|Dow||-195.01 to 17,840.52|
|S&P 500||-21.34 to 2,085.51|
|Nasdaq||-82.22 to 4,941.42|
|10-YR Yield||+.011 to 2.046%|
|Gold||-$27.30 to $1,182.70|
|Crude Oil||+$1.06 to $59.64|
The “Short of a Lifetime.”
That’s what well-known bond fund manager Bill Gross of Janus Capital called it a few days ago.
DoubleLine Capital manager Jeffrey Gundlach, another popular figure in the business press, said he hates the asset too. So much so, in fact, that he was considering betting against the investment using 100 times leverage!
That investment? German bonds! And sure enough, those bonds are starting to fall in value!
Take a look at this chart of “bund” futures, and you can see they lost more value in the last two days than at any point in the last few years. The move looked like yet another “flash crash” on an intraday basis, given the absolute vacuum of liquidity and the swiftness of the price plunge.
Click chart for larger version
You probably know basic bond math. But just in case, bond interest rates move in the opposite direction of bond prices. So the price drop was accompanied by a sharp spike in German yields — the biggest increase in 27 months!
What’s driving the move? For starters, figures released overnight showed European deflation is over. Overall prices were flat in April, while “core” inflation came in at 0.6 percent. That raises the possibility of the European Central Bank tapering its QE program before the original target of next September.
There’s also chatter we could get a Greek debt deal done over the weekend. That would eliminate a key source of uncertainty that has kept a “flight to quality” bid in higher-quality European bonds.
Finally, as I have repeatedly hammered home to you, things are getting “less bad” over there and “less good” over here. That’s focusing investor attention on the massive bubble in European bonds — a bubble that drove prices so high, a wide swath of securities exhibited “negative yields.”
This move is in its infancy, as you can tell from my chart. But I believe it could easily gather steam … and if it does, it will have big implications for YOUR stocks, your bonds, and your currency-related investments!
|“Don’t lose sight of what’s happening overseas, or in bond markets overall.”|
First, rising European yields will put upward pressure on U.S. yields … just like falling and/or negative yields put downward pressure on them for the last year. That means longer-term Treasuries, long-term bond funds, and ETFs that invest in them could lose value.
Second, money fleeing bonds will need a place to go. I wouldn’t be surprised to see investors start moving more money into stocks, and that could lead to a major breakout in the stock market. But it won’t be led by the kinds of leadership groups we saw when rates were low and falling.
Energy, materials, banks, industrials and other economically sensitive stocks could take the lead. Utilities, REITs and consumer nondurables could start to lag. We’re already seeing that to some extent, and it may require some adjusting in your portfolio. There may also be hiccups along the way, like we saw today when sharp moves in the interest rate market threw stocks for a loop.
Third, rising European yields and increased optimism about Europe’s economy could put an even-bigger wind in the euro’s sails … and deflate the U.S. dollar! The dollar is already suffering its longest losing streak in four years right now. While the buck’s decline could take a brief breather at any time, I believe its downside momentum is going to gather steam over time.
Bottom line? Don’t lose sight of what’s happening overseas, or in bond markets overall. It could have a bit impact on your bottom line!
So let me have it: Are you paying attention to these developments? Do you know how they can, or can’t, impact the profitability of your investments? What are you doing in response to the nascent rise in interest rates, and the reversal of the dollar’s long rally? Here’s the link to share your thoughts — and I urge you to do so!
|Our Readers Speak|
Things have settled down in Baltimore in the wake of rioting earlier this week. But you continued to share ideas about the root causes of the violence, and possible solutions.
Reader Richard K. said: “Many of America’s millionaires have achieved their financial independence through hard work and have been rewarded over the years by having a tax code changed to allow them to keep what they have earned. Many conservatives want Americans to believe that the American Dream is real and that through hard work the poor can be rich or at least join the ranks of the middle class.
“But how many Americans today must hold down two or three jobs that pay minimum wage in order to keep a roof over their heads and food on the table? Is holding down two or three jobs to put food on the table not, by definition, hard work? And if so, why can they not join the ranks of middle class?
“Upward mobility in America today is more of a myth than reality. A recent study among developed countries showed that Denmark, Norway, Finland and Canada scored the highest for economic mobility whereas the U.S. was in twelfth place between France and Italy.”
Reader Bob also pointed to the lack of well-paying jobs as a key cause of dissatisfaction. His take:
“Unfortunately, you cannot continue to squeeze the lowest wage workers to a point where they have no way of surviving … and at the same time be allowing them to be replaced by illegals … without eventually causing the sort of thing that is happening now. When people lose hope, violence must result.
“During the depression, Henry Ford proved that without fair wages and jobs, you have no buyers for your products. His social policies may have been harsh. But he kept both his business and his employees. Modern leaders need to study the 20s and 30s lest they repeat history.”
Meanwhile, Reader Gordon weighed in on the latest economic figures. He noted that corporations aren’t spending their strong profits on typical investments for the future. Instead, they’re showering wealth on shareholders! His view:
“It’s obvious why this is happening. Corporations are not spending a nickel on physical expansion and hiring workers. It’s all stock buybacks and M&A. They spent over $4 TRILLION in the last few years on stock buy backs. A decline in the number of outstanding shares is all that is boosting the bottom line.”
Thanks again for your comments. Hopefully, the economic recovery will broaden out and give more low-income and middle-income Americans a chance to move up the ladder. And hopefully, corporate America will start investing more in actual productive infrastructure.
In the meantime, while we’re all hoping, I’ll continue to focus on new ways to help you build your own wealth in the investment markets. I’ve shared many of my ideas, and if you’d like to add more of your own, don’t forget to put the website to good use!
|Other Developments of the Day|
Gotta love the headline on the digital front page of the Wall Street Journal today: “Oil Drop Opens Door to Megadeals.” The story points out that oil exploration costs are rising, while smaller oil companies are trading for the cheapest valuations in decades.
That’s a perfect mix for a massive wave of mergers and acquisitions. And it’s yet another reason to buy energy stocks, which I’ve been recommending you do for a few months now!
We got a bit of uplifting news about a 15-year-old being rescued from the Nepalese rubble after five days. But that’s about all. The death toll from the 7.8 magnitude earthquake has climbed to at least 5,200, and search and rescue teams in general aren’t finding many survivors.
Apple’s (AAPL, Weiss Ratings: A+) Watch rollout is running into a serious hurdle — defective parts! One of its two suppliers apparently botched the production of a key part used in Apple’s “taptic” engine. That’s slowing production and limiting the supply of watches on the market.
There’s merger news in tech! Smartphone and tablet chipmaker OmniVision Technologies (OVTI, Weiss Ratings: B) sold out to a Chinese investor group for $1.9 billion, or $29.75 per share, in cash. That was a 12 percent premium to its pre-deal stock price.
Meanwhile, rumors about a potential takeover of software giant Salesforce.com (CRM, Weiss Ratings: C-) drove that stock sharply higher yesterday. The firm’s market cap is a hefty $47 billion, though. That led some to be skeptical about the possibility of a deal considering only a handful of software firms are large enough to swallow it whole.
So what do you think about the latest round of tech mergers? The aftermath of the quake in Asia? Or anything else I wrote about here? Let me know over at the website.
Until next time,