This Hasn’t Happened Since 1999
Investors have never been so sure interest rates are going higher... Prepare for a bond-market reversal... This hasn't happened since December 31, 1999... Don't bet on a 'Great Rotation'... P.J. O'Rourke: Ten things I'm thankful for this year...
Investors have never been so sure interest rates are going higher...
According to analysts from financial-services giant Deutsche Bank, investors are fleeing from bond funds at the fastest pace since at least 2013.
Meanwhile, the Wall Street Journal reports traders are betting an all-time record $2.1 trillion that short-term U.S. interest rates will rise.
And Bloomberg data show the futures market now puts the odds of a December Federal Reserve rate increase at 100% for the first time.
In short, it appears virtually everyone believes rates can only go higher – and bonds can only go lower – from here. This represents a dramatic shift from just a few months ago, when most folks believed the opposite was true.
And as regular Digest readers can likely guess, it makes us uneasy. When sentiment becomes this lopsided, it's often a sign a reversal is imminent... at least in the short term.
Of course, that's exactly what happened this summer. Government bonds in the U.S., Europe, and Japan had soared to record highs... Yields on vast swaths of this debt plunged into negative territory... And investors were piling into bonds like there was no tomorrow. Then bonds plunged...
The yield on the benchmark 10-year U.S. Treasury has soared from 1.35% to as high as 2.35% in less than five months.
But not everyone believes interest rates are a one-way bet today...
Our colleague Steve Sjuggerud believes the rally in rates – and the selloff in Treasury bonds in particular – is overdone. As he explained in his latest True Wealth Systems Review of Market Extremes last Thursday...
Of all the major market moves we've seen since last week's election result, the fall in long-term Treasury bonds might be the most extreme.
Last week, the largest Treasury bond fund – the iShares 20+ Year Treasury Bond Fund (TLT) – had its worst two-day performance in history... falling 5.7%.
That pushed the fund to the second-most oversold level we've ever seen. And as you might expect, that means a reversal is likely, based on history... Just take a look at the chart below. It shows the recent crash in TLT, which tracks the long-term Treasury bond market...
Steve said these moves have pushed bonds to one of the most "oversold" extremes he has ever seen...
As you might know, the relative strength index (RSI) measures a stock's recent gains compared with its recent losses. A low RSI tells us something is oversold and could be poised to reverse.
Generally, an RSI at less than 30 shows an oversold level... And TLT's RSI recently fell to less than 20. That's the second-lowest we've ever seen...
Clearly this is a major extreme. Any RSI reading below 25 is rare. And since 2002, we've only seen TLT's RSI fall below 25 and then rise above it 12 times.
As Steve explained, Treasurys have been higher one year later in 11 of those 12 instances. And the returns have been relatively strong...
It's important to remember that long-term Treasury bonds generally move slowly. Since 2002, they've only led to 2.6% annual gains. But buying after these oversold extremes led to much better returns...
TLT returned 2.3% over three months, 4.6% over six months, and 5.5% the year after these oversold RSI extremes. These gains aren't huge, but they're dramatically better than typical gains.
The trend here is obviously down... in a big way. We saw the largest two-day loss in the history of TLT last week. But this condition tends to lead to a rally.
Our colleague Jeff Clark, editor of Stansberry Research Pro Trader, agrees...
In today's edition of our free Growth Stock Wire e-letter, he also highlighted the historic decline in Treasury bonds...
Widows and orphans have had a tough few months.
Long-term U.S. Treasury bonds – often cited as the safest investment on the planet and suitable for the most cautious investors – lost more than seven years' worth of income in just the past four months.
Lending money to the U.S. government for 30 years in exchange for a 2% yield turned out not to be such a good idea. Yields are now 50% higher than they were back in July. And these Treasury bonds, or "T-bonds," have collapsed in price.
Like Steve, Jeff notes the selloff has created incredibly oversold conditions that suggest a sharp rebound is likely. In fact, he thinks buying Treasury bonds – via TLT – is one of the best short-term trading opportunities in the market right now...
TLT closed Friday at $120.85 per share. That's right on its long-term support line... going all the way back to last October. This is a logical spot at which to expect a bounce.
Also, look at how far TLT is trading below its 50-day moving average (DMA). It rarely strays more than 3% above or below the line before reversing back to retest it. As of Friday's close, TLT was trading at more than 8% below its 50-DMA.
I can't ever recall seeing that large of a gap. The proverbial rubber band is stretched to the limit. TLT is poised for a snap-back rally.
Jeff says traders can buy TLT today near $121 per share. If bonds keep moving lower from here and break below the long-term support line, they can close the trade near $120 for a small loss of just about $1 per share.
On the other hand, if bonds rebound as Jeff expects, TLT could quickly rally back up to its 50-DMA near $131 per share... or about $10 per share in profit.
While investors have been fleeing from bonds, they've been rushing into stocks again...
On Monday, all four U.S. major benchmark indexes – the S&P 500 Index, the Dow Jones Industrial, the Nasdaq Composite, and the small-cap Russell 2000 Index – closed at new record highs on the same day. This hasn't happened since December 31, 1999... just months before the Internet bubble popped and U.S. markets crashed.
The new highs in U.S. stocks follow record inflows into equity mutual funds and exchange-traded funds over the past two weeks.
The diverging action in stocks and bonds has led some analysts to conclude a long-awaited "Great Rotation" has begun. As financial-news outlet Barron's explained this morning...
It's tempting to believe that these disparate phenomena are connected. One story some bulls are telling to explain these interrelationships is the so-called Great Rotation theory, which first gained widespread currency several years ago.
That theory predicts that, as the multidecade bond bull market comes to an end, investors will shift their hundreds of billions invested in the bond market into the equity market, thereby propelling stocks massively higher.
But before you get too excited, there are reasons to doubt this scenario will continue...
First, research suggests equity and bond-fund flows have surprisingly little correlation. More from Barron's...
It turns out that nearly 95% of equity fund flows are caused by factors not directly related to bond fund flows. (For the statisticians among you, the r-squared when correlating monthly changes in these two data series is just 5.5%.)
That means we have to look elsewhere to explain why the stock market has surged over the past two weeks.
We shouldn't be surprised by these results, according to Claude Erb, a former fixed-income and commodities manager at mutual-fund firm TCW Group. In an interview, he argued that the typical investor is often reluctant to transfer money from one asset class to another – meaning that the more likely recipient of bond fund redemptions is money-market funds.
Worse, research also shows any positive effects tend to be short-term in nature.
In other words, when the credit-default crisis arrives, many panicked bond investors may find stocks aren't the safe haven they appear to be today.
New 52-week highs (as of 11/21/16): Berkshire Hathaway (BRK-B), WisdomTree SmallCap Dividend Fund (DES), ProShares Ultra Oil & Gas Fund (DIG), Freddie Mac (FMCC), iShares Core S&P Small-Cap Fund (IJR), Nuveen Floating Rate Income Opportunity Fund (JRO), PowerShares S&P 500 BuyWrite Portfolio Fund (PBP), PowerShares High-Yield Equity Dividend Achievers Fund (PEY), Ritchie Bros. Auctioneers (RBA), Gibraltar Industries (ROCK), and Shopify (SHOP).
In today's mailbag, a question about last week's webinar... and more feedback on our new Stansberry's Big Trade service. We'd love to hear from you, too. Send your notes to feedback@stansberryresearch.com.
"Hello, in [Thursday's] Digest, "What You Missed at Last Night's 'Big Trade' Event," the link to the replay has not been working. I've tried for several days and it just times out... What is the correct link to view the replay? Thank you." – Paid-up subscriber Mike DeWitt
Brill comment: Mike, we're sorry you haven't able to access Porter's webinar replay. We've confirmed the link is now working correctly.
Again, you can access the full replay by clicking here. And should this link still not work for you – or if you'd simply prefer to read rather than watch a video – you can access a printed transcript of the key ideas from Porter's presentation right here.
"Porter, I have 20 positions with 10 contracts per position. As we speak the VIX is at 13.00, and I'm up across the board. Can't wait to see what happens when the VIX starts to rise... I am up 83%... 66%... and 75%... the others are up at minimum 20%, only down on [two positions].,, I have also been trading with Jeff Clark and doing very well... I'm trying to position myself where I can make $600 a day trading, then I can quit my day job, run our winery and trade. Cheers!" – Paid-up subscriber Karl H.
"Good morning! I am very happy with the Big Trade subscription. Another great job – keep up the good work!" – Paid-up Stansberry Alliance member Larry Cole
"Greetings from Mexico. MUCHAS GRACIAS to Porter and his team for the EXCELLENT webinar on The Big Trade... " – Paid-up Stansberry Alliance member Frank S.
"Porter, excellent job Wednesday. I've only been a subscriber for just over one year, but am truly impressed with your ability to present research and explain concepts to those of us want to learn... and act. I have followed your advice (on paper) and done very well. I am sure my real world adventure will be as successful. Your Big Trade has me very excited but timing for me couldn't be worse. If I buy in now I won't have any money to safely invest. If I follow your advice with a small investment (very small) I have no doubt in the outcome. You have been up front and a man of your word. Here is mine. As my small investment grows and I reach the buy in price, I will send it to you even if the you have closed the program to new members. I greatly appreciate that you share your staff's and your own knowledge with us. And you are correct... If we make money we will gladly pay you for more knowledge. It's fun to learn." – Paid-up subscriber D. LeMay
Regards,
Justin Brill
Baltimore, Maryland
November 22, 2016
Giving Thanks
It's Thanksgiving, a national holiday devoted to counting our blessings. One of those blessings is that we have a national holiday that celebrates saying "thanks." It's one of the most polite things people can do.
Come to think of it, we could also use a national holiday that celebrates saying "please" and another that celebrates saying "you're welcome." Our nation could use a little more politeness after this election we've been through. But let's be grateful for what we have.
Here are 10 things I'm thankful for...
- This Election Is Over!
Maybe we can't agree whether the outcome was good, but we can agree that the choice of candidates was bad. And one of them lost! So we're all half-happy. And that's better than no happiness at all.
- Politics
After the kind of election we endured, politics may seem to be an odd thing to be thankful for. But I've always believed that politics is good for our country. America has its fair share of pretentious blowhards, self-important busy-bodies, pompous know-it-alls, and people with brains in reverse proportion to their egos, which are the size of Capitol Hill. Isn't it great that Capitol Hill is where they are? Politics gets them out of the house.
And while politicians can do a lot of damage in Washington, they could be doing worse damage elsewhere. What if the kind of people who rise to the top in politics rose to the top in business and investing? That would crash the Dow.
- Money
Of course, we're thankful if we have a lot of it. But even if we don't have much money, we should be thankful that money exists. It was one of mankind's most brilliant inventions.
Standardized coinage only dates back to about 1,000 B.C. Before then, all buying and selling had to be done by barter. Imagine spending a day at the mall with your pockets full of chickens and getting your change in eggs.
- Markets
Speaking of the world as it was not so long ago, think of living a life without markets. Think of not having any place to exchange what you have for what you want.
That's the way life was before there were cities and towns. If you grew wheat, that's what you had... wheat. You ate wheat, you drank wheat whey. You burned wheat chaff to stay warm. You wore clothes made from woven wheat stems, and you lived in a hut made of wheat stalk thatch.
A few miles away, somebody else raised goats. And what he had was... goats. He ate goat meat, drank goat milk, burned goat dung, wore goat-skins, and lived in a goat-hide tent. And boy, did he ever smell like a goat!
- Market Fluctuations
The ups and downs of the marketplace may drive us crazy, but they're a good thing. Market fluctuations mean that we have a "free market" in which everyone is at liberty to adjust the price of goods and services according to supply and demand.
The opposite would be a "controlled market." And guess who would control it? The people in power would get anything they wanted in the marketplace at whatever price they cared to pay for it. And the rest of us would go begging.
(P.S. We can also be thankful for market fluctuations because they're a good way for investors to make money – if the investors are paying attention to the Stansberry Digest.)
- Disruption
It can be hard to remember to be thankful for disruption – it's so disruptive. But all progress is caused by disruption, often by painful disruption. Literally painful, in the case of the discovery of fire. The caves of cavemen everywhere must have echoed with shouts of, "Ouch, that's hot!"
The digital revolution has caused a painful disruption in the print journalism industry where I spent most of my working life. So it's me who first and foremost needs to be reminded to be thankful for disruption – because here I am, digitally.
Nature itself reminds us to be thankful for disruption. If it weren't for a disruptive asteroid strike 65.5 million years ago, we'd have dinosaurs all over our lawn. We'd have to use a Caterpillar D11 for a pooper-scooper.
- Failure
It's necessary to success. If things that should fail just kept hanging around, you'd get (as mentioned) dinosaurs all over your lawn... Or, to take a more recent example, President Obama's 2009 stimulus package.
- Getting Old
I thought I hated it. Then I watched my teenage daughters. They can go through more emotional crises in the course of one hour of text-message exchanges than I've experienced since... since President Obama's 2009 stimulus package.
There are worse things than getting old. Being young again would be one of them.
- Family
Ironically, it's often at Thanksgiving, when we get together with our family, that we forget to be thankful for them.
There's Aunt Lucy, who always insists on bringing the wine – in a box from Chateau Ohio. There's Cousin Louie, who insists on showing you a website proving the election was stolen from Gary Johnson. There's my teenage daughter, the one who became a vegetarian five minutes ago, who insists that the main course be "tofurkey." There's my wife and my mother-in-law having a fit in the kitchen. And there's my father-in-law and me, who they're having at fit at, because we're planted on the sofa drinking beer, watching a football game, and doing nothing to help.
Bless each and every member of the family. If it weren't for them, I'd be eating tofurkey alone.
- The Stansberry Digest
This is a personal thank you. I've been contributing to the Digest for a year now, and it's been an honor and a delight. Stansberry Research readers are the best audience a writer could hope for. The writing has been a pleasure, and the reading even more so. I've learned a lot about money, investments, and economic reality.
Thank you Porter, for being a great boss. Thank you Jamison Miller, for making Stansberry get-togethers great fun. And thank you Carli Flippen, for being my editor.
Carli takes the soft dough of my prose, kneads it, rolls it, and bakes it into something palatable for the readers. Thanks!
Regards,
P.J. O'Rourke