I can’t keep track of the trains of thought I’m pursuing in my posts. So I don’t even try, much less worry about the fact that I might have argued a point in opposite directions. But somewhere in my travels, I suggested that PCY (rather than EMB) was the purer play on foreign sovereigns and that a partial explanation of why PCY was being bid up was its inverse relationship to the US dollar. In other words, to go long PCY was the same as shorting UUP. Well, things weren’t that simple, as doing rolling, 1-month correlations soon discovered. Sometimes, the two did move inversely. Sometimes, in lockstep. You can repeat the demo, but you needn’t, because a picture gives a better idea of what’s going on. http://finance.yahoo.com/echarts?s=PCY#symbol=pcy;range=2y;c... From there, I wandered into currency funds generally, and ending up creating the following chart for DBV, which is a fund that goes short three of the G10 currencies (currently, EUR, JPY, CHF) and long three offsetting ones (currently, AUD, NZD, NOK). http://stockcharts.com/h-sc/ui?s=DBV&p=D&yr=0&mn... Clearly, the trend is up, up, up. But the recent 4-day price gap above the Keltner Channel, paired with the Chaiken indicator (showing money flowing out of the fund), paired with CCI (suggesting an overbought condition) suggested DBV had become a short. Contradicting that suggestion, of course, was the strength of the upward trend (confirmed by the TSI indicator). "Was DBV a short, or not?", and was I sure enough of my analysis to bet money on it? My intention went I went to bed Sunday night was to put on the trade, at least in “sim-mode” (aka, paper-trade it). But I was wide awake in the early hours and too busy thinking to want to get out of bed in time for the opening. So I let the opportunity pass. And when I did get up, I went to work in the bond market instead. But the trade would have worked had I put it on. http://finance.yahoo.com/echarts?s=DBV#symbol=dbv;range=1d;c... That prompted me to ask this question: "Am I good, or am I good?" BRRRP! Wrong question. The right question is this. "Was the trade put on from a clear set of rules, such that, the trade could be repeated?" That's what I knew I lacked. If I had to bet, I'd say that I had read the chart correctly. DBV was a short. But what about the next chart, and the next chart, and the next? 'Process' is what matters, not getting a bet or two correct, and I knew I still had a lot of work to do toward developing a clear set of rules. OK, DBV is a currency fund, not a bond fund. But the same considerations apply. Despite all the nonsense about mutual funds (and ETFs) being “a means to make long-term investments”, they really are nothing more than trading vehicles. And bond funds --especially -- are trading vehicles, because they have no maturity. When interest-rates rise, you’re going to suffer capital-losses. So you get into bond funds when the getting in is good, and you get out of bond funds when the getting out is good. Your time-frames can be long, months or years. That’s not a problem, and that is the least of your worries. But you get in, and then you get out, and you are going to do so on signals that could be purely ‘fundamental’, but must also include ‘technical’ considerations as well. That means if you want to buy bond funds, you have to develop a market-timing system you can trust. Otherwise, you’re going to get killed and suffer the fate that the average fixed-income investor does, namely an 84% under-performance of your relevant benchmarks --and all due to your crappy timing-- as the Dalbar 20-year studies of investor behavior so clearly document. So, what’s a workaround? Buy individual bonds and hold them to maturity. That tactic sidesteps the whole timing problem. Charlie-------------------------- Dalbar’s results are reported in QAIB Advisors Edition 2012 as a freely downloadable PDF file found through any search engine.
Your other post was timely. Bond funds are indeed bursting. Three of the funds I have been tracking to help me determine when to get out are either at their floor or within $.01 or two of their floor - and all of them are likely to close down $.01 or more today.I will likely be spending some time on the phone over the next few days telling people that it is time to get out.
Hawk, One good call doesn't make me a market strategist, and that's where I'm stuck right now. I need to put together a market-timing system (aka, a trading system), which I clearly don't have. I'm a good chart jock, but that's not enough to win most races, and that's the downsides of being a fixed-income value-investor who buys individual bonds. "Timing" can be hugely unimportant, due the fact you're buying what amounts to puts. If you buy a bit too early (or late), no biggie. You'll take a hit to gross profits, but you won't trash your account. But if you're buying securities without that price protection (i.e., an enforced exit at par), your downside is where you set your stop, and that takes disciple to set.I can't applaud and say that you're doing the right thing by your clients, because certainly a case can be made that the Bernank isn't going to let interest-rates rise and --thereby-- increase the gov't's cost of borrowing. ("Never bet against the Fed.") OTOH, anytime traders want to take the Fed to the woodshed and thrash it soundly, they can and will. I'm just sooooo glad I can sit tight on 100% of what I own and sidestep the timing problem. Charlie
Speaking of charts, if the 10-year breaks above resistance, then the smart money bet is that prices won’t retrace. http://finance.yahoo.com/echarts?s=^TNX+Interactive#symbol=^...
Again, from The Daily Pfennig, a free currency newsletter written by Chuck butler and published by Everbank. On Friday morning, I told you about the dollar rally that was kicked off by a stupid statement in the FOMC meeting minutes about ending Quantitative Easing (QE) in 2013. Recall that I said it was stupid for the markets to have reacted they way they did, for the FOMC didn't say "when in 2013!" they could continue with QE until 12/31 and it would still be 2013! And I think that calmer heads began to pop up and prevail on Friday, as the ugliness of the morning, didn't last all day. Friday's, end of day, price action in the currencies and metals wasn't good, but at least it wasn't as bad as earlier in the day! You can watch the 10-year Treasury most of the time to get the pulse on what the Fed is up to. On Friday morning I told you that the 10-yr Treasury yield had risen to 1.96%... A little later that morning, I was talking to the Big Boss, Frank Trotter, and I said, "you watch, I think the Fed will be in to buy, for they can't have the 10-year' yield breaking through 2%". And guess what? Or better yet, guess where the 10-year yield is this morning? Back down to 1.90%... So, the Fed is intervening in the market? Like, do they really think they have enough money --taxpayer money, YOUR money-- to keep interest-rates down if traders want to bid them up? A battle is shaping up, folks, between the bond vigilantes and the Congressional/Federal spendthrifts, and we *know* who's going to lose that one. Chuck continues on. China and Brazil have renewed their currency swap agreement, which allows them to remove dollars from the terms of transactions between the two countries. So, Brazil can sell oil to China without having to use U.S. dollars to settle the transaction. The first time I read about these currency swap agreements I saw them for what they truly were. and told you! These agreements are to lessen the role of the dollar. China has signed these agreements with a medium list of countries, and continues to look for more countries that no longer want to be saddled with depreciating dollars in their reserves! Australia and Japan signed last year. And there are still rumors of the Arab countries signing an agreement with China. Should that happen, then the dollar's relevancy in the world will have taken a HUGE blow! http://www.dailypfennig.com/2013/01/07/fundamentals-return/The currency markets are HUGE, like, 3x the daily dollar volume of all other securities markets combined.That isn't a group of traders you want on the other side of your trade, which amounts to this, "Yes we can spend our way out of debt, because our misreading of what Keynes actually said tells us so." Mauldin, Schiff, Rogers, Bass, and that most astute of all Yale economists, GWB, are all saying the same thing, "This sucker's goin' down." Maybe not this week or the week. But there's no way Congress will increase revenues and/or cut spending in a timely, meaningful way. So, bond prices are going to fall (and stock prices, and housing prices, and every other asset inflated by the Fed's multi-decades long policy of easy money). Look to Japan for a preview of what's coming here. Charlie ----------------http://annual.cfainstitute.org/2012/12/07/kyle-bass-on-japan... http://globaleconomicanalysis.blogspot.com/2012/12/kyle-bass...
My concern remains that regardless of how long the fed wants to keep rates low, those in bond funds are almost guaranteed to feel pain because what the funds currently hold have no place to go but down. In simpliest terms, if they are trading, they are trading rate for risk. If they are not trading, they are holding bonds that will have to depreciate as they approach maturity - and regardless of what they are doing, in most cases, they are probably buying bonds that yave a lower YTM than what they currently are holding.NAV has little if any upside potention this year. All the volatility is likely to be downward.Last year was another great year for bonds and bond funds. Signs are indicating that the ride is closer and closer to being over.
My concern remains that regardless of how long the fed wants to keep rates low, those in bond funds are almost guaranteed to feel pain because what the funds currently hold have no place to go but down.Hawk, Again, I disagree, and Schilling makes this argument. Let's say the current rate for the 10-year is 1.5%. You --and many people-- are saying that the rate couldn't go lower or even negative. Well, that's hardly true. It could happen. If it does, then those who buy at current levels --as Schilling is doing-- would achieve cap-appreciation gains of roughly 10%. "Forget the coupon", he says. "The trade worth making this year is long Treasuries for cap-gains."In other words, he's making a prediction that rates will go down. You are making a prediction that rates will go up. A third prediction could be made that rates will remain flat. Over any time frame you choose, two of those three will be wrong, and --ironically-- all of them will be proven right under other time frames. All of investing (trading/speculation/gambling/etc.) is nothing but a prediction game. You're making bets that certain event will (or won't) happen. That's one half of the risk calculation. The other half --the half nearly everyone ignores-- is the magnitude of the consequences, which Taleb illustrates well with a story from his career in which he is asked to make a market forecast and that forecast is compared to the position he currently had on. He guessed that the market would go up the next week, but he was massively short. Why? Expectancy theory. What were the upsides and downsides in each case? Traders in the conference immediately understood his point. The "risk manager" didn't. Same-same with the problem you face, that I face, that all of us faces. "How do we position ourselves?" Right now, there's just pennies in front of the oncoming bulldozer, instead of the quarters before. The nimble could grab them. The clumsy had better let them go. Charlie
You --and many people-- are saying that the rate couldn't go lower or even negative.No, I don't think I made such a comment. I think they can certainly go lower, but I doubt the potential for lower rates will necessarily mean significant increases in the NAV for bond funds that are already heavily invested. I think cap gains of 10% are overly optimistic. Now, he might get 10% on that specific purchase but again, what about funds that are already invested? Funds that are otherwise diversified over many different maturities and sectors?Your point seems to be that opportunities still exist to make a profit by buying individual bonds. I completely agree.My point is that, as your chart and my alerts are close to indicating, the ability to make a profit in some bond funs may soon be over. At such low yields, it does not take much of a NAV correction to wipe out an entire year of interest on a bond fund. One government bond fund I watch is down 2.1% from its peak this past summer. The yield on the fund is less than 3%. Worth the risk for less than 3% annual yield?We bounced off the NAV lows so we still have more time but you have to remember, your typical bond fund investor is not the same type of person that is a bond trader.
Hawk, We're looking at the interest-rate picture the same way (that risks have risen hugely), just talking about it a bit differently with respect to how we'd mange our own portfolios (or those of others).Charlie
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