Daily State of the Markets
As I may have mentioned a time or twenty, I'm not a big fan of basing investment decisions on one's "macro view." Such an approach would appear to be anchored in logic. The first step is to establish your macro view of the world. In other words, you first decide what is likely to happen to the economy, interest rates, inflation, stocks, currencies, commodities, etc. Simple, right? And then from there, you invest accordingly and wait for your thesis to play out. That's how Paulsen made his billions, right?
My problem is that I can rarely predict what one market is going to do next week, let along figure out what a slew of markets are going to do over the next year. Sorry, but I'm just not smart enough to pull this off. (And that darn crystal ball of mine is in the shop again!)
Exhibit A in my argument against average investors utilizing a "macro view" approach would be the current "consensus view" on interest rates.
Something Everyone Knows...
The phrase "something everyone knows isn't worth knowing" really applies here.
Ask yourself, what did just about every analyst on the planet expect interest rates to do in 2014? If you answered, "go up," go ahead and give yourself a gold star because you nailed it. Yep, that's right; most everyone, everywhere expected to see rates rising in 2014. And what have they done so far, you ask? Check the chart below.
30-Year Treasury Yield - Daily
Hmmm... the yield of the U.S. Gov't 30-Year Treasury Bond has moved from 3.964% on 12/31/13 to 3.503% as of yesterday's close (which is up from the year's low of 3.454% seen three days ago). This means that the yield on the 30-year has FALLEN 46 basis points - a decline of 11.6% - in less than four months. What gives?
As my friend and soon-to-be business partner Paul Schatz of Heritage Capital LLC wrote yesterday:
Then why is the most economically sensitive bond's yield falling out of bed like something dark is lurking?
Why indeed, Paul? (And for the record, Mr. Schatz has been bullish on bonds for the majority of 2014 - nice call.)
Top 10 Reasons Why Yields Have Fooled Investors
So, if you were a "macro" guy/gal, you were likely tempted to come into 2014 short bonds, because, hey, everybody knows yields are going up. The Fed is tapering, the economy is improving, and this trade is a no-brainer, right?
But for those of you keeping score at home, the Ultrashort 20+ Year Treasury ETF (NYSE: TBT) is down -17.2% year-to-date as of yesterday's close. Oops.
Here are the top 10 reasons why the macro crowd has gotten it wrong on the bond market in 2014:
So there you have it; yet another reason why we prefer to use rules and models to guide our investment decisions instead of effectively guessing as to what is going to happen next. While our approach isn't perfect (far from it!) and stumbles from time to time, it also keeps us out the BIG problems that can occur when you get a macro call dead wrong.
Will rates continue to fall? Will stocks succumb to the meaningful decline that everyone is looking for this year? Frankly, I have no idea. But I can say that we will be ready to take action when/if our models tell us that the odds favor the bears.
Publishing Note: I have an early meeting on Thursday and will not publish a morning missive.
Looking for a disciplined approach to managing stock market risk on a daily basis? Check Out My "Daily Decision" System. Forget the fast money and the latest, greatest option trade. What investors need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets.
Turning to This Morning...
PMI data out of China and Europe as well as the continued flow of earnings are in focus this morning. While the HSBC Flash PMI in China did uptick a bit in April, the key is that the indicator reading remains in the contraction zone. Across the pond, the flash PMIs improved in the Eurozone for April. And we will get the data on the U.S. later this morning. Currently U.S. futures are pointing to a flattish open on Wall Street.
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Crude Oil Futures: -$0.13 to $101.62
Gold: +$6.30 at $1287.50
Dollar: higher against the yen and pound, lower vs. euro
10-Year Bond Yield: Currently trading lower at 2.709%
Stock Futures Ahead of Open in U.S. (relative to fair value):
Thought For The Day...Keep in mind that not every person's opinion is worthy of your attention and/or consideration...
Positions in stocks mentioned: none
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