Yield Falls on Long Dated Treasury Bonds

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the fourth Thursday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

The monthly Long Term update was posted Thursday and follows this post on the website.

Economy:

Existing home sales for Feb. were 4.6 million annualized, up from 4.0 mil in January.  We’re entering the spring selling season, but that increase is still nice.  New home sales for Feb. were 640K annualized, up slightly over Jan.  With mortgage rates up so much since (over 6% now) you might expect sales to slow down, especially when you put that mortgage rate on a home price that inflated 40% over the last two years.  Some of the sales are going to middle aged couples and even older people whose homes appreciated so they can cash out a fat profit to put down, or even buy the new home for all cash and avoid the mortgage entirely.  But it has to be a tough market for you people who were not in the housing market the last few years and did not get the benefit of the home price inflation. 

Durable goods orders fell 1% in Feb. after falling 5% in Jan., not a good sign.

Geo-Political:

The Fed raised the Fed Funds rate by .25% on 3/22 bring it up to 5%, but they sounded a bit dovish about future rate hikes.  The interest rate hikes cause the value of existing bonds to fall, and long term bonds fall in price more than short term bonds because it will take longer to get your principal back and invest it in a new higher-yielding bond.  SVB failed to hedge their “duration risk” (the risk that comes from holding a long duration bond in a rising rate environment), and since deposits were only ensured up to $250K by the FDIC, small businesses or individuals with more than $250K on deposit tried to withdraw their money, creating a run on the bank.  Then SVB failed.

This is why I have not favored bond funds in recent years.  With rates so low, it was only a matter of time before we entered a “rising rate environment”.  The question now is, are we near the top of the interest rate cycle, and is it safe to buy a bond fund now?  Unless something weird happens we are probably near the top of the interest rate cycle.  The bond futures market has priced in a cut in the Fed Funds rate by the end of 2023.  If you want to hold the bond/CD, CD yields are better than Treasury bond yields currently.  A non-callable CD is better so they don’t call it away and force you to reinvest at a lower rate, and don’ let the bank “auto renew” or “auto roll” your CD because you have no idea of the interest rate in the future.

The European banks are getting into the same problem as the US banks, with rising interest rates.  Credit Suisse was sold to UBS, in a fire sale.  The Swiss central bank did not honor about $15 billion of “AT1” bonds from a previous bailout, and that bond type was issued to several other big banks.  Today Deutsch Bank stock fell because they have some AT1 bonds that could become worthless if Deutsch Bank got in trouble.  Fallout continues to swirl.

Interest rates were kept too low for too long and now we have to deal with the aftermath.  The Fed indicated a few months ago they thought the neutral rate for Fed Funds that is neither accommodative nor restrictive was 2 1/2%, I’ll just say 3%.  I’ve said it before, Fed Funds should never be zero percent like we had for years, because that says money has NO time value, and that is not true.  It encourages risky behavior.  The Fed has trouble getting rates high enough so that when trouble occurs, they have room to cut rates without driving Fed Funds to an absurdly low level, like 1% or 2%.  When Greenspan dropped Fed Funds to 1% in 2004 to help Bush 41 get re-elected, it was not wise and it was the first time Fed Funds had gone to 1% since the early 1960’s.  Those low interest rates, combined with stupid mortgage products with two year teaser rates at 2% that adjusted up to 8-10% after two years were the underpinnings of the Great Financial Crisis (GFC) in 2008.  Following the GFC the Fed took the Fed Funds rate to zero, they were left there too long.  Along with excessive government spending for 20 years, inflation came back and got up to 9%.  Now the Fed must get rates high enough to cool inflation, which Powell has said will cause some pain.  The pain could have been avoided in my opinion if the interest rate hikes had been slowly and steadily implemented between 2010 and 2020.  We should have at least gotten back to the neutral rate of 3%.

And what were those crazy European banks doing with negative interest rates?  That was just another name for a tax in my opinion.  Let’s see, I buy a bond for $1,000, hold it for a year, and I get back $980.  That looks like a tax to me, and I never saw it aid in stimulating the European economies.  Let’s see, I’m going to reduce people’s income, take some of their money, and I expect them to go out and spend and keep the economy humming!  Sheer stupidity, and it did not work.

Technical Analysis:

For the week ending 3/24/2023, the S&P 500 was up 1.5%.

Technically (see chart below) the market looks poor.  RSI at the top of the chart is neutral at 50 and chopping sideways.  Momentum shown by MACD at the bottom of the chart is positive and trending up (just turned up).  The price action is negative, below the bottom of the recent uptrend channel (two green lines rising to the right).

There is a new line on the chart, it’s a purple dashed line from the Feb. highs, sloping down to the right and showing a series of lower highs.  That is not good.  The challenge to the market is to break above that short term downtrend.  The current move up does not look complete, so maybe we will break out, but right now, the trend looks down.

Click THIS LINK to open the chart in a separate window.

The next thing we have to talk about is the significant move down in yield on longer dated Treasuries.  The chart below is a one year chart of the yield on the ten year treasury bond.

The yield dropped from 4.1 to 3.4% over three weeks, since the collapse of SVB.  The Fed hiked the Funds rate by .25% this week, and the ten year bond continued to fall.  The bond market is saying they see a recession coming and they think the Fed will be cutting rates in 2023.  We may have seen the peak in interest rates for this year, or we’re close. 

What am I doing?  I bought another non-callable 5 year CD through Fidelity, 4.7%.  I sold a couple of lovable losers hanging around my portfolio, they would go lower in a recession.  There are some stocks I will hold through the recession because they pay a good dividend, like KMI with a PE of 14 and yield of 6.6%, better than I get on a CD.  I sold a few far out of the money Put’s on stocks I would be willing to buy well below today’s price.  I’m getting ready for a recession.

———————–  

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

1. Is it a bull market or a bear market?
2. Why does healthcare cost so much?
3. Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Long Term – March 2023

Once a month, on the fourth Thursday of the month, I will put up a long term view of the market.  This is provided for investors who don’t want to trade secondary swings in the market, but would like to exit the stock market relatively soon after a bear market begins, or enter the market after a new bull market begins (change in the primary trend).  In the blog, they will always have a title called “Long Term (month) (year)”, so you can use your browser “Find” function and easily find them.

Economics:

GDP – The second estimate of 2022 Q4 GDP is +2.7%, down slightly from 2.9%. 

The March 16^th Atlanta Fed estimate of Q1 GDP is +3.2%, a good sign.  Within  a month of the actual number on late April, GDPNow gets close the the real number.

The economy continues to expand.  People look at this and the low unemployment rate and they say “what recession?  We don’t see one on the horizon.”

This is bullish for the stock market.

Year	Quarter	GDP %
2022	Q4	2.7%
2022	Q3	3.2%
2022	Q2	-0.6%
2022	Q1	-1.6%
2021	Q4	6.9%
2021	Q3	2.0%
2021	Q2	6.7%
2021	Q1	6.4%
2020 – Covid	Year	0.1
2019	Year	2.3
2018	Year	2.9
2017	Year	2.6
2016	Year	2.0

Fed interest rates – The Fed raised the Fed Funds rate by .25% on March 22, which brought the Fed Funds rate to 5%, up from zero a year ago. 

Inflation has slowed a bit and interest rate increases impact the economy estimated at a six month lag.    Powell at the Fed press conference on the 22^nd reiterated the Fed’s strong commitment to bring inflation back to their target of 2%.

The other thing the Fed is doing is Quantitative Tightening (QT), which means they are not buying bonds to replace those that they hold when they mature, and outright selling bonds into the secondary market.  This will force private companies and individuals to buy the bonds, and then those dollars are not available to buy TV’s, boats, or other big ticket items.  Money is going out of circulation shown by a outright decline in the M2 money supply, which does not happen often. 

Since the banking mini crisis at SVB and a few other regional banks, the Fed is allowing the regional banks to borrow based on the face value of bonds they hold, rather than the lower market value.  That should allow the banks to meet depositor demands for their money, but it will swell the Fed’s balance sheet.

Fed policy is restrictive for the economy, and bearish for the stock market. 

Date	Fed Funds Rate	5 Year Treasury	10 Year Treasury	30 Year Treasury
Mar 2023	5.0	3.6	3.5	3.7
Feb 2023	4.7	4.2	3.9	3.9
Jan 2023	4.5	3.6	3.5	3.6
2022 Q4	3.9	4.0	3.9	4.0
2022 Q3	2.5	3.4	3.3	3.3
2022 Q2	0.8	2.9	2.9	3.0
2022 Q1	0.2	2.0	2.1	2.3
2021 Year	0.2	0.8	1.4	2.0
2020 Year	0.4	0.6	0.9	1.6 – Covid
2019 Year	2.2	1.9	2.2	2.6
2018 Year	1.8	2.8	2.9	3.1 – Tax Cut
2017 Year	1.0	1.9	2.3	2.9

Valuation:

S&P 500 earnings – Factset shows that for Q1 of 2023 the estimated earnings are projected to be -6% vs. Q1 of last year.  It is unusual for earnings to show an outright year over year decline.  This will follow the 4% earnings decline in Q4 2022.  Remember, projections of the future are frequently wrong.    

For Q2 Factset projects an earnings decline of -3% also.  Normal year over year earnings growth is about +5%. 

The forward PE for the S&P is 17 compared to the ten year average of 17, but remember, the forward PE is just a guess and nobody’s guess has been very good lately. 

The 12 month forward “operating earnings” estimate on the S&P 500 from the Standard and Poor’s company is $219, down $1 from last month.

The outlook for earnings is bearish, below the long term trend of +5%.

PE on S&P 500 – The current 12-month trailing GAAP PE on the S&P 500 is 23, down from 24 last month and down from 31 in the summer of 2021.  I used 4 quarters of earnings with the most recent being Q4 2022. 

This metric is  moderately overvalued relative to my trimmed 30 year average of 19.  I trimmed out the quarters during recessions for my 30 year average, since the P/E behaves very abnormally during those times.  I go in 5 point increments for my terminology, so 20 – 25 would be moderately overvalued, while 25 – 30 would be significantly overvalued.  Above 30 would be dangerously overvalued.  On the downside, I will go with 14-18 being moderately undervalued and 9-13 being significantly undervalued.  As a last resort, I will go with 4-8 as being egregiously undervalued, and hope we never see that because all investors will be in pain at that point.

This indicator is bearish.

Age of primary move, bull or bear market – This bear market is 1.3 years old.  This is neither bullish nor bearish, but it is worthwhile to keep it in mind. 

Geo-Political:

Covid:  I will drop it as a geo political factor next month, since China has re-opened.

Liquidity:  Central banks globally are withdrawing emergency accommodation for Covid.  They are tightening financial conditions by raising interest rates to fight inflation.

US / China:  It appears that the US and China are engaged in a tug of war to see who is the world’s economic leader.  China has advantages in low cost labor and some natural resources such as rare earth metals, but they lack oil and natural gas.  China developed the ability to produce advanced electronics with the aid of the US, but the primary market for those items is the US and Europe.  The US has long been a technology leader and we have sophisticated financial markets that are usually well regulated.

Ukraine:  Thewar in Ukraine drags on.  Ukraine is having more success on the battlefield than most expected, with the help of western weapons.  Russia is destroying much of eastern Ukraine’s cities and rebuilding will be difficult.  Sanctions against Russia are disrupting commodity markets since Russia was such a large exporter or oil, natural gas, and metals.  Ukraine was a large exporter of wheat and other foods and that export is hindered by the war.  It appears that after the initial shock in the commodity markets when Russia invaded, prices have stabilized and the world is dealing with new sources and trading patterns.

Geo-politics is currently bearish, mainly due to the war in Ukraine.

Technical:

Technically the chart below is neutral near term (months), but still positive longer term (year).

RSI at the top of the chart is neutral at 50, moving sideways.  Momentum shown by MACD at the bottom of the chart is negative and falling, but the rate of deline is moderating.  The price action is neutral for the medium term, but still positive longer term.  For the last 9 months, we’ve been in a trading range from 3500 – 4200.  I wonder which side of the range we will pop out, above or below?

2022 was dominated by the Fed raising interest rates to fight inflation.  Valuations had become “dangerously overvalued” on a PE basis, as far back as the spring of 2021 (go back and look at some of the Long Term updates from spring and summer of 2021, in the valuation section).  The govt. had printed too much money over the last 20 years and kept interest rates low, which is a prescription for creating an overvalued market and for inflation.  It had to be corrected.

In 2023, most think the Fed is near the end of its interest rate hikes.  The strength or weakness of earnings will dictate the market direction.  The yield curve is still inverted and that happens when the bond traders see economic weakness ahead, they think the Fed will lower interest rates in the future, so they better buy bonds now and lock in the yield before it falls further.

S&P 500 Ten Year Chart

This is neutral in the short run, but remains bullish longer term.

Conclusion:

1. GDP growth is positive with Q4 GDP rising by 2.7% so that is bullish. 
2. The Fed has short term rates at 5%.  That is restrictive and bearish. 
3. S&P earnings for Q1 are projected to be -6% below Q1 2022 which is below trend and bearish. 
4. The PE valuation of the S&P based on the 12 month trailing GAAP number is 23, which is moderately overvalued and bearish.
5. The geo-political factors are bearish.  
6. Technically the chart looks neutral short term, but bullish longer term.

By that way of looking at it, the market is bearish, with one factor bullish, and four bearish and one neutral.

Long Term Issues to Keep in Mind:

National Debt: 

(December 2022) – The national debt stands at $31.5 trillion.

(Updated March 2020) – Covid 19 begins.  Well this is going to get a lot worse.  Looks like the politicians are going to be printing money and dropping it from helicopters.  But all the other major economies will do the same thing, so relatively, the dollar may not drop much (which would be bad for inflation).

(Negative – Noted Jan. 2018)  The deficit will go up despite the republicans saying that if the tax cut bill is “dynamically scored” using “possible” increases in economic activity, it will hold down the deficit by increasing tax receipts.  This has not been shown to work in the past.  The US added $980 billion to the national debt in fiscal 2019 (ended 9/30/2019), a tragedy in good financial times.

(Late 2020) – The total national debt exceeds $26 Trillion, and as interest rates rise, the component of the annual budget allocated to “interest on the debt” will increase, putting pressure on existing programs, or increasing the deficit.  If the deficit is allowed to rise too much in good economic times, the value of the dollar will fall and that is inflationary which is usually bad.  The thing saving us today is how poorly all the other nations are managing their economies, so the dollar continues to hold up.

Rich Comeau, Rich Investing

The Regional Banks are Unsettled

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the fourth Thursday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

The monthly Long Term update will be posted Thursday 3/23.

Economy:

The CPI for Feb. was up .4%, and year over year it was up 5.5%, both marginally better than the readings in Jan.  The problem is that inflation is still running at 4.8% annualized if we multiply 12 X .4 (the monthly rate for Feb.).  The rate of inflation is coming down, but prices are still going up too fast.  The Producer Price index (PPI) fell .1% in Feb. but producers will not pass along such a small decrease to consumers, but it is encouraging that some price pressure may ease eventually.  The Conference Board leading economic index (LEI) fell .3% in Feb., the eleventh straight monthly decline.  This sizable and persistent decline in the LEI usually suggests that a recession is looming.

Geo-Political:

The commentary over the failure of Silicon Valley Bank (SVB) has been the talk of the week, and similar problems at a few more regional banks.  The bank executives bear most of the blame for failing to properly assess value and risk in their investments.  Another part of the blame lies with the Fed, but not in the way you may think.  The root of the problem goes back to the 2008 and the aftermath.  The Fed did a pretty good job resolving the financial crisis in 2008-2009.  I think Bernanke and Yellin made a mistake of leaving interest rates too low for too long.  When money has no time value (an artificial system created by the central bank), people are free to make poor financial decisions because there is no cost to carry debt.  Jerome Powell at the Fed began to raise rates in 2018, but the market buckled late that year and he reversed course.  With Covid, Powell again sent rates to zero, and held them there too long.  As recently as last March the Fed was still buying bonds to suppress longer term interest rates, a clear manipulation of the market.  So from 2008 to 2022, fourteen years, interest rates were too low.  The Fed was too accommodative.  Some bankers thought that low interest rates were the norm and would not rise rapidly, they were wrong, and that destroyed a few banks.  The bank stock will go to zero so the stockholders will be wiped out, the bond holders will come out with something from the bankruptcy judge (the Treasury bonds they hold are worth something, and eventually will mature at par), but all of the depositors will get all of their money even if they had deposits well over the $250K limit of FDIC insurance (because of a special facility put in place by the Fed and Treasury).  That was done to prevent runs on all of the regional banks, which would have been a disaster.

The Fed meets 3/21-22 with their decision on the Fed Funds rate on Wed.  The betting is evenly split between no hike and a hike of .25%.  My guess, they hike by .25% and say they will pause to watch events in the banking sector.  Of course a pause can be resumed later.  I doubt that either decision would have a major impact on the market.  I think inflation is too high to not have a hike in the Fed Funds, and could send the message that the banking upset is worse than people can see.

Technical Analysis:

For the week ending 3/17/2023, the S&P 500 was up about 1%.

Technically (see chart below) the market looks poor.  RSI at the top of the chart is neutral at 45.  Momentum shown by MACD at the bottom of the chart is negative and falling.  The price action is negative both short and longer term.

We’ve been in a bear market for 15 months.  From the recent low in October we had a bear market rally up to 4200.  The earnings season was poor, with earnings down 4% for Q4 vs. the prior year.  The recent bank failure by SVB rattled the market and showed that the Fed’s rate hikes are serious and can cause serious problems for businesses.  We broke down below the bottom of the up channel (the lower green line) and we broke below the 200 day moving average.  The break to the downside appears to have both magnitude and duration, but I want to see another week of data.  It looks like the bear has reasserted itself.

Click THIS LINK to open the chart in a separate window.

What am I doing?  My biggest move of the week was to buy a five year CD through Fidelity, 4.9% call protected (it is not callable, so I am guaranteed the 4.9% interest for all five years), FDIC insured.  This one is issued by Morgan Stanley.  CD’s have not had good yields for 14 years, but they do now and it reasonable for us retiree’s to lock up a decent yield.  I was assigned due to a Put option on BMY so I bought at $67.  It looks like we’re headed for a recession, the CEO of Bank of America thinks so, and one of the things we can ask is “do I own some stocks that I don’t want to hold through a recession”.  If you can get out of a risky position with a small loss, that is a reasonable thing with a recession looming.  If you own strong companies with a good dividend (IBM comes to mind), it will probably go down in a recession, but they will pay you the dividend to wait for an economic recovery.  If you judge value in the stock market by the PE ratio, some great values are created in the stock market by recessions.  You need cash available later to put to work.  With money markets paying over 4% now, even waiting in cash has a decent payday.  Cash is not trash right now.

———————–  

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

1. Is it a bull market or a bear market?
2. Why does healthcare cost so much?
3. Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Silicon Valley Bank Shutdown

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the fourth Thursday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

Economy:

Factory orders in Jan. were up 1.4%, good.  Initial jobless claims in the prior week were 211K, in the normal range.  Non-farm payrolls added 311K jobs in Feb., a strong number.  The unemployment rate for Feb. inched up to 3.6%, still very good.

There was nothing to not like in the data.  The big test will come on Tues. 3/14 with the CPI data.  Some thought that a hot CPI read would push the Fed to hike the funds rate by .5% on 3/22, but the failure of Silicon Valley Bank will probably keep the Fed to a .25% hike so as not to rile the banking sector further.

Geo-Political:

Silicon Valley Bank was shut down by the California regulator on Friday 3/10.  The bank had been in business for 40 years and was a major funder of startups in Silicon Valley.  They had deposits of $175 billion of which $150 billion was uninsured by the FDIC.  Most US banks have about 40% of their deposits uninsured.  The FDIC only insures bank deposits up to $250K per account.  Many startups had all their money at SVB and ran their payroll through them, with funds that are not insured.  The FDIC is the receiver of the bank’s assets and will have to sort this out over the weekend.  Hopefully they were watching this and had some sort of a plan.  There could be 1,000 small businesses impacted, and the FDIC does not want to immobilize them.  They could look for a buyer over the weekend, maybe they were talking.  Or the FDIC could loan the payroll to the companies for a month while this all gets figured out.  We’ll see.  Some of the smaller regional banks took a big dive in the stock market, and a big one in GS went down, but JPM did not budge.  Quality counts.

Regarding SVB and what the problem is, some point to the Fed’s rapid rate increases over the prior year, and the fall in bond values that the bank held.  I call BS on that.  They’re a BANK.  They are supposed to know money and interest rates and bond durations.  If they managed that risk, and they needed to hold bonds, they would have stayed with short duration and the rise in interest rates would not have hurt them so bad.  I didn’t hold ANY bonds for the last 15 years, so if I could figure it out, they should have also.  They must be idiots to go broke.  Then they were lending to many startups with no or little cash flow.  You can do that to some extent, but you would have to balance that with solid loans that will be repaid.  If those startups borrowed cheap money to fund the startup and loans were coming due and had to be refinanced at much higher rates, the bank needed to recognize that risk and manage their loan book better.  Now after 15 years of unreasonably low rates, perhaps the bank could be forgiven for thinking it would go on forever.  Let me restate, perhaps you or I could be forgiven for thinking it would go on forever.  The bankers are professionals; it is their business to know better.  They are idiots, now they are broke idiots.  The bank’s risk management appears to have been inadequate.

From the depositor viewpoint, you have to do your risk management also.  The company ROKU said they had 26% of their assets at SVB.  That is bad, but they will survive because they spread their assets over several banks.  They can thank their executives, probably the CFO.  Roku may get most of their money back, depending on how the FDIC handles the wind down.  If falling bond values were part of the problem, depending on the duration of the bonds, if they are held to maturity and are good quality, they will mature at face value.  It may just take time to get all of the value back.  Roku may not have time to wait, and might opt to take a haircut on the bonds now to free up their capital.  But they will probably survive.

Should the other depositors who did not spread their risk across banks get some sort of bailout from Congress, like happened in 2008?  You could say no, 2008 was more system wide.  But, there is an awful lot of national innovation value supported by SVB, and perhaps their over-indulgence of risky loans.  As a nation, would we be OK seeing all that innovation, and those good jobs, go up in smoke because the bankers made some unwise decisions and took on too much risk?  I think a case could be made for some bridge loans to the depositors to keep them going.  Maybe not every company gets the bridge loan.  Maybe the FDIC brings in several VC firms to assess who is worth saving and who is not.  Maybe put in place some milestones for performance and if you hit the milestone you continue to be funded.  There are lots of options, I hope we are smart about it, and when the chips are really down, we have usually done a decent job.

Technical Analysis:

For the week ending 3/10/2023, the S&P 500 was down about 5%, the fourth down week in the last five.

Technically (see chart below) the market looks poor.  RSI at the top of the chart is low neutral at 35 and falling.  Momentum shown by MACD at the bottom of the chart is negative.  The price action is negative for the short term.  There was support at 3950 from the late Feb. low and the 200 day moving average, and both failed to hold the market up.  We have also broken below the lower bound of the two green lines, the upside rally channel that started in October.  The breach looks serious.  The next downside support is at 3790ish.

This is from Brian Moynihan, CEO of Bank of America:

“March 7, 2023 – Bank of America CEO Brian Moynihan warned the US will enter a recession this year, though a downturn is unlikely to be severe.

A recession will start in the third quarter then continue through the fourth quarter and into the first quarter of 2024, Moynihan said at The Financial Review’s Business Summit on Tuesday, according to Reuters.

“It’s a very slight recession in the scheme of things. I don’t think you’ll see a deep recession,” he added. “It will be more of a technical recession than it will be a deep drop in the US.”

BofA’s forecasters estimate quarterly contractions of 0.5%-1%, Moynihan added.

A technical recession is defined as two straight quarters of negative GDP growth, the but economy isn’t considered to be in an official downturn until the National Bureau of Economic Research declares a recession.”

https://www.yahoo.com/lifestyle/bank-america-ceo-brian-moynihan-151857475.html

The implication if Mr. Moynihan is correct, and he has a good chance to be correct, is that it is not a good time to begin a long term investment, unless you don’t mind being down by 10% or so for the first year.  If you find a quality company with a reasonable PE and maybe a good dividend, on a pullback you can start a position at least and add to it if we get the recession.  This is not an easy time.

A short term bond fund should have a good yield now, and in a bond fund, you can sell the fund and get access to your money on any day.  If you hold a bond you can sell it on the secondary market through your brokerage company, but someone has to go through the bonds available and like your bond.  I have sold individual bonds, and it is much easier to sell a bond fund if you want access to your money immediately.

Click THIS LINK to open the chart in a separate window.

What am I doing?  With stock prices falling, Put option premiums rose, so I sold a few Put options on stocks I would like to hold at a lower price, such as AMGN at 200.  I had some call options I sold a month or two ago when stock prices were higher and I got a good premium for selling the call.  With stock prices down, I can buy the call option back, closing the contract and I can capture 80-90% of the profit in less than half of the original contract duration.

JPM came down with the other banks, but I don’t think it has any risk from the SVB debacle.  I will look to buy a little, and maybe sell a Put with a strike down around 110 or 115.

———————–  

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

1. Is it a bull market or a bear market?
2. Why does healthcare cost so much?
3. Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Bonds

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the fourth Thursday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

Economy:

Durable goods orders were down 4.5% for January, not good.  The S&P Case Schiller home price index (20 cities) for December was up 4.6%, so the Fed still has work to do on inflation.  The ISM manufacturing index for Feb. was 47.7, up a few tenths from Jan., but anything below 50 shows contraction.  The ISM services index for Feb. held steady at 55, showing growth.  The service sector has grown to four times the size of the manufacturing sector since the US offshored so many manufacturing jobs to China early in this century, so what happens in the service sector is much more important these days, and it is still holding up.

Geo-Political:

For several months I’ve obsessed over the actions of the Fed, which do seem to drive the stock market activity these days.  With 2 weeks to the next Fed meeting, let’s take a peak at the second largest economy, China, and see how they are doing since ending their “zero Covid policy” of locking down cities with major outbreaks of Covid.

“Published 8 Feb 2023  – China’s economy has had a tough time of late. The strict lockdowns associated with the earlier zero-Covid policy and Beijing’s subsequent messy reversal saw economic growth officially come in at just 3% for 2022. The reality was probably lower.

With the economy now reopening, expectations are building that China can stage a strong recovery. The International Monetary Fund (IMF) recently upgraded its growth forecast for China to 5.2% for 2023 (from 4.4% previously). With this, China is expected to return as a key driver of growth and demand in an otherwise slowing world economy.

China’s housing market is likely to remain a significant source of weakness.

A decent recovery for China in 2023 seems likely as consumers return, business activity normalises, and confidence improves, at least after the initial wave of mass Covid infections fully plays out (and assuming China does not see further large waves of infection).

Yet, beyond the likelihood of a reasonable initial bounce-back, China faces major downward pressures that seem likely to constrain its recovery, in both the short and medium term.

China’s housing market is likely to remain a significant source of weakness. Having earlier clamped down hard on excessive housing investment, Beijing is now reversing course with a variety of support measures. However, there are strict limits as to how far the latest policy shift can go, unless policymakers are willing to reignite an unsustainable housing boom that could generate even more dangerous financial risks than existed previously.

The key issue is that the end of China’s housing boom is structural – reflecting not only an overhang of supply and increasingly saturated demand but also rapidly slowing urban population growth.”

https://www.lowyinstitute.org/the-interpreter/china-s-growth-prospects-after-zero-covid

The US has stated that China is considering providing lethal aid to Russia in its war against Ukraine.  The US has increased trade tensions with China for about four years, since Trump began US tariffs on certain Chinese goods.  The tariffs remained in effect under Biden, and frankly have not appeared to have much effect on China.  Under Biden the US has taken a more targeted approach and is denying the most advanced computer chips to China because of the potential for their use by the Chinese military.  If China went ahead with provision of lethal aid to Russia, its relationship with the US would further deteriorate.  Many US companies want access to the Chinese market to sell them iPhones, Big Macs and Teslas, but they also see the risk to their companies by placing so much of their supply chain in a single country, especially one where the government can impose political aims on its corporations.  If company CEO’s don’t comply with the government policies, they just “disappear” for a while, then they reappear and follow the rules.  Our supply chains are really at risk under those circumstances.  American companies are not pulling out of manufacturing in China, but new manufacturing capacity is being built elsewhere in Asia or S. America so they are not totally dependent on China.  China’s policies will hurt their growth in the long run.

Technical Analysis:

For the week ending 3/3/2023, the S&P 500 was up about 2.5%, breaking a string of down weeks.

Technically (see chart below) the market looks confusing.  RSI at the top of the chart is neutral at 50 and up last week.  Momentum shown by MACD at the bottom of the chart is slightly negative, but it looks like it is trying to turn up.  The price action is negative long term (see the 3 black fan lines), positive intermediate term (see the green uptrend channel), and neutral short term (trend from down to up is not confirmed yet).  Many of the CNBC analysts say the market is confusing right now.

Recent economic data shows strong employment and the fact that last month’s inflation data was steady rather than down means that the Fed will continue to hike interest rates.  That is not what the stock market wants to hear.  The next Fed announcement on rates is March 22^nd.  Most analysts have expected a hike of .25%, but hot economic data over the next couple of weeks could push the Fed to hike .5%.  The market does not like surprises, so that would not be well received.

Click THIS LINK to open the chart in a separate window.

What am I doing?  In the biggest buy I have made recently, I went back into GOVT, a managed Treasury bond fund that yields 4.07% currently, see the iShares fact sheet below.  Yahoo Finance shows the yield to be 1.7%, but that must be based on the nominal yield of the bonds, which does not take into account the drop in the market value of the bonds that occurred as the Fed raised interest rates.  You may remember back in Oct. I bought some GOVT and sold it in early Dec., making a whole year’s worth of gain in a few weeks.  I plan to hold GOVT for a while now, but I can’t promise that if the bond yield drops and bond values rise I may turn it into a trade again.

Click to access govt-ishares-u-s-treasury-bond-etf-fund-fact-sheet-en-us.pdf

So, why did I do this? 

First, diversification of your funds across asset classes is good WHEN THERE IS VALUE IN A NEW ASSET CLASS.  I have held almost no bonds since 2008 because they had such a low yield, I felt there was no value in the asset class.  Ten year Treasury bonds yielding 1% are bad, but ten year Treasuries yielding 4% are pretty good, unless interest rates keep rising and the bond values fall like they did in 2022.  It is unusual for both stocks and bonds to go down in the same year, although it just happened in 2022 because inflation was present and inflation is a wild card that is not usually present.  But normally, a mix of funds across asset classes provides some support to your portfolio when one asset class gets clobbered.

Second, there is value that I want to capture.  The ten year treasury started 2022 yielding 1% and ended the year around 4%.  That killed the value of the underlying bonds.  I think that even if interest rates rise further in this cycle, at some point in the future bond yields will go back below 4% on the ten year.  It may take a few years, but I can collect 4% in the meantime.  There has been a lot of discussion on CNBC about what the Fed’s “terminal rate” will be on Fed Funds, and those discussions have moved higher from 5% to 6%.  Nobody knows for sure, they could have to go to 7% or 8% to kill inflation.  But longer duration bond yields are set by the market, not the Fed, and longer term bonds have not followed the short term Fed Funds rate.  That has given us today’s inverted yield curve, where longer term bond yields are lower than the Fed Funds rate.  The US govt. debt is around $32 trillion so the govt. does not want to see extremely high interest rates because it would cost too much to carry the debt.

Third, and this is personal, but I’m 70 years old, officially an old man, and it is hard work to actively manage my entire portfolio.  I could use a portion of the portfolio that is relatively safe and delivers a decent yield.  I realize that rates can go higher, so I did not put all that I would like in bonds into GOVT last week.  If rates go higher and the bond values fall, I can buy more and lower my cost basis and improve the yield.  We know the Fed is not finished raising interest rates.

There is a lot to be learned about bonds in the two charts below, so study them for a while. First is the GOVT bond fund, and second is the yield on the ten year treasury bond.

If you have a question about this, ask it in the comments on the website, I enjoy the comments.

———————–  

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

1. Is it a bull market or a bear market?
2. Why does healthcare cost so much?
3. Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing