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David Fuller and Eoin Treacy's Comment of the Day
Category - Fixed Income

    Email of the day on what to do in the third psychological perception stage of a bull market:

    After listening to the latest Long-Term Outlook broadcast in which you reiterated your view that we were in the final phase of a cyclical bull market and that while it was a time to be watchful, it was not a time to sell, I could not help thinking back to 2008 when David, in his daily audios, said on several occasions that he did not think the sub-prime crisis would amount to much.

    Unless I'm much mistaken, he continued to make this comment until at least June. Around June 2008, I bought Citibank at $33 (equivalent to $330 today) yielding 7.5% - a bargain. They fell to $27 and I bought some more. Unfortunately, I lacked the guts to buy when they fell to $1 but I did add to my holding as the price steadied and rose - not much because I remained cautious (scared to death to be more truthful). Only this year has my Citibank investment moved into profit. I make these comments because as Sam Goldwyn famously said, 'forecasting is difficult, particularly when it's about the future'.

    Like anyone else, I have no clue as to the timing, the depth or the length of the next correction or crash. However, without income flowing in from any source other than investments, I am now beginning to prune - or intending to prune: selling, as you know, is harder than pulling hens' teeth.

    Why do I want to prune now? Because I do not want to be trying to raise cash when markets are plummeting. Some would argue that one should just hold through the corrections and crashes and I would agree with that - to an extent. My caveat would be that one must have cash to take advantage of the market swoons when they occur. If one remained fully invested from 1999 to the current time and lacked cash to add to the market in 2009 or 10, one's returns would not look overly good. So, I intend to increase my cash reserve now, probably top slicing tech, resources and China. If I wait for someone to ring a bell, or point out that chart patterns are deteriorating, the probability is that it will be too late.

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    Asia Outlook Rising Momentum, inflation emerging

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section: 

    German Yields Surge as Draghi Avoids a 'Strong Swipe' at Euro

    This article by John Ainger for Bloomberg may be of interest to subscribers. Here it is in full: 

    German benchmark yields climbed to the highest level in more than two years after European Central Bank President Mario Draghi disappointed investors who had expected him to take a tough stance against recent euro strength.

    Peripheral sovereign bonds led declines across the currency bloc as Draghi warned that foreign-exchange volatility required monitoring, but also noted that economic growth could surprise to the upside. With comments on the shared currency identified as the main barometer of the ECB’s thinking before the meeting, Draghi’s reluctance to take a tougher stance on the euro triggered the selloff in government securities, according to Toronto-Dominion Bank.

    Draghi didn’t take a “strong swipe at euro strength” and “that has bled into rates,” said Richard Kelly, Toronto- Dominion’s head of global strategy. “He upgraded growth and hasn’t yet said anything new on inflation. So it all adds up to a slight drift higher for rates.”

    German 10-year bund yields climbed four basis points to 0.63 percent as of 2:34 p.m. in London, after touching 0.64 percent, the highest since December 2015. Those on Italian peers increased six basis points to 1.96 percent, while comparable Spanish yields jumped six basis points to 1.42 percent.

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    Bond ETFs Awash in Pain May Be Red Flag for Risk Appetite

    This article by Dani Burger and Sid Verma for Bloomberg may be of interest to subscribers. Here is a section:

     

    “The tax package is probably giving institutional investors more confidence about the shape of corporate balance sheets,” said Matt Maley, a strategist at trading firm Miller Tabak + Co. “Thus they might be making up for the selling that is coming from these products geared towards individuals, who are worried about the rise in government yields.”

    U.S.-listed corporate bond ETFs are headed for a second consecutive month of outflows, the first time that’s occurred in at least seven years. The pain is across ratings. The iShares iBoxx Investment Grade Corporate Bond ETF, LQD, had the biggest day of losses last week since 2016, while BlackRock’s high-yield equivalent, HYG, is in the midst of its biggest two-month outflows on record.

    If the withdrawals are a symptom that retail funds are losing their taste for fixed-income, the impact could be far-reaching. A tweet from DoubleLine Capital LP co-founder Jeffrey Gundlach Thursday -- who has previously warned underperformance may portend a selloff for risk assets -- noted the gap between junk ETF prices and stock gains.

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    Doubling of U.S. Bond Supply Seen as a Threat to Global Rally

    This article by Sid Verma for Bloomberg may be of interest to subscribers. Here is a section:

    A “dramatic” increase in U.S. bond supply over the next year risks unhinging global markets from their bullish foundations, warns Torsten Slok at Deutsche Bank AG.

    The supply of U.S. government debt will almost double to $1 trillion this year to finance a widening budget deficit as the Federal Reserve whittles down its holdings. Unless new buyers emerge, the overhang could be far-reaching.

    “If demand for U.S. fixed income doesn’t double over the coming years then U.S. long rates will move higher, credit spreads will widen, the dollar will fall, and stocks will likely go down as foreigners move out of depreciating U.S. assets,” the chief international economist at the German lender wrote in a note Tuesday. “And this could happen even in a situation where U.S. economic fundamentals remain solid.”

    Those fears aren’t shared widely on Wall Street, where spreads on corporate bonds have sunk to 2007 lows and bullish indicators abound. The rally in credit appears relentless, retail demand for bonds is insatiable and tax cuts may reduce corporate borrowing.

    Commercial banks, emerging-market reserve managers and pension funds are all set to plug the $1.1 trillion hole in global bond demand left by central banks this year, according to JPMorgan Chase & Co.

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    Just Markets

    It was a pleasure to tune in to this conference call with Jeff Gundlach at DoubleLine and the firm kindly sent along the slides. 

    Email of the day China, Currencies, Inflation and Gold

    In the video today, you emphasized the significance of recent moves by China regarding its currency and inflation.  These issues were discussed in length in a Mises Institute report which will be of interest to many readers.

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    Euro Tests Three-Year High as End-of-Stimulus Fear Batters Bonds

    This article by John Ainger and Samuel Potter for Bloomberg may be of interest to subscribers. Here is a section:

    The currency jumped, sapping stocks, and bonds slid as a slew of data signaled a potential uptick in inflation in the euro area, after manufacturing growth accelerated to a record in December. The numbers followed comments at the weekend from European Central Bank policy maker Benoit Coeure, who said that unless inflation disappointed there’s a “reasonable chance” the central bank’s extension of QE in October could be the final one.

    While Coeure didn’t mention the exchange rate, his comments were a boon for euro bulls and coincided with a period of ongoing dollar weakness. The common currency’s strength is translating into a painful start to the year for Europe’s export-heavy stock markets, while bonds have picked up where 2017 left off, with benchmark German bund yields rising to the highest since October.

    “The ECB suggestion that bond buying will not be extended is likely behind the recent push higher in the euro,” said Neil Jones, head of currency sales at Mizuho Bank Ltd. in London. “My sense is the euro will extend beyond its three-year high in the next two weeks.”

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    Italy's Gentiloni Says Election Campaign Is 'Imminent'

    This article by John Follain, Lorenzo Totaro and Chiara Albanese for Bloomberg may be of interest to subscribers. Here is a section:

    The euro zone’s third-biggest economy, whose recovery is trailing most of its peers, risks a hung parliament after the ballot. Opinion polls show the anti-establishment Five Star Movement, which wants a consultative referendum on abandoning the euro if European Union treaties aren’t renegotiated, leading Gentiloni’s Democratic Party and groups in a possible center- right coalition that would include former Premier Silvio Berlusconi’s Forza Italia.

    But neither Five Star, the Democrats headed by former Prime Minister Matteo Renzi, nor the center-right bloc would win a parliamentary majority, according to the surveys. A possible “grand coalition” of the Democrats and Forza Italia would not have a majority either.

    “It’s virtually certain that we won’t have a clear majority,” said Sergio Fabbrini, director of the school of government at Luiss University in Rome. “The talks to verify whether a new majority can be formed could last until the summer. In Germany, the talks have dragged on for ages, and in Italy we may end up with about twice as many parties in parliament as in Germany.”

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    When Will the ECB Pull Its Trillions From the Markets?

    This article by Jana Randow, Jeremy Scott Diamond and Hayley Warren for Bloomberg from a month ago is equally relevant today and piqued by interest. Here is a section: 

    After three years of asset purchases, negative interest rates and cheap loans, the European Central Bank is finally confident that it has beaten the risk of deflation in the euro area. Now it’s time to start thinking about how to unwind those extraordinary measures.

    It won’t be simple. The ECB’s mandate is to keep inflation just below 2 percent, but to judge its progress it looks at a range of key economic and market indicators.

    In the first step toward the exit, policy makers decided to reduce monthly asset purchases by half starting in January and extend it for at least another nine months.

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