Contrary to popular belief, dealing in the markets is like being thrown into a bed of roses. You get to smell the roses alright and you also get to feel the thorns.
Divining the future is in a difficult moment, it is highly dependent upon what you believe now and that belief must rest upon hard facts and data or, otherwise, you may be led far astray. The bond futures markets spiked yesterday upon the comments of several Fed Governors indicating that a rise in short term interest rates may be forthcoming.
The problem here is that the composition of the Fed is about to be changed by Mr. Trump with three new appointments and what the Fed says now may be wholly irrelevant once his new appointments are in place.
Realistically, the 10 year Treasury has been trading in a range between its support/resistance lines which, by my calculations, is 2.32% and 2.51%. We have not broken out of this band and, even with yesterday's comments, we are still in the middle ground at 2.40%, according to Bloomberg data.
We are also getting a signal, in my opinion, from the Corporate bond market. ValuBond shows that the 10 year "A" rated average Corporate yield has compressed from 3.23% to 3.10% in just one month. This is telling, in my view. This is a compression gain of 4.1% in just one month. Even with all of the new issues, demand continues to be quite strong, in my opinion, and the value coefficient continues to weaken as the compression continues unabated.
Then comparing American yields against the European yields and the Japanese yields, you might think our yields are Nirvana, by comparison. I showed the chart in yesterday's commentary and while the Fed might do something in March, I think that it would only cause the Yield Curve to flatten further. I remain in the camp of lower yields to come but many have another belief.
You can't convince a believer of anything; for their belief is not based on evidence, it's based on a deep-seated need to believe.
I am aware that this is tricky ground, but I am also aware that there is nothing that is going to influence the markets more now, in my view, than what Mr. Trump says and does. His appointments to the Fed, likely to be business people, his conclusion on individual taxes, corporate taxes and energy taxes will likely move the markets dramatically, once unveiled. It is not a matter of politics, think what you like, but have a focused mind on what Mr. Trump wants to get accomplished and what legislation the Congress is likely to pass.
American shale oil production is rocking the world. Should Mr. Trump impose Federal taxes on the importation of foreign oil and, at the same time, provide tax credits for the exportation of American oil then the gauntlet has been laid and the consequences, in my view, will be enormous. Here is one significant way to balance the American budget and off-set the proposed increases in military spending and infrastructure. I believe, in some form, that this will be a forthcoming event.
Obamacare may not be "repealed and replaced" but it is certainly going to get modified, in my view. Politics aside, there is really no choice. The scheme is just not working, no matter your political views. Something has to be done and it will have a significant affect, in my estimation, on the drug companies, hospitals, and their bonds, and on state revenues and liabilities. Hospitals and medical districts, with Municipal bonds, may be the big losers before all of this is said and done. I would carefully consider my ownership of these securities.
Europe is in serious disarray. That is my opinion. With the possibility of an event or events to come from their elections, or their banking system, I am squarely with Donald Trump's view. "Buy American---Sell American---Trade American." It is certainly true that people are sometimes awarded from speculation but it is also true, in the markets, that the safer course is often the best bet.
Grant's Rules state that "Preservation of Capital" is the maxim of the first accord. Consequently, when that "preservation" is threatened by circumstances beyond the control of the present governments in Europe, and the European Union itself, then America becomes the guiding light at the next bend of Europe's tunnel.
There is just way too much political and economic risk for me there at present and with an 11.2% gain in the DJIA since November 8, I am not feeling too bad about my "investing in America" suggestion. "Seize the Opportunities" and "Seize the Warnings," and someplace between the two, are profits and a good night's sleep.