The Week's Events Were a Reset, and Bonds Are the Key to the Markets: Best of Kass
Doug Kass fills his blog on RealMoney every day with his up-to-the-minute reactions to what's happening in the market and his legendary ahead-of-the-crowd ideas. This week he blogged on:
- How bankers -- including the Fed -- are feckless
- How inflation can rob a market of value
Click here for information on RealMoney, where you can see all the blogs, including Doug Kass'--and reader comments--in real time.
Originally published July 1 at 4:56 p.m. EDT
My Takeaways and Observations
My month was made by Double D's comments, and I mean it. At my core I am a softie, and D's sweet words tugged at my heart. I shared them with my family.
Bottom line to me on the markets: This week's events reset global economic and profits growth lower.
Bankers -- and that includes our Fed -- are feckless. They have failed and continue to fail to understand the structural problems that confront world growth. To me, this is pathetic. For now, markets don't care.
The Fed has lost control of the markets and has no more tools. Its forecasts are profoundly wrong-footed, and it has been that way for five years.
The move higher off of Monday's lows has led me to up my short exposure.
On bonds: my debate with Tom Graff, a possible "blow off" phase in the climb in bond prices and some serious questions to bond market bulls.
Some worthy charts.
Markets moved slightly higher throughout the first day of the new quarter. For a change, it was a yawner.
However, for the full week, the normal market correlations of stocks to bonds, oil, commodities and currencies failed as the animal spirits overwhelmed factors that traditionally provide headwinds.
I was up to about 2 a.m. at a poker game with some hedge-hoggers (and up at 4 a.m. to start writing/trading), so I will be briefer than usual.
After the close, Autodata reported June monthly sales at a 16.6 million seasonally adjusted annual rate. Peak Autos!
- The U.S. dollar weakened.
- The price of crude oil rose by 83 cents to $49.15.
- Gold roared ahead, up $25 to $1,345 as it breakouts from the $1,300 level.
- Agricultural commodities got schmeissed across the board: wheat -16, corn -4, soybean -16 and oats -7.
- Bonds continued to ramp. iShares 20+ Year Treasury Bond ETF (TLT) - Get Report was up $1.68.
- The yield on the 10-year U.S. note dropped by four basis points to 1.46% after hitting 1.40% early in the morning. The long bond yield declined by seven basis points to a 2.24% yield.
- The 2s/10s spread declined to a new record low of 85 basis points. Not good for financials that borrow short and lend longer and that have an asset-sensitive balance sheet.
- Municipal bonds were down small but closed-end funds traded somewhat higher.
- High-yield bonds were mixed.
- Blackstone/GSO Strategic Credit Fund (BGB) - Get Report was up a dime and back to $14.50 in the search for yield.
- Banks disappointed for the second day in a row, as I suggested in my Sell Banks post yesterday morning. After the close Warren Buffett filed for permission to go over 10% of Wells Fargo's (WFC) - Get Report ownership, though he currently doesn't have an intention to do so. He is averaging down!
- Brokerage stocks also were lower, but marginally so.
- Insurance stocks also stunk after a feeble rally from large declines in the last week. I remain short Lincoln National (LNC) - Get Report and MetLife (MET) - Get Report .
- Retail was mixed to higher. Shorts Nordstrom (JWN) - Get Report and Foot Locker (FL) - Get Report didn't do a damn thing.
- Old tech flat lined.
- Autos rallied small but could get hit on the after-the-close news. I covered much of my shorts in the belly of Monday's declines. I am a short seller on strength now.
- iShares Nasdaq BiotechnologyETF (IBB) - Get Report was up $5. Allergan (AGN) - Get Report rose $3 and there were good gains for value plays Celgene (CELG) - Get Report and Gilead Sciences (GILD) - Get Report .
- Energy and media were mixed.
- Ag equipment was mixed. Caterpillar (CAT) - Get Report was up a half a buck but Deere (DE) - Get Report was down after a Morgan Stanley downgrade yesterday.
- (T)FANG returned to favor, led by Amazon (AMZN) - Get Report , Alphabet (GOOGL) - Get Report and Netflix (NFLX) - Get Report , which caught an upgrade.
- Staples quieted down.
- In individual stocks, Twitter (TWTR) - Get Report is making a move back toward some previous resistance (I added). My longs DuPont (DD) - Get Report and Hartford Financial Services Group (HIG) - Get Report showed little movement.
Here are some value-added contributions on our site:
1. Jim "EL Capitan " Cramer gets toothy. He also chimes on Tesla's accident.
Again, Tom Graff on bonds and Tim "Not Phil or Judy" Collins on bond spreads.
Eric Jackson on the impact of the Lions Gate deal on Viacom .
Rev Shark on correction risks.
Position: Long DD, HIG, TWTR, TBT; short SPY, TLT, NFLX small, SBUX small, JWN small, FL small, DIS small, F small, GM small, CAT small.
1.42%
Originally published July 1 at 8:51 a.m. EDT
I believe that bonds are the key to the markets these days -- and from my perch, fixed income and bond-equivalent stocks seem to be setting up for a possible "blow-off" move.
Europe's growing negative interest-rate environment is an important feature to this. So is the fact that Wall Street's sentiment about bond prices is turning ever more bullish as forecasts for 10-year Treasury yields as low as 1% proliferate.
But in all likelihood, the blow-off that I expect could produce a major cycle end. And the roughly seven-point drop that we've seen this morning in 10-year Treasury yields (to as low as 1.42!) shows that this move might have already begun.
There will be victims of this squeeze to record-low rates, which will put pressure on both the "savings class" and on bank and insurance-company profits.
In fact, this bubble will likely have a bad ending for both stocks and bonds -- the only issue in my mind is when.
So, let's end the week by asking ourselves two important questions:
- What could possibly be more unnatural than central banks' Zero Interest Rate Policies in the face of the high debt levels that we're see around the world?
- What ever happened to pricing risk according to the fundamental probability of debtors paying back their obligations?
Stay tuned.
Position: Long TBT; Short TLT (small), LNC (small), MET (small)
At the time of publication, Kass and/or his funds were long/short XXX, although holdings can change at any time.
Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.
Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long WFC, AGN, GOOGL, TWTR.