The #1 Rule in Investing

By Charlie Bilello

“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” – Warren Buffett

With all due respect to Warren Buffett, the #1 rule in investing is not anything close to “never lose money.”

In fact, the entire notion is absurd. Anyone who has ever invested in the history of the world has lost money at one time or another. Buffett himself lost close to 50% on two separate occasions. Being in a drawdown is the norm, not the exception. That is the price you pay in exchange for a higher return than a risk-free savings account.

So what is the number 1 rule in investing? That’s an impossible question, but if I had to pick just one it would be the Peter Lynch line about “knowing what you own and why you own it.” For if you don’t get that one right, you won’t hold any investment long enough to reap the benefits of compounding. You can have the best assets/strategy in the world but if you don’t understand what it is you will abandon it at the first sign of trouble. And believe me when I tell you that there will be many times of trouble.

Most advisors nowadays focus on asset allocation for their clients, typically a diversified mix of stocks and bonds. This is a good start, for asset allocation is the most important determinant of portfolio returns.

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A West Coast State of Mind

By James Howard Kunstler

Driving south on I-5 into Seattle, the Cascadia Subduction Zone came to mind, especially when the highway dipped into a gloomy tunnel beneath Seattle’s relatively new skyscraper district. This fault line runs along the Pacific coast from north of Vancouver down into California. The western “plates” move implacably east and downward under the North American plate, building up massive tectonic forces that can produce some of the most violent megathrust earthquakes on the planet.

The zone also accounts for a chain of volcanoes that tend to produce titanic explosions rather than eruptions of lava and ash as seen in the hula movies. The most recent expression of this tendency was Mt. St. Helens in 1980, an impressive cataclysm by the standards of our fine-tuned complex civilization, but a junior event of its type compared to, say, the blow-off of Mt. Mazama 7,500 years ago, which left Crater Lake for the tourists. A publicity-shy correspondent writes:

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Wrapping Up an Eventful Week in Bonds and Stocks

By NFTRH

US Treasury Bonds/Yields

On May 20 we presented a case in NFTRH 500 that the bearish bond play (bullish yields) was done, at least temporarily, from a contrarian perspective.

About Those Bond Yields

That was written before I realized – thanks to an alert NFTRH subscriber – that Thursday, May 31 would be another Fed SOMA (or QT) day, as bonds are allowed to hit maturity.*

The day after this bond maturation yields again went up (bonds down) as the stock market shook off the media-manufactured fears that ostensibly started in Italy but actually were destined to crop up regardless in one place or another (there was a lot of trade war noise this week).

See this NFTRH Premium update, now unlocked to the public, as it was presented in-day and in real time to give perspective for subscribers (and myself) as the media were scaring the herds into risk ‘off’ behavior and the perceived safety of Treasury bonds.

Continue reading Wrapping Up an Eventful Week in Bonds and Stocks

Why It’s Different This Time

By Steve Saville

One of the financial world’s most dangerous expressions is “this time is different”, because the expression is often used during investment bubbles as part of a rationalisation for extremely high market valuations. Such rationalisations involve citing a special set of present-day conditions that supposedly transforms a very high valuation by historical standards into a reasonable one. However, sometimes it actually is different in the sense that all long-term trends eventually end. Sometimes, what initially looks like another in a long line of price moves that run counter to an old secular trend turns out to be the start of a new secular trend in the opposite direction. We continue to believe that the current upward move in interest rates is different, in that it is part of a new secular advance as opposed to a reaction within an on-going secular decline. Here are two of the reasons:

The first and lesser important of the reasons is the price action, one aspect of which is the performance of the US 10-year T-Note yield. With reference to the following chart, note that:

a) The 2016 low for the 10-year yield was almost the same as the 2012 low, creating what appears to be a long-term double bottom or base.

b) The 10-year yield has broken above the top of a well-defined 30-year channel.

c) By moving decisively above 3.0% last week the 10-year yield did something it had not done since the start of its secular decline in the early-1980s: make a higher-high on a long-term basis.

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Sentiment Snapshot: Bonds and Reflation

By Callum Thomas

This week I took a long hard look at the survey results and a series of other charts, because they all seemed to be challenging my medium term views and biases.  Not only that, they seem to be flying in the face of a range of crowded and consensus trades.  In short, the bond selloff is being called into question, and if you have questions on bonds, then you’re probably going to end up with questions on the whole reflation trade…

This series of articles looks at the results from the weekly surveys I run on Twitter which ask respondents to differentiate bullish vs bearish views on bonds and equities for fundamental vs technical rationale. I also add some of my other charts and indicators to round out the picture.

The key takeaways from the weekly sentiment snapshot are:

-Equity investors are reassessing the fundamentals outlook.

-Bond investors seem to be already well ahead of them on that front.

-Bond survey trends point to a counter-trend move in bond yields, and the macro momentum seems to line up.

-Questions on bonds may lead to questions on the reflation trade.

1. Equity Fundamentals vs Technicals:  Starting as usual with a look at the weekly survey results for equity “fundamentals” vs “technicals” sentiment (the survey asks respondents whether they are bullish or bearish for primarily fundamental vs technical rationale), technical net-bulls dropped slightly, but it was the drop in fundamental net-bulls that caught my attention this week.  You could say that based on the latest results investors are starting to reassess the fundamentals outlook.  As I noted in the latest weekly S&P500 #ChartStorm, the fundamentals (at least earnings) have been looking pretty decent, but the outlook is by no means baked in.

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Gold, US Stocks and Bonds

By NFTRH

I’ll try to keep things simple with this recap of the 3 of the 5 major food groups (leaving aside commodities and currencies) for investors. No confusing you today with too many inter-market ratios, overly technical language or cute metaphors like the 3 Amigos (although it is notable that Amigo #2 is stopping exactly as we’d forecast, as you’ll see in the Bonds segment below).

So let’s take a technical look at larger picture of the 3 groups using weekly charts for gold and SPX and a monthly for 30yr bond yields, along with some thoughts. We’ll reserve the shorter-term technical management for subscriber updates and weekly NFTRH reports.

Gold

For the sake of your financial well being, continue to tune out inflation, trade wars, shooting wars, Ebola, China demand and Indian wedding season as reasons to be bullish the relic, it’s wilder little brother, silver and the miners. Continue to tune in to gold’s standing vs. stocks and other risk ‘on’ assets along with investor confidence, the economy, interest rate dynamics (including the yield curve) and to an extent, the state of your local currency.

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Do Bond Investors Have to Take Duration Risk?

By Charlie Bilello

Duration giveth, and duration taketh away.

For much of the past 35 years, while interest rates were in a secular decline, duration (a measure of a bond’s sensitivity to changes in interest rates) was the best friend of bond investors. In 2018, it has become their worst enemy.

At one end of the spectrum, you have short-term Treasury bills (BIL) with a duration of 0.1 and a total return of 0.6% year-to-date. At the other end of the spectrum, you have long-term zero-coupon bonds (ZROZ) with a duration of 27.3 and a total return of -10.0%.

The correlation between duration and year-to-date returns in the table of popular bond ETFs below? -0.86.

Data Source: YCharts

While 10-Year Treasury yields have risen from 2.4% to 3.06% in 2018, the largest bond ETF (AGG) is down 2.81% and the largest bond mutual fund (VBTLX) is down 2.84%. The duration on both instruments is roughly 6 years.

Continue reading Do Bond Investors Have to Take Duration Risk?

No Nuance in the Bond Market

By Kevin Muir

It’s now cool to be bearish bonds. A couple of years ago you were labeled a pariah for even suggesting inflation might pick up. The few of us that argued locking in 10-year money at 1.4% wasn’t a good risk reward supposedly didn’t understand the overwhelming three Ds – debt, demographics and deflation. Yeah, ok…

However, given the recent bond bear market, nowadays the tide has turned to the point where anyone suggesting we might see a bounce in bonds is equally chastised for not fully grasping the atrocious fundamentals surrounding the US debt market.

Here is a great chart I lifted from a Bloomberg article titled “Corporate Bonds Sink Fast in One of Worst Tumbles Since 2000 by Cecile Gutscher that shows the rolling 100-day return of the JPMorgan bond index.

Funny how prices make opinions and not the other way round.

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Pushing Against the Big Wave

By Kevin Muir

One of the greatest traders of all time, yet probably one of the least well known, once said, “win or lose, everybody gets what they want out of the market.” Easy for Ed Seykota to say as he sits on his deck overlooking Lake Tahoe sipping a nice California cab. Yet as I struggle to make sense of this great game we all love to play, I wonder if maybe Ed is correct. I know his comment might seem a little preachy, but the older I get, the more I realize that a trader’s biggest obstacles lie in the dark recesses of their thoughts, not in the day-to-day zigs and zags of the markets.

So I wonder. Not only do we all get what we want, but do we only see what we want to see?

The other day, one of the biggest bond bulls out there posted the following chart:

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Asset Allocation Trends

By Callum Thomas

This article looks at a couple of key trends in asset allocation.  We look at the evolution of investor portfolio allocations to stocks, bonds, and cash both across time, and more recently.  Importantly, we look at how it ties into the valuation picture against the backdrop of a coming full circle in the global monetary policy experiment.  It seems for investors a brave new world is upon us as we move into a more challenging phase of the cycle.

The key takeaways on the trends (and challenges) in asset allocation are:

-Cash allocations are at almost 20-year lows, which is typically something you see later in the cycle.

-Equity allocations have drifted up at the expensive of cash and bond allocations.

-From the 80’s to the 90’s we saw what looks like a structural shift in portfolio allocations.

-With the major asset classes all looking expensive, and central banks moving into quantitative tightening, it’s a brave new world for asset allocators.

1. Cash Allocations: As regular readers will know, I’ve talked about this chart a lot and I think it does capture a few key issues. It also serves to highlight or contrast with the rest of the charts in this article, particularly the one on valuations at the end.  Firstly, for clarity the chart shows surveyed cash allocations across individualinvestors in America (the AAII survey), and implied allocations (derived from ICI mutual fund statistics).  They both say basically the same thing – that cash allocations are near record lows, certainly at a cycle low.  Investors have been both drifted out of cash (drift = changes in asset allocation driven by market movement), and basically bullied out of cash by central banks.  And as I implied, there is a cyclical element to it – this is usually the type of condition you’d see toward the later stages of the market cycle.

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Sentiment Snapshot: Bonds, Stocks and Macro

By Callum Thomas

The latest results from the weekly surveys on Twitter showed a slight rebound in technicals sentiment, with the all important fundamentals sentiment still holding up well – at least for equities.  This lines up with our optimistic view on the fundamentals and the data pulse which for now is still holding up well.  In contrast to equities, bond market sentiment has seen a notable pullback from extreme bearishness, and ironically this could be just the thing that is required to set up the market for another push higher in bond yields.  With markets in flux, it pays to stay on top of investor sentiment, so check out the charts below and follow us for updates.

The key conclusions on equity and bond market sentiment are:

-Equity “fundamentals” sentiment is still holding up, and now “technicals” sentiment is starting to rebound from deep pessimism.

-Bond market sentiment has seen at least a partial reset both on surveyed sentiment and broader market sentiment.

-The solid readings in the ‘nominal surprise index’ and earnings revisions momentum line up with the optimistic view on the fundamentals outlook, and remains a key swing factor on the overall risk outlook.

1. Equity Fundamentals vs Technicals: The latest weekly survey on Twitter showed a solid rebound in “technicals” sentiment, as investors apparently reassess the risks of a bear market.  Meanwhile fundamentals sentiment has held up fairly steady; not undergoing the same swings as we’ve seen in technicals sentiment.  It speaks to the thesis that this is largely a technical/sentiment driven correction with fundamentals little changed.

Continue reading Sentiment Snapshot: Bonds, Stocks and Macro