After all of the hype, and the hoopla, that both the equity and debt markets are over stressed, for one reason and another, new evidence comes to light. According to the St. Louis Fed, market stress has dropped to its lowest level on record with data going all the way back to 1993. The St. Louis Fed Financial Stress Index fell to -1.6 for the week ending January 17, they reported last week.
You may recall that, just months ago, the Press was littered with stories that the Yield Curve was signaling a Recession. I kept saying this wasn’t the case and that the Yield Curve was distorted, not be Recessionary indications, but by the fact the Fed was not buying Treasury Bills. In fact, I spoke with one member of the Fed and shared my opinion and suggested that they start buying Treasury Bills, which would end the Recessionary nonsense.Whether the Fed listened to me, or not, they did come into the markets and started buying $60 billion of Treasury Bills a month and, lo and behold, the talk of some kind of imminent Recession disappeared in the Press.
What this also did was continue to expand their balance sheet, once again, and while the Fed denied that this was Quantitative Easing, it was pretty much an assertation that fell on deaf ears. This month Dallas Fed president Robert Kaplan became the first Fed governor to say that bill purchases are affecting other asset prices. He was later joined, in this conjecture by Larry Kudlow, President Donald Trump’s top economic adviser.Funds focused on buying U.S. bonds have taken in $115bn since the beginning of October, when the Fed announced it would begin buying Treasury Bills, according to data from EPFR Global.
The yield on Bloomberg’s High Yield debt is currently 5.292% which is only 366 basis points over the corresponding Treasury Index. More notable is the Bloomberg U.S. Corporate bond Index now which is 2.665% and now trades at only 103 basis points over the Treasury Index. Nobody is getting paid now, in my opinion, for “credit risk.” There is just a mad scramble for yield, at any cost, as insurance companies, pension funds, retirees, and associated entities, cannot find enough “Absolute Yield” to be profitable or cover their costs and expenses.
Will the situation begin to improve anytime soon? Probably not.
The equity markets, in 2019, covered a lot of the yield pain. For the last 12 months the DJIA is up 17.19%, the S&P 500 is up 23.67% and the NASDAQ is up 30.01%, according to data from Bloomberg. So, equities were the off-set to lower and lower and lower bond yields. I do not expect this to be the case in 2020, however. I see last year as a “Spectacular” year and re-runs are a rare event if you track equities historically. In fact, the last time we had a year like 2019 was in 2013 which indicates the distance between higher priced equity markets. In fact, since 1928, the S&P has only showed a gain of between 5-10%, or more, in six out of the last 91 years. That is pretty telling, in my estimation.
Even more interesting is that 2019’s huge run higher in stock prices came even though we had a year of flattish earnings. This followed last year’s negative equity returns in a year when profits surged by 20%. This points out to me that it is not revenues, or earnings or even dividends that are driving the markets now, but the main force are the central banks and their continuing interventions.
“May the Force be with you.”
Watch out now, take care
Beware of greedy leaders
They take you where you should not go
While Weeping Atlas Cedars
They just want to grow, grow and grow
Beware of darkness
– George Harrison
A Few Warnings
I don’t know, you don’t know, but more “stuff” could come rolling out of our Impeachment proceedings. Grant’s first ten rules, “Preservation of Capital,” always applies. It depends a lot on if there are to be more witnesses and who they might be. A little money, tucked into your wallet, seems a sensible thing to have at present. Just my thought.
The Coronavirus Infection
The Centers for Disease Controls and Prevention (CDC) has just proclaimed the Coronavirus Infection a very serious threat. The 5th US Coronavirus infection was just confirmed by the CDC in 4 states (AZ, CA, IL, WA). There are now 2082 cases and 56 Official deaths. Incubation is asymptomatic, CDC says, contagious, and can be as long as 14 days.CDC is closely monitoring an outbreak of respiratory illness caused by a novel, “new,” coronavirus (termed “2019-nCoV”) that was first detected in Wuhan City, Hubei Province, China and which continues to expand. Chinese health officials have reported more than a thousand infections with 2019-nCoV in China, including outside of Hubei Province. The infection rate is now growing quickly and has spread to a number of international locations.
Here I point to companies in the travel industry. Things may proceed along normally enough, but maybe not. If things spiral out of control there could be a serious impact, in both revenues and earnings, for some airline companies, ocean cruise companies, river cruise companies and some hotel groups. I would be taking a hard look at your portfolios to determine what bonds, and stocks, you might own with exposure here, and making some very calculated decisions.
Forewarned is forearmed!
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.