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The "Peeps" hated bonds 30 years ago and they love them today, writes Kevin Ferry (with...

The "Peeps" hated bonds 30 years ago and they love them today, writes Kevin Ferry (with annotated chart) in maybe the only Treasury market analysis you need. The "Peeps" are as wrong "as they were when I walked on the floor in 1984. Wrong today, this minute, next week? Who knows."
Comments (26)
  • Yep.


    It's rather illuminating, and somewhat humorous, perhaps, that we only see dicussions of "mean reversion" when critics wish to bash stock prices and generate an argument for why corporate profits and share prices must fall. But, Treasury yields at levels never before seen in history? No problem.


    It's impossible to predict the exact moment in time when it all reverses, just as all market timing is always impossible to forecast accurately. What's not impossible is to imagine the flight out of "safe" Treasuries when that moment arrives. It will surely be a sight to behold.
    1 Jun 2012, 07:44 AM Reply Like
  • Bonds and stocks can go down at the same time--has everyone forgotten Q1 2009?


    Yes, at some point, bond yields will certainly rise though I suspect this may take years. Profit margins are indeed cyclical (review the chart of the past 100 years) and will revert over the next year or so--I don't know how much, but Gary Shilling's estimate of $80 for S&P earnings sounds reasonable.


    I sold my stocks in mid-January and have been sitting in cash since then with the exception of short positions in CAT and CMI initiated in late February. Someone told me I had missed some huge 2012 rally for heeding ECRI--what did I miss other than an evanescent, short-term speculative trading opportunity? Before this is all over, you're going to owe Achuthan a subscription.


    That being said, some buyable values are already starting to emerge, and I can't fault anyone for buying certain quality and/or high yield stocks at current levels, but I suspect we're first going lower over the next few months. Besides buying longs, I may initiate a short sale of TLT at that point as well. We're getting closer. Amazing how seasonality has really worked the past three years--I should have waited until March to sell out--left 100 S&P points on the table.
    1 Jun 2012, 07:08 PM Reply Like
  • good call on CAT. the strike 2 at the Joliet IL plant shows that CAT knows where the world economy is going and they could care less if these guys never go back to work
    1 Jun 2012, 07:17 PM Reply Like
  • JPK:


    No, stocks and bonds (if you mean Treasuries) can't both go down at the same time unless rates, in fact, increase (the immutable result of falling Treasury prices.) Corporate bond prices could fall in tandem with stocks, of course.


    ECRI didn't make an announcement that a recession was imminent on January 1st. They made it on September 30th, and from that point to April 2nd of this year (the SPX high), the SPX gained 30%. Now, the market is down exactly 9% from that high, so those that got spooked by ECRI last September and avoided equities are now only "avoided" a 21% gain, not 30%. To make ECRI even start to look good, we have to throw off the remainder of that 21% gain from September (or over 16% from present SPX value), plus more, since the SPX is paying out ~3% in dividends annually. So, nearly a 20% drop from here, just to BREAK EVEN.


    It's important to accept that no matter what decision an investor might make NOW, for whatever reason, as regards buying, selling or holding securities, following ECRI's advice last September has been an unmitigated disaster for anyone who eschewed equities in the interim, as a consequence.


    Every day that the market recedes, while corporate earnings continue their advance, the value equation gets better and better. Every day that the Treasury yield sinks lower, the risk equation for holders gets worse and worse, most especially due to the principle of bond convexity.


    Can anybody accurately forecast the short-term movement of either? Unlikely, but forecasting the longer-term resolution of the disparity in yields between Treasuries and equities is not hard to imagine.
    1 Jun 2012, 07:29 PM Reply Like
  • Stocks and Treasuries both went down in Q1 of 2009--look at your charts--Treasury yields bottomed in Dec. 2008 while stocks bottomed in March 2009. Similarly, in Japan, stocks and JGB yields have declined in tandem for a long time into their deflationary period.


    ECRI's calls typically look forward about six months, and yes they were a bit early (and a bit late in Feb 2008), but in each case, the call was still actionable from an investment perspective. Also, you're completely missing the fact that ECRI makes calls on the economy, NOT the stock market. One needs to use macro forecasts together with sentiment and valuations in making one's tactical moves.


    I'm guided by ECRI, and I've repeatedly indicated that I didn't sell until mid-January, so no, I didn't miss the initial big move off the Oct. 3 low. So no, it hasn't been a disaster--basically a wash (actually, it's been a gain because of security selection and short-sale positions, but I'm going to be hard on myself for your sake) as of now, but I expect it will be a big tactical alpha generator by this fall. The data over the past two months suggests we're going into recession right now, and this will be acknowledged in hindsight 6-12 months from now.


    You are correct that every day the market recedes, the value proposition gets better, and that's why I'm licking my chops with watchlists and a finger on the buy button as I watch this decline. As for corporate earnings advances, margins are cyclical, so I won't be bothered by the declines--I suggest that you don't get bummed out once profit disappointments ramp up--you'll end up selling at the bottom. Need to stick with valuations (based on cyclically-adjusted earnings).


    I would concur that no one can forecast the short-term, but I think the intermediate term is a bit easier particularly if there are strong macro signals in place, and this is where I find ECRI very helpful.
    1 Jun 2012, 07:57 PM Reply Like
  • Holy Canolis, Batman--just checked 30-year yields which are already at 2.5% and below the 2008-09 bottom--that was a very fast move--2.5% was Gary Shilling's long-term target, and I think Jeff Gundlach (who knows a little something about bonds) also suggested that as a likely long-term yield floor.


    I think TLT might be shortable right here in fact, or perhaps next week. I definitely like short TLT much better than long equities at this point in time. Suspect we're approaching another period where Treasuries and stocks decline in unison.
    1 Jun 2012, 08:20 PM Reply Like
  • Here's a good interview on these subjects--this guy sees 30-years at 1.5-1.6%. Hard to believe, but perhaps the TLT still has room to run. Macro is getting really crazy.



    I'm with him on the VIX signal though not sure we get to 80 this time--50 seems likely though. S&P dividend yield of 6% seems a little extreme though--long way down--I don't think it gets that easy with so much cash floating around and with strong corporate balance sheets. It's true though that previous secular bear market lows (1932 and 1982) did indeed get this cheap--talking the S&P around 400, or 40% of sales.


    Then again, going from 1500+ to 666 in the space of 18 months seemed impossible a few years ago. Talk about the opportunity of a lifetime if we get down that low.
    1 Jun 2012, 08:55 PM Reply Like
  • JPK:


    My original point was only that Treasury prices cannot recede without Treasury yields climbing. I was merely suggesting that you point out that both can decline in tandem, but in next sentence say rates aren't likely to rise anytime soon. therefore, either Treasury prices will not decline or, if they do, then rates will be rising, by definition.


    ECRI's usefulness to investors is only applicable to how its calls about the "economy" relate to the market. The fact of the mater was that they were wrong about the economy and that made them wrong about the market, too. It doesn't suffice to say they'll be right sometime, not when people use their forecast as a timing tool and deploy assets according to their calls.
    1 Jun 2012, 09:08 PM Reply Like
  • Treasuries--got it. Just to be clear, I think we're also talking about two separate time frames here--you're talking about the long-term, secular rise in yields from zero-bound back to much higher levels (e.g. 1990s or even 1980s levels), i.e. the long-term, 30-year super-cycle moves in interest rates. When people talk about investors and the public getting killed in bonds, that's usually the implication.


    My point with Q1 2009 is that we could have a wicked decline in equities over the next few months even if Treasuries don't continue their recent, short-term wicked ascent. You'll note that this is a useful observation, unlike a statement that "when Treasuries go down, their yields go up"--2+2=4; thanks for the insight.


    Many have been pointing to the rise (or absolute high-levels) in Treasuries as evidence that equity market sentiment is panicked, and equities are near a bottom, and there will soon be a rotation out of Treasuries into equities--I find all of this unconvincing as they don't always move in lock-step. Some day it will be true, but I suspect that day is a long way off and hundreds of S&P points lower.


    The evidence over the past couple of months does not suggest that they have been wrong about the economy--the data has been dreadful and deteriorating. They're never "wrong about the market"--they don't make predictions about the market--that's up to investors/traders (though it's OK to not offer predictions if you prefer to be a long-term buy-and hold investor). If the market bottoms out around here and heads sustainably higher for the next year or so, leaving me behind, then I (not ECRI) will have been wrong about the market. ECRI will still have been correct assuming that a recession is eventually recorded starting around right now. That being said, I suspect it's unlikely that equities won't go lower if we are indeed going into a recession.


    ECRI has worked well for me the past 10 years--if you don't like it, you don't have to use it, but your criticism about them being "wrong on the market" is completely misguided and unfair, and "wrong on the economy" is premature to say the very least given the data we've been getting.
    1 Jun 2012, 09:24 PM Reply Like
  • JPK:


    As a high-yield value investor I am much more interested in the value equation than in trying to time any "turn." It's enough for me to know that Treasuries present very poor value, and elevated risk, too, at these ultra-low yields. The beauty of high yields is that one doesn't especially have to worry about the timing of price recovery because one just keeps banking and compounding the yield. Getting paid to wait works out just fine.


    As an investor, not an economist, I still find any attempt to justify ECRI's erroneous call unconvincing because it is only useful if it can guide investment strategy. If it can't assume this function, then, it's irrelevant to our endeavors here, as investors.


    Thanks for the dialogue.
    1 Jun 2012, 10:29 PM Reply Like
  • I don't see any value in further debating the ECRI thing; just to get more constructive, I wanted to share with you my full 2011 list which is a mix of high-yield and dividend growth stocks (portfolio is listed below together with the portfolio % allocation and 2011 total return--the list gained 13.1% in 2011--I was fully invested throughout).


    I appreciate that you've done some good homework and put together a pure high-yield list some time ago, but my impression is that it's somewhat aggressive and may have some value traps, particularly if macro turns to pot as I expect--you're already seeing some examples such as TEF and FTE.


    I hope this is useful, and let me know if you have any thoughts on any of these. I also enjoy and appreciate the spirited dialogue--good luck and all the best.


    ABT 2% Abbott Labs 21.29%
    ADP 0.5% Automatic Data Processing 19.89%
    BDX 3.5% Beckton Dickinson -9.61%
    CHL 1.0% China Mobile 1.42%
    CL 3.5% Colgate Palmolive 17.78%
    CLX 3.5% Clorox 8.82%
    COP 2% Conoco Philips 10.88%
    CVX 3% Chevron 19.99%
    EPD 7% Enterprise Products 17.24%
    ETP 4% Enterprise Transfer Partners -4.62%
    EXC 2% Exelon 9.2%
    GD 1% General Dynamics -3.83%
    IBM 0.5% IBM 27.27%
    INTC 1.5% Intel 19.03%
    JNJ 4% Johnson & Johnson 9.67%
    K 1% Kellogg 2.27%
    KFT 3% Kraft Foods 22.25%
    KMB 2% Kimberly Clark 21.13%
    KMR 12% Kinder Morgan 25.84%
    KO 3% Coca Cola 9.24%
    LMT 1% Lockheed Martin 20.37%
    MCD 0.5% McDonalds 34.0%
    MDT 1% Medtronic 5.65%
    MO 7% Altria 26.85%
    MSFT 0.5% Microsoft -4.55%
    NSRGY 0.5% Nestle 1.65%
    NVS 1.5% Novartis 0.37%
    PEP 3% Pepsico 4.66%
    PG 4% Procter and Gamble 6.9%
    PM 1% Philip Morris 38.9%
    RDS.B 2% Royal Dutch Shell 19.05%
    SO 1.5% Southern Co. 25.98%
    SYY 1% Sysco 3.30%
    TEF 3% Telefonica -20.93%
    TOT 2% Total 0.61%
    UHT 2.5% United Health Trust 13.4%
    UL 0.5% Unilever 12.57%
    VZ 1% Verizon 17.61%
    WM 0.5% Waste Management -7.59%
    WMT 2% Walmart 13.52%
    XOM 3% ExxonMobil 18.45%
    2 Jun 2012, 12:19 AM Reply Like
  • JPK:


    That's certainly a reasonably diversified portfolio of well-recognized names. It's hard for me to make any specific comments about them, as they're not issues in which I invest or follow, save for positions in TEF, TOT, and RDS. I like UHT, too, but don't presently own any.


    The only other observation is that I have a steadfast "5% rule," which means I don't allow any positions to exceed that percentage of my portfolio. MO and EPD are slightly above, which is a "yellow light" for me, and KMR at 12% is a "blinking red light." I don't care how solid any company appears, I don't want a double-digit exposure in a single name. Surprises happen.


    My own portfolio is heavily weighted to financials, REITs, BDC's, various preferreds and individual debt issues and closed-end debt funds. I am slowly building positions in Europe, and will add a lot there if things become clearer.


    Comparing our two portfolios, mine is much more small-cap weighted and very high yield (presently 10.26% composite), while yours is much more mainstream. I'd certainly say mine is much higher risk.


    Good luck, too.
    2 Jun 2012, 12:57 AM Reply Like
  • This has to be the call of the decade from Goldman Sachs. Remember a couple months back when the 10 year was yielding 2.4% and Goldman was saying they should be sold; indeed, shorted, for a cyclical high!


    Wonder how they feel about burrying their muppet clients once again now that the 10 year yields 1.53%!


    I guess it doesn't matter. They got their short covered from customer selling and got long on the back of their 'call'. The firm made a killing, even if their customers paid for it...once again!
    1 Jun 2012, 07:44 AM Reply Like
  • always do the opposite of what GS says-not what they do-and you will be a rich man
    1 Jun 2012, 07:19 PM Reply Like
  • With all rates being manipulated by the Fed it's now impossible to know how long this charade can go on.


    Whenever bond buyers finally decide they will no longer lend for negative real returns it's going to get really ugly.
    1 Jun 2012, 08:04 AM Reply Like
  • We liked bonds last when Treasuries and Mortgages were paying 10-20% under Carter.We are at the other end of the pendulum swing
    now in the 1-3% range. (XHB) shows we will gradually swing back that way so we are just beginning to enter a ( position for "The Great Unwinding" predicted by Gross and Kass. We think some ways away still.
    1 Jun 2012, 08:12 AM Reply Like
  • The last safe haven is gold.
    1 Jun 2012, 06:36 PM Reply Like
  • what terrifies me is the plain and simple fact that our government refuses to spend like drunken sailors, keeps passing one responsible budget after another while sticking to it, refuses to engage in any unnecessary and risky wars, throws destitute companies like GM and AIG RUTHLESSLY to the private sector jackals, and engages John Q Public on the need for not only bailouts for their banker buddies but how "it's time for the average Joe to pay for my bailouts of all my rich fiends." or is it friends? anywho...i'm OUTRAGED i tell you. OUTRAGED!
    1 Jun 2012, 08:19 PM Reply Like
  • Treasuries are going to get ugly. Eventually logic will win out I would think. You can only get panic money moving into them for so long. What I do not understand is that if you are so scared of stocks going down why not go right to cash and wait - Treasuries are a hell of a lot riskier than cash at these levels.
    1 Jun 2012, 08:30 PM Reply Like
  • For big money, there's no such thing as "cash"--bank accounts are only insured to $250K. If things get really bad, bank failures and depositor losses become a distinct non-zero possibility. The closest thing to "cash" is short-term Treasuries--that's why you saw yields on these go negative in 2008, and why short-term German bund yields are currently negative--people are willing to pay for the privilege of owning them because they're the only thing with essentially zero hard default risk--the borrower owns a printing press.


    For long-dated Treasuries, I would concur--probably has something to do with institutional mandates and duration matching, and of course, you also have central bank buying.


    For a small individual investor though, I would concur with your sentiment--you can have FDIC-insured accounts or even withdraw $100 bills and bury them in your backyard.
    1 Jun 2012, 09:02 PM Reply Like
  • Why don't they just buy really short bills? Why on earth would you want to put on so much duration risk just to store cash?
    1 Jun 2012, 10:52 PM Reply Like
  • Europe has ZERO leadership. The monetary union is collapsing. Nobody trusts the numbers out of China. Japan is a demographic disaster. The Middle East (as usual) is one errant sneeze away from regional war. North Korea is even more unsteady as usual with a new leader and severe food shortages, and the U.S. is clearly slowing down (again).


    If you short Treasuries here then you are insane.
    1 Jun 2012, 10:15 PM Reply Like
  • When you buy 10s here then at the absolute most you have about 6-8 % capital appreciation left, and that only if the world falls apart completely. In any other scenario you will lose money. Economy slightly less bad? You lose. Inflation coming back? You lose. Europe not imploding? You lose. Nothing happens? You lose.


    Not my kind of odds, but to each his own.
    1 Jun 2012, 10:54 PM Reply Like
  • From a logical analysis standpoint, you're correct.


    But psychology and Fed manipulation have been ruling the Treasury kingdom for nearly 4 years now.


    There are financial pundit cemeteries filled with Treasury shorts. The financial pundit cemeteries in Japan are humongous!! ;)


    No, I'm not saying Treasuries are a good investment. I am saying that there is NO consensus for when institutions around the world will sell.


    Remember last year when everyone said that yields were DEFINITELY going up?


    Ouch to those who sold then...
    1 Jun 2012, 11:02 PM Reply Like
  • Of course you are right, but the fact that treasury shorts have been wrong in the past does not mean that they will always be wrong. Unlike other investments rates have an absolute price ceiling, a point where they cannot go up anymore no matter how much money flows into them. And we're getting closer and closer to that point.


    Germany 30s are already below Japanese 30s. Buying 30 year assets at a yield of 1.62 is insanity over the long run, unless you expect the world to never get better or you really think your time horizon is measured in days at the most.
    1 Jun 2012, 11:11 PM Reply Like
  • Markets can remain irrational longer than you can remain solvent.
    -John Maynard Keynes
    2 Jun 2012, 01:56 PM Reply Like
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