Day 14: Bill Gross is wrong


I've followed Bill Gross, the portfolio manager of the Janus Global Unconstrained Bond Fund for years. I was invested in his previous fund, PIMCO's $270 Billion dollar Total Return Fund; but today I respectfully disagree with the guru of bonds. Gross stated that a move in Bond yields above the 2.60% level would mark the end of bond yield declines that started in the 1980's. Wow! Seriously William? I know that Bill has lots of sophisticated systems and decades of experience modeling these things. Me, I've got diddly, but my gut says...Ummmmm no.

Lacking sophisticated modeling systems and well, sophistication of any kind I'm free to throw myself out there and make a prediction. Bill on the other hand has to play it safe, so he picks a low number like 2.60% and all is well. If Bill is right I'll buy him a drink at The Pioneer Saloon in Woodside, CA on a busy Saturday night. Ever been there you know how hard that is to accomplish. If I'm right, I'll settle for the same. By the way Bill, I like Bullet Bourbon on the rocks with a splash of coke for color.

First my thesis. Money has been flowing into U.S Treasuries for a long time now. Why? Simple, there's lots of money that simply has to be invested in bonds. Globally there are institutional investors who have no choice, they are mandated to invest and produce a specific return. With negative interest rates in many countries that money flowed into the U.S. Treasury bonds pushing prices to all time highs. At the same time our federal reserve has been buying bonds back artificially pushing up bond prices. Oh and lets not forget that the amount of money being printed and pumped into the economy is also at an all time high.

When prices go up the yields come down and when yields go up prices come down. When interest rates got low enough money began flowing into stocks at a faster pace. Specifically money flowed into stocks that were bond market equivalents. Why buy a 10 year treasury paying diddly when you can buy Verizon paying over 4 percent and get a little appreciation too. This began a cycle all through 2016 of investors chasing yields and appreciation on these stocks which resulted in several rotations. A rotation is simply investors pulling money from one sector and investing it in another. That's really important! It's like money moving from your right pocket to your left pocket. There's no significant new money in the stock market, just lots of bond money moving into stocks and then rotating from one sector to another sector.

So what happened to bonds? Well bond prices have been coming down as bond yields have climbed. Bill Gross thinks that 2.60% on the 10 Year Treasury is significant. He thinks it's more important than any other number out there. I disagree. The number is over 3%, specifically I'm calling it 3.03%. What happens at 3.03%? I think this begins a significant bear market in bonds. If history has been any teacher we'll probably see good bonds get trashed along with the bad as investors just lump everything together and the algorithms of computer trading systems sell off anything with the word "bond" in it's name. Personally I don't see any reason for municiple bonds to get hurt but the fact is they do and have. I love muni bonds and keep a long position in the iShares National Muni Bond ETF (MUB). Just for transparency I am long the Proshares Ultra Short 20 year Treasury (TBT). This ETF basically goes up in value as bond prices come down. I started shorting US treasuries July 5, 2016 and the fund is up almost $10 a share since then.

So if bonds go into this secular bear market condition does that mean that the stock market is destined for tragedy? I don't think so. Investors will get shaken, no question about it, but I don't see any prolonged collapse in stocks. In fact I'm going to really stick my neck out there and predict that the stock market goes even higher from here. I called DOW 21, 700 in a previous post. Look I'm not one of those people who sits around every day proselytizing what the market will do and how much it's going to move up or down, but I see one very significant data point that can move the market to unthinkable levels; participation. There is a general lack of participation in the market from a broad base of investors. If I ask 20 people if their invested I get 1 or 2 who say they have a little money in index funds or mutual funds. There is a lot of money sitting on the side lines at a time when they should be invested. I'm not suggesting you rush out and start plowing all your savings into stocks, that's the wrong approach. You've got to start with a great, low cost, S&P 500 exchange traded index fund like the Vanguard Total S&P 500 (VTI) or (VOO). No mutual funds, buy ETF index funds that are more liquid and cost less to run. Then add those out of favor DOW stalwarts in small amounts; wash-rinse-repeat. If that side line money comes into the market all kinds of growth can occur.

If I combine the side line money with a lower corporate tax rate, more jobs in the US, higher wages, higher inflation, more lending and repatriation of a couple trillion dollars in overseas money the US stock market will grow, maybe at levels like we haven't seen since the dot com boom of the 1990's. Ouch! My memory is still very fresh from those days.

The portfolio closed the day UP with a gain of +0.52% for +$2,587.10, reducing the overall portfolio loss down to

-$869.75 (-0.24%). Currently we have 31 companies in the green and 43 still in the red. No new investments have been made but it's time to review the companies on the 'Time Out' list. To date, Greene County Bancorp (GCBC) continues to be our biggest gainer, up +10.13%.

Top 5 investments to date by performance:

  1. Greene County Bancorp (GCBC) +10.83%

  2. LeMaitre Vascular (LMAT) +9.50%

  3. NetEase Inc (NTES) +6.67%

  4. Facebook (FB) +6.17%

  5. Mid Penn Bancorp (MPB) +5.64

Stay Invested

Clay Baker

Featured Posts
Recent Posts
Archive
Search By Tags
Follow Us
  • Facebook Basic Square
  • Twitter Basic Square
  • Google+ Basic Square

This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

© 2016 by Clay Baker all rights reserved