We are inducting this brave knight into the Roundtable of Knights Who Think for Themselves, not for his market prognostications per se (we all are entitled to our market opinions) but because of the educational value of this submission. You will never find a better example of thinking for oneself thanthis. And you will never find a better example of contrary thinking. You will never find a more informative analysis of the relationships between stocks and bonds. You will never find a better example of realistic flexibility. Here is a man with an avid opinion but who knows he could be wrong. We are proud to have had him as a User since 1993. And we toast him with a carefully selected bottle of Veuve Clicquot Ponsardin. -DW
==============
Interest rates going up. Bad news?...or Good news?
Simply said: Interest rates change because of (1) changes in supply and demand for cash and debt instruments and (2) perception of lending risks. For equity investors it is important to try to understand the predominate reason(s) why interest rates are changing. The reason(s) do make a difference in how the stock markets ultimately respond to the rate changes. For example, the following is part of the end of day (July 31, 2003) commentary from The Market Today, provided by the Schwab Center for Investment Research: "Treasurys were pummeled again as the upbeat data suggests that the recovery is accelerating." That is the almost universal understanding of why interest rates go up, that they go up from demand push inflation, which is "bad news" and so people generally react negatively.
However, now for the good news.
There is another perspective: Interest rates also go up as the supply of existing debt instruments (let's call them "bonds") for sale increases. So, just like stocks, as the amount of bonds for sale increases, the prices go down - simple supply and demand. And so, since bonds have a fixed interest rate, that means that they now, at the lower purchase price, earn a higher interest rate for the new buyers. Voila! Interest rates are then rising because more and more investors don't want to hold as much in bonds any more at their current low interest rate and so "dump" them to get the cash so that they can buy something else that will make them more money.
Well, just where might investors want to put all that money that's been earning them 1%, 2%, etc. per year and, to them, will probably continue to earn such low rates?
Since March 11 of this year, only 4 and a half months ago, the NASDAQ is up 36.46%, the QQQ is up 33.61%, the SP-500 is up 23.68% and the DJ-30 is up 22.72%. That's looking a whole lot better than 2% for 12 months. And, to make things worse, with interest rates starting to rise and bond prices going down, the poor bond investors are beginning to see losses in their fixed income holdings, and close to losing more than their meager interest is bringing in.
So, what is happening? I look at rising interest rates, at this time, as a very good sign for me as an equity investor. As the stock market major indices go up, more and more money is and will be moving from the bond markets to the equity markets, thereby increasing the demand for stocks as more investors seek higher returns than fixed income investments can give them. And, as demand for stocks increases, prices are bid up. As prices are bid up more and more bond money gets moved to the stock market and prices go up even more, etc., etc. Thusly there occurs a type of "regression to the mean" for the values of the "inventory" of both bonds and stocks.
Back in the 1970's when I was a bank trust officer, I learned to never underestimate the amount of money that can move into the stock market. A few months ago I read, perhaps in a Worden Report, that there is an enormous amount of money now in the bond market, much more than "normal". A lot of it moved there during the first bear market of the new millennium that we all have been through. That money has "memories"...of pain...and of gain. My "bet" is that, as time goes by, more and more investors will again seek those feelings that came with successful stock investing. In the future they will probably measure success much more reasonably than by the huge gains of 4 and 5 years ago. After experiencing 2% or 3% plus or minus in fixed income investments, 10% or 15% or 20% in a year in stocks will be a bonanza to a whole lot of people. And so, not a bull rally, but a new bull market continues, developing as a market of stocks with a more measured stride overall and providing the opportunity for good "beauty in the eye of the beholder" rewards to most types of investors and traders.
A few months ago DW wrote that we were probably at the point of a once-in-a-lifetime opportunity. I agree. Ups and downs; gains and losses; ambiguity - yes. But oh what a trip these next four years or so could bring.
-EB
==============
The Market Isn't Happy
They're blaming it on the report that more jobs were shed last month. And it obviously could be tied to the record breaking jump in the yield of the 10-year treasury yesterday, which coincided with yesterday's collapse in stocks late in the day and continued on into today. Whatever the cause, I always hate to see a market turn tale and run immediately following a glorious looking breakout. It is the most abnormal of events. It is always a surprise, and it usually kicks off something bad. And I suspect that whatever was kicked off this time is still on the prowl.
Whenever I say something bad about the market, I always find that a number of people don't seem to put it into the time context that I intend. So let me say again that every bearish comment that has been uttered by these fingers on the keyboard for many months has always pertained to a short-to-intermediate-term category. I think we are in the early stages of a bull market. Not necessarily a new-era bull market. That is, it is possible to have a heck of a bull market without achieving new all-time highs. It would seem unlikely that the Nasdaq could attain new all-time highs in the framework of just one cyclical bull market. But it wouldn't have to. Not with all that space up there. -DW
