The Topping Process Continues

The Dow Jones Industrial Average sold off almost 2,000 points in just a few days recently. The Dow now trades at the same level as it did back in January 2018.

Bonds meanwhile continue their move higher in price (lower in yield) as unlike stocks, their corrective move had added momentum. When it comes to bonds, we hear statements like highest prices (or lowest yields) since 2016. That’s because the current bond market rally is a correction of the downward price trend in bonds that dates back to 2016 (for me 2012).

Last month’s letter discussed how I expected asset prices of bonds, stocks and gold to soon complete. We have seen the initial move down for stocks and I look for similar strong downward moves to begin in bonds and gold at any time.

“At any time” is the operative word. Last month’s market focus was based on the movements of the asset markets over the past weeks as well as the past several years. Markets behave like markets, despite the actions of central bankers or presidents, war or peace. So last month’s giddy didn’t indicate a continuation of trend, but rather the end of a move.

Bonds received the giddy hand off from stocks here of late. Investors just can’t get enough bonds, no matter how high the price (or low the yield). But like stocks, expect bonds to sell off hard and kick off the next leg of their bear market.

Wall Street bankers are happy to oblige bond buyers by creating more and more product. Occidental Petroleum received $75 billion in orders for $13 billion in new bonds sold to finance its acquisition of Anadarko Petroleum Corporation (per Bloomberg). It reminds me of the leveraged buyout of TXU back in 2007. Warren Buffett called his involvement in TXU “a big mistake” (per NY Times) and oh, there he is in the Occidental deal.  Yes markets do behave cyclically so we can watch the Oxy bond deal over the next several years to compare.

Oh, I almost forgot, the Federal Reserve reduced their interest rate peg for the first time in over ten years. Yawn. As I said earlier, markets behave like markets despite central banks.

Taking a look at two year treasury note yields, they had risen from .50% to almost 3% fairly steadily from mid-2016 through November 2018 (all data per Bloomberg)…until what? The rates didn’t continue to rise, not because the Federal Reserve signaled an end of rising rates, but because the upward move was complete. Now that rates on the two year note have retraced from the  2.97% high to 1.55%% recently, the Federal Reserve felt compelled (obviously) to cut a mere .25% last month. Again, yawn.

Likewise, the reason rates will increase from these current levels is not because of Fed action, or any other action. Interest rates will increase from here because the retracement move is largely over. The next move for interest rates is higher.

If you own longer-term individual bonds or mutual funds of bonds, now is the time to sell. Prices have moved up, but in order to benefit you need to sell. Continuing to hold, I believe, is the wrong move. The profits in bonds these past few months was a trade. Make it and move to safer, firmer ground.

We have witnessed the end of stocks upside move (again, a trade) and now we need to prepare for lower prices to continue. Two thousand Dow points is the beginning of a greater downward move based on the stock market moves of the past many months.

Trade war, inflation (what inflation?), the Fed — none of it figured precipitated the two thousand point sell off. That’s why I don’t talk about it. It wasn’t relevant. Focus on the market ebbs and flows and forget about the narratives people build to justify their position.  Who or what will get the blame for the bond market sell off when it begins shortly or the one coming for gold? Whatever it is, just remember it is not relevant.

Clear Creek Independent School District, TX

Moody’s Rating Aaa (Aa2 Under) Fitch Rating AAA (AA+ Under)

Permanent School Fund Guaranteed

Due 2/15 Dated 9/3/19 Maturity 2/15/41 Sale Amount $108,970,000

Year Maturity Coupon Yield*

• 1 2020   5.00% 1.02%
• 2 2021   5.00%  1.05%
• 3 2022   5.00% 1.06%
• 4  2023   5.00% 1.07%
• 5   2024 5.00%   1.09%
• 6   2025   5.00% 1.16%
• 7   2026   5.00%   1.24%
• 8  2027  5.00%   1.33%
• 9  2028   5.00%   1.44%
• 10 2029**   5.00% 1.51%
• 11 2030**   5.00%   1.61%
• 12  2031**   5.00%   1.68%
• 13 2032** 5.00%   1.74%
• 14  2033** 5.00%   1.78%
• 15 2034** 3.00%   2.36%
• 16 2035** 3.00%   2.46%
• 17 2036** 3.00% 2.49%
• 18 2037** 4.00% 2.22%
• 19  2038**  4.00%   2.26%
• 20 2039**   4.00%   2.27%
• 21 2040** 4.00% 2.31%
• 22 2041** 4.00% 2.36%

*Yield to Worst (Call or Maturity) **Par Call 2/15/28

Source: Bloomberg

This is an example of a new issue priced the week of 8/5/19

Prices, yield and availability subject to change