The Worst Month in History for Bonds
Italy votes 'no'... And the market yawns... Keep an eye on European banks... The worst month in history for bonds... How some readers made an easy 19% as interest rates soared... This strategy has outperformed the market by 50% on average over the past six years...
Italy becomes the latest country to embrace populism...
Yesterday, nearly 60% of Italian voters said "no" to Prime Minister Matteo Renzi's proposal to overhaul the country's government... leading Renzi to announce his resignation shortly thereafter.
As several media outlets reported, the vote was apparently less about the merits of the proposal itself than a rebuke of the established government. In other words, the same populist backlash that led to the U.K.'s "Brexit" vote in June and swept Donald Trump to power in the U.S. last month appears to have taken hold in Italy, too.
However, unlike the period following those earlier events, the markets barely budged this time around...
Following a quick drop, the euro reversed higher... And stocks in Europe rallied, too. Here in the U.S, stocks opened higher.
The market yawned.
As Guillermo Hernandez Sampere, head of trading at German portfolio manager MPPM EK noted to Bloomberg...
After Brexit, it took three days for markets to shake it off, with Trump it took three hours, with Italy it took three minutes... The outcome was not as much of a surprise as many expected it to be – markets learned their lesson.
If there's any near-term fallout from the vote, it may be for the banks...
Regular Digest readers know Italy's banks are among the most troubled in Europe. And Sunday's vote could put plans to recapitalize the worst of them in doubt. As Bloomberg reported this morning...
Despite the generally positive tone in markets, Italian banks were badly hit, amid concerns that a period of political uncertainty following the vote could interfere with banks' planned capital raising and bring an abrupt end to the government's efforts to clean up the banking sector.
Shares of Banco Popolare di Milano were off around 7.5% on the day, while UniCredit fell over 5%. Shares of troubled lender Banca Monte dei Paschi di Siena swung between small gains and losses and were last down 3.7% after initially failing to open, as investors grew concerned the vote could hurt its EUR5 billion recapitalization plan.
So far this year, shares of Banca Monte dei Paschi di Siena are down roughly 85%, while Italian bank stocks as a group are down around 46% as they grapple with low profitability and soured loans.
November was a brutal month for bonds...
The global bond market – as tracked by the Bloomberg Barclays Global Aggregate Total Return Index – plunged 4% in November. This was the biggest one-month decline since the index was created in 1990... wiping out an incredible $1.7 trillion in market value.
U.S. Treasurys, long considered the cream of the crop of the sovereign-bond market, didn't fare much better. Bloomberg reports that an index tracking the Treasury markets declined more than 2.4% last month, the biggest one-month move in the typically "boring" government-debt markets since 2009.
These moves have continued this month...
The yield on the benchmark 10-year U.S. Treasury hit a fresh 16-month high of 2.49% last Thursday. It has now nearly doubled since hitting an all-time low of just 1.33% in July.
As we noted last week, these moves are likely just getting started. Interest-rate cycles are long. For the last 40 years, rates have been a one-way bet lower. Now that trend could be reversing.
Again, we wouldn't be surprised to see rates reverse lower in the near term. No market moves in a straight line forever... And after the big rally of the past few months, Treasury yields are likely like due for a breather.
But the long bull market in bonds appears to be over... And we expect interest rates will trend much higher in the coming years.
While many investors were caught off guard by the sudden reversal in interest rates, Steve Sjuggerud's subscribers were prepared...
In fact, folks who took his advice made an easy 19% in just two months as Treasurys plunged.
Steve first warned his subscribers that higher rates were likely in mid-June, well in advance of the bond market rout. As he told his True Wealth subscribers back then...
For the first time in, well, as long as I can remember – I finally expect a meaningful move higher in long-term interest rates.
Today, we are at an 18-year extreme in our advance-warning indicator. If history is any guide, then long-term interest rates are about to go higher...
In both 1998 and in 2012, our advance-warning indicator was a couple of months early. So we are not going to pull the trigger and bet on higher interest rates just yet. Instead, we are going to wait for the uptrend in long-term interest rates.
As Steve explained in this morning's edition of our free DailyWealth e-letter, the "advance-warning indicator" he was referring to was the activity of large speculators in the bond-futures markets, as tracked by the Commitment of Traders report. From today's DailyWealth...
[The indicator] was hitting a record extreme, and ended up peaking in early July. That meant investors loved bonds... to a degree not seen since 1998.
When everyone loves an investment, it ultimately reaches a point where nobody is left to buy. Bonds were at that point.
By mid-September, the uptrend in interest rates Steve was looking for had appeared. He recommended subscribers buy the ProShares UltraShort 20+ Year Treasury Fund (TBT) – which is designed to rally as Treasurys fall (and interest rates rise). More from Steve...
Our timing was pretty darn good... November was the worst month in global bond history, going back more than 25 years.
As you might imagine, the 18-year extreme in our advance-warning indicator disappeared completely. Our reason for being in the trade was gone. So we got out of the trade in mid-November, for a 19% gain in two months.
Now, there are two important takeaways from Steve's update...
First, as he noted, the extreme sentiment in Treasurys has resolved. This is one more reason to believe a short-term reversal in interest rates is likely soon.
Second, it's a fantastic, real-life example of the power of Steve's investment approach. As he explained this morning...
I hope you can learn from this... It's how we handle most of our trades and investments:
- Find a setup you like.
- Wait for the uptrend to confirm your idea.
- Get out when the setup (or the trend) is gone.
Doing this made us 19% in two months – in bonds. And it has worked for us for decades. It should work for you, too.
As longtime readers know, Steve's approach to trading and investing is unconventional...
But it's impossible to deny its success... His True Wealth advisory has produced double-digit annualized returns for subscribers over the past 10 years.
However, Steve admits you could do even better...
You see, several years ago, Steve discovered something he couldn't explain... a little-known investment signal that shouldn't work... but that appeared to beat every other investment strategy he had ever seen.
Over the past several years, he has spent more than $1.5 million researching this strategy and developing a brand-new system... one that combines this signal with the best of what he has learned during his 25-year career in the investment markets.
The result of this research is his elite True Wealth Systems service. And the returns so far have surprised even him...
Steve says this new approach has trounced the S&P 500, on average, by nearly 50% over the past six years... And all 10 current open positions are showing gains, with an average return of 51%.
If you aren't familiar with Steve's True Wealth Systems research, there has never been a better time to learn more... One of Steve's favorite recommendations has just triggered a "buy" signal. He believes it could soar as much as 500% over the next two years... starting right now. Click here for all the details.
|
New 52-week highs (as of 12/2/16): Black Stone Minerals (BSM), Corsa Coal (CSO.V), ProShares Ultra Oil & Gas Fund (DIG), short position in Hertz Global (HTZ), VanEck Vectors Russia Fund (RSX), Spirit Airlines (SAVE), and W.R. Berkley (WRB).
In today's mailbag, several subscribers respond to our request for feedback on Porter's insurance stocks. Sends your notes to feedback@stansberryresearch.com.
"Being hard of hearing, it took a while before you pounded the table hard enough for me to hear the 'call' of insurance stocks. I took a position in WRB and am happy to say I'm up 18%. The low volatility has made it a 'no-brainer'"... – Paid-up subscriber Kevin C.
"Yes! I own WR Berkley and am quite pleased with the result. It was the very first Stansberry recommendation I purchased, in 2014 (which is when I discovered Stansberry), and it's up over 20% since then, not including dividends. P.S. I own Fannie Mae and Freddie Mac too, both of which closed up over 100% today. That was pretty easy money." – Paid-up subscriber Gary F.
"Using the insurance dashboard that is published, I purchased WRB and then later AXS. Both are up around 50%. Thanks for the clear guidance about them." – Paid-up subscriber Tom Greene
"In response to your question regarding those who followed Porter's insurance stock recommendations, I bought AFG in May of 2013 and I'm sitting on 85% gains. My only regret is that I didn't buy more of them when they were in buy range. Keep up the great work." – Paid-up subscriber Scott N.
"I have 3 of 4 insurance stocks in the Stansberry's Investment Advisory portfolio... I wanted to get 25 % of my portfolio in insurance stocks. Currently, I [have] over 17% of my total portfolio. I love the monthly Stansberry Data Insurance [Monitor] & anxiously wait for it every month; this data & information aren't available anywhere else & any price. Free with your SIA subscription.
"I have become a resident subject matter expert on these issues; I'm not sure how many hedge funds are using this info, but if they're not, shame on them. I listen to the quarterly results every quarter, in fact 1 of these is paying a special dividend this Month Dec to shareholders. Just another example of your teaching & my learning.
"For all you considering becoming an Alliance Member, but wondering if you can afford it... 'Dude, you can't afford not to.' In just the past two years Stansberry's Credit Opportunities was rolled out... Now Big Trade... Not to mention Gold & Silver Investor. Really guys, what the hell you waiting for? Give yourself the best Christmas ever, become an Alliance Member. They even opened a money manager to assist common guys. Point is every single year, Stansberry Alliance gives back so much more..." – Paid-up subscriber Mark K.
Regards,
Justin Brill
Baltimore, Maryland
December 5, 2016