Punchbowl

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDN, UDOW, UDPIX, UPRO, URTY, USDU, UUP, UWM, VFINX, VOO, VTWO, VV
by: Terence Reilly

This week our eyes started to focus on bond yields. They had a move higher this week and our favorite bond guru Jeffrey Gundlach noted that he sees 3.25% on the 30-year as the Maginot Line. He feels that if the US 30-Year bond closes above a 3.25% yield for two consecutive days, we could be off to the races for bonds and not in a good way. The 30-year closed the week at 3.20%. We are very short in our duration and perhaps getting shorter. A move higher in bond yields would help us as we would be reinvesting our short duration bonds more rapidly into higher yields. As a reminder, Gundlach sees bond yields rising to 6% on the 10-year by 2020-2021! Imagine what that would do to the housing market.

We feel like the market is resolving some issues post Labor Day. Gold seems to be holding here. Emerging markets have found, at least, a temporary bottom. The key question remains will the US Dollar rise or fall? What about equity markets? Equity markets are hitting all-time highs and there appears to be a slow, reluctant grind higher. Dow Theory types will say that the recent new high in the Dow Jones confirms the Dow Industrial's new high. Dow Theorists would then expect 6-9 more months of an upward market. We appeared to be stuck in a range between 2865 and 2915 but the market has broken out higher and there is no real resistance as these are new highs. 2950 and 3000 would be psychological resistance. Emerging markets had a bounce-back week as the US Dollar fell. Commodities could be getting legs here if the dollar continues to fall. If it begins to rise, watch the emerging markets.

This market keeps proving its resilience so we can't fight it. The economy is clicking and Trump tax/repatriation policies are giving it a booster shot. That booster shot is giving the Fed room to tighten more aggressively but policy is still loose. While our Federal Reserve is reducing its balance sheet by $40 million a month, global central banks around the world are still injecting $500 million a month collectively into the global financial system. They are slated to take that number to zero early in 2019. Policy is loose but getting tighter. You can almost picture them getting ready to take the punchbowl away.

There are still no signs of a recession on the horizon as the economy is humming right along and that is exactly our concern. We buy when there is blood in the streets. Right now the economy is riding the sugar high of tax cuts and repatriation with accommodative monetary policy. The Fed knows that this is its cover to raise rates. It is tightening policy and lightening up on its balance sheet holdings. There will come a tipping point where monetary and fiscal policies become too tight. If not, then markets and inflation will run. Right now we are riding markets higher but preparing for higher bond yields and higher commodity prices. Don't fight the Fed but maybe fade it a bit. We are still in it to win it but looking for places to cut back on risk and adding active management.