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While I am disappointed the market has not yet broken (down), there is nothing in its action to suggest my thesis is incorrect.

They Are All Markets

December 15th, 2017 by Kurt L. Smith
  • Well, so much for Top of Tops. Last month’s market call that both bonds and stocks were headed lower, proved premature. The September-October bond market decline failed to gather downward momentum while stocks added another leg upward.

    While 1,000 Dow points isn’t what it used to be (lately about 4%, whereas 10% or more in years of yore), it is still 1,000 points. For me, a 1,000 points of wrong, but that’s the way markets can behave.

    Take Bitcoin, everyone’s favorite (new) subject. In what appeared to be a  frothy, over-extended market, Bitcoin merely added another fifty percent.  And that was just last week!

    Does one have to do with the other? Can the frothiness of Bitcoin and the added leg up in stocks or the pause in the bond bear market be related? Yes, they are all related: they are all markets.

    You are familiar with my stance on the bond bear market. The bond market top was 2012 and for the past five years the market has been at work raising market yields and depressing bond prices, to the point I believed we were at a  break-out last month. While I am disappointed the market has not yet broken (down), there is nothing in its action to suggest my thesis is incorrect. Ten year yields most recently bottomed at 2.01% on September 8th, traded at a high of 2.47% on October 27th and ended last week at 2.38%.

    Throwing stocks into the mix was based on the same analysis I used in 2012. I believe stock prices to be terminal and Dow 23,500 fit that bill. Unfortunately markets can and do add additional upward legs. But like bonds, terminal looks to me to be terminal and 23,500 is where my mark is recorded.

    Speaking of terminal, we should add Bitcoin to the mix. The market for Bitcoin is also terminal. Not many markets enjoy the description of going parabolic, but once one does, it is terminal. While we don’t know how high high is, we do know what the shape looks like and Bitcoin owners and aspirers are now enjoying the shape (straight up and parabolic) of this market.

    Stocks could also go parabolic here. I just put low odds on the prospect, hence my 23,500 call. But both appear to me to be terminal…that is they appear to me to portend the end of something, here, their price trend.

    Speaking of trends, it appears the subject I should of written about last month was two year US Treasury note yields, rather than my focus on the long-term ten and thirty year bonds.  The two year yield should be my poster child for my bond bear market call of 2012. The two year bottomed in 2012 at essentially zero, .14% on 9/20/2011 actually, and has been climbing ever since, particularly since the September 8th low at 1.25% to over 1.80% last week. The two year continued upward while the ten year (temporarily) stalled.

    Over the past five years the Federal Reserve has only raised rates four times, from .25% to 1.25%, beginning in December 2015.  With short-term yields such as the two year Treasury note continuing to ratchet higher, the Fed has a lot of catching up to do and the market fully expects the Fed to jump rates this week (probably by the time this letter is published). The Fed is a follower of the market; the Fed is not the leader.  Catching up with the market should be no surprise; catching up is expected.

    Oh yeah, there is also a new tax package wrapping up in Congress.  Could it be that tax changes could be responsible for last month’s leg up?  If you think so, then why not the same logic for Bitcoin and what do taxes have to with Bitcoin anyway?  The narrative is not important; narratives change.  What is important is that optimism is high; high enough for a tax package to be written.  Such optimism, together with the terminal look for stock and Bitcoin prices only reinforce the coming trend change for me.

    The bond bear market will continue, and eventually get noticed. In the meantime, stocks and Bitcoin better keep going up, lest I be proven correct.

    Round Rock, Texas GO

    S&P AAA (Under)

    Due 8/1 Dated 12/21/17 Maturity: 8/1/2039

    Sale Amount: $32,785,000

    1 2018 3.00% 1.30%
    2 2019 4.00% 1.56%
    3 2020 5.00% 1.64%
    4 2021 5.00% 1.71%
    5 2022 5.00% 1.81%
    6 2023 5.00% 1.92%
    7 2024 5.00% 2.02%
    8 2025 5.00% 2.10%
    9 2026 5.00% 2.19%
    19 2036** 4.25% 3.10%
    20 2037** 4.25% 3.14%
    21 2038** 4.25% 3.17%
    22 2039** 4.25% 3.18%

      *Yield to Worst (Call or Maturity) **Par Call: 8/1/2027

    Source: Bloomberg

    This is an example of a new issue priced the week of 12/11/17

    Prices, yields and availability subject to change


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