America's Biggest Creditors Are Dumping Treasurys
America's biggest creditors are dumping Treasurys... Signs of 'froth' in the stock market... New highs in copper... Another massive commodities extreme...
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According to new data, America's biggest foreign creditors are walking away from U.S. government debt like never before...
As you can see in the following chart, major foreign holders sold a net $202 billion worth of Treasurys last year...
This is the most in more than 15 years... and represents the first time since at least 2000 that foreign investors sold significantly more Treasurys than they bought. As Bloomberg reported this morning...
From Tokyo to Beijing and London, the consensus is clear: few overseas investors want to step into the $13.9 trillion U.S. Treasury market right now. Whether it's the prospect of bigger deficits and more inflation under President Donald Trump or higher interest rates from the Federal Reserve, the world's safest debt market seems less of a sure thing – particularly after the upswing in yields since November. And then there is Trump's penchant for saber rattling, which has made staying home that much easier.
Worse, this trend appears to be accelerating in Japan and China, the two largest holders of U.S. government debt...
Bloomberg reports Japan sold $21.3 billion worth of its $1.1 trillion Treasury holdings in December. While the absolute amount is still small, this represents the largest monthly decline in nearly four years (since 2013's "taper tantrum," when the Federal Reserve announced an end to its quantitative-easing program).
More important, this has happened at a time when U.S. debt is as relatively attractive as it has ever been compared with Japanese government debt. In fact, even after accounting for significant currency-hedging costs, Bloomberg data show benchmark 10-year U.S. Treasury notes yield nearly 10 times more today than 10-year Japanese government bonds.
China – formerly the largest foreign holder of U.S. debt – has been selling Treasurys for six straight months. According to news service Reuters, China sold $195 billion worth of Treasurys over the past six months and $215 billion over the past year. Both are all-time records, and these sales have pushed China's Treasury holdings to a seven-year low of a little more than $1 trillion.
These moves haven't caused any serious disruptions to the Treasurys market...
At least, not yet. As Bloomberg reported last week...
Demand for U.S. Treasuries has moved "from global to local," Bank of America Merrill Lynch rates strategists Carol Zhang and Shyam Rajan wrote in a note to clients Tuesday. Whether that turns out to be a good thing remains to be seen.
Domestic pension and insurance companies, banks, mutual funds, and money market funds all bought an above-average amount of U.S. debt over the past year relative to previous 52-week spans going back to 2007, according to data compiled by Merrill Lynch.
"The biggest macro theme playing out right now is the hand-off from international investors to domestic buyers of duration," wrote Zhang and Rajan. "Liability-driven investors are buying the long end of the Treasury market at a record pace since June 2016."
In other words, as foreign holders have been selling, U.S. investors have been stepping up to buy instead. And they've been buying longer-duration debt that is more sensitive to rising interest rates.
Whether this strong domestic demand will continue as interest rates rise – and the Federal Reserve stops buying, too – remains to be seen.
Over in the stock market, we note sentiment could be getting a little "frothy" again...
Market-research firm Investors Intelligence reports its proprietary measure of newsletter-writer sentiment has soared to its most bullish in a more than a decade. Extreme bullish readings can often be a bearish contrarian indicator. As the Wall Street Journal reported last week...
The share of newsletter writers who are optimistic on the stock market climbed to 62.7% this week, the highest level since 2004, according to Investors Intelligence, which surveys more than 100 newsletter writers each week for its Sentiment Index.
The gauge has become something of a contrarian indicator. It tends to reach peak euphoria ahead of a market top, and pessimism typically peaks at market bottoms...
A reading above 55% suggests a trading top is forming, while topping 60% means "it is time to start taking defensive measures," according to Investors Intelligence. The measure has been above 55% for 11 straight weeks, and above 60% for four of them.
It's important to note that the firm itself admits this measure doesn't mean a top is imminent. Unlike market bottoms that tend to be sharp, market tops can take longer. It also doesn't mean a substantial decline is necessarily likely.
But it is a sign that the risk of a correction is rising.
Our colleague Ben Morris agrees...
Last week, Ben showed his subscribers another warning sign that a pullback could be approaching. As he wrote in the February 9 issue of DailyWealth Trader...
The market isn't as strong as it appears. Yes... The major stock market indexes are trading at or near all-time highs. But the Russell 2000 Index of small-cap stocks is underperforming...
Regular readers know that small companies tend to grow faster than large companies in good times... and slow more in bad times. And their stock prices are more volatile. This means that the Russell 2000 can serve as a gauge of investors' appetite for risk.
When small-cap stocks rise faster than large stocks, it's a sign that investors are willing to take more risk in the market. It often leads to higher stock prices across the board. But when small caps lag behind large stocks, it shows that investors may be getting worried. It often leads to a pullback in the broad market.
As Ben explained, an easy way to compare the performance of small stocks to large stocks is by using what's known as a "ratio chart"...
To get the ratio, you simply divide the value of the Russell 2000 by the value of the S&P 500. When the ratio rises, it means small caps are outperforming large stocks. When the ratio falls, it means small caps are lagging.
In the five-year chart below, you can see this ratio (the black line) along with the S&P 500 by itself (the blue line). The "natural order of things" is for the two lines to rise or fall together. When the ratio falls while the S&P 500 rises, though, it's a sign of cracks in the foundation.
Just look at the light-blue bands below, which highlight these "cracks." The S&P 500 didn't always drop immediately following these periods... But it did always drop shortly afterward, usually within a couple of months. And when it did, the index often fell back down to the levels where the cracks appeared.
Like other Stansberry Research analysts, Ben remains bullish today... But that doesn't mean he thinks stocks will continue to go in a straight line. More from the issue...
Right now, the Russell 2000-to-S&P 500 ratio is falling while the S&P 500 itself is rising.
Typically, this has been an early warning sign. So I don't expect a big drop this week... or maybe not even this month. We could easily see the S&P 500 hit new all-time highs again and again.
The S&P 500 is trading right around 2,300, in all-time-high territory. If stocks do continue higher, don't be surprised to see them revisit this same level or a lower one – following a sharp drop – in the near future.
Speaking of Ben, his bullish call on copper continues to look prescient...
Regular Digest readers may recall we highlighted his copper recommendation last Wednesday.
In case you missed it, Ben believes a new bull market could be starting. And since tracking the breakout in copper prices back in November, he had been waiting for a good, low-risk opportunity to go long.
Earlier this month, he finally found that setup and told his readers to buy. And in the two weeks since then, market action has begun to confirm his stance.
On Friday, prices rallied nearly 5% to a new 20-month high following the first day of a strike at BHP Billiton's giant Escondida mine in Chile. And prices were up as much as another 7% in Asian trading this morning as the supply worries continued...
Elsewhere in the commodities market, our colleague Steve Sjuggerud recently identified another sentiment extreme...
As regular readers may remember, in recent months Steve has highlighted several of these situations, including the bearish extreme in U.S. Treasurys bonds and the bullish extreme in crude oil.
Last week, he noted that traders have become extremely bearish in a commodity most investors pay little attention to. As he and analyst Brett Eversole wrote in the February 8 issue of True Wealth Systems Review of Market Extremes...
This commodity crashed over the past year. And investors have completely given up on it. But history says that's the wrong bet. History says double-digit gains are possible, starting now. Let us explain...
The price of cocoa is down 27% over the past year. And that has led to massive selling from futures traders. Investors have reached extreme bearish sentiment levels based on the Commitment of Traders (COT) report for cocoa. The COT is a weekly report that shows what futures traders are doing with their money.
We use the COT as a contrarian indicator... When it hits an extreme – and these traders all make the same bet – the opposite tends to occur. Today, their bets on lower cocoa prices have hit an extreme. The trade is crowded. And that makes higher cocoa prices likely from here. Take a look...
As Steve and Brett noted, the chart is a perfect illustration of how most traders chase returns...
Positive sentiment peaked in early 2014... after cocoa finished a big gain in 2013. And now investors are bearish... after a dramatic fall in 2016. Futures traders have only been this bearish on cocoa a few times going back to 2000. And those were good times to buy.
Specifically, when the COT report falls below -10,000 contracts and then rises back above that level, cocoa tends to outperform over the following year...
In short, futures traders are making extreme bearish bets on cocoa prices right now. They're scared of cocoa's recent poor performance. But they're on the wrong side of a crowded trade.
One last note before we sign off today...
If you missed Friday's Digest, you may not have heard Porter's big announcement...
This Wednesday at 8 p.m. Eastern time, Porter and his senior analyst Bryan Beach will go live on-air to share all the details on their new research project – what we've dubbed the "10x Project."
If you're interested in learning how to make up to 10 times more money in safe, high-quality stocks – without using leverage or risky options trades – you absolutely don't want to miss this event. Reserve your spot in one easy click right here.
New 52-week highs (as of 2/10/17): Bank of China (3988.HK), American Financial (AFG), AMETEK (AME), American Express (AXP), Axis Capital (AXS), Bancroft Fund (BCV), iShares MSCI BRIC Fund (BKF), CBRE Group (CBG), iShares Select Dividend Fund (DVY), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), BlackRock Floating Rate Income Strategies Fund (FRA), Goodyear Tire & Rubber (GT), Huntington Ingalls Industries (HII), iPath Bloomberg Copper Subindex Total Return Fund (JJC), Nuveen Floating Rate Income Opportunity Fund (JRO), Northern Dynasty Minerals (NAK), PNC Financial Warrants (PNC-WT), and Shopify (SHOP).
A busy day in the mailbag... More feedback (and a surprising question) on Stansberry Portfolio Solutions... Two subscribers weigh in on Trump and financial deregulation... And some belated thoughts on this year's Stansberry Research Report Card. What's on your mind? Let us know at feedback@stansberryresearch.com.
"Gentleman, gonna keep it brief. Portfolios are great. Still addicted to reading everything since the learning is just as important to me as investing. Never want to get too passive. Thanks for all you do." – Paid-up subscriber David B.
"I am awaiting the launch of your Income Portfolio. When do you think this will be published?" – Paid-up Stansberry Alliance member Steve C.
Brill comment: Steve, it seems you missed our announcements... As we noted several times last month, our new Stansberry Portfolio Solutions product – including The Capital Portfolio, The Income Portfolio, and The Total Portfolio – officially launched on February 1. As a Stansberry Alliance member, you can access them right here.
"A short commentary: Is Donald Trump crazy and out of mind? 'Scaling back' Dodd-Frank is like removing some of the lifeboats of ocean-steamer Titanic. Nobody did care that they were insufficient while the party was on. To remove some of them to have more space for dancing will make the disaster even bigger when the ship tanks..." – Paid-up subscriber Rainer K.
"Another Great Recession is not good for our economy, even if you are a banker or billionaire. We have finally emerged from the last free-for-all! Keep Dodd-Frank safeguards in place. Let's not do Trump's foolish stuff. Thanks!" – Paid-up subscriber Anneva O.
"Sorry for the late response on this but feel this must be addressed. While Dan Ferris freely admits to some poor timing on his recommendations, his comments regarding the tax consequences are spot on, and thus most subscribers have likely had better results than those published, certainly those subscribers with a long-term outlook.
"Additionally, while the grades only focus on the newsletter recommendations, they do not take into account all of Dan's recommendations in 2016... namely those for Alliance members (thus another benefit of my Alliance Membership!) and I have not seen these addressed.
"From my calculations Dan ran away with the returns from picks at the Annual Alliance Conference on 9/21/16 in Las Vegas. Dan specifically recommended 3 merger plays, and the companies have all since been acquired. As the trades are over, I think we are safe to reveal the results without giving away to Non-Alliance Members. Dan specifically recommended:
- CVT trading at $31.52 on 9/21/16, taken out at $36 on 11/25/16 (14% gain in just over 2 months, or roughly 85% annualized)
- LXK; trading at $35.97 on 9/21/16, taken out at $40.50 on 11/28/16 (12.5% gain in just over 2 months, or roughly 75.5% annualized)
- APOL; trading at $7.56 on 9/21/16, taken out at $10.00 on 2/1/17 (32.4% gain in just over 4 months, or roughly 97% annualized).
"Dan has done a fantastic job for long-term focused Extreme Value subscribers and an excellent job for Alliance Members. Thank you, Dan... And thank you, Porter, for the Alliance Membership and the opportunity to partner with you." – Paid-up Stansberry Alliance member Justin Fowler
Regards,
Justin Brill
Baltimore, Maryland
February 13, 2017