Bond Speculators Jump On Board, May Even Bring Rates To New Lows

The FINVIZ charts I follow finally show that the large and small traders combined have taken a very small net long position in the 30 year bond.  This follows increasing interest amongst traders in the 10 year bond, which has now spread to the 30 year.  This all got going in mid-March with the Cyprus banking mess.  With the Bundesbank taking a public hard line on money-printing, ongoing depression in Spain, and several weeks of disappointing macro news in the US including multiple April Fed mfg surveys being punk, plus seasonal factors, bond markets are set up to make new lows in the summer for the fourth year in a row.  I'm working on different models and will note them when that effort is complete.

This is beginning to resemble the 5-year stock run between the historic Republican takeover of Congress in the 1994 election, after which gridlock allowed both spending growth to be nominal and tax cuts to be made.  This goosed stocks and bonds, stocks more so.  Following the brief inventory restocking after the "Great Recession",  the ongoing global macroeconomic weakness has led to the lowest interest rates globally in history.  As with interest rates on the upside in the '70s into the early '80s, and stocks in the '90s into Y2K, so it may be with interest rates.  Stocks look tired, and speculators have been heavily long them for 6 months.  This is about how long a major upside explosion tends to last to mark the end of a trend.  This was the pattern with silver in 2011, for example.

In any case, the powerful bond bull really got going, as mentioned, in mid-March with an upside gap.  The stock rally really got going Jan. 2 with an upside gap.  That breakout lasted over 3 months.  If indeed something similar occurs with bonds, then stocks will do well to consolidate rather than sell off.

As a reminder, earnings are coming in at best as expected, with a good deal of downside guidance for Q2, and the quantitative Value Line estimate made at the end of 2012 for this year was for an average Dow of 13,440, though with a wide error range.  This has had a good track record.  My bias is therefore that downside risks exceed upside opportunity now.  Thus we may see something that looks like 2011.

Comments on the Selloff and the Sequester: Still Cautious After All These Years

Things are beginning to resemble 2011, though with tech and the Russell 2000 small stocks as the "rage" this year, rather than commodities in 2011.  If past is prologue, stocks will survive a scare and rally.  Then, later in the year, "the horror, the horror" that most of this "recovery" from the Great Recession was exactly as Reinhart/Rogoff expected.

If the above scenario comes true, and of course it's pure speculation, we will see what we will see.  If my long-held Japan scenario continues to play out this year, new lows in long-term T-bond rates loom before yearend.

The speculative way to play this is to buy EDV or ZROZ.  Somewhat less speculative is to directly purchase a zero coupon T-bond of the longest duration possible.  In either of the above cases, one is basically gambling on reversion of long-term bond yields to the Japanese mean, as it were.   I and some of the accounts I manage are long EDV (we are Vanguard clients, and EDV is commission-free to Vanguard clients) and zero-coupon T-bonds, plus the more sedate TLT.

Regular readers know that the last time I had anything really nice to say about the US stock market came in early August 2011 after the mark of the beast 6.66% down day on the Dow  Even then, my bullishness was tepid.  Unfortunately, the late September recession call by ECRI made me step away from stocks and focus on the muni market, which was seriously undervalued relative to Treasuries.  Oh well...

But it looks to me as if the Russell 2000 is this market cycle's equivalent of the NAZ in the later '90s.  It's for mo-mo players only.  A lot has to go right with the economy for it to be even a fairly good investment on a multi-year basis.

One final thought.  The media is downplaying the effect of the sequester on the economy.  How, the mouthpieces ask, could a mere $85 B spending cut by the Feds harm the "recovering" juggernaut of the  economy?  Doesn't the stock market predict a boom ahead?

Yours truly thinks that the Fed is all in and cannot "stimulate" more, and the second derivative of fiscal stimulus will turn definitely negative if the sequester takes hold as legislated.  If anyone thinks this is somewhat the opposite of the situation in early 2009, given the tax increases that took hold on Jan. 1, please join me in raising your hand.

I am all for less unbalanced budgets.  I just think that in the investment world, they tend to lead to stock market selloffs and renewed bull markets in Treasuries.

Updates on Recent Posts, and a Mid-Year Resolution

Two days ago, I put out two posts here.  One needs little further comment beyond reiterating the title, which was "Metals Comments:  Silver and Others Breaking Down Again".  No change there.  Just to add that I think that oil works lower yet.  Do I hear $60/bbl (WTI).

The other was about Deere (DE), AAPL, and GARP investing.  Anyway, I went ahead that day and put in a 5% portfolio allocation to DE and more to HP (Helmerich and Payne), and more to AAPL.  When DE and HP had strong upside days yesterday in association with the VIX dropping to 17, I got nervous about this ultra-rapid drop in the VIX from 27 to 17 even as the macroeconomic data was getting worse and Spain was now clearly insolvent.  So I took a one-day, 3% profit in DE and dumped HP for a profit.  I love the company but hate commodities right now, as per the above-mentioned post.  Anyway, I also markedly decreased my longs in AAPL and took profits in about half of my bond-like stock plays, the utilities, beginning this morning and continuing through the downturn today.  Europe continues to remind me of the U.S. in 2008.  There is both a solvency and liquidity crisis there.  The global macroeconomic spillover is somewhat negative for the U.S., though decreased European demand for resources will help us with imported oil prices.  Probably more important is the liquidity issue.  Who knows, but I continue to fear a recurrence of 2011 or worse.

In the meantime, daily consumer spending per Gallup.com has collapsed to $68.  This is below the level at the same date last year and a full 27% below the level seen on-- are you ready-- October 27, 2008, a month after Lehman/AIG.  And, it is not adjusted for inflation. 

The times are out of joint. The plain vanilla Vanguard long-term muni bond fund VWLUX has had a total return the past year of about 14%.  The leveraged Nuveen muni bond fund NIO has had a total return of about 18%.  The zero coupon long Treasury has returned well over 50%.  Meanwhile, the SPY has returned about 4% with much greater volatility.  More relevant, I think, to economic conditions here in the U.S. is the Russell 2000.  Its ETF, the IWM, has had a negative twelve month total return of 4%.  All this interest rate decline is what in my view has been sustaining by stocks and the economy.  But said rate decline is played out, one would think. 

I have had a very good twelve months and a very good 2012.  It's feeling like a good time to do what I hate at a time of ZIRP and positive CPI, but I'm going to try to stick to my mid-year resolution and sit on this lead with a lot of cash in my trading accounts (self-directed IRAs).  Everything except AAPL that does not look overvalued acts badly, and things like T-bonds and AMZN that act well look overvalued.  Strange days...