MARKET THROWS A TANTRUM
Is the Sky Falling?!
Wednesday the 25th saw major selling across the board in equities (aka stocks) and in fixed income (aka bonds); Even the 30 year Treasury was down roughly -0.80%, the 30 year yield is just 2.50%.
March 25, 2015
Traders everywhere panicked today and sold across the board. The self inflicted pain is always amazing to me. If everyone didn’t sell, the market wouldn’t sell off. At how much lower will everyone consider the Major U.S. stock indices a bargain again? Where are they going to hide, or park their money in the meantime? In Treasuries? 
Fund managers have been selling collectively today, pushing the markets downwards, the institutional selling is gross! They’re throwing your money out the window!
Rates as of 3-25-15 (at the close)… at nearly unprecedented (and foolish) lows!
I believe the 10 year maturities is as far away as is safe to pick, as rates are going to increase; In other words the risk on 10 year maturities is all I think the riskiest fixed income investor should speculate with. Interest rate risk is a big and serious risk; e.g. a 30 year Treasury will lose approximately 15% per 100 basis points that the 30 year yield moves upwards. In the early ’90s, rates for 30 year Treasuries were 7.50… In November of 1994 the 30 year Treasury bond yielded 7.69% (press here for that chart). If rates, in the next 15 years, get back to 7.50%, from the current 2.50%, that means rates will move up literally 500 basis points, and I believe investors will be shocked at how much they can lose in Treasury bonds!!! I’ve also drawn a circle around two rip offs, the 30 year Treasury bond, yielding just 2.50%, and also the 1 year Treasury bill, yielding a whopping 0.45%. Notice that maturities found between 5 and 10 years in Agency and GSE (Government Sponsored Enterprises, such as the Tennessee Valley Authority) fixed income securities yield 2.50%, these maturities are MUCH MUCH safer than 30 year Treasury maturities. Interest rate risk is measured by duration. I’ve also circled BBB rated 10 year maturities, which on average currently yield 6.22%, which seems fairly decent to me. Also, A rated Municipals, on average, yield 4.05%, which could be triple tax exempt. U.S. Territory municipals, such as the high yield “junk” bonds of Puerto Rico are also triple tax exempt, and yield approximately 8 to 10 percent. Some believe Puerto Rico will default on its debt, so swim at your own risk.
Know that you can buy treasuries, agencies, and municipal fixed income (as well as corporate fixed income) on margin, and there are discount brokers such as Interactive Brokers (rated #1 by Barron’s Magazine for like 20 years in a row now), with really really super low margin interest rates. Also, note that the margin maintenance requirements for fixed income is not 50%, as it is for stocks. In other words, your brokerage will let you more than (in layman’s terms) “double down” on fixed income. Each issuer and credit quality may have different initial margin maintenance requirements. It could hypothetically make sense to buy fixed income on margin. If your margin interest rate is less than the yield, and if you believe the interest rate risk is not an issue, on e.g. 5 year maturities or less, it may be something to think about and discuss with your broker.
Major Stock Markets between March 10, 2000 and today, March 25, 2015
Above, is a chart I prepared of the Major U.S. Stock Markets since 3-10-2000 through today. Notice the Nasdaq Composite is down over the 15 year period. I think Nasdaq stocks, and their four letter tickers, are like four letter words. I’d like to think people could make money on an investment over a 15 year period. Notice the Nasdaq has returned -3.41% over the past 15 years, and two weeks! This is before inflation and currency depreciation adjustments. “Pathetic” sums up how I feel about that.
Is there a bubble currently popping in biotech? I think so! See ticker IBB.
Do you smell a rat when you look at this? Biotech Bubble? Anyone? Anyone?
Sometimes I feel as though I’d like to short IBB, I should seriously consider it; Maybe everyone should?. A main component of IBB is ticker PCYC, it’s up over 105% over the past three months. PCYC has a PE Multiple of over 233, according to Yahoo Finance. Another major component of Biotech indices is REGN, which has a pe multiple of 147.88. That doesn’t seem like a bargain to me. The PE Multiple on the DJIA is approximately 16.64.
Swim at your own risk. Perhaps it’s time for a market correction?
The VIX is currently about 50% below its 52 week high, and also about 50% above its 52 week low, it is currently at 15.44 (at the close on March 25, 2015). There’s an inverse correlation between the trajectory of the VIX, and the trajectory of every major stock market that there is. In other words when the VIX increases the indices decline, and when the VIX decreases the markets increase. I believe the VIX could increase, bringing about lower stock prices, before it begins to descend, bringing about higher stock prices once again. In layman’s terms, I believe the stock market is going to “go down,” before it “goes up” again. If the VIX breaches 16.87, I think the next stop for it could be 20.97. I believe the major U.S. stock markets will close higher than the present levels at year end for 2015.
Quotes of interest, and percentages off their 52 week highs & lows, and their yields (including cap gains distributions)
I don’t want a selloff, I just want to voice some concern. Look at selloffs (in the equities markets, and in e.g. ticker USO since June of 2014 to the present) as buying opportunities. The sky is not falling, and it won’t fall even with interest rate hikes, or because Greece either stays in the Euro currency or not. If the Federal Reserve raises rates four times, by 25 basis points each meeting, slowly over the course of a year, beginning in e.g. June, or more likely, in September of 2015 or in 2016, even 1.00 to 1.25 percent Fed Funds will be extremely accommodative for economic growth. Again, the sky is not falling.
Beware also of a stronger dollar. King Dollar increasing could lead to wider trade deficits, less imports, and more imports, and diminishing profits from abroad, brought back by the multinational corporations with overseas exposure. Greece and Russia are also trouble makers, and present a wild card for the markets.
Looks like investors are going to sell some more on Thursday. Futures vs. Fair Value are indicating an implied open (click here for an update) of down triple digits, afterhours over night. Europe is down roughly 1 to 1.5 percent, and the Asian markets are mixed. Oil is rallying strongly Thursday in Asia and Europe!
Happy trading!
Andrew G. Bernhardt
[CLICK HERE FOR MY GREAT USEFUL LINKS PAGE]
PS- Here’s an article on bubble and/or correction risk (be sure to read the report cited at that article, press here for it).
PPS- Here’s another article and video on correction risk, click here.
Bernhardt Capital Management LLC 