All-Time Low

Friday’s close, August’s final trading day, marked the lowest close for US 30-year Treasury bond yields. Ever.

Long-term US Treasury yields printing all-time lows cannot be ignored. It is sending a message. It has, at times in the past, been a great harbinger that an economic slowdown will be likely sometime in our future. But at other times it’s signaled fear from an external event and the subsequent rush to safety. US Treasuries are considered the safe haven and where investors stash their cash waiting for markets to settle down. Just thinking out loud in an attempt to provide another reason, if I were a foreign investor and needed to park some money where it is guaranteed (let’s avoid the guarantee discussion for the sake of keeping the blog civil), US treasuries are about the best answer.  At least for now. While a yield less than 2% is just about as unappealing as listening to Rosanne sing the national anthem, it sure beats most every other sovereign bond offering around the globe. As we know, most of Europe is now charging you interest to lend them money rather than giving it. Large inflows into US Treasuries drive prices higher and yields lower. If you are looking for certainty here as to what the exact message is, you’re going to be sorely disappointed. Unfortunately, the exact message will only be known in the future because it will be so obvious in hindsight. What the message should be used for is the same message you would get if you walked down a dark alley alone, at night. Raise your awareness and have a plan.

The other thing that cannot go without mention at this time of all-time low yields is to continue to highlight the devastating impact low yields have on pensions. When yields fall and stay low, the biggest losers, besides savers are pension funds. Why? because they are required, by law, to hold some of their retirement investments in the “safety” of US Treasuries. All pensions use returns of 7-8% (some foolishly have used higher and are in deeper trouble or already defunct because of it) to project and pay the future benefits to their participants. In order to earn a long-term pension return of 8% with 2% treasury yields, the stock portion of their investment holdings will need to return 12-14%. Every year. Forever … well at least as long as the pension survives … or they cut benefits. What do you think the likelihood of that happening is? Exactly. And why the pension crisis is not a matter of if, but when. I have no doubt, there is still ample time but smart pensioners should be finding a way to eventually live on less.

Burritos or Curing Cancer?

Wall street’s “sell” is most often about a story … and who wouldn’t invest in a company that is attempting to cure cancer rather than one that sells burritos if you could only own one? That’s anti-American isn’t it? The difference (so far) this year between the best and worst performing stocks that are within the sp500 index is a trivial 130%+. The top performing stock is Chipotle Mexican Grill, up more than 87% while the worst performing is Nektar Therapeutics, a biotech company creating products that are targeted at curing cancer is down more than 44%.

This, by no means is meant to disparage Nektar any more than it is to promote Chipotle. Rather, an example of why, if you want the best returns, you need to find other (or supplemental) reasons than just a story.

8-25-19 Weekend Stock Market Update Video

A quick look at last week’s US stock market action and some important levels to watch.

https://youtu.be/Jn2SzPtC_9M

By the Numbers

The good news is historically when the US stock market closes the first quarter of the year higher than it opened, there is a very high probability it will end the near with positive returns (40/42 times) as you can see in the chart below.  What else is rather obvious, the higher the first quarter gain, the greater the probability the year ends positive.  On the outside, the data suggests there is a strong argument to stay invested for the entire year.

Those numbers tell a compelling story but when slicing the data in a different way, I wondered if the story becomes less persuasive when removing the first quarter’s performance. Just how many of those 42 years ended with a Q2-Q4 positive performance? I wanted to find out if better returns were achieved by selling at the end of the first quarter and sitting on the sidelines or staying fully invested. As it turns, out while its not as strong, it was statistically significant as 33/40 years ended with positive Q2 through Q4 performance. If you are an evidenced based investor, the data suggests you ignore those inner sell concerns and stay invested for the balance of the year.  Or, better yet, watch price and volume and follow your plan.

Double Bottom

After hitting $100 share in March of last year, Western Digital’s stock, WDC, fell on hard times as it declined more than 65%, bottoming 10 months later in December.  Since then it has made two higher highs and one higher low and sits just under an important past area of resistance. You can see in the upper pane RSI momentum now resides in the bullish zone while price is above the bullishly aligned moving averages (price > 50dma >200dma). While not perfect, the recent 11+ month consolidation formed a double bottom which, if plays out, has an upside target at T1, a 40+% gain from a breakout. I do want to point out the volume patterns are confirming a potential move higher as we are seeing the large volume (bottom pane) spikes shifting from predominantly red (institutional selling) to green (institutional buying)

 Of course, being a technology stock (hard drives), this opportunity will have little to no chance of ever hitting its upside target if either an escalation or no change to the current US-China trade standoff happens. But, any positive resolution sets WDC’s stock as an attractive opportunity with healthy gain potential.