Tuesday, January 12, 2016 – Deep Thoughts on the Securities Markets and The Economy

Tuesday, January 12, 2016 (3:30amCT)

DEEP THOUGHTS ON THE SECURITIES MARKETS AND THE ECONOMY

It’s been the worst start for a year… Ever.

Do you know what I think of the most recent stock market sell off?  I think it’s phony as hell!  There is literally no catalyst I can think of that sparked the most recent sell off.  So, in my mind, there could easily be a strong snap back rally, like in late August and September, etc. 

When I think about “crisis watch,” “crises watch,” or “bubble(s) watch,” a game I play with myself and with the old wise men I know and trust, I (and we) can’t think of any valid issue looming to spark further selling.  In my mind, the recent sell off has been completely and utterly irrational and illogical.  Know that it can “get worse,” before it “gets better.” 

Why are the indices 10 to 15 percent off their peaks?  Why does everyone literally sell everything indiscriminately on low and lower oil?!  Low and lower oil is great for the U.S. economy (it’s only “bad” for OPEC nations, and bad for the energy sector). It’s bad for Brazil, Russia, Saudi Arabia, Iran, Iraq, and Kuwait. In the USA the entire energy sector is allocated into the broad based indices around 2.59 percent to 6.4 percent. So, the energy sector is really a tiny sector of the US economy, and is a tiny allocation to its broad based stock indices. Let the whole f-ing sector go bankrupt due to its own inept incompetence and ignorance of total overproduction! 

When I see oil trading lower (nearly every day now), I think “great” and also “the market should be surging!!!” The USA isn’t Kuwait or Saudi Arabia, it’s not Brazil or Russia either. I worry investors believe it is! Why have the broad based indices correlated to the trajectory of oil over the last couple months?!  Oil has been going down for 8 to 9 years now! It peaked above 145 per barrel. Low and lower oil and energy prices are great for the U.S. economy because it’s like a tax cut, and it stimulates consumer spending and consumer sentiment, which are major components and drivers of GDP growth.  There is literally no recession looming in our immediate future for the USA, not in 2016, and likely not in 2017 either. GDP growth is expected to accelerate worldwide, except for China which claims recently it has decelerated to just +6.5 percent GDP growth expected for 2016.  There is no looming housing market collapse, there is no massive layoffs around the corner, and unemployment is low, and the labor market is strengthening. Additionally, real estate in the USA is also strengthening; It and REITs will not be highly damaged by interest rates going from zero to 25 basis points, or even if rates reached 1.25 percent, or even 4 percent.  Even 3.5 to 4.0 percent fed funds is “accommodative.” Inflation is under control, and is very low, which should be great for PE expansion. Maybe in the next year it will reach a CPI-U of +2.0% to +2.5%. Interest rates have finally begun to rise, off of zero, and stand at 0.25 percent.  Janet Yellen at the Fed is expected to raise rates to 1.00 to 1.25 percent by early 2017. 

There is no boogey man coming for the markets, instead the markets just might boogey woogie higher!

Beware of the angry bull’s threat display!

Alternatively, if the markets continue their downward trend, I’m not sure what everyone will blame the nasty bear market on, if one materializes?  Did the economic cycle die of old age? Was it paralyzed by interest rates reaching perhaps 0.75% in the future? Was it King Dollar, and the emerging market currency depreciation? Maybe investors worldwide are worried about extensive U.S. tax reform? Perhaps, there is political risk? Would “The Donald” or “Hill & Bill” really be that bad for our futures?! Do you think anything they even claim they will do will be done? Either of them doing anything will be met with total resistance and nothing they want will happen; So, nothing will change. Know usually though, election years are great for investors, and just because the markets completely fell apart during the last election doesn’t mean it will this time! It was a total coincidence to me during the last election that the markets imploded. The markets implosion from late 2007 through early 2009 was directly associated with the housing market bubble, reckless lending (the “NINJA LOANS” – no income, no job, and no asset loans), and too many fools (with terrible credit quality) who owned homes, who couldn’t afford it- especially once the economy went from boom to bust.  There is no parallels today, to that reckless past of ours. Banks nearly don’t do anything, except checking and savings accounts, they nearly never lend anymore, and they are and have been regulated the f-ing hell out of; So, there’s no bad loans to go bust.  The future is bright.

Who cares about the “bubble” popping (in its final stages) in China in its stock market?! The Chinese markets are already down more than fifty percent! The Chinese markets have not appreciated now for many many years, they’ve really been rolled back. How many bubbles in emerging market stocks have there been in the past 15 to 25 years?! It’s not the first or the last time there’s an emerging market collapse. I’ve said for years, emerging market stocks are like lotto tickets! Furthermore, who really cares about North Korea’s nuclear weapons testing?! Every country has tested nuclear weapons. Nuclear weapons have been around since the end of WWII, and I’m sure every country that wants them, has them; Its been over 70 years since they were first invented and designed, and unfortunately they’re very cost effective and cheap. The USA blew them up running tests constantly in the ’40s, ’50s, and ’60s (probably up until the nuclear test ban treaty in the mid to late ’90s!), under water, at sea level, and above sea level, underground too, and also at very very high altitude (which disgustingly and mysteriously knocked out all radio transmission signals worldwide for several hours).

To me the fear mongering, war mongering, and terrorism discount on the markets has been overdone.  The pessimism, the fear, and paranoia over nothing has been overdone. Volatility is very elevated to me.

At some point sanity will return.

The only risk I see lately, is that the perception is that higher rates will increase the value of the U.S. dollar against the euro, and also especially against emerging market currencies, reducing our exports, leading to a drag on sales volumes, and also on foreign earned income.  The ruble has been particularly weak, china has been artificially depreciating its currency the yuan aka the renminbi. Brazil is having its worst recession in at least 30 years, thanks to low and lower oil, and rapidly depreciating commodities like coffee, and sugar, etc. Brazil is also plagued by low prices for iron, juices, cars, petroleum, tobacco, soy beans, poultry, and meat. At some point, Brazil is going to be a fantastic opportunity for investors. It like Russia, will likely reach rock bottom, once oil hits rock bottom.

When will oil hit rock bottom?! It’s anyone’s best guess, but I think we’re getting close, and it’s likely at some point in the next 2 to 4 months. Oil can’t decline substantially every day, forever. Oil, energy, and basic materials will likely represent a huge opportunity for investors as well, once oil hits rock bottom.

I believe the future is bright, and despite the worst start for any year, I still believe that the U.S. broad based stock indices (matched by tickers: VTI, DIA, SPY, MDY, and maybe IWM) represent the best investments for long term (10+ years) investors. I also really like tickers EMB and PCY (which match the U.S. dollar denominated JPM EMBI), and over the long run, over every 24 months or greater, I believe that these tickers will provide positive total returns.

I think it’s time to be bullish.  There’s a small chance of total idiocy and paranoia and a huge market sell off, to a depth of maybe -30 to -40 percent off the all time highs of the broad based stock indices, but with no valid or logical or rational catalyst, I really don’t see that happening, until there is actually a recession.  I firmly believe that there is no recession looming (anytime soon) in the USA (not in ’16 or ’17), so I see no reason for a bear market materializing.

The grizzly bear can’t even believe it this time!

Here are some reports to use, to assess the economy of the USA and the world.

(1) Minutes (releases, statements, accessible materials, implementation note, and projections; and press conference) of the FOMC;

(2) The Economic Indicators [November 2015];

(3) JPM Asset Management Guide to the Markets.

Happy trading,

Andrew G. Bernhardt

[Great Securities & Economics Links]

[Great News Sources]

[Running Commentary of mine, on the business news]

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. 22, 2015 – Weekend Update

Sunday, February 22, 2015

“WEEKEND UPDATE- NEW HIGHS FOR STOCKS AT BROAD & WALL”

MORE GAINS FOR WALL STREET. Friday saw most major U.S. stock indices increase, bringing the major market averages into positive territory for the week, thanks to compromise midday on Greece and a German Bailout.  For the week, the DJIA gained +0.67%, the S&P500 gained +0.63%, and the S&PMidCap400 gained +0.94%.  The indices now stand roughly 1.78 to 4.80 percent in the green YTD;  The Nasdaq Composite and Nasdaq 100 indices are getting within roughly 2.78% of highs reached on March 10, 2000, yes really, just 15 years ago!  If the Nasdaq can rise by +2.78% they’ll break even with where they were 15 years ago (before inflation and currency depreciation adjustments of course over the past 15 years).  On Friday, volatility, as measured by the VIX imploded by -0.99 points or -6.47% to 14.30. See the graphic below for daily and weekly performance of the U.S. Major Stock Indices.  In fixed income Friday, Treasuries and High Yield Sovereigns traded higher by +0.20% to +0.40%.  See the graphic below to see how fixed income faired.  I continue to believe the major U.S. stock indices will increase slightly by 2 to 3 percent before taking a few steps back, before making another advance to new all time highs.  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.  I am however expecting the next CPI report to come in negative with deflation for the month.  The average monthly CPI monthly increase has been approximately +0.20%; 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 coming off prices of nearly unprecedented highs, due to unprecedented low yields; RATES ARE RISING, and fast.  Thirty year zeros (as measured by etf ZROZ) are down by -13.33% 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 (as measured by etf TLT) are down by -8.64% 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 yields are 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.  Given the slowdown in Europe, Greece, and in China however, this rate increase program of the FOMC may be delayed, past this summer.  Initially, I believed rate increases would not materialize in 2015, then I believed perhaps the Federal Reserve would raise rates in June of 2015, I’m beginning to believe that perhaps the rate hikes will be delayed past June 2015, maybe in September or in 2016 they will raise rates.  The earliest rates would be increased would be summer (June) of 2015 I believe.  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. 20, 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 decrease by -2.36% to 18.65; USO is now -52.71% off its peak of the past 12 months; reached in late June ’14;  USO is also +14.42% 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 lower by -1.97% or -1.02 per barrel to $50.81.  Volatile oil is making the Russian stock market (as measured by the etf RSX) very volatile.  [Click here for an Oil-VIX chart & update]

PE Multiples & Yields of Major U.S. Stock Indices, Feb. 20, 2015

As you can see the PE Multiple of the DJIA is lower than other major U.S. Stock Indices; The dividend yield of the DJIA is 2.21%, and it was 2.20% last year.  The 30 year Treasury bond yield is 2.73%,and the ten year Treasury note yield is 2.13%.  Therefore, with such high dividend yields on equity indices it’s difficult to be bearish and I believe the stock market has some potential to move higher.  [Click here for Yields on Treasury Securities, http://finance.yahoo.com/quotes/^IRX,^FVX,^TNX,^TYX]

Select Quotes of Interest, Feb. 20, 2015

In the Fixed income markets, see the graphic above to see how Treasury etfs traded (ZROZ, TLT, IEF, TIP, STIP) 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 2.73%, and the 10 year Treasury Note yield closed at 2.13% [Data from here: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield%5D. 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 slightly lower versus the Ruble, but slightly higher versus the Euro; The Euro gained approximately +0.13%, 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 $1.1384, and also can now be exchanged for 61.8745 Rubles.  [http://finance.yahoo.com/currency-investing  Click here for an update on all major cross rates.]

I believe the catalysts for today’s and this week’s stock market increase were Greece and its debt negotiations with the Euro Zone and with Germany, as settlement talks came to a positive note on Friday, the market took off;  Consequently, on Friday, an etf of Greek stocks (etf ticker GREK) increased by +10.06% to 14.11.  The etf GREK has been on a tear lately!

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

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

On the 25th, after the close, Transocean, ticker RIG reports eps;  Shares have gone from roughly 43.14 to 17.01 in the past 12 months (they have also recently announced a major cut to their dividend). I believe the stock could move up or down by 1.50 per share immediately after its eps report.  Perhaps its time for RIG to stop declining, and to begin a new bull run?

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, P, 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, PGAL, EWI, EIRL, EWP, 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 that Greece has bought itself another 4 to 6 months (starting Feb. 20th) before anyone has to really worry about its ability to repay interest and principal on its debt.  Also, if Russia ever stops sabre rattling that would be the next catalyst for the markets to move higher.  If oil moves higher I believe that will bode well for energy sector shares, and for the stock indices in general, bring about higher prices still.  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 (including XLF), REITs (particularly Hospital REITs such as HCP, HCN, SBRA, OHI, NHI, and/or the etf ICF), 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 (it may be a great time to snatch up some CCC rated fixed income!).  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 believe the best thing to do is to trade long term deep in the money LEAPS calls on stock indices, combined with very high allocations to high yield fixed income (along the lines of 10 to 20 percent in index options, and the remainder 80 to 90 percent in high yield fixed income).  If the JPM EMBI (matched by etf ticker: EMB) is good enough for high allocations of 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.  To me all fixed income with maturities over 10 years are extremely dangerous, the interest rate risk right now is very real even including Treasuries.  The only type of Treasury I’d endorse right now is short term (0-5 years to maturity) inflation linked TIPs, via etf ticker STIP.  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