Joy riding

Joy riding.  Stocks rose yesterday as no bad news on trade hit the tape.  Crazy UK politics was not enough to upset investors who took the glass half full view and bought equities.

1.  A tale of two yields.  Although investors don’t generally invest in the S&P500 index for its yield, something very interesting, if not ominous just occurred in the wake of this month’s rally in long maturity treasuries.  The yield to maturity of a 30 year treasury is now less than the twelve month yield of the S&P500 Index.  What makes this fact interesting is that it rarely, if ever, occurs.  In fact, the last time it occurred was in March, 2009 when the US was in the throws of the financial crisis.  But what does it really mean and how should investors look at it?  First, let’s look into why 30-year yields are so low.  I have been reporting a great deal on why bond investors buy long maturities if they perceive trouble ahead. Simply put, US Treasury notes are the safest assets in the world and if investors are expecting the global economy to go into a recession they would favor a safe haven like a treasury bond.  The increased demand along with expectations for low inflation drives bond prices up and yields down.  Furthermore, despite low yields, the US Long Bond (30-year) yields considerably more than its developed market peers, making 1.97% attractive, thus further increasing demand.  The result is that 30-year treasury yields have fallen by -35% year to date with a drop of -19% in August alone.  Now let’s look at the S&P500, fresh off the 2017 tax incentive in which corporations became flush with cash.  Corporate debt is near all time highs as companies tap the low interest rate debt markets thus providing companies an even wider berth in their cash flows.  How are companies using all this cash?  Dividends and stock buy backs.  Increasing dividends by large cap stocks and rapidly dropping treasury yield is why this anomaly has occurred.  Does it mean something evil this way comes?  No, it is simply a sign of the times as central bankers around the world have adopted a ZIRP and NIRP (zero and negative interest rate policies) combined with the expectation of an economic slowdown.  Investors considering healthy, well performing companies that offer dividends which have a history of increasing them, might choose stocks in lieu of lower treasury yields… and if a stock goes up, better yet.  Caveat emptor: investing in stocks does not guarantee return of principal while treasury bonds do. The take away: stocks should never be used as a substitute for bonds, even in this topsy turvy environment
2.  Word from across the pond.  I have been resisting reporting on Brexit recently as it seems to be a topic that interests US investors very little.  I am not sure why, as the UK and EU are two crucial factors in the global economy, which by all measures has slowed down considerably.  Perhaps it is because the saga has been drawn out for such a long period of time, investors have simply lost interest.  In all fairness, there are plenty of other things to focus on given recent ups and downs with US – China trade war and Fed intrigue.  Just yesterday, UK PM Boris Johnson asked the Queen to dismiss Parliament until just before the October 31st deadline.  What does that mean?  Johnson, a staunch Brexit advocate and conservative has been jockeying around since he moved into number 10 (that’s 10 Downing Street) and has made very little progress in Parliament and with the EU, which has been sticking to their guns.  Johnson has also made it clear that he would exit the EU even without a deal, despite the fact that the majority of Parliament is against a hard Brexit.  Yesterday’s move appears to be a political move designed to eliminate the challenges to hard Brexit that would be mounted by Parliament as the UK approaches the deadline.  In other words, Johnson just increased the prospects of a no-deal Brexit.  A hard Brexit would damage the Eurozone economy and possibly push it into recession not to mention the UK economy which will suffer even more.  And by the way, the Queen agreed, even though her permission was just a formality.  It is time for investors to refocus on the Brexit saga.
Stocks rallied yesterday, ignoring a UK political twist, happy not to have any bad trade news, and because crude oil finally rallied.  The real rally was driven by the energy sector, which rallied by +1.4% after crude oil jumped by +1.55% as the EIA announced a reduction in US supply.  The S&P500 climbed by +0.65%, the Dow Jones Industrial Average rose by +1.00%, the Russell 2000 advanced by +1.15%, and the NASDAQ Composite Index traded up by +0.38%.  Bonds advanced further and 10-year treasury yields were unchanged at 1.47%.
– The Bureau of Economic Analysis will announce another estimate of GDP and is expected to have revised estimates down to +2.00% from +2.1%.
– Personal Consumption is expected to come in at +4.3%, unchanged.
– Pending Home Sales are expected to be flat after growing by +2.8% last month.
– The Treasury will sell $34 billion 7-year notes.
– Pre bell earnings include Dollar General, Best Buy, Hanes Celestial, Dollar Tree, Abercrombie & Fitch, and Burlington Stores.  After the bell we will hear from Ulta, Dell, and Marvell Technologies, amongst others.
–  This morning WHILE YOU SLEPT Beijing indicated that it would not hit back after Trump’s new tariffs kick in on Sept. 1st exciting the markets.


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