The great lesson about finance

images-7While we saw some early morning action, it looks like I picked a decent day to spend an entire morning in the dentist’s chair. For you young traders out there always wondering why Doug Kass or I or someone else is in that chair, just wait until you get older. I’d advise you to take care of your teeth like you take care of your trading capital.

Still, it gave me time to reflect on the markets, and when the dentist finally granted my freedom, I pulled up a 30-minute chart of the SPDR S&P 500 ETF (SPY) to see if my eyes saw what my mind theorized in terms of a trading plan. The good news is this isn’t a complex plan. It’s not even unique. The chart still screams volatility, but even more so it screams: Do not push your luck. If you buy a dip, then sell the first rip. If you short a rip, then cover the first dip. Rocket science? Hardly, but the market rarely is these days. I don’t know that it ever has been outside algorithms.

We’ve spent months without these gaps and it has lulled many into a false sense of comfort. I honestly forgot what a painful gap felt like until the action on Friday. They sting and weigh on emotion. They blow through stops and wipe away hedging. They often push correlations to 1 and that diversity you thought you had is nothing more than a shadow in a rainstorm. Gold and Treasuries didn’t offer you shelter from the storm. They fled with your shadow, leaving you wet and cold and alone.

It takes these kicks in the pants to remind ourselves not to get complacent. Predicting these changes is difficult if not impossible, and I’d wager the majority of the folks who did catch the move lower this time tried to catch it incorrectly many times before. I’ve been looking for it along with volatility for weeks. Yes, it finally happened, but I took quite a few hits being stopped out of positions while waiting for it. That’s the nature of the beast.

The bears have their shadow comfortably beside them over the past few days. It’s unfamiliar to them, but so is the loneliness the bulls are feeling at the moment. Balance the euphoria and the worry, so you can focus on what the market is saying. To me right now, it is saying don’t get too comfortable in any position.

How to Add Stock to Your Buy List

images-8Put down the 10-K filings and the stock screeners. It’s time to take a break from the traditional methods of generating investment ideas. Instead, let the crowd do it for you.

From hedge funds to individual investors, scores of market participants are turning to social media to figure out which stocks are worth watching. It’s a concept that’s known as “crowdsourcing,” and it uses the masses to identify emerging trends in the market.

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Crowdsourcing has long been a popular tool for the advertising industry, but it also makes a lot of sense as an investment tool. After all, the market is completely driven by the supply and demand, so it can be valuable to see what names are trending among the crowd.

While some fund managers are already trying to leverage social media resources like Twitter to find algorithmic trading opportunities, for most investors, crowdsourcing works best as a starting point for investors who want a starting point in their analysis.

Today, we’ll leverage the power of the crowd to take a look at some of the most active stocks on the market.

  • Nearest Resistance: $21
  • Nearest Support: $20.81
  • Catalyst: Acquisition

Small-cap biotech stock Vitae Pharmaceuticals  (VTAE)  is up more than 158% this afternoon, boosted following news that Allergan  (AGN)  (which is a holding in Jim Cramer’s Action Alerts PLUS charitable portfolio) was offering to buy the smaller company for $21 per share in cash. That is driving enough volume in to Vitae to make this small firm one of the most actively traded stocks on theNasdaq this morning.

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The deal adds Vitae’s psoriasis and dermatitis treatments to Allergan’s pipeline, filling out the company’s skin health offerings. Allergan sees the deal closing by year-end — and the near-immediate gap up to the offer price this morning signals that Wall Street is pricing in a high likelihood of the deal getting done.

For traders who missed the buyout, the money has already been made on the VTAE trade.

Apple  (AAPL)  , a holding in Jim Cramer’s Action Alerts PLUS charitable portfolio, is up 4% on big volume as I write this afternoon, rallying following early presales numbers for the firm’s iPhone 7 and iPhone 7 Plus, which were reported by T-Mobile  (TMUS)  and Sprint  (S)  yesterday. T-Mobile CEO John Legere reported that sales were “like four times bigger than the iPhone 6 for us at the pre-order stage,” with Sprint adding that preorders for the next-gen phones are up 375% versus the same period last year. That sneak peek at sales numbers is sending Apple upwards for the second straight session.

The technical picture has something to do with Apple’s price strength here. Shares are breaking above an important resistance level up at $111, a price level that’s acted like a ceiling for shares since April. From here, prior highs around $120 look like the next target for Apple to take out on the way up.

The Stocks Could Get Short on Squeezed

unduhan-13Volatility is coming back to U.S. markets with a vengeance. After the longest sideways range in stock market history, equities broke hard to the downside on Friday, selling off 2.45%.

And they’ve kept up their streak of big moves ever since. The S&P 500 rebounded 1.47% Monday and then gave effectively all of that back with a correction in yesterday’s session. In short, stocks are still tracking sideways now, they’re just doing it in a much, much wider range.

That return to volatility is creating the potential for some big upside opportunities in some of Wall Street’s most-hated stocks. As it turns out, the big stocks that short sellers hate the most also tend to hand investors the biggest returns.

 

That’s not just my opinion .The data bear it out as well. Over the last decade, buying the most hated and heavily shorted large- and mid-cap stocks (the top two quartiles of all shortable stocks by market capitalization) would have beaten theS&P 500 by 9.3% each and every year.

Too much hate can spur a short squeeze, a buying frenzy that’s triggered by short sellers who need to cover their losing bets to exit the trade.

For our purposes, one of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which estimates the number of days it would take for short sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.

Today, we’ll replicate the most lucrative side of this strategy with a look at five big-name stocks that short sellers are piled into right now. These stocks could be prime candidates for a short squeeze in the months ahead.

The Boeing Company (BA) Stock Price | FindTheCompany

Up first on our list of heavily shorted large-cap stocks is aerospace giant Boeing  (BA) . Boeing started 2016 on a rough note, but shares have been rebounding alongside the rest of the market since February, up more than 19% on a total returns basis since shares found their bottom. That hasn’t stopped short sellers from piling in with bets against Boeing this year; with a short interest ratio of 11.1, it would take more than two weeks of nonstop buying pressure for short sellers to cover their bets at current volume levels.

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Boeing is best known for its line of large commercial airliners, a business that’s been enjoying some important long-term tailwinds lately. Boeing is also one of the largest defense contractors in the country, a business that the company has been moving away from as commercial aviation bears fruit and defense only becomes more competitive. Today, Boeing’s sales mix is about 70% commercial aircraft and 30% defense. While Boeing’s planes may be fast, the sales process is slow. Airlines mull over purchase decisions over very long timeframes, and new platforms take painfully long to get regulatory approval and make it to the customer. Boeing’s backlog of more than 5,700 aircraft provides some protection from the uncertainty surrounding that sales process; demand is high right now.

While the recent rout in crude oil prices has taken some of the pressure off of airlines, the industry understands that fleet upgrades are a critical part of surviving the next cyclical downturn in the airline business. That fact means that Boeing should have little trouble finding customers for its next generation of fuel efficient jets like the 737 MAX and the 787 Dreamliner.

Grow Your Business with Business loans

Banking is gaining much popularity that it has taken vast space in the life of the people. It helps a lot to secure the large amount of money and also it offers with many features and benefits. With the help of banking you can easily make business deals as you can easily transfer money and receive from there. Every person must have personal bank account as it is much useful in many different paths and also it helps in securing money and future. Banking has made the things so easier and frequent that now many business deals and great deals are done through it.

grow-your-business-with-business-loansAnyone can borrow money from the bank if he is a part of that bank. The bank provides the customer every kind of possible facilities for the welfare. FNBnorcal.com does help in lending the money. Before borrowing the money from the bank you have to follow the strict terms and conditions. If you keep following the rules you won’t have to face the problems during lending back the money to the bank.

 The loans from the bank for various business purposes:

  • Start-up cost: borrowing the money from the bank can help you to startup the new business. The borrow funds is one of the most common funding sources for the small business. This fund helps you to start the business and you can make the empire of the business by hardworking. But according to rule and condition you have to lend the money to the bank after the given time period.
  • Repayment options: Different business has different terms to repay the money. Some repay the money weekly, monthly and some repay the fund annually. As the business starts to increase the businessman has to repay the money back to the bank.
  • Expense deduction: Business owner may deduct the interest paid on business loans from their federal income tax return. This is the advantage of start up the new business and you can reinvest all profit back into the business.

With the help of bank you can borrow the money for various business purposes. But in the case of business you have to keep the terms and rules in mind to lend the money back to the bank. The bank provides lots of advantage and benefits to the businessman. No business can survive for long time without the help of the financial help by the banks.

 

Go Business with Markets

Various media outlets are doing their usual job of overreporting both Friday and yesterday’s “bloodbaths” on Wall Street, as well as Monday’s “big rally.” But the truth is that none of what’s happened since Friday has been either — it’s just the market being the market.

After a period of relative calm following June’s post-Brexit-vote instability, things have become unsettled again by uncertainty about what the Federal Reserve will do at its Sept. 21 meeting and beyond. But let’s face it, the S&P 500’s lack of volatility in recent weeks indicates that many investors had simply been away on vacation.

The 48 trading days between July 1 and Sept. 8 saw just one session (July 8) where the S&P 500 closed up or down by more than 1%. By contrast, the index rose or fell at least 1% 38 times during 2016’s first half, including each of the six trading days between June 23 and June 30 amid Britain’s Brexit vote.

In fact, the S&P 500 tumbled by more than 5% over the two sessions immediately following announcement of the Brexit referendum’s results. Then, the blue chips regained 5% over the three trading days that followed.

But the S&P 500 has been fairly flat since then, rising a mere 1.4% or so over the past 2-1/2 months. The summer ended up being a period of relative calm — surprising given a bevy of concerns that could have weighed stocks down.

But now that summer-vacation season has ended, investors apparently have the jitters once again as they await the Fed’s Sept. 21 rate-hike decision. I expect the past three days of volatility to only continue as markets digest every argument, nuance and emotion regarding whether the Fed will raise rates (and if so, by how much).

But it really doesn’t matter what the Fed does, folks. All that matters is whether the central bank’s decision is a surprise or not.

For example, a 1% rate hike would shock the markets, likely causing a bloodbath in both stocks and fixed income. However, Wall Street’s current expectation is that the Fed will simply hold off yet again on raising rates. Even a 25-basis-point hike (the most that’s expected) wouldn’t kill us.

Still, expectations are expectations. So, get ready for emotion-driven market gyrations and endless media coverage until the Fed actually announces its Sept. 21 decision. Then, we can start the whole process all over again until the Fed’s next meeting in November!

The Power Failure of SolarCity

SolarCity (SCTY) shares have cratered 71% from their mid-December high of $58.87, and they are poised to face strong headwinds going into the remainder of the year.

Driving this expected turbulence is a combination of a slowdown in the solar-installation industry in the second half of the year and declining odds that its bailout merger withTesla Motors (TSLA) does not go through.

According to a recent report by Axiom Capital Research, an extension of a federal tax credit to prompt more consumers and businesses to install solar on their rooftops is likely to lead to weaken solar demand in the second half of the year, as procrastinators take advantage of the extra time to apply for rooftop solar systems.

And while this does not bode well for any company in the solar installation business, it serves as a double-whammy for embattled SolarCity (SCTY) , which is in the midst of trying to convince Tesla Motors (TSLA) shareholders it is worthy of the high-profile electric car maker’s $2.6 billion acquisition plans.

“SolarCity is in dire need of cash. It’s already gotten two bridge loans from Tesla and it needs this deal to go through,” said Gordon Johnson, an Axiom senior analyst, told Real Money this week. Axiom, in its June 28 report on SolarCity, estimated the company wasquickly burning through its cash and would likely fall to near zero, or $1.4 million, by the fourth quarter. As a result, some Wall Street watchers have been whispering the “bankruptcy” word as it relates to SolarCity.

In placing the odds that Tesla’s SolarCity acquisition will go through, Johnson is currently giving it 50-50, down from his previous estimate in June of a 60-40 chance, he said. Axiom currently has a Sell recommendation on the stock and a $7 price target. Johnson noted that price target takes into account a failed Tesla buyout of SolarCity and represents less than half the value of its closing share price on Tuesday of $17.06.

And while SolarCity received some investor love earlier this week when it raised a $305 million equity investment from a private investment firm to finance solar projects, as well as an 18-year loan through five institutional investors, it still continues to burn through cash at a fast clip and now likely faces an industry slowdown in installations in the second half of this year.

“Before an incentive ends, you usually see a rush of customers a year to year and a half before,” Johnson said. But since the federal tax incentive has been extended, the usual procrastinator crush is expected to be delayed.

Previously, the federal Solar Investment Tax Credit for commercial and residential installations was supposed to drop to 10% from 30% on Jan. 1, 2017. But in December 2015, Congress approved extending the tax credit of 30% through the end of 2019, according to a report by the Solar Energy Industries Association (SEIA).

Under the revised law, the credit would then drop to 26% in 2020, 22% in 2021 and then 10% for commercial solar projects and zero for residential from 2022 and beyond, according to the SEIA. The purpose of the extension, according to the SEIA, is to promote more growth for the solar industry. Solar installations are expected to rise 54% to more than 72 gigawatt nationwide between 2016 through 2020.

However, what Axiom’s research found in tracking new rooftop solar applications filed with the California Public Utilities Commission by investor-owned utility companies like PG&E and Southern California Edison and others, the trend for new applications is declining.

And with California accounting for 39.2% of the cumulative installations in the nation, the Golden State serves as a proxy for what the rest of the nation will likely incur.

In its Sept. 1 report, Axiom stated data from the California Solar Initiative found that June rooftop solar system applications plunged 23.8% month-over month to 52.7 megawatts across the state and fell a whopping 42.4% over year-ago figures.

But an even more chilling figure is that new solar applications on a year-over-year basis have fallen in six of the past seven months, with June marking the steepest drop of all. Axiom notes in its report that this is “suggesting demand in CA’s rooftop solar market is decelerating.”

Yellen Speaks Friday To Inspire You

The biggest event of the week for bond traders is likely to be Federal Reserve Chairwoman Janet Yellen’s speech at the Jackson Hole Conference. Technically called the Federal Reserve Bank of Kansas City Economic Symposium, the conference is the preeminent monetary policy conference in the world and has often been used by sitting Fed chiefs to signal important shifts in policy strategy.

Yellen’s talk, titled “The Federal Reserve’s Monetary Policy Toolkit,” could very well include some important short-term and long-term clues as to where the Fed’s policies are headed. Here are some thoughts about what she might say and why you should care.

Short term, a hike is probably coming

I think there is a good chance that Yellen will describe the economy very similarly to how Stanley Fischer did on Sunday. I’m not sure if she’ll expressly say that a hike is still needed sometime before year end, but I expect her to strongly hint at it. Perhaps something like, “If conditions continue as they are now, it may be appropriate to increase short-term interest rates at least once before year end.”

Practically, two rate hikes is almost impossible now. But she will at least try to get the market to believe in one hike.

The market is still 50/50 that a hike is coming and that percentage has hardly moved since the July jobs report was released on Aug. 5. So, if the market believes her, it will be a bit of a surprise. But the only part of the curve that is really vulnerable is the 2-3 year part. I could see the 10-year selling off, but there is pretty strong support between 1.57% and 1.60%, so I don’t think there is a trade there, honestly. I’m also not sure she’ll be bold enough to really change the market’s view. As I’ve been saying for a while, the market is getting tired of the cry wolf routine. They are probably going to have to get very specific in order for the market to buy it.

What about negative rates?

Given that the speech is titled “policy toolkit,” I suspect the majority of the speech will be talking about long-term issues, specifically what policy options might look like during the next recession. It is widely assumed that rates won’t be very high by the time we get there. So, the Fed probably won’t have enough firepower from simply cutting rates.

Negative rates are something that Europe and Japan are trying, but I think are increasingly being discredited. It will be notable if Yellen mentions negative rates unfavorably. For a valuation perspective, this creates something of a floor for short-term bonds in the near term. If we know that the Fed’s next move will be a hike, then it will be tough for the 2-year rate to move much lower than where it is now at 0.75%. Look for the 2-5 year part of the curve to get pretty darn flat around 0.80-1.00%, especially if Yellen poo-poos negative rates.

Does QE become the primary tool?

I believe there is increasing consensus inside the Fed that QE is going to be a key tool during the next recession. That actually isn’t the big question. The big question is how to make QE effective? On that point, there remains serious controversy. Hearing how the Fed chief thinks about this debate could really shape how we think about interest rates over the remainder of this cycle.

Many are worried about how Fed policy may be distorting financial markets. Some think rates at near zero (or negative) have particularly distortive effects. If that’s true, then it might be better to leave short-term rates at some higher number (like 0.50% or 1.00%), even in the face of a recession and ramp up QE instead of cutting further. This is probably true if you are looking at just the bond and/or lending markets. Very low rates are more likely to encourage speculative home buying or overly aggressive lending standards by banks.

But QE seems more likely to get stuck in the financial system without actually making its way into the real economy. For example, we have not seen any major pickup in corporate investment despite low long-term interest rates faced by companies. Much of the new debt raised in the last two years has gone to buying back stock, not real spending. In that sense, QE probably distorts the equity market more than it distorts the bond market (somewhat ironically).

I doubt Yellen will go into detail about this, but parse her words carefully on this front. The yield curve will get even flatter if we think that fed funds will remain well above zero during the next recession. A QE-based strategy probably also takes out some of the downside risk on investment-grade bonds. Higher-quality bonds see only a small increase in the odds of bankruptcy, even given a pretty bad recession. But they tend to sell off anyway because of how risk-averse high-quality buyers tend to be. But if QE becomes the primary tool of the central bank, the resulting bond shortage would probably overwhelm the small fundamental risk increase. This is why investment-grade corporates are my favorite sector right now.

Could the Fed’s strategy change in more radical ways?

Former Yellen employee turned regional president John Williams recently wrote a paper mentioning some more radical changes. Today the Fed follows an inflation targeting strategy, where it ostensibly tries to hit 2% inflation over a 2-3 year period. Many private economists now favor some sort of level targeting. This means that you’d target a total level of prices or spending at some growth rate. For example, under the current regime, if the Fed misses its 2% inflation target in a given year, it still tries to get to 2% the next year. Under a level target, you’d target a total price level that grows at a 2% pace every year. So, if the price index starts at 100 in year 0, it would be 102 in year 1, 104 in year 2, etc. If they missed in one year, they’d then try to overshoot on inflation in subsequent years to get back to the trend level. So if they only hit 1% in a given year, they’d try to hit 3% or so the next year.

She isn’t going to endorse any particular thing, since adopting any version of level targeting would be the most radical shift in Fed strategy since the 1980s (yes, I’m including the adoption of QE). But she could imply that they are open to new ideas. Or she could call such ideas interesting, but not for us.

There isn’t a trade to do based on anything she says about levels targeting. But for those who want to understand where interest rate policy is heading in the long run, this is probably the most important part of the speech.

Earn More About Stocks Trading

Put down the 10-K filings and the stock screeners. It’s time to take a break from the traditional methods of generating investment ideas. Instead, let the crowd do it for you.

From hedge funds to individual investors, scores of market participants are turning to social media to figure out which stocks are worth watching. It’s a concept that’s known as “crowdsourcing,” and it uses the masses to identify emerging trends in the market.

SMALL INVESTMENT, BIG POTENTIAL. TheStreet’s Stocks Under $10 has identified a handful of stocks with serious upside potential. See them FREE for 14-days.

Crowdsourcing has long been a popular tool for the advertising industry, but it also makes a lot of sense as an investment tool. After all, the market is completely driven by the supply and demand, so it can be valuable to see what names are trending among the crowd.

While some fund managers are already trying to leverage social media resources like Twitter to find algorithmic trading opportunities, for most investors, crowdsourcing works best as a starting point for investors who want a starting point in their analysis.

Today, we’ll leverage the power of the crowd to take a look at some of the most active stocks on the market.

Shares of small-cap biopharmaceutical stock Raptor Pharmaceutical (RPTP)  are up 20% this afternoon, boosted by news that the firm is being bought by Horizon Pharma  (HZNP)  in an $800 million deal that pays shareholders $9 per share in cash. The deal adds Raptor’s rare disease treatments to Horizon’s portfolio of drugs, and Horizon plans on financing the deal through a combination of debt and cash on hand.

From a technical standpoint, the money’s already been made on the Raptor trade. Shares popped to within a few cents of their acquisition price almost immediately this morning, indicating that shareholders see a very high probability of the transaction being completed. Investors should look elsewhere for upside opportunities this week.

The Reason of Treasuries Won’t Go Away

There have been some reports in the media about how the 10-year Treasury, if hedged into either euros or yen, now has a yield of roughly zero. The implication is that if European and Japanese bond buyers have been a major driver of demand for U.S. bonds, then they would presumably be sensitive to the hedged yield, not the nominal yield.

If that yield advantage has gone away, could demand for U.S. Treasuries also go away? There is probably something to this line of thinking, but the conclusion is much narrower than people are making it out to be.

First, what do we mean by a hedged yield? If you are a European bond buyer and you want to keep your currency exposure in euros, then any non-euro bonds you buy have to be hedged back into your home currency. There isn’t just one way to accomplish this, but a common way would be to use a basis swap.

In simple terms, you pay U.S. LIBOR (currently 0.81%), you receive EURIBOR (which is LIBOR but in euros; that rate is currently -0.30%), plus one side or the other has to pay to make the currency element happen, which is around 0.50% right now paid by the euro side of the trade. If you add all that together, you get 1.61% per year in hedging costs, which is basically equal to the Treasury yield. So when I use the term “hedged yield”, I mean the Treasury yield less this hedging cost. Since the hedge cost is 1.61% and the Treasury yield is 1.58%, the hedged yield is -0.03%.

Let’s assume that our European investor faces just two choices: buy American Treasuries and hedging, or German Bunds. The investor might just compare this hedged yield to the Bund yield and pick whichever is higher. On that very simplistic basis, the investor is basically indifferent. The hedged yield of -0.03% is almost exactly the same as the 10-year Bund yield at -0.05%.

That wasn’t true at the beginning of the year, when the hedged yield was 1.20% and German Bunds were yielding just 0.62%. That kind of yield advantage, even after hedging away the currency risk, is bound to create demand for U.S. bonds.

So now that the hedged yield and the Bund yield have converged, does that mean this source of demand will go away? And if so, doesn’t that mean rates in the U.S. need to rise? I think this is taking this analysis too far, for a few reasons outlined below.

You can see that the net hedged yield (yellow) is sometimes way above or way below the German Bund yield (red). This persists for years at a time and reverses for no obvious reason. It is also not predictive of future yield changes. A regression of the current spread between hedged yield and Bund yield vs. future Treasury yield changes showed no relationship at all.

This might seem counter-intuitive. Why would there be such a weak relationship between these two yields that are such obvious substitutes?

In part that is because this isn’t an arbitrage…

While they are substitutes, the hedge isn’t without risk. Over the life of this kind of trade, the hedger is exposed to changes in LIBOR. If LIBOR in the U.S. were to rise or if EURIBOR were to fall, the cost of holding the trade would go up. Lo and behold, we’ve been seeing LIBOR rising recently without any corresponding change in longer-term rate expectations.

This has to do with some friction around changes in money market rules and is likely to be a one-off, if not a fleeting issue. It could be that buyers are betting that U.S. LIBOR will fall back once this money market issue has passed.

Regardless, this is why there is not now, nor will there ever be an iron-clad relationship between these two yields. But there is probably a bigger reason why there seems to be a random relationship between the rates.

Mostly because hedged buyers probably aren’t the marginal buyers

Most large global investors have a healthy need for U.S. dollars. Financial institutions, such as insurers, are likely to do plenty of business in the U.S., therefore aren’t necessarily hedging anyway. These institutions might also have an increasing preference for USD exposure, which again means no hedging.

We can see this if we look historically at the U.S. vs. German chart above. The correlation between the two yields without hedges is 0.91. With the hedge, it is just 0.88. In other words, the hedge cost doesn’t explain anything about the variation.

The hedging example everyone is using also makes the assumption that the buyers’ cost of funds are based on EURIBOR. That is also not necessarily true. Insurers are a good example. Their cost of funds is based on premiums and liabilities, not EURIBOR. Or, take sovereign wealth funds and foreign currency reserve holdings. Neither of these really faces a traditional cost of funding.

It is possible that hedged investors weren’t the marginal buyers in the past, but are now. It is possible that the unusual circumstances of negative rates have caused buyers to get more creative. If so, the fact that the hedge cost has risen to be equal to the yield on the 10-year will be something of a governor on fresh demand. But it definitely can’t cause a material back-up in Treasury yields. If the bonds are just a smidge too expensive and yields back up a bit, the demand comes back.

Economic Fundamentals That You Should Know

The jump in long-end U.S. Treasury yields over the past week has caused concern among bondholders that the trend could continue and become self-validating — regardless of what the Federal Reserve does or what reports indicate about the trajectory for economic activity.

It’s a warranted concern, especially since the “Taper Tantrum,” just three years ago, is easily remembered by current bond traders. During the latter half of 2013, the 10-year Treasury surged from about 1.65% to 3%, and the 30-year from 2.85% to 4%.

That environment also crushed many income vehicles, with arguably the biggest impact being on the mortgage real estate investment trusts (mREITs), which, on average, all declined about 50% during the same period.

Bond market participants have been on egg shells ever since, exhibiting a kind of post-traumatic stress response when yields start rising. A “fool me once, shame on you; fool me twice, shame on me” attitude has become prevalent for bond traders and other income-vehicle investors.

The current narrative is that if the 10-year can get to 1.60% it can get to 1.80%, 2%, 2.20%, etc. That may be a rational viewpoint, but it’s also leading to mental, and I think even physical, fatigue in bond traders and income seekers. I offer this from first-hand experience as our shop is principally an income-seeking one for clients and we spend more time discussing global interest rates, bond yields, currencies, and monetary and fiscal policies than anything else.

For institutional holders such as insurance companies that have to hold sovereigns as reserves no matter what happens to yields, the psychological issues aren’t as severe. For bond traders, though, with the principal objective of capital gains, the environment of the past several years has led to feelings that vacillate quickly and with increasing frequency between, “I’m rich, I’m broke, I’m a Seer, I’m a fool.”

And this has been amplified for the highly visible bond traders like Jeffrey Gundlach and Bill Gross, who are regularly referred to as “Bond Gods” by the financial media.

Putting aside macro and micro supporting arguments for either rising or falling bond yields, the pragmatic public narrative is that yields are likely rise. The pragmatic part of that forecast is that it’s deemed to be better, from a business perspective, to be wrong prognosticating rising yields than the opposite. Yields have a tendency to rise much more quickly than they fall, so there’s an asymmetry of risk in forecasting rising long-end yields vs. falling ones.

The prudent course then is to anticipate that yields will rise, because there is less time to respond to rising yields than falling yields. However, this is the exact opposite of the risk asymmetry for monetary policy that Fed Governor Lael Brainard discussed yesterday.

In Brainard’s opinion, the principal risk of raising rates now is that it is too preemptive, and that doing so could cause the unintended and undesired consequence of a deceleration in economic potential, which would (logically) result in falling long-end yields.

The reason for the opposing views of the risk asymmetry posed by a Fed rate hike, and its effect on economic activity, and thus long-end yields, is determined by which end of the economy you think is most instructive of immediate future economic potential.

There’s been an increasing coalescence around the idea that declining unemployment rates and tightening labor conditions are symptomatic of imminent inflationary concerns that warrant higher short-end rates, and then would require higher long-end rates. However, that only comports with an economic environment where aggregate economic growth is already being evidenced — and that’s not the case, as Brainard stated, just as she did last December before the Fed implemented a rate hike.

Long-end yields rose in the few months prior to last December’s rate hike, but almost as soon as the hike was announced they began to decline again and maintained that trajectory throughout 2016, with intermittent pops as Fed members discussed the “need” to increase rates.

The decline in long-end yields since the last hike was not caused by the hike, though. It was caused by the markets realizing that the economic need for it did not materialize in economic activity. That also means that whether or not the Fed hiked last December, long-end yields, logically, would have followed the same path of decline.

Until something like fiscal stimulus forces aggregate economic activity to increase, macroeconomic forces will continue to put downward pressure on long-end Treasury yields, regardless of what the Fed does, and actually increase that downward pressure if the Fed hikes rates in this environment.