. Longer-term rates on ten year and thirty year notes and bonds challenged our premise briefly in 2016, allowing the “lower rates for longer” mantra to swell, but the results, or shall I say, performance, speaks for itself.

 

All-Time Low Yield            June 2017  Low                       Recent High

0.14%      9/20/11                1.26%    6/2/17                   2.60%    5/17/18

0.53%      7/25/12                1.67%    6/14/17                2.95%    5/17/18

1.32%      7/6/16                   2.10%    6/14/17                3.13%    5/18/18

2.09%     7/11/16                 2.68%    6/26/17                3.26%    5/18/18

-Source: Bloomberg

 

Owners of ten year US Treasuries in July 2016 have watched the yield on their note increase an astonishing 181 basis points, for a 13 percent price decline in the note’s value (vis-à-vis the Treasury 1.625% 5/15/26). For owners of the bellwether thirty year bond, the 117 basis point increase in yield has lowered the bond’s value about 23 percent (vis-à-vis the Treasury 2.50% 5/15/46).  All treasury prices per Bloomberg.

Double digit loses in longer-term treasury prices over the past two years are huge. Yet even at the most recent high yields lately of 2.60% to 3.26%, they continue to look low by historical standards.  With double digit price damage occurring at what many folks consider “low yields,” it should prepare bond investors for continued and greater carnage as yields continue their (so far) slow movement to more “normal” interest rates. (more…)

Remember Credit Quality?

April 2nd, 2018 by Kurt L. Smith

Since November’s letter, Top of Tops, I’ve discussed the unfolding progress of the new bear markets in both stocks and bonds. While recognizing the risks of an impending bond market crash, we instead were treated to the beginning of a stock market crash.

On March 23rd the Dow closed at 23,533, essentially even with the November 1st close. But what a wild five months it has been for stocks. Almost straight up to the all-time high of 26,617 January 26th, to a 12% sell off in a mere ten days to a new closing low as of this writing.

I don’t just see possible horrific losses for stocks unfolding, I see probable horrific losses for stocks unfolding. This is why I have referenced the 1987 stock market crash (down 22% in one day, down 40% over eight weeks). The seemingly impossible has happened before. Who knows, this time it may be worse.

Conventional wisdom may direct investor’s funds towards bonds if such a stock market panic unfolds. That would be a mistake in my opinion. While stocks attempted to bounce since their 12% sell-off and have failed, bonds did rally. But this rally happened in the midst of a larger bond market sell-off.  With an overall downtrend for both stocks and bonds, if both do get aligned and move strongly lower together the resultant fear could heighten concerns of a crash in financial asset values. (more…)

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