Fixed Income Archives - Page 13 of 16

May 5, 2013

S&P 500 and Treasury yields surge

10-Year Treasury yields rallied sharply on Friday, breaking the new resistance level at 1.70%. Follow-through above 1.80% would confirm the decline is over, signaling another test of resistance at 2.00%/2.10%.

On the monthly chart we can see that breakout above resistance at 2.00%/2.10% would signal a primary up-trend and possible test of 4.00% in the next few years. Only a breakout above 4.00%, however, would end the secular bear-trend of the last three decades.
10-Year Treasury Yields

Last week Treasury yields were falling while stocks were rising. That changed on Friday, with the S&P 500 breaking through resistance at 1600, suggesting an advance to 1650. The index has exceeded its target of 1600* and seems overdue for a correction, but bullish sentiment is rising and the market can stay irrational longer than you can stay solvent (attributed to John Maynard Keynes). Oscillation above zero on 13-week Twiggs Money Flow indicates a healthy primary up-trend. A June quarter-end below 1500 now looks unlikely, but would present a long-term bear signal.

S&P 500 Index

* Target calculation: 1475 + ( 1475 – 1350 ) = 1600

Bellwether transport stock Fedex is testing support at $90. Respect of the rising trendline would signal the primary up-trend is intact. Recovery above $100 would confirm.
Fedex

Structural flaws in the US economy have not been addressed and uncertainty remains high, despite low values on the VIX. House prices are rising, largely due to institutional buying, but the overhang of shadow inventory is expected to delay recovery of housing construction. Mamta Badkar at Business Insider reports:

Shadow inventory fell 18 per cent year-over-year in January to 2.2 million units, according to CoreLogic’s latest report. This represents nine months’ supply.
…..down 28 per cent from its 2010 peak of 3 million units.

As traders we have to follow the trend, but in times like this it is important to remain vigilant.

May 2, 2013

Gold and commodities fall as bonds rise

Gold is testing short-term support at $1450. Breach would be likely to penetrate the rising trendline, indicating another test of primary support at $1320. Reversal below $1400 would warn of a further down-swing. Breach of $1320 would confirm, with the next major support level at the 2008 high of $1000.

Spot Gold

* Target calculation: 1550 – ( 1800 – 1550 ) = 1300

The Gold Bugs Index, representing un-hedged gold stocks, is falling rapidly. The index behaves like a leveraged gold instrument. Fixed costs of extraction make miners extremely sensitive to relatively small fluctuations in the gold price — which is why many miners hedge. The index is headed for a test of its 2008 low, which equated to a spot price of $700/ounce. I am not predicting that gold will fall below its cost of production, variously estimated at between $900 and $1150 per ounce, but expect further weakness.
Gold Bugs Index
My bullish outlook for gold is fading (into the future) as deflationary pressures faced by central banks grow.

Treasury Yields

Money continues to flow into bonds — reflecting a lower inflation outlook — and further outflows from gold are likely. Ten-year treasury yields broke support at 1.70% — prior to 2012 the lowest level in the 200 year history of the US Treasury — and a test of the all-time low at 1.40% is likely.

Dollar Index

Crude Oil

Brent Crude is headed for a re-test of its former support level at $106/barrel. Respect is likely and would offer a target of $92*. Nymex WTI recovered above $90/barrel, but further weakness is expected. Reversal below $90 would warn of a swing to the lower trend channel around $84 . Falling crude prices are a healthy long-term sign for the economy, but indicate falling demand and medium-term weakness.

Brent Crude and Nymex Crude

* Target calculation: 99 – ( 106 – 99 ) = 92

Peter Glover and Michael Economides in The Coming Arab Winter write:

Within just a few years of it taking off, the US shale gas and oil industry is enabling America to become increasingly self-sufficient with imports from the Middle East greatly reduced. The US is closing in on eclipsing Saudi energy production capacity. The 2012 edition of the IEA’s World Energy Outlook says America will surpass Saudi as the world’s biggest oil producer by 2020; such is the rate of current US oil development it could well be before then.

According to one recent report, the dramatic expansion of US production could push global spare oil capacity to exceed 8 million barrels per day. At that point OPEC could lose its ability to set or influence prices and global oil prices could drop sharply. While that would take a heavy toll on many Western energy producers, it would prove disastrous for OPEC’s member states.

The peak oil myth is discredited. Expect long-term weakness in crude prices as the US, China, Australia and elsewhere ratchet up shale gas production.

Commodities

Commodity prices continue to diverge from stocks, with the Dow Jones – UBS Commodity Index headed for primary support at 125. Breach would warn of a decline to the 2008 low of 100. Declining 13-week Twiggs Momentum, below zero, warns of a down-trend; reversal below the 2012 low of -15% would strengthen the signal. Stock prices are precariously high in relation to commodities. Recovery of US housing is unlikely to drive a massive construction boom as there must still be significant over-supply of existing units.

Dow Jones UBS Commodities Index

April 25, 2013

Gold rallies while treasury yields fall

Gold is testing short-term resistance at $1440. Bear market rallies are notoriously unreliable and reversal below $1400 would warn of another down-swing. Breach of $1330 would confirm another decline, with the next major support level at the 2008 high of $1000.

Spot Gold

* Target calculation: 1550 – ( 1800 – 1550 ) = 1300

I am still bullish on gold in the long-term. We face a decade of easy monetary policy from central banks, with competing devaluations as nations struggle to recover at the expense of each other. This WSJ interview with PIMCO CEO Mohamed El-Erian offers a realistic long-term outlook.

Dollar Index

There has been no major strengthening of the Dollar, which one would expect if gold’s fall was caused by revision of the market’s inflation outlook. The primary trend is up, but so far resistance at 84.00 has held. Breakout would signal an advance to 89.00/90.00.

Dollar Index

Treasury Yields

Ten-year treasury yields continue to test support at 1.70%. Follow-through below 1.65% would test the July 2012 low at 1.40%. Prior to 2012, the 1945 low of 1.70% at the end of WWII was the lowest level in the 200 year history of the US Treasury. Money flowing back into treasuries is a bearish sign for stocks.

Dollar Index

Crude Oil

Brent Crude is falling sharply, while Nymex WTI rallied back above $90/barrel. The gap between the two is narrowing as the European economy slows. Falling crude prices are a healthy long-term sign for the economy, but indicate falling demand and medium-term weakness. Nymex reversal below $90 would confirm a primary down-trend.

Brent Crude and Nymex Crude

April 24, 2013April 16, 2018

PIMCO’s Gross: Investing may be more difficult in years ahead

Charles Stein and Alexis Leondis at Bloomberg quote Bill Gross, co-chief investment officer at PIMCO (Pacific Investment Management Co) about the outlook for the next decade:

Recently, Gross has become more reflective in his monthly online commentaries. In the April outlook, called “A Man in the Mirror,” he suggested that the careers of the great investors of the past three or four decades were fueled by an expansion of credit that may be coming to an end, and that investing may become more difficult in years ahead.

“All of us, even the old guys like Buffett, Soros, Fuss, yeah — me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience,” he wrote. “Perhaps it was the epoch that made the man.”

Central banks have at last awoken to the dangers of rapid credit expansion and are unlikely to allow a repeat of the credit-fueled growth of the last thirty years. Bull markets of the future are therefore likely to be a lot more sedate.
Read more at Pimco’s Rising Stars Pull in Money for Future After Gross – Bloomberg.

February 28, 2013

Analysis: Bond managers fret junk bond rally is losing steam | Reuters

Jennifer Ablan and Sam Forgione at Reuters explain why Dan Fuss, vice chairman and portfolio manager at Loomis Sayles, which oversees $182 billion in assets, is slashing exposure to high-yield bonds:

Fuss and others worry the Fed’s easy money policy – short-term interest rates held at effectively zero and a bond-buying program known as quantitative easing – will soon foster inflation, a bond manager’s biggest fear. That would drive up interest rates, so bond prices, which move in the opposite direction to rates, would fall.

December 12, 2012

Ray Dalio Explains The Rare Set Of Circumstances That's Making Him Bearish On Markets | Business Insider

Joe Weisenthal reports on hedge fund guru Ray Dalio’s outlook:

His novel set of circumstances he sees is an economy that faces austerity (due to the Fiscal Cliff, etc.) coupled with a Fed that’s mostly blown its bazooka, and can’t get much more juice out of QE.

Yields can’t go down anymore.

Austerity is coming.

Economy is running out of steam.

QE is losing its efficacy.

Rate turn probably finally coming late in 2013.

November 5, 2012

Treasury yields warn more of the same

Inflation has fallen over the last quarter-century, so one would expect to find Treasury yields have fallen, but there is more than just benign inflation at work. The Fed has also been suppressing long-term interest rates, with QE1, QE2, Operation Twist and now QE3.

10-year Treasury Yields

The yield on 10-year Treasuries is now below the Fed’s long-term inflation target of 2 percent, offering savers a negative return on investment unless they are prepared to take on risk. The Fed’s aim is to induce investors to take on more risk, in the hope that increased capital spending will stimulate employment and lead to a recovery. But they risk leading savers into another disaster, with falling earnings or rising yields ending in capital losses.

Corporations are reluctant to expand and will remain so until they see a sustainable increase in consumption. Fueled by new jobs — not short-term credit. Low interest rates without job growth could cause another speculative bubble, with too much money chasing too few opportunities.

Without jobs, no monetary policy is likely to succeed.

November 4, 2012

On Investment Time Horizons – Seeking Alpha

David Merkel observes that Shiller’s CAPE10 ratio and Tobin’s Q-ratio both “indicate that stocks are not likely to return a lot over the next 10 years”.

The CAPE10 ratio is a long-term, smoothed PE-ratio first popularized by Yale Professor Robert Shiller in his book Irrational Exuberance. CAPE10 compares the current S&P 500 index value to the average of the last 10-years annual earnings. James Tobin’s Q-ratio compares current price to net worth (total company assets minus liabilities).

Merkel points out, however, that “the same is true of most high-quality bond investments …. and high-yield investments when expected losses are netted out…..I am not crazy about buying bonds here. The risk-reward is awkward, but the same is true of stocks.”

Bottom line is investors are being starved of yield by the Fed’s Twist and QE3 operations. Investors may be forced to take on additional risk in order to boost yields, but that could end in disaster, with capital losses if yields rise or earnings fall. Where possible, the safest strategy would be to tighten your belt and sit this out.

via On Investment Time Horizons – Seeking Alpha.

November 1, 2012

Yield Is The Last Refuge Of Scoundrels – Seeking Alpha

By David Merkel:

What’s that I see? We’re at a 50-year low for yields on low investment-grade-rated bonds. Surely the economy should be booming. What, like the Great Depression, we are in a liquidity trap? Seems that way…….

Baa Corporate Bond Yield WBAA

via Yield Is The Last Refuge Of Scoundrels – Seeking Alpha.