Let’s have a look at a long-term perspective on Treasury yields. The chart below shows the 10-Year Constant Maturity yield since 1962 along with the Federal Funds Rate (FFR) and inflation. The range has been astonishing. The stagflation that set in after the 1973 Oil Embargo was finally ended after Paul Volcker raised the FFR to 20.06%.
Here’s the same chart with the S&P 500 adjusted for inflation and the annualized inflation rate subtracted from the yields. The impact of stagflation becomes much clearer. We can better understand the severity of the decline in equities from the mid-1960s to the bottom in 1982. And we can also see why high yields can be deceptive in periods of double-digit inflation.
The most interesting series in the charts is the FFR red line. We can see how the Fed has used rate to control inflation, accelerate growth and, when needed, apply the brakes. Unfortunately, the FFR has been virtually zero since December 2008, so it is no longer available as a tool to stimulate the economy. Incidentally, I annotated the top chart with the tenures of the last three Fed chairmen so we can see who was managing the various FFR cycles since the summer of 1979.
The next chart is based on daily data and adds some additional Treasuries for a close look at yields since 2007.
The word ‘RISK’ is a simple four- letter word; yet, the management of risk is critical in any investment or income generating strategy. When historical norms no longer hold, and markets can make moves within a span of days, or just a few weeks what used to take a whole year or years to make, it becomes critical for trading and investment practitioners to rethink old models and adjust given new information or market realities. Whilst increased volatility increases market risk as a whole, it also provides tremendous opportunities to make an abnormal return if you are on the right side of the market trend. For market participants, the question is – are you prepared to assume the increased risk that can provide the environment to make huge returns, and at the same time, if your thinking is wrong, assume huge losses. Or, is it wise in a period of high volatility to disengage and get back in when sanity returns to the financial markets? This is a critical question that market participants have to answer and honestly face up to the conclusions they come up with. For most people detached from the market and not involved in any trade, there is always the false assumption with the knowledge of hindsight that they are prone to being risk takers. And given the choice, they will definitely take more risk rather than less and that somehow they harbor the wrongful notion that they would have been on the right side of the trade. Taking calculated and limited risk where the risk reward structure is favorable is always preferable to assuming tremendous amounts of risk in the hope of being right.
In an era of investment where crisis, whether real or imagined hit the market with such frequency, and cause extreme market moves within a compressed timeframe, what should one do? Should we totally disengage, call it quits and look for new avenues? Or, should we take cognizance of such realities and design our investment strategy for such markets? The market, it seems is so structured in a way that now a tsunami or an earthquake or a plane crash is no longer a real event that
Having retraced almost 61.8% of the September drop, Gold’s recent run up – as the USD strengthens no less (from 10/28) – suggests some demand for safety is back (or more simply is the demand for German Gold making the German’s hoard a little more?). Silver is actually outperforming from Friday’s close but remains below Friday’s highs for now.
As China ‘threatens/promises’ liquidity injections to its banks, Greek politicians argue over premium parking spaces, US brokers/exchanges squabble over the MF capital leftovers, and global liquidity goes from bad to worse – perhaps it is time to take a step back and focus on what really hasn’t seemed to matter – the economy. Ray Dalio published his Template For Understanding back in October of 2008 and has recently updated it (as of October 2011). For your Sunday evening reading pleasure – “How the Economic Machine Works and How It Is Reflected Now”. Critically, the hedge fund manager provides a framework for considering what he believes are the critical Three Big Forces: trend line productivity growth, the long-term debt cycle, and the business/market cycle.
When I imagined this I was thinking of three things, the hopeless tragedy embodied of last week’s EURO Freak Show, zombie bankers marching across Europe like the fascist armies of WWII and who will benefit most from the explosion when it finally occurs.
Three of the smartest strategists at Goldman, Huw Pill, Francesco Garzarelli, and Peter Oppenheimer, have released what one could tentatively call a white paper on the “next steps” for Europe. Far from being the traditional permabullish sellside drivel, this is a must read note, as it cleanly lays out the risks for the Eurozone from this point. The note focuses on three key aces: 1) fiscal consolidation and the ongoing role of the ECB in the future of a Eurozone which still has no fiscal cohesion (which makes sense: just like in the US, the Fed is aggressively putting the ball in Congress’ court, as neither the monetary nor fiscal apparatus has any interest in being blamed for ongoing economic deterioration, so in Europe the ECB wants a federal union, complete with Eurobond issuance powers, so it is not in the cross hairs: alas, European politicians realize this is career suicide and the question remains: when push comes to shove, and saving the Euro requires career harakiri from politicians, will they step up to the plate?); 2) Italy, of course, as the country under the spotlight now and going forward; and 3) what the above two mean for BTPs and thus the European (and Global) equity markets. The sense we get from the Goldman trio is that while the company which has just spawned Europe’s latest central banking head, while cautiously neutral is pushing for a downside case: after all what better way to unlock the Heidelberger Druckmaschinen true potential, than with a full blown crisis…
From Goldman Sachs
1. Fiscal consolidation is a precondition for further support
Over the past week, the pace of events in the European crisis has again picked up, amidst increasing sovereign bond market tensions, particularly in the case of Italy. After a week of drama, we are likely to see the formation of a government of national unity in Greece, mandated to approve and oversee the financial adjustment package agreed with the EU ahead of national elections next Spring. Meanwhile, a routine vote on last year’s public accounts to be held this Tuesday in the Italian Lower House will be a test of how much support the government can still rely upon and may lead to political change there too. Finally, the much anticipated Cannes G-20 summit – which…
The Federal Reserve officially announced Operation Twist on September 21 with the stated purpose of lowering longer-term interest rates. The yield on the 10-year note had been hovering around 2.19 prior to the much-rumored announcement, which was 47 basis points above the historic closing low of 1.72 set a month earlier on September 22.
The Fed Funds Rate has been essentially at zero for three years. What has the 10-year note done since the “Twist” announcement? The interim high daily close was 2.42 on October 27th. The interim low was 2.01 on November 1st.
It’s too soon, of course, to tell how successful the “Twist” strategy will be for lowering interest rates; the program is barely off the ground. According to the Freddie Mac survey, the 30-year mortgage rate has fluctuated between 3.94% and 4.18% since the first week in September, and the most recent average (as of November 3rd) is 4.00%. But we will watch Treasury yields and mortgage rates in the weeks ahead to see if Operation Twist lives up to the Fed’s expectations.
Background Perspective on Yields
The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed’s website for the FFR.
Even as the EURUSD is surging because of, uh, we are not quite sure – HFTs hitting all stops most likely, it is only 9 short hours until BTPs, that one and only fulcrum security for the entire European continent reopens. And while for Greece getting a new government, even if one headed by a former Fed member is somehow good news (we wonder how the people will react knowing that their fate as debt slaves repaying European banks has just been sealed for a few more months), in Italy government “stability” (we realize the comic value of this statement) is the key to prevent a blow out to the 10 Year BTP, and the launch of a domnino cascade that will stop only with French OATs, and potentially rip through through that final firewall: Germany (with or without BuBa’s billions in gold reserves… which we can only hope are not parked with the New York Fed). So back to Italian government “stability” which according to France 24 is not doing that hot. “Tens of thousands of Italians gathered in Rome on Saturday to protest Prime Minister Silvio Berlusconi’s tackling of the country’s sovereign debt crisis. “Silvio out” was the rallying cry for the large crowd that took part in the rally organised by the Democratic Party, the country’s main opposition movement. Some demonstrators poured scorn on the prime minister after G-20 leaders humiliatingly put Italy’s struggling economy under surveillance, amid a lack of trust in Berlusconi’s reform pledges. At the summit in Cannes, the billionaire prime minister played down the gravity of the economic crisis with a trademark quip, claiming that “restaurants are full and the planes fully booked.” “I go to restaurants… to do the washing up,” read one banner at Saturday’s mass demonstration.” And the kicker is that over the weekend enough defections from his party have taken place which according to many, but not Silvio, are enough to lose him his majority: “There is growing concern Berlusconi no longer commands enough loyalty among MPs to ensure the quick passage that European and international financial officials say Rome must achieve to avoid falling victim to a dramatic debt crisis like that bringing Greece to its knees… “We don’t want elections. We want to govern,” Berlusconi added.” So much for democracy in yet…
Last week we looked at the world’s demographic destiny for the coming decades. I imagine most readers perused the information and said, “Yes, we already know the world’s population is getting older. Everybody keeps saying demographics are important, but I’d like to know how slowly changing demographics actually affect the economy here and now.
Today we are going to explore how demographic change impacts growth. (We will use lots of charts and graphs, but the text of the letter is actually shorter than usual. The whole picture is worth 1000 wor...
By Jacob Wolinsky. Originally published at ValueWalk.
David Einhorn Q1 2016 Letter
David Einhorn Q1 2016 Letter – Long YELP
David Einhorn Q1 Dear Partner:
The Greenlight Capital funds (the “Partnerships”) returned 3.0%,1 net of fees and expenses, in the first quarter of 2016. It has been a while since we’ve had a profitable quarter to report. Though we would like to make it a habit, trying to manage for quarterly results is really not our philosophy. We think one of our advantages is the ability to be more patient than others, especially as investment horizons appear to be getting shorter.
It was a strange quarter. The S&P 500 spent the first half of the quarter going straight down. Then in the spirit of “never mind”, it turned on a dime, recovering all ...
Monday enjoyed some follow through upside after Friday's afternoon recovery. However, gains were on very light volume given the distribution which carried most of last week. Also, market breadth remains in decline from overbought levels.
The Nasdaq frames this neatly. The rally has come off a bull defense of the 50-day MA on higher after a series of heavy volume selling days. MACD, On-Balance-Volume and +DI/-DI are in well established 'sell' triggers along with a sharp relative underperformance against the S&P. Bullish dip buyers will be pleased with today's action, but other factors are running against them.
Earlier today we reported that in what many are convinced is just another self-gratifying publicity stunt, Australian entrepreneur Craig Wright "outed" himself as bitcoin's mysterious creator "Satoshi Nakamoto" by unleashing a major PR campaign and revealing his "identity" to three media organizations - the BBC, the Economist and GQ.
Here’s what happened during the rebound in equities that added nearly $3 trillion to U.S. share values in 10 weeks: mutual funds hoarded cash, short sellers tightened their grip on bearish bets and individuals bailed out of the market.
Reminder: OpTrader is available to chat with Members, comments are found below each post.
This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).
We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options.
Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.
To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here
Reminder: Pharmboy and Ilene are available to chat with Members, comments are found below each post.
Remember this? It was Monday. PRGO is down from around $130 to under $100 since I started following it LAST WEEK. That's down almost 25% in a week, and almost 50% in the last year. So I wrote,
"Perrigo CEO Joseph Papa leaves Perrigo (PRGO) to lead Valeant (VRX) while PRGO issues a warning about missing earnings expectations. Not surprisingly, PRGO stock plummeted today.
Robert Ingram, Chairman of the [Valeant] Board, stated, "The Board has conducted a thorough search process and believes that Joe is the ideal leader for Valeant at this time. He has a strong shareholder orientation,...
Although we try to stay focused on finding and managing promising trade ideas, the comments in the comment section sometimes take a political turn (for access, try PSW — click here!). So today, Jean Luc writes,
The GOP debate last night was just unreal – are these people running to be president of the US or to lead a college fraternity! Comparing tool size? The only guy that looks semi-sane is Kasich. The other guys are just like 3 jackals right now.
And something else – if Trump is the candidate, that little Romney speech yesterday is probably already being made into a commercial. And all these little snippets from the debate will also make some nice ads! If you are a conservative, you have to be scared now.
Phil writes back,
I was expecting them to start throwing poop at each other &n...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
Note: The material presented in this commentary is provided for
informational purposes only and is based upon information that is
considered to be reliable. However, neither PSW Investments, LLC d/b/a PhilStockWorld (PSW)
nor its affiliates
warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither PSW nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance, including the tracking of virtual trades and portfolios for educational purposes, is not necessarily indicative of future results. Neither Phil, Optrader, or anyone related to PSW is a registered financial adviser and they may hold positions in the stocks mentioned, which may change at any time without notice. Do not buy or sell based on anything that is written here, the risk of loss in trading is great.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only intended at the moment of their issue as conditions quickly change. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Site owned and operated by PSW Investments, LLC. Contact us at: 403 Central Avenue, Hawthorne, NJ 07506. Phone: (201) 743-8009. Email: email@example.com.