MARKET ROUNDUP | |
Dow | -2.83 to 17,083.80 |
S&P 500 | +0.95 to 1,987.96 |
Nasdaq | -1.59 to 4,472.11 |
10-YR Yield | +.045 to 2.509% |
Gold | -$11.80 to $1,292.90 |
Crude Oil | -$1.09 to $102.03 |
Remember TV personality Jim Cramer’s famous rant about the Federal Reserve? The one in August 2007 where he lost it on air, saying about the Fed that: “They’re nuts! They know nothing!”
Well, guess what? If I were on television today, I would do the exact same thing — but for a completely different reason. This time, the Fed is nuts for not RAISING rates, rather than not cutting them!
Why? Forget everything else you have read or heard on TV, on the Internet or anywhere else, and just look at this chart. It shows the price of Eurodollar futures (the amber line), charted against initial jobless claims filings (the white one):
Not familiar with Eurodollar futures? Don’t worry. They’re simply a financial instrument that tracks expectations about the future direction of short-term interest rates.
When investors start to believe the Fed will have to raise interest rates, they sell Eurodollars, causing their price to fall. And since rates move in the opposite direction of prices, short-term yields surge when Eurodollars decline.
Now look at this chart closely and you’ll see that in the late 1990s, jobless claims fell as the economy picked up. Eurodollar prices plunged as investors priced in the Fed hikes that accompanied that improvement.
“I’m talking about a sharp break in Eurodollar futures prices, and a sharp rise in interest rates.” |
Then in the mid-2000s, the exact same thing happened. Jobless claims fell, the economy improved, and Eurodollar futures plunged as the Fed hiked rates.
That brings us to today. We just learned today that initial jobless claims plunged 19,000 to 284,000 in the most recent week. That’s the lowest level going all the way back to February 2006!
That news comes on the heels of previous reports showing the country has created more than 200,000 jobs for five straight months. The last time that happened? As I mentioned recently, it was late-1999/early-2000.
Yet the Fed has — so far — steadfastly refused to raise short-term rates! It’s still pegging them at around zero percent, even as it slashes QE toward zero.
Me? I’ve been saying for a while now that the Federal Reserve is falling further behind the curve on inflation and economic growth. Now I have just shown you concrete, irrefutable proof that over the past 20 years, EVERY SINGLE TIME claims have tanked like this, the Fed has started raising interest rates and Eurodollars have plunged!
Yet some of these pinheads who come on CNBC — and their out-of-touch-with-reality counterparts at the Fed — are expecting us to forget decades of interest-rate history and assume rates will keep staying pegged to the floor? They’re saying the Fed can’t and won’t change tactics, despite radical changes in the state of the underlying economy.
Like Cramer once said: “They’re nuts! They’re nuts! They know nothing!”
Jim Cramer on the Fed: “They’re nuts! They know nothing!” |
I believe we’re on the verge of a veritable “Rate Quake.” I’m talking about a sharp break in Eurodollar futures prices, and a sharp rise in interest rates.
It’ll be led by rising short-term rates most aggressively, though long-term rates should climb as well. And I believe it isn’t far off in the future — it’s imminent. Like in the next few weeks or months at most!
Are you ready for that kind of move? Do you know what it will mean for your bonds and bond funds? I sure as heck hope you do! Because the incredibly complacency and lack of volatility in the fixed income markets looks totally out of sync with the environment I expect is coming.
My recommendations:
Dump your junk bonds in favor of alternatives like MLPs!
Get out of long-term Treasury bonds!
If you’re going to hold anything in fixed income, stick with floating-rate notes or securities and funds with average maturities and durations of two to three years at most. Those are two measures of interest rate risk that every single bond mutual fund and ETF provides on its website or other printed materials.
Then with the funds you raise, rotate into investments that benefit from higher growth and higher inflation. Think energy, materials, aerospace, health care and more.
So have you already made those kinds of moves? Are you still overloaded in bonds, and if so, why? What do you think about the job market — is it improving or do you think the figures overstate that improvement? As for the Fed, what are your thoughts on whether they’re behind the curve and need to raise rates? Let me know at the Money and Markets comments section here.
OUR READERS SPEAK |
When it comes to the situation in Eastern Europe, there continues to be a vigorous debate among readers like you.
One comment that stood out came from Reader RC. He said the following in response to a previous post blaming the U.S. for setting the stage for Ukrainian tension:
“David couldn’t be farther from the truth. His statement about the U.S. supporting separatist movements is just diluting the truth, spreading the blame. Putin is a cancer in our century and he must be dealt with directly. Russian thinking only understands strength and each time the world draws a red line and nothing happens, this is a green light for Putin to continue.
“I am not advocating war. I am a U.S. combat veteran. I live in Ukraine, and have for the past 2 years. I do know that Russians love money, and that’s where the world must come together and deal with Putin: With hard, deliberate and meaningful sanctions. Yes, it will shake the markets, but who cares? Markets will recover, but these innocent families never will.”
As for investing in Master Limited Partnerships, or MLPs, the verdict is relatively split. Many of you believe in the energy market’s prospects, but you are hesitant to invest in MLPs because of the tax reporting issues involved in doing so.
Reader Elliot shared the following on that topic: “It is interesting that you mentioned two MLP funds that issue standard 1099-b’s rather than the dreaded K-1. Both Alerian AMLP and JPMorgan’s ALJ pay taxes at their level, which diminishes yield but also cuts hassles of the K-1.
“There are at least three landmines embedded in owning MLPs as a partner and getting a K1 rather than 1099:
“1) State taxes must be paid in any state charging income tax in which a pipeline travels.
“2) Placing shares in a Roth or other IRA can evoke the Unrelated Business Taxable Income if distributions exceed $1,000 from all such investments per year.
“3) Accounting for which portion of distribution is a tax free ‘return of capital’ versus income, and applying the depletion allowances in some cases makes it a confusing and expensive accounting task. Even with the instructions sent by the MLP (often late, requiring amending tax return or filing for an extension) no two accountants follow these instructions in the same manner.”
Those are certainly worth keeping in mind. But I have generally never advocated putting the tax cart before the investment horse. In other words, if an investment has strong potential, I am all for investing in it even if requires more work at tax time.
Any other comments on MLPs? Putin? Other topics we’ve covered? Then don’t hesitate to share them here!
OTHER DEVELOPMENTS OF THE DAY |
 Yet another airplane has gone down, this time an Air Algerie flight with 116 on board. It was flying between two cities in Africa and has reportedly crashed in Mali. Tragic.
 Fighting continues to rage in the Middle East, with shelling and rocket fire between Israel and Hamas militants showing no sign of letting up. U.S. Secretary of State John Kerry is in the region trying to help negotiate a cease fire, but so far has little to show for it.
 Even as I’m relatively optimistic about the economy, I don’t think housing is going to lead us in this economic cycle. Instead, the housing market should lose some steam as all the investor buying we saw in the past couple of years cools.
We just learned that new home sales fell a greater-than-expected 8.1 percent in June to a seasonally adjusted annual rate of 406,000. Previously reported numbers for the spring selling season were also revised sharply lower.
 Facebook (FB, Weiss Ratings: C) blew it out on earnings, with profit of $791 million, or 30 cents a share, in the second quarter. Excluding items, EPS came to 42 cents – well above the average estimate of 32 cents. Revenue also topped forecasts, sending the shares to a record high.
 On the flip side, mobile phone chip giant Qualcomm (QCOM, Weiss Ratings: A-) laid an egg. Its shares came under pressure after the company forecast weaker-than-expected sales. Concerns over its market position in China also weighed on the shares.
Reminder: You can let me know what you think by putting your comments here.
Until next time,
Mike Larson
{ 33 comments }
Mike, do you rank Business Development Companies, along with Bonds, Fixed rate Notes etc, or would you consider them more in the MLP category (without the K1 problem )??
If Putin were US president, you would think he was the greatest thing since sliced bread. you are letting the Ivy League Mafia tell you what to think. Putin is not liked with the media and other liberals because he is nationalistic, the Orthodox Church is flourishing, and he doesn’t tolerate homosexuality and other perversions, and doesn’t coddle Islam. And he has some real cahoneys! We have a lying p.o.s. with no principles.
WTF !? It is documented that the US spent $5BILLION DEstabilising the Ukraine. WE caused the mess, and I believe the Ukraine govt. shot down MH17. With all the honesty of the sinking of the Maine, the Lusitania, Benghazi, the Gulf of Tonkin …. the US is doing SATAN’s work, creating CHAOS out of order and becoming despised by Humanity for our actions.
The statement of support for our American Ukraine by the US Veteran shows what is wrong with the USA today…our markets. Americans have come to believe all the crap Washington shovels at them, have lost their ability to know when they are being Had!
Today’s announcement that “Yats” has resigned as leader in our “free Ukraine” should give the ex serviceman a jolt oi reality “Yats” was the State Department stooge of the “Lady” Nolan, under Secretary of State, whose leaked emails regarding our interference in the Ukraine went all over the world. “Fuck the EU, the Ukraine is ours!” It was after that the CIA employed their secret groups and Ukraine erupted into two camps all because we were re-inforcing democracy there, like we did in Iraq and Afghanistan, Egypt, Libya and now Syria, the new birthplace of the Caliphate Islam has promised us for the last 30 years! Yats got lo lead because we could not find a real Ukrainian to front for us and he is leaving before the world knows what liars and cheats are running our Federal Government! Malaysia is a boomerang and our “Pukin Putin” will end up the hero while our dollar crashes like Malaysia Airlines M17 and the one before.
You know your investments but you are deficient in “affairs”. Rothschild would not be happy with you!
Regards, Alice Maxwell
Every time the tbt goes below 58 I load up. It seems like a no brainer.
ME TOO!!! don’t for get SDS, SJB ,BIS,QID and many others along with Mikes picks.
MLP’S are just like S corps and partnerships for tax purposes. It’s no big deal have filed k-1’s all my working life and been audited twice in 44yrs no big deal schedule E & D fill in the form and transfer to 1040.
Many Tax people don’t like them and tell you so
Learn how to do the taxes yourself.. I have many MLPs and do my own taxes. Tax people do hate them. It takes a little extra time to do them.. The IRS can’t answer a lot of questions about them. One thing is to hold them and collect the great rates and leave to your heirs. They will owe no taxes on all the distributions you have received.
Mike you are the second source who tells me that interests rates are going up. If anything happens to the market wouldn’t the fed just print money to keep them down? I have REITS are they safe?
Dump the utilities and any highly leveraged companies. The cost of borrowing will increase and lower net worth.
You are talking bonds, and you never mention us savings bonds. Exactly what is or isn’t different about us savings bonds vs munis and corporate or treasuries. They seem to act much differently than these other bonds. Should I be dumping these us savings bonds at this time? Thanks for the help.
I have been a paying customer since sometime in 2007 when both you and Martin Weiss were talking about the bond rate explosions that were supposed to occur. I followed your advice and purchased shares in two inverse ETF’s : RYJUX and TBT. In the roughly 7 yrs since you and Martin made those recommendations both ETF’s are worth far less today than they were back in 2007. I have noticed that you and Martin have continued to write about the ‘mother of all investment bubbles’ – the bond market rate explosion has yet to materialize, and I hope other subscribers don’t fall prey to your Chicken Little recommendations.
IT WILL, so double down like the rest of us. Rates wont stay this low for ever 5% is ave. and it has got up to 18%.
The eurodollars turning lower is a great oppurtunity. Thanks for your input on interest rates markets and their link with the economy and other capital markets.
You need to play both sides of the fence, but don’t get caught on the wrong side. :)
I have a question for you, Mike, but before I ask it I want to say, thanks a million for telling us about the bursting bond bubble. Now, the question that I and my fellow gold investors have is: how it will it affect the price of gold?
Your charts in Money And Markets with a black back ground are difficult to read.
Can you please use charts with a light back ground.
Thanks.
P.Kuhne
Subscriber
When you speak of Eurodollar Future Prices, does that have any bearing on the relationship of the Euro to the US$ ?
Don’t know where their numbers come from but I know for fact that one position in teaching commanded 1,000 folks wanting it; all with degrees, etc. I bet the numbers are wrong; the government is always issuing corrections after the fact.
With the heavy debt the U.S. is carrying they cannot have rates go too high.
The news headline today “Gold demand in China plunges” was a surprise to Edelson and the rest of you Weiss guys, huh? …And “the markets have peaked and we’re already in a correction…”…??? Not even a missile strike on a public airline, killing all the passengers and crew, can keep our numb and dumb markets from continually hitting new highs these days! Thanks for helping me to lose my @$$, since I have had little enough sense to pay attention to what you fellows have been prediciting! The whole reason for reading your newsletter is to get some idea beyond my own thoughts….. disappointing is not even the word for this.
Hi Mike I was in mlps made some doubles but I got better companies now ! N don’t believe all the BS news from TV
The Evil Crooks own more than 80% of the news network s
Those that control the news CONTROL the Story
Don’t you forget that !
Salud amigos
God bless America n more the good people
Mike….i really doubt the fed can afford to let rates rise…they can not pay the interest,,,,we are bankrupt and rising rates will only make us bankrupter….they will prob come up sith some other plan….the drop in unemployment is not necessarily because people are not filing, they may just want to stop looking and move in with parents or friends etc. I suspect rates will drop as layoffs increase…company profits can only grow with lower labor costs….i think the announced layoffs just in july so far must be near 100 k……you have been predicting rising rates for months now and been proven wrong, and cost a lot of people a lot of money….these are unusual times and unusual forces are bearing on markets….many suggest we are in a recession already and things will get much worse before better or crash….i bet rates have a chance of going negative before up….
Maybe jobless claim drops but participation rate drops too.
http://research.stlouisfed.org/fred2/series/CIVPART
Mike
Ask yourself one question why with all the trouble in this world why gold is not hitting the moon in price.
2 part time jobs do NOT count when replacing one full time one.
Do not know where you live but around here the DEPRESSION is still alive and well
I am doing ok but my adult children are DEBT SLAVES & probly always will be
I read the forecasts and recommendations from about 10 or more research analysts. In my opinion, Mike Larson is the most intelligent and honest of all. His guidance is, again in my opinion, unbiased and based on solid factual information.
(Mr. Larson doesn’t know me and we have no relationship other than my interest in his reports.)
of course th fed will raise rates. when yields from corporate and municipal bonds
rise the Fed will have to follow suit Every ‘advisor’ i read says the same thing –
almost! Get out of Gov. bonds. What no one addresses, to my knowledgel is
“What about i-bonds and TIPS?” These instruments pay interest porportionsal to the rise in inflation (CPI). Th Gov. is reluctant to raise rates
because of the increased payout on inflation adjusted bond returns, as well as
annual social security benefits, etc. I only buy munis in my home state and which are
insured. I am holding on to my Gov. inflation adjusterd bonds as they are the best
hedge againsst inflation I have (I may noit ‘make’ much money but at least I can
maintain purchasinhg power as inflation spurs the Fed to raise ratesl m(not to
mention the erosion of the value of the dollar caused by unparralled national debt.)
So there!
Mike
Having been in the FX business for the past 30 years, I cringe at the term “Eurodollar” !!! There is no such currency in the world called Eurodollar. Would that be US Dollardollar, Australian Dollardollar or Canadiandollardollar? The european unit of currency is a EURO. Plain and simple EURO. Do you add the term dollar to Yuandollar or Yendollar or Randdollar? Adding the term dollar to the backend of their currency is actually funny and especially coming from a man in your position and with your extended knowledge in the money markets.
This is like a lot of graphs posted on Money and markets. Very poor contrast. I can’t see the dates and the Eurodollar chart is barely visible. I won’t waste my time on them.
You were talking about selling off junk bonds and even treasury bonds. I don’t know where us savings bonds come in here, it seems they are setup a little differently, could you educate me on whether the us savings bond are in the same trouble as these others?
Most investors now believe three things about the Federal Reserve, money and interest rates. They think that the Federal Reserve is artificially depressing rates below what would be a “normal” level. They believe that in the process of doing so the FED has enormously increased the supply of money and they believe that the USA is on a fiat money system.
All three of those beliefs are incorrect. One benchmark rate that he Federal Reserve has absolute control of is the rate paid on reserves deposited at the FED. That rate is now 25 basis points, after being zero since the inception of the FED in 1913 until recently. If the FED had left that rate at zero, t-bill rates would now be even lower than they are now. The shortest t-bills rates would now probably be negative.
Paying interest on reserves combined with the subsidy to the banks of providing free unlimited deposit insurance on non-interest bearing demand deposits is keeping t-bill rates positive. Absent those policies the rate on t-bills would be actually negative. The Chinese and others all over the world are willing to pay anything for the safety of depositing funds in the USA. Already, Bank of New York Mellon Corp. has imposed a 0.13% charge on large deposits.
An investor who believes that interest rates are headed up may respond that the rate paid on reserves is a special case, but that the vast increase in the money supply resulting from the quantitative easing must result in higher rates when the Federal Reserve reverses its course. The problem with that view is that the true effective money supply is still far below its 2007 level.
Money is what can be used to buy things. Historically money has first been specie (gold and silver coins), then fiat money which is paper currency and checking accounts (M1) and more recently credit money. The credit money supply is what in aggregate can be bought on credit. Two hundred years ago your ability to take your friends out to dinner depended on whether or not you had enough coins (specie) in your pocket. One hundred years ago it depended on the quantity of currency in your pocket and possibly the balance in your checking account if the restaurant would take checks.
Today it is mostly your credit card that allows you to spend. We no longer have a fiat money system. Today we have a credit money system. Just because there is still some fiat money does not negate the fact that we are on a credit money system. When we were on a basically fiat money system there was still a small amount of specie in circulation. Even today a five cent piece contains about 5 cents worth of metal, but no one would claim we are still on a specie money system.
Fiat money is easy to measure; M1 was $1.376 trillion in 2007 and was $2.535 trillion in May 2013. The effective money supply is the sum of fiat money and credit money. Credit money cannot be precisely measured. However, When the person in California whose occupation was strawberry picker and who had made $14,000 in his best year was able to get a mortgage of $740,000 with no money down and private equity could buy a company like Clear Channel in a $20 billion leveraged buyout, also with essentially no money down, the credit money supply was clearly much higher than today. A reasonable ballpark estimate of the credit money supply is that it was $70 trillion in 2007 compared to $50 trillion today.
The effective money supply is the sum of the traditional fiat money aggregates plus the credit money supply. Thus, despite the claims of Ron Paul and Rick Perry to the contrary, the effective or true money supply has fallen drastically over the last few years..â€
http://seekingalpha.com/article/1514632