Sunday, March 29, ’15 – “My Thoughts & Market Update”

Sunday, March 29, 2015

My Thoughts & Market Update

The Major U.S. Stock Indices declined the week of March 23rd through the 27th, see the graphic below for their 1 day, 5 day, 1 month, 52 week, and YTD performance.

Market Performance (through Friday, March 27th, 2015)

As you can see the DJIA, the DJ Transports, and the DJ Utilities are now down YTD.  I remain bullish, as I believe the economy may have had a recent soft patch due to the extreme winter weather and blizzard in the north east as of late.  I believe the economy will make a comeback and the markets could appreciate going forward from there.  Jeremy Siegel believes the DJIA could reach 20,000 by yearend. (Click here for that video & article).  If we get to 20,000 by December 31, 2015, that would be a +12.9136% move, from Friday’s close of 17,712.66.  The labor market continues to improve, and inflation remains very very low;  According to many economists, lower energy and fuel prices should also bolster and assist economic growth;  Know that in 2007 through 2009 lower oil and energy prices really didn’t bode well for the economy worldwide (there have been reduced payrolls and reduced capital spending in the energy space, and energy company stocks comprise about 10 percent of the S&P500 and lower oil prices do not bode well for these companies or for their earnings, nor does a very strong dollar… a strong dollar can lead to wider trade deficits, less exports, more imports, and diminished earnings brought home from large multinational corporations.  Peter Lynch always said “earnings drive the market.”).  Click here for the highlights of the BEA’s Economy at a Glance.  Yellen (I believe) will have to have the CPI actually increase (by the average +0.20% per month for a few months in a row) before she can justify perhaps raising interest rates;  I continue to believe that rates could remain close to zero through June, possibly through September, and into 2016 due to low inflation, and the weakest economic recovery on record, post any recession. Additionally, China, Japan, and Europe appear to be weakening, which may pressure the Federal Reserve to keep rates low.

Lately, Yellen has also voiced some concern over demographics, and lack of population growth, and economic growth going forward (see this article).  As we all know (or as we all may know), the birth rate, the fertility rate, and the age of first marriage have really changed since the ’60s with the advent of birth control.  Basically, women are having few children, and they’re having fewer children later in life (women’s labor force participation rates have changed, family units have become more broken over time, and the age of first marriage has also increased greatly, all since, on average, 1960).  This is straining Social Security, as the direct transfer from the working to the retired doesn’t work very well, if there are fewer and fewer children, because these children who never are born or had (due to birth control pills), don’t grow up, and they don’t find themselves in the labor force working, to make e.g. Social Security and all the generous entitle programs more solvent; on the contrary they become less solvent with less and less children and lower birth rates and lower fertility rates.  This could be a major headwind for 1st world countries going forward well into the future, in the coming decades (Japan and Europe have major problems as well with this, as birth control pills have become even more popular over there relative to the U.S.).  These concerns could be used as an excuse to keep rates very very low by historical standards.  Maybe some day, creditors will be rewarded?  Know that you can buy fixed income on margin (Reg T allows for initial margin maintenance requirements of less than 50% for Treasuries, Agencies, and Municipals), and there are low margin interest rate brokerages, such as Interactive Brokers (and others) who is rated very highly by Barron’s Magazine.  Click here for The Board of Governors, Federal Reserve System, FOMC’s website, of Economic Forecasts, transcripts of Minutes, and their video news conference (of March 18th, 2015).

Below is the economic calendars for this past week, and for next week.

Economic Calendar Last Week (above)

Economic Calendar This Week (above)

Below is a bond yield matrix, of current yields by issuer, credit quality, and maturity.  I have circled in red what I think should be avoided, and I have circled in green, and have put in a black rectangle, what I think looks good, in my view.  I believe ten years is as far away in terms of maturity that anyone should speculate with.  Also, click here for Bill Gross’s Fixed Income Investment Commentary.  Last month Bill Gross (who is widely believed to be “The King of Bonds”) discussed the board game Monopoly, this month he talks about pets and dogs.

Bond Yields by Issuer, and average credit quality, and maturity, through Friday, March 27, 2015.

Kiplinger’s March Economic Outlooks (above)

Notice how Kiplinger believes oil will be trading significantly higher.  I think ticker USO (which matches the performance of West Texas Intermediate crude oil) is beginning to look appealing, as is XLE (the energy sector etf), and some individual energy and oil company stocks… such as tickers XOM, BP, BPT, CVX, and COP.  These could prove to be great long term holds, for patient investors, some of these securities sport high dividend yields.

Select Quotes of Interest (Friday, March 27, 2015)

[CLICK HERE for an update on the above quotes]

Notice how most of the Major U.S. Indices are now 2 to 3 percent off their all time highs.  Perhaps it’s a good time to get invested (indexing based investments over the long run are a great idea, see tickers VTI, DIA, SPY, MDY, IWM, ICF, and QQQ).  Buying on dips can prove to be a great idea, over the long run.  Notice how USO (which matches the performance of West Texas Intermediate Crude Oil) is now 56 percent off its 12 month highs, and XLE the energy sector etf is 24 percent off its 12 month high.  I’m bearish on the etf IBB as I believe the hype surrounding biotech is and has gotten extreme;  Some major components of IBB have doubled in stock price in the past three months and have triple digit pe multiples!  Some of these companies think they’ll cure cancer!  I’m also bearish on the long end of the yield curve, so ZROZ and TLT are, I believe, going to continue their downward slide, as they have extreme interest rate risk, as measured by duration, and I believe interest rates will increase all along the entire yield curve, in my view (which will most harm bonds at the long end).  Surprisingly, junk bond spreads are quite normalized, and junk bond current yields are not at unprecedented (or nearly unprecedented) low yields as Government, and AAA, fixed income yields are.  I believe there are opportunities to be had in BBB and BB rated “junk” aka high yield fixed income;  See tickers EMB (EMB is my favourite- and The J.P. Morgan Emerging Market Bond Index (“The EMBI”) has also been a long term favourite of the Harvard and Yale Endowment funds, as well as a favourite among many Pension funds).  Also see tickers PCY, JNK, HYG, and perhaps even QLTC (these are all in the junk bond and high yield space); Ticker SJNK is a short term maturity junk bond etf also, and may well prove to be a great long term investment as well (talk with your advisor, there’s tons of opportunities to be had, and CONSTANTLY!).  I believe the 30 year Treasury bond has perhaps had a sea change, and that we’ll potentially never again see the low yields reached (and high bond prices reached) of January 29th, 2015.  I believe rates could move significantly higher over the years from here.  I believe the bond market rally (at the long end of maturities) of roughly 1982 to January 29th 2015, is over!  I believe that investors will be shocked at just how much can be lost in 30 year Treasuries (and 30 year Treasury Zero Coupon securities) over the next 15 years.  In 15 to 20 years, investors may be able to purchase Treasury bonds issued in January and February of 2015 at MAJOR DISCOUNTS.  Beware of duration of your fixed income portfolio, the interest rate risk might be at extremes at this time.  Lower durations and maturities of ten years or less have significantly less interest rate risk versus their 30 year fixed income counterparts.

PE Multiples of the Major U.S. Stock Indices (as of Friday, March 27, 2015)

Notice how the DJIA has a PE Multiple of just 16.63, that’s cheap to me, and I believe it can only mean (or suggest) it may move higher this year;  Additionally, the dividend yield of the DJIA has increased in the last 12 months from 2.43 to 2.51 percent for the DJIA, which I believe is a bullish indicator.

Headwinds for the stock market continue to be the following: increased violence (and the waging of war) in the Middle East, Russia’s “Sabre Rattling,” and the default risk of (Russia) and Greece.  Additionally, I can’t see how negative interest rates in Europe can be good for that region of the world.  I’m not sure how or why or how their stock markets are up roughly 10% this year (as measured by tickers EFA and IEV, and EWG, et al).  Know that the economies of Japan and China are also slowing down.

Click here for a copy of the most recent CPI-U Data Release; and click here for the most recent GDP Release.

Happy Trading!

Andrew G. Bernhardt

[Click here for my Great & Useful Links Page]

[Click here for all the tickers I like to follow daily]

[Click here for Futures vs. Fair Value, to see the Implied Open]

[Click here for Yellen’s Worries on Low Population Growth] – Which I say is because of birth control pills;  This could lead to $85 Trillion dollar Federal Government deficits in the USA in the future (see Kotlicoff’s “The Coming Generational Storm”). Who would you blame for this (the birth control pill issues, and enormous deficit projections in Europe and the United States)??  Would you blame the incompetent lawyers and the ABA, or the incompetent medical doctors and the AMA who prescribe the birth control pills?!  Why are these pills legal with such nasty economic consequences?  Feel free to leave comments below.

Feb. 8, ’15 – WEEKEND UPDATE – SLIGHT SELL OFF ON BROAD & WALL

On the Securities Action of Friday, February 6, 2015

“WEEKEND UPDATE- SLIGHT SELL OFF ON BROAD & WALL”

SLIGHT SELL OFF ON WALL STREET. Friday saw most major U.S. stock indices decline by about -0.30%.  However for the week, the DJIA gained +3.84%, the S&P500 gained +3.03%, and the S&PMidCap400 gained +2.91%.  The indices finally got themselves into positive territory for the YTD figures as well.  On Friday, volatility, as measured by the VIX increased by +0.44 points or +2.61% to 17.29. See the graphic below for daily and weekly performance of the U.S. Major Stock Indices.  In fixed income Friday, Treasuries traded lower, as did high yield Sovereigns, while high yield corporates rallied.  See the graphic below to see how fixed income faired Friday.  I continue to believe the major U.S. stock indices will soon plow through previous all time highs, by three to four percent, before taking a few steps back, before making another advance higher.  I continue to remain bullish, and I believe energy shares and crude oil will trade in a volatile range, but will trade higher given a month or two or more, which I believe will lift all major U.S. Stock Indices to new highs.  Lastly, I think that higher energy prices will bring “hot” (meaning higher than usual) CPI-U monthly figures, which will put upward pressure on fixed income yields in the open market, particularly in the Treasury long term and intermediate maturity sectors.  The average monthly CPI monthly increase has been approximately +0.2%, since oil’s “demise” it’s been quite low, closer to zero, if not negative month to month.  As energy prices (primarily light sweet crude oil) rebounds, I’d expect the monthly CPI-U figures to come in “hot” at nearly twice to three times the historical average, at literally +0.4% to +0.6% month to month for a while.  Treasuries are just off prices of nearly unprecedented highs, due to unprecedented low yields.  Thirty year zeros are down by -8.61% off their all time highs, which I believe they’ll never see again, or at least, for many many years.  Conventional thirty year Treasury bonds are down by -5.44% off of their peak.  Long term (and intermediate) treasury yields have no where to go but upwards, which will bring Treasury prices down further, due to higher yields.  High yield fixed income is not at unprecedented low yields, and therefore, may not sell off as strongly as Treasuries, given equal maturities.  Higher or “hot” CPI-U monthly figures could also put pressure on the FOMC to raise rates, perhaps as early as this summer.  Higher yields at the short end (raised by the Federal Reserve) are likely to push rates up across the board.  I wouldn’t be surprised if long term Treasury Securities saw negative total returns over the next 36 months.  I believe, long term maturity Treasury bond investors (and perhaps intermediate Treasury note investors) are in for a big surprise(!!!), called negative total returns over the next three years, as rates begin to “normalize” in the USA.  I believe investors will be totally shocked at how much can be lost in a Treasury bond as rates increase.  If rates rise by 200 basis points at the long end, there could literally be 30% losses for Treasury bond investors.   Additionally, there could be nearly literally 60% losses for 30 year Zeroes in the Treasury Bond market.  Interest rate risk is measured by duration.  Swim at your own risk!

Feb. 6, 2015, Major U.S. Stock Indices

[http://finance.yahoo.com/futures Click here for an energy prices update] Friday saw USO an etf of West Texas Intermediate increase by +2.31% to 19.47; USO is now -50.61% off its peak of the past 12 months; reached in late June ’14;  USO is also +19.45% off rock bottom, set on January 29th at 16.68.  I believe oil will remain very volatile, perhaps an options strategy called an at-the-money straddle using two week out expirations could prove to be very lucrative; I believe oil is going a lot higher (maybe another 10% or more), and soon (over the next few weeks).  I would base this estimate of mine on the oil-VIX which is extremely high right now.  If the oil-VIX implodes, it will bring higher oil prices. On Friday light sweet crude oil traded higher by +3.68% or 1.86 per barrel to $52.34.  Higher oil likely sent the Russian stock market (as measured by the etf RSX) up by +3.29% to 16.34; RSX now stands -40.50% off its peak of the past 12 months.  [Click here for an Oil-VIX chart & update]

PE Multiples & Yields of Major U.S. Stock Indices, Feb. 6, 2015

As you can see the PE Multiple of the DJIA is just 16.78, it was 15.08 last year; The dividend yield of the DJIA is 2.45%, and it was 2.49% last year.  The 30 year Treasury bond yield is 2.52%,and the ten year Treasury note yield is 1.94%.  Therefore, it’s difficult to be bearish on the equities markets with a stock market with a lot of potential to go higher.  [Click here for Yields on Treasury Securities, http://finance.yahoo.com/quotes/^IRX,^FVX,^TNX,^TYX]

Select Quotes of Interest, Feb. 6, 2015

In the Fixed income markets, see the graphic above to see how Treasury etfs traded (ZROZ, TLT, IEF, TIP) and how high yield etfs traded (U.S. dollar denominated high yield sovereigns being etfs EMB and PCY) (as well as high yield corporate fixed income being etfs HYG, JNK, and QLTC).  The 30 year Treasury Bond yield closed at 2.51%, and the 10 year Treasury Note yield closed at 1.95% [Data from here: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield]. I continue to believe, and will reiterate, that if oil can stabilize in a trading range, or start to appreciate, that there will be some major opportunities in the energy sector in equities, and in their high yield fixed income; Also I continue to believe that when oil stabilizes (or begins to appreciate) that there will be some major opportunities in high yield fixed income funds, such as the ones listed above, EMB, PCY, HYG, JNK, and QLTC.  When higher energy prices materialize in the future, inflation could pick up as measured by the CPI-U, which may or could send e.g. Treasury Security yields higher, while also pressuring the FOMC to raise rates at the short end.

Friday saw the US Dollar trade lower versus the Ruble, but significantly higher versus the Euro; The Euro lost approximately -1.47%, as measured by the etf FXE.  I continue to believe the Ruble and the Euro are still too high, and will further deteriorate, making the dollar stronger. The U.S. Dollar can now be exchanged for a Euro at a cost of approximately $1.1315, and also can now be exchanged for 66.5245 Rubles, which is about -0.25 Rubles less than yesterday’s exchange rate.  [http://finance.yahoo.com/currency-investing  Click here for an update on all major cross rates.]

I believe the catalysts for today’s stock market declines were higher oil and in-line labor market figures, which indicated a very strong labor market.  A stronger economy means that the Federal Reserve may raise rates sooner rather than later.  This threw cold water on the markets mid-day, turning slight gains to slight losses by the closing bell;  Higher oil prices lifted the energy sector;  Lastly, shares in Greece lost ground as pessimism increased.  Consequently, an etf of Greek stocks (etf ticker GREK) declined by -4.59% to 11.85.

 

Above is a summary graphic of the weeks economic data releases.

[Click here for updates on Futures vs. Fair value, http://www.cnbc.com/id/17689937]. 

Monday before the opening bell and after the opening bell will not see too many hype stocks report eps.  HOT and Z will both report eps Tuesday after the close.  I believe that Z could move about ±6.80 per share after it reports its eps, it closed Friday at 100.65.

I would suggest that perhaps a long bull call ratio back spread with net credit characteristics may be lucrative; Especially if also combined with a long bear put ratio back spread with net credit characteristics on any particular “hype stock” just before eps are released; Placing the trade just a minute or two before the close (3:00PM Central Time) on its earnings release date (if it reports that day after the close, or the next morning before the opening bell).  It certainly is amusing to see what happens to hype stocks just after their eps releases in the aftermarkets and on the first full day of trading post eps.  Most sink fast!  

“Hype stocks” to me would be e.g. GOOGL, TSLA, PCLN, FB, AAPL, LNKD, AMZN, EBAY, NFLX, TWTR, BABA, GPRO, and Z, and also what I would describe as “Big Momentum Players” such as e.g. CMG, GMCR, AZO, V, and MA etc. (a sub group of hype to me).  This list of Hype and Big Momentum Players is just off the top of my head, and is in no particular order, nor is it any particular science for choosing these types of volatile securities.  RSX, GREK, TUR, FXI, EWZ, and CUBA are also very volatile etfs found in places worldwide with high geopolitical risks.  West Texas Intermediate matched by the etf USO is also a very volatile etf to trade as of late.

I will continue to reiterate that I’m currently bullish on the major U.S. stock indices.  I believe a theme of higher crude oil prices will potentially materialize over the next few weeks, if not becoming more of a longer term theme, for the next year, if not longer.  I also believe and would reiterate that the geopolitical risks involving Greece’s sovereign debt and interest payments will be resolved, and also that Russia may stop sabre rattling soon.  This will bring about higher prices for stocks, and for all major U.S. stock indices, which could reach new all time highs very soon.  I also think that investors may begin selling longer duration and longer maturity fixed income of all kinds, and with the proceeds they may purchase stocks, resulting in higher yields on fixed income, and also higher stock prices.  Higher energy prices may bring about higher monthly CPI-U inflation figures, resulting in a fixed income sell off, and higher interest rates, over the next 6 to 12 months, if not for the next 36 months.  Interestingly, I believe that the higher credit quality fixed income may sell off more than the lower credit quality fixed income.  I would base this upon the unprecedented sovereign yields worldwide and in the USA.  To me, this means that Treasuries at the long end, may suffer great losses as rates “normalize.”  For 2015 I am most bullish on equities and the S&PMidCap400, the S&P500, as well as the DJIA. The DJIA has the lowest PE Multiple among all the major U.S. Indices currently.  I am also bullish on Financials, REITs (particularly Hospital REITs such as HCP, HCN, SBRA, OHI, NHI), and the “Big Tobacco” (e.g MO, PM, RAI, BTI, etc.) sectors;  In fixed income I like high yield etfs e.g. EMB, PCY, JNK, HYG, and QLTC.  Options can be used to “hedge” fixed income ETFs as well, in strategies such as level one covered call writing (of e.g. at-the-money monthly calls).  I’d likely trade deep in the money calls on stock indices, combined with very high allocations to high yield fixed income.  If the JPM EMBI (matched by etf ticker: EMB) is good enough for the fixed income of the Yale and Harvard Endowment funds (and other large time institutional entities) then why trade Treasury Securities?  I think people (or any entity) who buy Treasuries are “ripping themselves off!”  Treasuries to me, generally speaking are for short term investing, and maximum preservation of capital.  All high yield fixed income indices (which are BB rated) have, over the long run, always closed at a new all time high every 18 rolling month period.  Consequently, every or any time that high yield fixed income indices are trading well off their all time highs, I’d view it as a major buying opportunity!  Happy Trading!

By Andrew G. Bernhardt

2:35amCT, Thursday, January 22, 2015 On Interest Rates, Inflation, Money Creation, Savings & Investment, and GDP Growth

On Interest Rates, Inflation, Money Creation, Savings & Investment, and GDP Growth.

Inflation is in the best interest of the government because it erodes the real value of the government’s debt; and also it is in the best interest of the people (and of the government) because it stimulates spending (supporting wages, productivity, and growth, and earnings), because people are more likely to spend during inflationary times versus deflationary times, when they hoard money, waiting for later and waiting for cheaper goods & services.  Stimulating spending is good for everyone.  Additionally, higher inflation, controlled around 2 to 4, or even 5 percent, is also conducive to savings & investment, because normally interest rates are greater than inflation, which is great for lenders and creditors.  Real returns on capital and on investment is what investors should be striving to achieve.  Therefore, the central banks of the world, and the U.S. Treasury and Federal Reserve should in my mind, “print money,” (or electronically create it, and then spend it) by increasing the amount of M1, M2, and of the M3.  The governments should spend the created money to stimulate GDP growth.  In my mind, the government should stop borrowing constantly as much as it does, and instead, it should create more money (that otherwise would have been borrowed), in an effort to create e.g. approximately +3.88% inflation.  I also believe a little inflation is in the best interest of investors, shareholders, corporations, and incorporated businesses.  This is because large capitalization stocks, and mid-caps (likely small caps as well), they can over time capture the newly created dollars, which may help to support EPS growth rates.  In other words if there’s 3.88% inflation, the EPS growth of approximately +3.88 should be fairly easy, and thus e.g. EPS growth of say 7.88 percent would really be a real increase of EPS 4%.  In other words, slight inflation is a giveaway to EPS growth, great for investors, it stimulates spending, GDP growth, higher interest rates, and is conducive to savings & investment, it also decreases the liabilities owed by the government by diminishing the real value of the debt and interest due (it does the same for the private sector and their debts).

I probably sound “pro-inflation” here which is in my mind sometimes irresponsible, I obviously don’t like high rates of inflation, I like about 3.88% annual inflation.  I’m not promoting the government policy of creating hyper-inflation.  I am simply totally against deflation, and I’m against very low inflation rates as well, as inflation can create easy EPS growth for companies in which people are shareholders.  As a nation, I believe we should strive for less inflation than our competitor nations, to help strengthen our currency (as high inflation can lead to a depreciating currency), but it shouldn’t be paralyzing low either.  Super high inflation rates of e.g. education and health care in the USA are completely and utterly irresponsible to me, and I’m not sure what the solution is, but people should boycott industries that charge obscenely higher and higher prices, while continuously increasing prices like there’s no tomorrow (e.g. sustained annual tuition hikes that are literally sometimes three times higher than the CPI’s annual percentage increase, aka that are three times higher than the inflation rate, are utterly absurd to me).  “Crazy” price hikes (of e.g. increasing prices significantly higher than the inflation rates annually) constantly in any industry should be investigated in my mind for price fixing, price manipulation, price discrimination, and for violations of the Robinson-Patman Act, The Clayton Act, and the Sherman Anti-Trust Act; and also for price gauging.  It simply should not be tolerated.  Coffee also at “guess where” probably should not cost $8 to $12 dollars anywhere on this earth, that would be price gauging, aka ripping people off.  Industries that inflate their prices at extremely high rates, e.g. three times the inflation rate, are nearly in my mind committing fraud, and their EPS growth would be equal to at least their obscene price hikes, this fuels excessively high returns for shareholders, while “squeezing” the consumers (I’d call it price gauging and price manipulation, etc.).

Deflation to me is mismanagement of money creation, and when and if it happens, the printing press (of a nation’s central bank) needs to be utilized to bring about +0.2% inflation per month, on average.  Deflation can also be a symptom or direct result of poor legislation of e.g. commodity margin leverage regulations, e.g. if rules are made more stringent and investors can’t borrow as much as before to invest in CFTC regulated commodities and currencies, then deflation will or certainly could show its face.   Deflation is obviously paralyzing to the economy worldwide, it should be prevented with vigilance by our nation’s U.S. Treasury and Federal Reserve (by our monetary policy and by our legislature).  Governmental stimulus programmes of purchasing its own government bonds, helps to lessen the blow from crowding out investment and borrowing, and injects money directly into the economy, but it leads to lower and lower interest rates (perhaps leading to less savings and investment).  We need to raise inflation rates and raise interest rates, which might actually increase consumer spending, consumer sentiment, and spur savings and investment, and increase GDP growth.  Zero interest rate policies worldwide are not conducive to savings and investment, and is not fair to lenders and creditors.  If you’ve borrowed any money, it’s now time to refinance, with rates nearly at all time lows.

There are my current thoughts in a nutshell.

By Andrew G. Bernhardt