Author Archives: opadmin

1st Inning or 9th Inning?

This will be brief as we all know what has happened and have no idea where we are headed. Are we in the early phase of this viral event or is a return to normalcy on the horizon?

The equity markets crashed into the March 23rd lows – down 35% in five weeks. They subsequently rallied around 25% as of April 14th – the fastest decline and rise in the shortest number of days in history. There is the very real possibility that stock prices could continue their declines towards new lows as we digest the dire economic news as it deepens in the coming weeks.

The Federal Reserve and the U.S. Treasury have unleashed Trillions of dollars in loans, grants and guarantees. Treasury bond yields have collapsed with yields now ranging between .1% and .6%. In our last letter we mentioned the possibility of negative interest rates this year. They have arrived.

For months we have been talking about investor complacency accompanied by record low unemployment rates and record high stock prices. Over the last year, for various reasons, we had accumulated very large positions in U.S. Treasury bonds for all of our accounts despite the record rise in stock prices. In the past month roughly 22 million have sought jobless benefits, easily the worst stretch of U.S. job losses on record.

This record surge in claims should push the unemployment rate up to 17% in the April data, a new post-World War II high. Under the current circumstances, our Treasury purchases have proven to be a very prudent decision.

A Trillion is a large number. What is a Trillion in seconds? Dollars?

A million seconds is 13 days.
A billion seconds is 31 years.
A trillion seconds is 31,688 years.

J. Brock Hamilton
April 16, 2020

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Fed Induced Flood

So where are we in the midst of this ongoing equity market melt up? The Federal Reserve (Jerome Powell) continues to flood the banking system with liquidity causing risk assets (stocks, bonds, derivatives, etc.) to inflate relentlessly. Get this: The current thinking is that the Fed may cut interest rates again several times this year. They say the U.S. economy is “fragile” and could tip into recession. One thing we know for certain is that sustained periods of “free” money lulls brilliant people into making stupid investment decisions.

Central bank policies are directly driving asset prices and the bubbles therein. It’s what they do.

ZeroHedge reports “And not just the Fed: soaring recession fears in 2019 which sent a record $17 trillion in debt in negative yield territory prompted 49 central banks around the world to cut rates 71 times in 2019, according to JPMorgan. The Fed itself reduced interest rates three times last year, and launched QE4 in October ostensibly to “fix” the repo market but in reality, to push stocks higher, just as the president had demanded.”

“Greg Jensen, the co-CIO of Bridgewater, warned that he (fund is $160 Billion)was cautious on stocks, describing them as “frothy” as ‘most of the world is long equity markets in pretty extreme situations’, and predicted that gold would soar to $2000 and higher because the Fed and other central banks would let inflation run hot for a while and “there will no longer be an attempt by any of the developed world’s major central banks to normalize interest rates. That’s a big deal.”

“It gets worse: while the “tinfoil” blogosphere has repeatedly said the Fed could cut rates back to zero, if not negative, Jensen is one of the first “serious people” who told the FT he would not rule out the possibility that the Fed could slash rates to zero this year as it looks to avoid recession and disinflationary pressures.”

“But the main reason why Bridgewater is going long gold is also the most startling one: as a result of coming inflation surge and the ballooning US budget and trade deficits, the status of the US dollar as the world’s reserve currency could be threatened.”

CNN MONEY 1/15/2020

This graph shows the recent trajectory of Fed’s growth in total assets in red. The green is the trajectory of the S&P 500. This is a major factor for the current valuation of the stock markets.

I find it fascinating that the Fed has reengaged Quantative Easing, though they deny that’s what they are doing. The chart above tells the whole story.

To finish, below is a chart of the current members of the Four Comma Club. They are the Trillionaires.

Who are they?

The Big Four

J. Brock Hamilton
January 2020

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QE to QT

Despite the SP500 index being marginally positive for the first half of the year the economy continues to surge ahead. Jobs are going unfilled and homes are in short supply.s passed at the end of 2017. The economy has been overly stimulated by the tax cuts and fiscal-spending package that Congress passed at the end of 2017. Just as its effects are fading, the Fed will continue to push interest rates higher and shrink its $4 trillion

That shrinking in the $4 trillion balance sheet is where the QT (quantitative tightening or unwinding of extreme central bank stimulus) is starting to take hold. The Fed is on schedule to have $50 billion of debt they own “roll off” each month without replacing it.

As an article in Zero Hedge recently commented, “Thus far, the US stock market has held up relatively well. But this is where it gets really bad. The Fed will raise the pace of its QT program to $50 billion this month. And it’ s doing it at the same time that the ECB is dropping its own QE program to below $30 billion per month.

Put another way, this is the FIRST time since 2008, that global market monetary policy will be NEGATIVE: more money will be leaving the system via QT, than will be entering it via QE.”

Bloomberg writes, “Securities purchases from the Fed, European Central Bank and Bank of Japan are just $125 billion year-to-date, well below the $1.5 trillion run-rate of 2017, they estimate. That suggests markets are missing an injection of some $1.38 trillion thanks to policy makers changing tack. Liquidity will see an outright contraction in six to eight months, the strategists estimated — one reason they’re bearish on global markets even after recent declines.”

Higher interest rates are definitely beginning to provide some competition for stocks hovering close to all-time highs. The volatility we spoke about in our last letter continues along with stagnant index returns.

Higher interest rates are making the U.S. Dollar stronger which will hamper profits of corporations with international exposure.

The Fed is on track to raise interest rates two more times this year. Oil is the highest since 2014 and inflation is in your face every time you pull out your credit card. Tariffs and trade wars will also have unintended consequences.

We may be on the front end of the “Easy Money Era” which would be great. Kick ZIRP goodbye forever!

Enjoy the rest of your summer!

J. Brock Hamilton
July 2018

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VOLATILITY!

The markets peaked on January 26th and volatility is back with a vengeance and that creates opportunity.

Three of the Dow’s biggest daily point drops in its 122-year history, including its 1,175-point record fall on February 5th, have occurred this year. And it was a wild ride Friday April 6th when it plunged 767 points before ending the day down 572 points.

In our last letter, back in January, we wrote “The ride in 2017 was as smooth as silk. There is an old saying that the longer a trend remains intact the more violent the change will be when it occurs. We have not seen such a consistently low level of stock volatility in decades. 2018 will bring more volatility in asset valuations. That’s a given. Stocks are expensive on a forward earnings basis by any metric. Fourth quarter earnings for SP500 companies should be very favorable, possibly the best in six years. With Dow 26,000 I’d assume much of that has already been discounted.”

We had reduced equity positions in the final quarter of 2017 in anticipation of a change in sentiment.

There have already been 27 trading days in 2018 on which the Standard & Poor’s 500 stock index has closed up or down by more than 1%, compared to just ten days in all of last year, according to S&P Dow Jones Indices. If the current pace of 1% swings persists through year-end, it would put the large-company stock index on track for its most volatile year since the financial crisis. USA Today 4/6/2018

Both the Dow Jones Industrial Average and the S&P 500 have fallen into correction territory in 2018. At its lows, the 30-stock Dow shed more than 12 percent from highs reached in January before paring those losses.

CNN Money Fear and Greed Index showing extreme fear based on volatility 4/09/2018

Record low volatility to record high volatility from August 2017 to April 2018

So, where do we go from here? The positives are numerous. The unemployment rate is at historical lows, the economy is strong, earnings are great and tax revenue to the U.S. Treasury has never been greater.

Then there a few other factors which keep us up at night: Dow Jones 1000-point single day swings, tariffs, inflation rising above 2%, taxes, politics, annual trillion-dollar deficits, national debt, rising interest rates, wars, earnings, oil at a four-year high etc. These are just a few things we sort through on a daily basis which have caused us to be more cautious over the last year or so.

Going forward we shall focus more on ETFs and companies developing technological innovation and disruption that will accelerate the pace of change. These areas include Mobility-as a Service (MaaS), robotics, AI artificial intelligence, genome editing and immunotherapy in the healthcare arena and Frictionless Value Transfers, more commonly referred to as “mobile payments.”

As stated in the first sentence, “volatility creates opportunity.”

J. Brock Hamilton
April 2018

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What’s in a Name?

A lot has happened since our last letter. Last September J.P. Morgan’s CEO said that Bitcoin was a “fraud”. Last week he said he “regrets calling Bitcoin a fraud” after the digital currency tripled in price in three months. The next day Warren Buffett said in an interview regarding crypto currencies, “I can say with almost certainty that they will come to a bad ending”. Digital currencies are one thing but the Blockchain is another. Blockchain transaction verification/validation is here and it’s the future! We’ll write more about it in the future.

So, what’s in a name? An ice tea company on Long Island decided to change its name to Long Blockchain Corp. The stock rose 500% in a day. Kodak said it was looking into crypto currencies and blockchain while creating PhotoChain. The stock rose from $2.5 to $13 in two days. Both stocks have declined in dramatic fashion since the news was reported.

Bitcoin 10/30/17 to 01/16/18

Unfortunately, as of this writing, the Bitcoin has had a slight pullback of about 50% from its December peak as Asian governments are cracking down on crypto-exchanges.

We could write a book on what has taken place in the last quarter of 2017 without mentioning politics. Aside from rising stock prices, interest rates are starting to rise. We view this as long-overdue welcome news. Bond markets are much larger in dollar size than equity markets. The Financial Times says, “now bond prices are wobbling. This week the 10-year US yield jumped to nearly 2.6 per cent, its highest level for almost a year, after speculation that the central banks of China and Japan might be scaling back their Treasury purchases. Yields later fell back. But the swing was sharp enough to prompt Bill Gross and his rival and fellow guru Jeffrey Gundlach to warn that the three-decade-old bull market for bonds might be coming to an end (although they differ on the precise timing.)”

Rising rates will eventually present a huge problem. As the FT went on to say, “the reason is that the long era of ultra-low interest rates has lulled many institutions into complacency. Investors have been reaching for yield, that is taking additional credit risks, on the presumption that rates will stay low, and using derivatives to magnify their bets. Nobody really knows how much exposure this has created, since the $400 Trillion over-the-counter swaps market is so opaque.”

Short Term Treasury Yields are at 10 Year Highs

So, interest rates are rising, oil has made a huge rebound, stocks are trading relentlessly higher at an extraordinary rate, home prices have recovered and global DEBT continues to rise to unprecedented levels. The unemployment is steady at 4.1% and unemployment benefits are at a 44 year low.

So, what’s missing that could change the course of markets this year? QE to QT, Tax Reform, Volatility and Inflation to name a few.

QE – Goldman Sachs made a comment the other day that U.S. Treasury issuance is to more than double in 2019. That’s part of quantative easing reverting to quantative tightening. The Fed is going to let $30 Billion of Treasury bonds they have purchased over the years “roll off”, thus adding to the supply that needs to be issued. The national debt and budget deficits remain on their upward trajectory.

Tax Reform – will create significant unknowns. Bloomberg reports, Apple Inc. and Microsoft Corp. have stashed billions of dollars offshore to slash their U.S. tax bills. Now, the tax-code rewrite could throw that into reverse. The implications for the financial markets are huge. The great on-shoring could prompt multinationals — which have parked much of their overseas profits in Treasuries and U.S. investment-grade corporate debt — to lighten up on bonds and use the money to goose their stock prices. Think buybacks and dividends.”

Volatility – remains at record lows for stocks. The ride in 2017 was as smooth as silk. There is an old saying that the longer a trend remains intact the more violent the change will be when it occurs. We have not seen such a consistently low level of stock volatility in decades. But as Morgan Stanley commented recently, “In April, it felt as if people were looking for a reason for the market to fail. Now, we have seen a total reversal with people having a hard time even imagining how the market could decline.”

Inflation – The Federal Reserve is as confused as any other economist about the lack of inflation in their analysis despite the tightest labor market in decades. Federal Reserve governors make fortune tellers look good!

2018 – will bring more volatility in asset valuations. That’s a given. Stocks are expensive on a forward earnings basis by any metric. Fourth quarter earnings for SP500 companies should be very favorable, possibly the best in six years. With Dow 26,000 I’d assume much of that has already been discounted.

A we’ve said in the past, “saddle up partner because we are going to be in for a wild ride!”

J.B.Hamilton January 2018

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Cryptic Crypto Currencies and Stocks

You can’t see it or touch it but it’s there. It’s a digital currency, owned by a few and not controlled by any government or central bank. The best-known and largest crypto currency is Bitcoin. It was created in 2009 by a man named Satoshi Nakamoto. It originally had a value of around one tenth of a penny in late 2009. A Bitcoin user named Laszlo Hanyecz made headlines in early 2010 when he bought two pizzas for 10,000 Bitcoins. The transaction was valued at $25.00. Those Bitcoins would have a value of about $57,000,000 today.

Fast forward to 2017 and to Jamie Dimon’s (CEO of J.P. Morgan Chase) thoughts on Bitcoin from the chart and quotes below:

**Zerohedge Oct 13, 2017
*DIMON: PEOPLE WHO PURCHASE BITCOIN ARE STUPID
*DIMON: “WHO CARES ABOUT BITCOIN?”
*DIMON: I DON’T UNDERSTAND THE VALUE OF SOMETHING WITHOUT VALUE
*DIMON: I COULD CARE LESS ABOUT BITCOIN
*DIMON: BITCOIN IS `A GREAT PRODUCT’ IF YOU ARE A CRIMINAL’

So much for Bitcoin. It doubled in price since September when Dimon said it was a fraud. The last quote I saw it was being valued at around $5700.

As for stocks the most important indices continue to trade at record highs. The Dow is above 23,000 today. The SP500 P/E ratio is 25 today and 20 going forward. That’s historically very high by any measure.

Today is the 30th anniversary of the Great 1987 crash in stocks. The Dow Jones index declined by 508 points or 22% on that day. Last week marked the 10th anniversary of the 2007 peak in the Dow Jones before we entered the Great Recession from which we have yet to recover.

As we’ve stated many times in previous letters, the Central Banks’ coordinated zero interest rate policy combined with quantitative easing and complacency have allowed stocks to continue to drift higher with little regard for geopolitics (NKorea) and other macro events.

A fellow named Richard Thaler, who was awarded the Noble Prize in Economic Science last week, had some interesting comments during an interview with Bloomberg. He said ” humans are predictably irrational” and that “the stock market’s complacency in the face of North Korean nuclear threats and political uncertainty at home is disconcerting.” “We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping. I admit to not understanding it.”

Confusion and complacency reign while stocks go up and trading volumes decline at an alarming rate.

Good news on the intererest rate front! Rates are finally beginning to lift off from their extended historical lows as shown in the chart below.
Fed Funds — January 2007 to October 2017

Increasingly, market participants are pricing in the prospect of another rate hike at the December FOMC meeting, which fits with the prevailing projection among Federal Reserve members.

So stocks are at an all time high, interest rates are low but beginning to rise, trading volumes have collapsed and volatility has all but disappeared. That is a nasty confluence of data points that cannot continue. The Machines remain in control.

Beware of years that end in 7. They historically have been the start of something big!

J. Brock Hamilton October 19, 2017

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MAN vs. MACHINE

Too much liquidity, too much technology, too much complacency.

Barron’s had a fascinating article this week regarding passive index/ETF investing. It’s simple. Give your money to the fund manager, pay a small fee and forget about it. The computer does the rest while you play golf or sail around on your yacht. No problem. Stocks keep rising as more investors keep piling their cash into passive and quantitative investment funds. On a related note, Federal Reserve Chairwoman Janet Yellen just said on June 27th another financial crisis is unlikely in our lifetime. That’s quite a remarkable statement coming from what Jim Cramer calls “a PhD who doesn’t know how the markets work and has never bought or sold more than a savings bond in her life.”

In the article Barron’s writes “We still call it a stock market, but these days it has many more indexes than it does stocks: There are nearly 6,000 indexes today, up from fewer than 1,000 a decade ago. Meanwhile, the number of stocks in the Wilshire 5000 Total Market Index has shriveled to 3,599, from 7,562 in 1998. The exchange-traded-fund industry has been enthusiastically churning out new products and the burdens of public listings and easier access to private capital has shrunk the available number of stocks. When money pours in, passive funds must buy stocks in the same proportion as the indexes they track—with no regard for stock price or fundamental valuation. Therein lies the conundrum: Indexing works because it can piggyback on the wisdom of the crowd, but its very rise shrinks the crowd whose decisions help make the market.”

Our friend and bond broker extraordinaire, Chris White of Cantella and Co in Boston, had some very poignant observations about this Barron’s article, the Fed and liquidity. He says, “We are seeing massive inflows into Passive funds vs. outflows of Active funds. The argument, which is somewhat circular, is as follows: Central banks have pumped so much liquidity into the market place that volatility has been crushed. Lack of volatility has caused Passive managers to outperform Active managers. Passive managers buy their respective indices when they get funds, not discriminating about values of what they buy. This works as long as Central banks continue to pump funds into the market place. Despite the Fed raising Rates and the ECB talking about tapering we have not seen a reversal of flows…….YET…..What will happen to this paradigm when the outlook changes from Central banks supporting the markets? We will see a draining of liquidity, volatility will increase and Passive funds start to underperform and then will we see a reversal of tactics? Here are some things to think about: Global stocks have added 10 trillion in value the last year from 66 trillion to 76 trillion, or around 15%. Money funds assets have fallen below the lows of 2000 and 2007. Margin debt is increasing. Assets in low volatility ETFs have increased at 150% annual rate since 2009. This one is wild! Vanguard owns over 5% or more of the 491 companies out of the S+P 500. Per JP Morgan, only 10% of trading volume originates from fundamental discretionary traders.

Even JPMorgan Chase CEO Jamie Dimon had some seasoned observations about the current state of affairs from a conference in Paris last week.

Bloomberg quotes him as saying “We’ve never had QE like this before, we’ve never had unwinding like this before.”

“Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before.”

“When [the unwind] happens of size or substance, it could be a little more disruptive than people think.”

“We act like we know exactly how it’s going to happen and we don’t.”

Dimon finalized his comments by saying “That is a very different world you have to operate in, that’s a big change in the tide, the tide is going out.”

Today, major stock indices are at lifetime highs, money continues to pour into stocks at an increasing rate and the Fed is stuck with trying to figure their way out of this epic bubble they created with — the Great Unwind.

This surge in momentum and asset valuations could all end with a reversal in ten minutes, days, months, or years. Then again we could be looking at Dow 30,000 in the next year or two.

So, since the Federal Reserve Chairwoman from Bay Ridge, Brooklyn says another financial crisis is “unlikely in our lifetime” and passive funds keep buying stocks without regard to price or valuation, the “Great Unwind” may never happen. Right?

Have a safe and prosperous summer!

J. Brock Hamilton
July 14, 2017

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The Swamp

The Swamp, as you know, is a metaphor for all that is wrong with the incompetence that Washington politicians continue to offer us year in and year out. The President says he wants to drain the Swamp while some say the Swamp is draining the President.

I suspect most Americans are exhausted with Swamp fatigue, fake news, the Fed and low interest rates.

Speaking of fake news, we saw two stories in the Wall Street Journal recently that caught our attention:

“Two of Wall Street’s most powerful financial CEOs — Larry Fink and Jamie Dimon — are raising warning flags over the nation’s economy.

BlackRock Inc.’s Fink said Thursday that U.S. growth is slowing on concern whether the Trump administration’s agenda will get through Congress. Dimon lamented that “it is clear that something is wrong” with the nation in a letter to investors Tuesday. Both CEOs are part of a group of business leaders that advise President Donald Trump.”

Yet, this week, Morgan Stanley’s Chief Investment Officer of Wealth Management, writes, “although optimism is a late cycle phenomenon, history tells us the best returns often come at the end. It has taken eight long years to get here, but Wall and Main Street are finally starting to feel a bit better about the future.” “the end of the cycle is often the best.” Morgan Stanley is calling for a possible 30% rise in the S&P 500 by the end of the year. “Think 1999 or 2006-07. In a low-return world, investors cannot afford to miss it.” Cannot afford to miss it??

I’ll side with Mr. Dimon’s and Mr. Fink’s cautiousness rather than Morgan Stanley’s exuberance for now.

Ciovacco Capital writes: “Given the Trump trade is based on expectations for reduced regulation, lower taxes, and faster economic growth, if investors had moved all their chips to the Trump table, we would expect strong outflows in defensive-oriented bonds over the past several months.” According to The Wall Street Journal, skeptical investors are racing toward bonds at a record pace:

The WSJ writes: “Investors are buying record volumes of new bonds, signaling that many remain skeptical about the prospects for faster economic growth and are reluctant to move on from a strategy that has worked for years… The strong appetite for bonds shows how hard it is for investors to shake the assumption that the economy can do any better than muddle along as it has for years, with U.S. real gross domestic product growing less than 3% a year.

On April 10th, President Trump began walking back the time frame for tax reform and tax cuts. Healthcare reform comes first. Additionally, he just made a very rare comment that the U.S. Dollar is too strong and that he prefers low interest rates. He also changed his positions on China, NATO, interest rates, the national debt, and the Export-Import Bank. These are big policy reversals from candidate Trump. It sounds like Goldman Sachs/Wall Street and the President’s son-in-law are re-directing White House policies.

S&P 500 – Six Months

The S&P 500 topped out in early March after the President’s State of the Union address. Stocks have come a long way on a lot of promises. Stocks remain expensive by historical standards yet interest rates continue to remain stubbornly low despite the Fed’s forecast for increasing rates later this year. Earlier this week the yield on the 10-year U.S. Treasury bond traded at the lowest yield level of the year.

We won’t know if the Trump Jump will revert to a Trump Dump until it happens. Volatility and risk have started to pick up dramatically in the last few weeks with the incredible daily news flow.

Gold is trading at a five-month high as geopolitical events and U.S. Dollar weakness continue. From Bloomberg: “Gold prices have climbed back to the highest level since November on growing worries about everything from North Korean nuclear tests to faster inflation and French election results. In 2017, bullion has risen 12 percent.

Gold – Six Months

We will close with an extreme example of one stock that is trading at new highs. Tesla Motors (TSLA $305) just surpassed General Motors in valuation reaching $51 billion in market capitalization, even though the company sold just 76,230 cars last year – compared to GM’s 10 million. That means Tesla has less than one percent of GM’s market share. Extraordinary CEO! Extraordinary company! Extraordinary vehicles! Extraordinary valuation!

Regards,
J. Brock Hamilton April 12, 2017

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2016! What a year!

Stocks took a huge dive last January bottoming out on February 11th, down about 11.5% for the first six weeks of 2016. Predictions were that Fed Chair Yellen was going to raise interest rates many times. That never happened. On January 12th, U.S. oil broke below $30 per barrel, down from $107 just 18 months earlier.

Fast forward to November 8th. Stock futures dropped nearly 700 points in overnight trading as election returns reflected Donald Trump would win the presidential election. By the opening bell at 9:30 am the next morning the decline had reversed and stocks would open up 200 points. The year 2016 ended with the S&P 500 up 9.5%, the majority of the gains coming since the presidential election. Stocks are expensive by any measure.

S&P 500 2016

As we get into 2017, there are a few themes evolving, some quite conflicting. Plans are for taxes to be cut for all income levels. The maximum rate would be cut from 39.6% to 33% according to Trump’s plan. The other two rates would be 12% and 25%. At the same time our national debt is projected to continue its glide higher and higher beyond the $20 Trillion benchmark. Some economists think the tax cuts and increased spending plans put forward by the Trump team may trigger higher inflation and force the central bank to raise rates more aggressively.

J.P Morgan comments, “The prospects of pro-growth policy reforms under the Trump administration (i.e., deregulation, tax reform, fiscal spending) should continue to push the market higher…However, rising yields and USD are the main risks to our positive equity outlook. This week’s incrementally hawkish tone from the FOMC meeting is raising the hurdle for both expanding equity multiple and corporate profitability. … Historically, a 6% rise in trade-weighted USD pressures S&P 500 EPS by roughly 2-3%.”

Goldman, Merrill and Morgan Stanley, oddly enough, all have a consensus for the S&P 500 to rise only 2% in 2017!

What about those rising interest rates? Long dated (30 years) Treasury, municipal and corporate bonds have been hammered with price declines of as much as 20+ percent because of rising rates. The yield on the 10-year U.S. Treasury has risen from 1.35% last July to as high as 2.6% last month. A nice 92% increase in yield. Bill Gross of Janus recently commented, “If 2.6 percent is broken on the upside … a secular bear bond market has begun,” Gross said. “Watch the 2.6 percent level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important than dollar/euro parity at 1.00. It is the key to interest rate levels and perhaps stock prices in 2017.” He went on to say, ” the 10-year yield has been in a downward trend line since 1987. If that channel is broken, look out.

10-Year U.S. Treasury Yield July 2016 – December 2016

America is driving the global political risk and uncertainty right now. U.S. foreign policy, protectionism, rising interest rates and the U.S. dollar strength are huge issues without answers going forward.

We have an inauguration on January 20th for a new president. We believe that day will be a pivotal point for the markets and set the tone for the remainder of 2017. We shall remain cautiously optimistic on the future but suspect volatility will return with a vengeance creating better opportunities to buy into great companies at better prices.

J. Brock Hamilton
January 10, 2017

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Change is in the (H)air

November 8th was what is known as a “Black Swan” event. A completely unexpected five standard deviation event.

We live in a world bombarded minute by minute with analysis of events by experts. Highly paid, over educated, elite experts. Great job experts! Now go look for another line of work.

We have been getting more cautious over the past few months as earnings growth for many companies has been slowing down. I believe we are in the 6th quarter in a row of reduced earnings expectations for the S&P 500 index. Then the events of November 8th came to pass and the whole game has changed. The financial industry was blindsided. Stocks soared and long-dated bonds collapsed.

“I’ve never seen anything like it,” exclaimed one veteran bond trader shocked at the ongoing carnage across the global bond market.

“When we think through the possible implications of some of Trump’s proposals which have to do with increasing tariffs, the most immediate implication is increasing prices – which is inflation,” Michael Hasenstab, CIO of Templeton Global Macro said.

“We do view the election of Donald Trump as a game changer,” said Adam Donaldson, head of debt research at Sydney-based Commonwealth Bank of Australia. “The strong bias toward fiscal expansion and inflationary policy represents a stark change to the malaise of recent years. This opens the door for the Fed to hike in December, but also more quickly in 2017 and 2018 than previously expected.”

Bloomberg reports “More than $1 trillion was wiped off the value of bonds around the world this week as U.S. President-elect Donald Trump’s policies are seen boosting spending and quickening inflation.”
Bonds getting slammed is the best news I’ve seen in a while. We all own some bonds albeit very short in maturity. The good news is that as bonds are sold off, the interest rate yield to maturity rises. Rising yields equal rising income. We could all use more of that.

So where do we go from here? There are so many moving parts and scenarios that it is impossible to say. Once again the experts are clueless. Extreme caution is the best approach. While there are many positive eventual outcomes there are just as many negative ones as global assets re-price on earnings, inflation and interest rate projections.

30 Year Treasury Bond – Yield Change

30years

I did a quick analysis the other day of the 2.5% May 15, 2046 U.S. Treasury bond. It has declined in price by approximately 16% since its July 2016 high. That’s a big hit and that’s why we never buy any bonds with those extended maturities.

We are in uncharted territory. We have $20 Trillion in debt with record low interest rates and record high stock prices. Volatility is reemerging and opinions are changing by the minute. As we have said before:

“Saddle up Folks, You’re in for a Wild Ride”

J. Brock Hamilton
November 11, 2016

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