Bonds Falling!

Martin Weiss here with a quick warning to all investors now jumping into traditional stocks — especially stocks that are sensitive to rising interest rates:

While Stock Prices May Be Rising, Bond Prices Have Been Plunging!

The price of 30-year Treasury bonds reached a high of 118 in late August, and they’ve been falling virtually non-stop ever since.

Last week, they went down in anticipation of the Fed’s rate hike.

This week, they’ve gone down even further in response to the Fed’s rate hike.

Just as I’ve been telling you, the fact that the Fed did not move more aggressively to fight inflation has been a major disappointment for bond investors.

They don’t like the inflationary storm they see coming. Nor do they like the fact that the U.S. Treasury Department is gong to be dumping wave after wave of new issues on the market to finance the bulging federal deficit. So they’re turning around and heading for the hills.

Meanwhile …

Most Stock Investors Have Been
Thumbing Their Nose at All This.

For now, stock investors don’t seem to give a damn. Nor do many of the companies they’re investing in.

“Who cares,” they say, “if the Fed jacks up rates by just a quarter point? We can handle that.”

What they don’t realize is that it’s not just the Fed that sets the course for interest rates. Bond investors all over the world — the same ones that are now selling T-bonds and running for the hills — actually have more power to impact interest rates than the Fed or any other government agency.

These investors include mammoth insurance companies in Japan … giant banks in Western Europe … thousands of financial institutions in the U.S. … plus millions of individual investors everywhere.

Unlike Mr. Greenspan, in order to decide the fate of interest rates, they don’t have to meet in an erudite conference room at the Federal Reserve Board in Washington. Nor do they have to testify before Congress to explain their actions.

All they have to do is call their broker — or hit a key for their trading screens — issuing one four-letter instruction: SELL.

And it’s those sell orders pouring in from around the world that are now driving bond prices lower and interest rates higher.

My main point: If the Fed doesn’t make interest rates rise quickly enough, bond investors certainly will!

At 8:30 am this morning, the Labor Department announced that jobs grew, although not quite as much as most economists had hoped.

But that’s just the news headline that caught everyone’s initial attention. Hidden behind the headline is an inflation time bomb: The news that U.S. hourly wages have just registered

• their biggest year-over-year surge since July of 2003, and …

• their biggest month-to-month surge since February of 2003!

In other words, the cost of labor in America — the last missing ingredient to fuel a classic inflationary spiral — is now beginning to jump.

So if bond investors were concerned about inflation before this morning’s news … they are likely to be shaking in their boots as soon as they recognize the implications of surging wage costs.

Result: More selling in the bond markets and still higher interest rates.

Stock Investors May Be Able to Ignore
This for a While. But Not for Very Long.

Yes, stock investors think they can handle quarter-point rate hikes in the Fed funds rate, and maybe they’re right. But can they handle half-point hikes in long-term rates? How about a surge of a full percentage point?

Regardless of how far or how fast long-term rates rise, take a look at how they can impact corporate America and Wall Street:

First and foremost, many financial corporations — banks, insurers, brokers, mortgage lenders — live and die by interest rates. If rates go up, especially if they go up faster than expected, they can suffer huge losses.

Second, it’s now widely recognized, even by the Fed, that much of the housing market is a house of cards. And it’s also well known that this house of cards rests on a shaky foundation — low mortgage rates. So when mortgage rates rise, down comes the structure.

What is the single factor that does the most to drive mortgage rates higher? Falling bond prices!

Third, most public companies in America borrow money. So their financing costs are going up. That’s a given.

Fourth, most consumer-oriented companies — especially auto makers and retail firms — depend heavily on the continuing ability of their customers to get cheap financing as well. If their customers have to pay more on auto loans and credit cards, sales volumes are going to suffer.

Fifth, higher-yielding bonds are fiercer competition for stocks themselves. A lot of money that would normally go into the stock market shifts to the bond market. It won’t be enough to give much of a boost to bond prices. But it could be more than enough to tip the scale in the stock market.

So Let’s Do a Reality Check And See Where We Stand

We’ve been bearish on most (but not all) stocks for a while. Are we right? Or are we wrong?

If you look at the individual sectors we have been panning and the sectors we’ve been favoring, we’ve been mostly on target.

But if you look at the broad market averages, the jury is still out.

The S&P 500, for example, which comes closest to faithfully representing the average of all stocks, has been stuck in a sideways chop all year long.

Last month, it broke below its long, nearly 3-year trendline, signaling that the bear market of the early 2000s could be returning. But then it turned back up. And now, it has just touched back to a hair BELOW that critical trendline.

So what the S&P does in the next few days could be pivotal.

If it can continue rising and climb above its long trendline, it will signal that the bear signal we got last month was false, and our bearish outlook was wrong, at least for now.

If it fails and turns back down, it will signal that the bear signal was valid and it’s truly time to batten down the hatches.

We’ll keep you posted either way. And either way, I’m not veering from my recommendation to:

1. Unload interest-sensitive stocks. Even if the market rally continues a while longer, these are bound to underperform as rates rise.

2. Stick primarily with stock sectors that benefit from rising inflation, such as energy, gold and other natural resources — as well as regions that are primary natural resource producers.

3. Make a list of all your stocks and mutual funds, plus all the banks and insurers you do business with. Then go to www.WeissWatchdog.com, and sign up for the level of service that best fits the number of companies you’re interested in. You’ll get the latest Weiss Rating (plus e-mail alerts) on each company. And you can then decide what to do.

My recommendation: if it’s not B- or higher, consider moving elsewhere.

4. If you feel you can’t or don’t want to reduce the exposure of your stock and bond portfolio, at least look into some hedges. I’ve recommended Rydex Ursa for hedging against a stock portfolio but it has not done very well in the last couple of weeks. As stocks rise, its value goes down.

Plus, I’ve also recommended Rydex Juno for hedging against rising interest rates, and since late August, it has gone up nicely as rates have risen.

Either way, these are hedges. So they should be held as long as you feel you still need the protection.

5. For your speculative funds, we recommend options on interest-sensitive investments. We’re getting ready to grab profits on some of them very soon. And then we’ll look to recommend more on any quick, bond-market rally. See my latest report.

Just be sure to use strictly funds you can afford to risk, keeping the bulk of your money invested conservatively.

Best wishes,

Martin

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