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Ready to Act

There are times when we need to be ready to act with our financial assets, whether we talking about investment choices, loans or cash. I think we’re getting close to one of those times.


Bonds- Getting Ready to Bail Again


Treasury Bonds have done a great job for investors in the last couple months as stocks have been in a near free fall. Today, the long term Treasury bond is up almost 11%, 10 year Treasuries are up 5.62% and (our choice) Build America Bonds paying 4.52% interest annually are also up 5.31% YTD. This is all great news but we need to remember that the bulk of these gains are really just recoveries from losses incurred in early 2015. In fact, the 20 year Treasury Bond is still below the level set on 1/30/2015 by 1.35%. Most regular readers know how I feel about US Treasury bonds or most sovereign debt for that matter. They are somewhere between unattractive and a disaster for longer term investors. We will own them selectively for a trade as we do now with the Build America Bonds (BAB) but just to generate a little income and hedge any equity holdings. Jared Dillon who writes an excellent and highly contrarian newsletter called the 10th Man from Mauldin Economics, put this out today




We now have an alarming $6 Trillion dollars worth of negative yielding government bonds floating out in the world. None of them are US based thankfully but we’re a global ecosystem remember. Assets classes like bonds and stocks are moving with high correlations across oceans. Some are arguing that the US will also eventually move to negative rates like Europe and Japan. That’s crazy and it won’t happen. Desperate countries do desperate things but we’re not that desperate. Negative yields on bonds mean that owners of bonds effectively pay interest to the bond issuer to own the bond. It would be the same as my bank paying me interest to give me a loan on my house. Crazy? That’s what’s happening and it can’t last because it is just as illogical as it sounds. So the only reason one would own a bond with a negative rate is because you are governed entirely by fear, you believe in the entrenched future of deflation forever or you must own them because you issued them (wink).


I will suggest that Government bonds are fast approaching bubble status. I can’t say how or when we should expect a spike higher in rates, (spike lower in bond prices) but I see something like that happening. This will not come from anything under the control of central banks but simply market forces at work. The action item here is simple. Get ready to exit your bond positions. Likewise, I would pick up the phone and call your lender and ask about refinancing options for homes or other properties. We’re very close to the lowest mortgage levels we have seen in the last five years (again). I shaved a full point (1%) off of our small commercial loan for our office building in Denver this am with a telephone call and signature. No charge. Done.


Bottom Developing in Commodities?


I should say some commodities. Energy is still a disaster. But while we’re hearing all this chatter about deflation and negative rates and global recession, I’m also watching Gold, Iron Ore, Copper, Basic Materials, Inflation Protected Bonds, Emerging Markets and select Industrials move quickly to the top of the performance charts. The market is visually telling us a different story than what we are hearing over the last three weeks. This is a story about inflation – coming. This is a story about opportunities in very oversold sectors that have been trading down hard for nearly five consecutive years. Something is very strange about what we’re seeing because it conflicts directly with the recession/ deflation thesis that seems to be firmly entrenched. Now that the US dollar has broken its uptrend, we also have some macro confirmation to start looking at commodities of all sorts for a meaningful low. The action item here is to be patient but perhaps consider building small entry level positions in gold and other inflation hedges.


Get Your Cash Ready


This is a very early call to make. Now that the broad US market has broken the August and February lows and International markets have touched the -20% decline mark, I think it’s time to identify cash to potentially add to any investment accounts and get it ready to move. We are NOT ready to say “Add money now” because this is a highly emotional market that is just now breaking support. The action item here is to find cash, free up cash, move cash into a place where it can be invested. Often this very act is by itself prohibitive to investors adding to their investment accounts in at important times. Then, they feel it’s too late after prices blast off the lows. So let’s be ready but not invest our cash yet.


As an aside commentary, this waterfall decline in stocks early in the year is very much a bear market pattern. Bear market years have very weak 1st and 4th quarters while the 2nd and 3rdquarters are typically much stronger and can have some impressive rebound rallies. A bull market pattern is exactly the opposite. Strong in the 1st and 4th quarters and weak in the middle. Think about the mantra sell in May and go Away. That’s a bull market theory that works terrible in a bear market pattern. Often, we see the first set of price lows in March or April during bear market years just as we did in 2001 and 2008. Then we get that relief rally which can carry right through the summer with some impressive gains. Finally, sellers reemerge and take prices down to lower lows in the final quarter. Thus far, we are looking at a very clear bear market pattern for stocks but that also means, we could have a tradable rally develop in the next 30-60 days giving us perhaps our only set up to make money in 2016. This is also very speculative commentary and a very blunt instrument for trading purposes. We’ll act according to actual market conditions as always.


That’s it for today and probably tomorrow- Have a nice long holiday weekend.

 Sam Jones