Thursday, February 14, 2013

Some Contrarian Signs in the Treasury Market

First, a note.  I put up a "long-term bullish" article on CVS on Seeking Alpha (LINK).

Next, while I continue to be more bemused than anything else, I am noting the bubbly valuations on the Russell 2000 (25X trailing P/E) and even higher on the Russell "growth stock" indices, and wondering if and when it is 1998-9.  If so, Treasuries will come into fashion again.  But overvaluation along does not kill a bull market.  In those pre-QE days when money was acknowledged not to be free, the market top only occurred after the Fed tightened.  Will it be the same now, or as with Japan, stock corrections and recessions will occur with ZIRP going on?

ZH updated a chart I saw some months ago that show a strange correlation between very low volatility in the T-bond and future market corrections or worse, associated with sharp drops in interest rates (LINK
There are few data points, and both were followed by dramatic events:  the LTCM/Russian bankruptcy fiasco, and the 2006-7 period.  Note for those looking at the right-side numbers, the numbers have a zero cut off.  The top right number is 200, not 20, the next down is 180, not 18, etc.

Also, I was emailed the most recent copy of the McClellan Report, which has turned bullish on bonds.  It presents data from the Rydex Funds showing the following:  A) that money market fund balances are at multi-year lows; everyone is "in", and B) the market timer(s) in the long Treasury and short Treasury trading funds, who have been consistently wrong, is(are) heavily short them again.

Next, futures market positioning on the 30 year Treasury is at speculative short levels that have been associated with major peaks in yield the past two years, though the 10-year shows less negative sentiment, and negativity in both assets was even greater leading up to and during the Great Recession.

Last, I have observed that as a moderator of the Apple-oriented Braeburn Forum and as a contributor to SA, bullishness is rampant.  There are some skeptics, but few people even try to adjust P/E's for the fact that the U.S. is engaging in monetary financing of state deficits.  This would be sustainable only if there is still a crisis as in 2008-9, in which case P/E's should be low; or it will stop soon, and all this free money from Washington will no longer be free, in which case P/E's will tend to drop (though earnings of the "right" companies may continue to grow.

I continue to believe that if the Rogoff-Reinhart paradigm continues to follow historical precedent, more low-interest rate stagflation lies ahead for the United States.  The investing public, including fund managers, is not thinking this way.

Thus, there is an increased chance of a discontinuous market event within the next year or two.


  1. I clicked on Chemietoilette and my security system blocked it.

    I don't care about two years from now. I want to know if I should be short or long equity ETFs right now.

    1. Rigorous: The question of the ages! All I can say is what I am doing. I generally agree with Jeremy Grantham at and his 7-year projections. His faves based on intrinsic value analysis are, with a wide error range, 1) emerging markets 2) high quality individually-selected US stocks and 3) international large cap and small cap stocks. But as far as US-only goes, he sees no prospective difference between large cap stocks, small cap stocks, bonds (presumably T-bonds, not munis) and cash on a 7-year basis. So I am long DGS, an intl stock ETF, some BRIC ETFs, some foreign individual stocks, and some high quality US stocks. But as a semi-retiree, most of my assets are in munis, with hedges in Treasuries and gold.

      The US financial markets appear to be a casino. What is the equilibrium level of economic activity and corporate profits absent all the extraordinary policies going on today? If you think it is much lower than it is today, you may wish to be cautious about stocks- and global stocks do correlate closely w US stocks nowadays.

      (The first comment was a bot. Before I joined TDC, I made commenters register to avoid them. Then some commenters complained that this was bit onerous. I may have to go back to that procedure, which most blogs utilize.)

  2. Enjoy reading the articles and thankful for them. also sad to see daily capitalist shut down.

    1. Agree on both counts, Manish.
      Hope you are also following me on Seeking Alpha.