Cada vez que suben los
rendimientos de los bonos, estos se han más atractivos frente a la bolsa…, más
sustitutivos a invertir en acciones. Bueno, solo ocurre en EEUU. Sin embargo,
su bolsa sigue subiendo y subiendo… y no hay un cambio hacia la renta fija que
ya tiene mejor rendimiento.
Get out your party hats ladies and
gentlemen, the markets hit all-time highs this past week.
After increasing equity exposure in
portfolios on the 11th, as the markets pulled back to the previous break-out
support levels, I suggested
a push to new highs was
likely.
“The pullback to the previous breakout
support level did allow us to add further exposure to our portfolios as we said
we would do last week.
Next week, the market will likely try and
test recent highs as bullish momentum and optimism remain high. Also, with many
hedge funds lagging in performance this year, there is likely going to be a
scramble to create some returns by year end. This should give some support to
the rally over the next couple of months. However, as shown above, the short-term
oversold condition which fueled last week’s rally has been exhausted, so it
could be a bumpy ride higher.
The breakout above the January highs now puts 3000 squarely into focus for
traders.”
As shown, the breakout continues to follow
Pathway #2a as we laid out almost 6-weeks ago. (Next week, I will update the pathways for the rest of
this year.)
While the recent rally has been useful in
getting capital successfully allocated, we are still maintaining prudent
management processes.
+Stop-loss levels have been moved up to
recent lows.
+We added defensive positions to our
Equity and Equity-ETF portfolios.
+With yields back to 3% on the 10-year
Treasury, we are looking to add additional exposure to our bond holdings.
As I noted previously, we continue to use
dips in bond prices to be buyers. This is because the biggest gains over
the next 5-years will come from Treasury bonds versus stocks.
“While the market has been rising on
stronger rates of earnings growth, due primarily to tax cuts and share
buybacks, that effect will begin to roll off in the months ahead. Tariffs and
higher interest costs are a direct threat to bottom line profitability,
particularly when combined with higher labor costs.”
“There are several important points to
note in the chart above:
1.-In the past 40-years, there have only
been seven (7) other occasions where rates were this overbought. In each case,
it was a great time to buy
bonds and sell stocks. (When rates got oversold, it was
time sell bonds and buy stocks.)
2.-There were only two (2) other periods
where rates were this extended above their long-term moving averages. The one
that occurred between 1980-1982 began the long-term decline in bond
prices.
3.-Economic growth has peaked every time
rates got this extended. (Which shouldn’t be a surprise.)
4.-Whenever rates have previously pushed
2-standard deviations of their 2-year moving average – bad things have tended
to occur such as the Crash of 1974, Crash of 1987, Long-Term Capital
Management, Russian Debt Default, Asian Contagion, Dot.com crash, and the
Financial Crisis.”
While the markets are currently ignoring
the risk of higher rates, even a cursory glance at the chart above suggests
that we are near the point where “rates
will matter.”
Remember, credit is the “lifeblood” of the
economy and with consumer credit now at record levels, and 80%
of Americans vastly undersaved, think about all the ways that higher rates impact
economic activity in the economy:
1) Rising interest rates raise the debt
servicing requirements which reduces future spending and productive
investment.
2) Rising interest rates will immediately
slow the housing market taking that small contribution to the economy
away. People
buy payments, not
houses, and rising rates mean higher payments.
3) An increase in interest rates
means higher
borrowing costs which leads to lower profit margins for corporations.
4) The “stocks are cheap based on low interest
rates” argument
is being removed.
5) The massive derivatives and credit markets
are at risk. Much
of the recovery to date has been based on suppressing interest rates to spur
growth.
6) As rates increase so does the variable
rate interest payments on credit cards.
7) Rising defaults on debt service will
negatively impact banks.
8) Many corporate share buyback plans and dividend
issuances have been done through the use of cheap debt, which has led to increases corporate
balance sheet leverage.
9) Corporate capital expenditures are
dependent on borrowing costs. Higher borrowing costs lead to lower CapEx.
10) The deficit/GDP ratio will begin to soar
as borrowing costs rise sharply. The many forecasts for lower future deficits
will crumble as new forecasts begin to propel higher.
I could go on, but you get the idea.
The issue is not if, but when, the Fed
hikes rates to the point that something “breaks.”
However, between now and then, the markets
will likely continue to try and push higher as investor confidence continues to
swell, pushing investors to take on ever increasing levels of risk,
particularly as it appears as if the economy is firing on all cylinders.
But is it really?
Economic Growth Likely Fleeting
Economic data has certainly surprised to
the upside in the U.S. as of late with unemployment numbers hitting lows,
manufacturing measures coming in “hot,” and
consumer confidence at record highs. As I discussed just recently, the RIA EOCI (Economic Output Composite Index) is
near its highest level on record.
(The index is comprised of the CFNAI, ISM
Composite, several Fed regional surveys, Chicago PMI, Markit Composite, PMI
Composite, Economic Composite, NFIB Survey, and the LEI.)
But is this recent surge part of a
broader, stronger, and sustainable economic recovery?
If you notice in the chart above, these late-stage surges in economic
growth are not uncommon just prior to the onset of a recession. This
is due to the cycle of confidence which tends to peak at the end of cycles,
rather than the beginning. (In
other words, when everything is as good as it can get, that is the point
everyone goes “all in.”)
However, the most recent surge in the
economic data has been the collision of tax cuts, a massive surge in deficit
spending, the impact of the rebuilding following several natural disasters late
last year, and most importantly, the rush by manufacturers to stock up on
Chinese goods ahead of the imposition of tariffs. To
wit:
“By plane, train, and sea, a frenzy has
begun, resulting in surging cargo traffic at US ports, booming air freight
to the US, and urgent dispatch of goods from Chinese companies earlier than
planned.
Getting in under the wire before Trump’s tariffs bite could mean hundreds of
thousands saved on single shipments.
Bloomberg describes this week
that cargo
rates for Pacific transport are at a four-year high as manufacturers rush to get
everything from toys to car parts to bikes into American stores.
This rush, which comes on top of a
typically already busy pre-holiday season, is expected to continue well after
next week as the tariff will leap from 10 to 25 percent after the new year.
US importers are expected to stockpile Chinese products
before the 2019 25% mark. There’s currently widespread reports of companies
scrambling to pay expedited air freight fees to dodge the new tariffs, as well
as move up their orders. “
This is an important point. Not only has
this been the case just recently, but since the beginning of this year when the
White House began this nonsensical “trade
war.”
“Of course, the most likely outcome will
be a return to trade at about the same level as it was just prior to the
initiation of “trade wars.” However, it will be a “return to normal,” rather
than an actual improvement, but it will give the White House a “win” for
solving a problem it created. “
However, this is really a tale of “two economies” as
the surge in the economic data is almost solely coming from the manufacturing side
of the equation. As shown, the “service” side,
which is more immune to the effects of tariffs, has been declining over the
past several months.
Of course, while so-called “conservative Republicans” are
breaking their arms to pat themselves on the back for “getting the economy going again,” the
reality is they have likely doomed the economy to another decade of sluggish
growth once the short-term burst from massive deficit spending subsides. The
unbridled surge in debt and deficits is set to get materially worse in the
months ahead as real revenue growth is slowing.
All of this underscores the single biggest
risk to your investment portfolio.
In extremely long bull market cycles,
investors become “willfully
blind,” to the underlying inherent risks. Or rather, it is
the “hubris” of
investors they are now “smarter
than the market.” However, there is a growing list of
ambiguities which are going unrecognized may market participants:
+Peak autos, peak housing, peak GDP.
+Political instability and a crucial
midterm election.
+The failure of fiscal policy to ‘trickle
down.’
+An important pivot towards restraint in
global monetary policy.
+An unprecedented lack of coordination
between super-powers.
+Short-term note yields now eclipse the
S&P dividend yield.
+A record levels of private and public
debt.
+Near $3 trillion of covenant light and/or
sub-prime corporate debt. (eerily reminiscent of the size of the subprime
mortgages outstanding in 2007)
+Narrowing leadership in the market.
Yes, At the moment, there certainly seems
to be no need to worry.
The more the market rises, the more
reinforced the belief “this
time is different” becomes.
But therein lies the single biggest risk
to the Fed and your portfolio.
“Bull markets” don’t die of pessimism –
they die from excess optimism.
Abrazos,
PD1: Todos queremos ser más
felices. La felicidad es lo que más nos preocupa alcanzar y lo que vamos
buscando con nuestra conducta, con las cosas que hacemos… Y sí, el dinero no te
la da, ni mucho menos. Si sabes inglés, te recomiendo este video… La
felicidad en un 50% es genética (ya sabes lo mucho que quiero a los siesos).
Aunque también hay que estar proactivo, hay que hacer cosas para conseguirla,
tomar decisiones, cambiar lo que hacemos mal, tratar de adquirir buenas
costumbres. Y sobre todo, la fe, la familia, ser caritativo y la satisfacción
por el trabajo…, por hacer bien las cosas.
