|Dow||+82.08 to 17,924.06|
|S&P 500||+7.85 to 2,088|
|Nasdaq||+25.90 to 4,945.54|
|10-YR Yield||-.056 to 2.184%|
|Gold||-$7.40 to $1,182.90|
|Crude Oil||-$2.13 to $58.80|
Two trillion dollars. Trillion with a “T”!
That’s how much money Bloomberg estimates has been vaporized in the capital markets, and in just two weeks to boot! Bonds. Stocks. Doesn’t matter. They’ve all plunged.
But just like the subtitle of the satire movie Dr. Strangelove, maybe we should learn to stop worrying and love the bomb just dropped on the asset market. Why?
“I don’t know when this lunacy ends … What I do know is that I’m not going to dive in and lend my hard-earned money and get back less dough in return, and I suggest you don’t either!”
Indeed, it’s EXACTLY the kind of first-round “Bloody Wednesday” impacts I’ve been warning about. So I take comfort in the fact you aren’t suffering fixed-income losses as long-term government bonds tank.
|Investors have been rotating into sectors with more economic sensitivity, such as energy stocks.|
Second, because the way that bonds and stocks are getting hit is actually somewhat encouraging. Long-term bonds are selling off more aggressively than short-term notes. That means long-term yields are rising faster than short-term ones, and the Treasury “yield curve” is steepening.
This oldie-but-goodie column explains this interest rate indicator in more detail. But suffice it to say that a steeper curve is what you typically see when economic growth is picking up globally, and when investors are rationally preparing for a higher-growth, higher-inflation environment. It’s not what you see when policy is getting radically tighter, and recession fears are building.
Believe it or not, it’s actually somewhat bullish for companies like core, high-quality banks. They thrive in a steeper curve environment, and that’s why things like the KBW Bank Index (^BKX) are trading flat-to-up even as the broader market is getting whacked.
At the same time, money is rotating out of supposedly “safe” (but radically overvalued) sectors like REITs and utilities, and rotating into sectors with more economic sensitivity instead. That includes one of my absolute favorite investments — energy stocks, which have been on a huge tear since I issued my aggressive “bottom/buy” calls at the beginning of the year.
In other words, the WORST kind of selloffs are those driven by deflationary trends and radically tighter monetary policy. But that’s not what we have here.
Here, we have a steeper yield curve developing.
|“Energy stocks have been on a huge tear since I issued my aggressive bottom/buy calls at the beginning of the year.”|
Here, we have people who SHOULD be losing money in dumb bond investments losing it.
Here, we have a global growth picture that’s improving.
And here, we have the dollar starting to give up the big gains that helped crush key sectors of our economy in the first place.
So sure, losing money stinks. That’s why you can never forget to take some profits along the way when times are good, and why you should always maintain a healthy reserve of cash.
But SO FAR, this is a selloff I’d be embracing by continuing to invest in highly rated stocks (our Weiss Ratings will point you in the right direction) … by continuing to avoid long-term bonds … by taking some profits if you have them … and by using weakness to add to positions in strong individual sectors like energy. If anything changes, I’ll be sure to let you know!
With that said, what’s your take? Are you getting out of stocks here, or taking advantage of the selloff to buy more? Do you think government bonds look attractive after the half-percentage-point or so increase in yields? Or are they still a sucker’s bet? What sectors do you think are worth buying, if any, here?
|Our Readers Speak|
Iran. Jobs. Oil. There’s a little bit of everything being discussed over at the website, and that’s exactly what I like to see.
Reader Fred1 weighed in on Iran’s latest actions, and how we’re treating the country these days, by saying: “So Iran will release the ship they nabbed after the owners agree to pay a ‘fine.’ I and most Americans would call that by a different noun — try extortion or ransom. This Iranian behavior should be front page news. And they continue to hold five of our citizens under false pretenses.
“How can our country be negotiating anything serious with a rogue nation like this? They show little difference from the Somali pirates.”
Reader Arve provided his take on the job market, and the behavior of our large corporations:
“I work for a Fortune 500 multinational. The company continues to grow and invest in China and Mexico. The U.S. is stagnant and/or losing investment.
“NAFTA and free trade have a major negative impact on U.S. jobs. Exchange rates and interest rates have almost no impact on this trend. With energy prices low, it is even more incentive to move to Mexico and China for jobs (low, low wages and benefits) because it is cheaper to ship low labor cost goods around the world.”
Reader Dai J. added thoughts on the dollar and corporate behavior too, saying: “Blaming a strong dollar for the lack of job creation tells only part of the story. A small part. The problem is much, much deeper.
“The complete lack of capital investment on the part of Fortune 500 companies is the primary driver. Preferring to buy back stock and congratulate one another with glorious bonuses, large businesses are leading the charge to the bottom.”
Finally, Reader Tommr shared his succinct take on energy: “I am expecting crude oil prices to return to approximately $80 per barrel in two to three months, if not sooner!”
Thanks for all the input. I agree that our policy toward Iran’s leaders and Iran as a country is woefully naïve, even as many Iranian individuals reportedly have a willingness and longing to turn more toward the West. And I agree that oil prices are likely headed higher in the coming months, even as a short-term correction could come at any time.
As for jobs and the dollar, there’s ample evidence that our largest corporations are being undercut by foreign producers. A lower dollar won’t fix everything — we need more productive investment in real assets like factories and equipment, as Dai J. noted. But it would help level the playing field more, and I believe Washington will do everything it can to bring that about. Stronger growth in Europe and elsewhere will help that cause.
Anything else you’d like to add? Then here’s the link to get you started!
|Other Developments of the Day|
Want some more perspective on the seriousness of the government bond rout in Europe? Then the Financial Times is happy to oblige!
Consider that 10-year German government bonds yielded a record-low 0.05 percent less than a month ago. That yield hit 0.78 percent earlier today. You simply don’t see a move of that magnitude, that quickly very often.
Tomorrow is when we get the big monthly jobs report from the Labor Department. In the meantime, we learned today that initial jobless claims rose by 3,000 to 265,000 in the most recent week. That was a better number than most economists expected.
Will the Conservatives keep their grip on power in the U.K.? Will Labour take over? Or will parties previously regarded as “fringe” entities gain more ground? That’s what today’s U.K. elections will help determine. Worth watching to see how the vote will change British policy and/or will impact the value of European stocks and the British currency.
The NFL released its long-awaited report on “Deflategate” late yesterday. The report implicated two New England Patriots operational employees and suggested quarterback Tom Brady likely knew something was up — even if no definitive proof of that was uncovered.
It’s up to the NFL now to decide what discipline to pursue. Penalties may include fines, lost draft picks, or a temporary Brady suspension.
Oh and to address the obvious question, Brady shouldn’t have lied. But I don’t think an extra PSI or two missing from a few footballs changes the fact he’s one of the greatest quarterbacks in the game. I also think many other quarterbacks and teams both present and past do pretty much the same thing. They just don’t get the attention because of Brady’s higher profile and a general dislike for the Pats.
The deflation stuff is also a much less serious offense than other garbage that goes on in college and professional sports (steroid use, spousal abuse, point-shaving, gambling by players, you name it). So slap Brady with a fine, sit him for a game or two to prove a point, and let’s move on.
Think I’m right on the NFL report — or not? Any insights you’d like to add on the British election, or surging interest rates? Let me know over at the website.
Until next time,