Bond market

#359 - Bond Boot Camp: What They Are and How They Work

A new year, a new website and the questions are pouring in!  

First up this week was Tom from New Hampshire who is looking to get his financial life in order.  It wasn't too long ago that it went a bit off track but with a new year, Tom has some benchmarks he's looking to meet and wanted to run them by us.  Next up was Erin in New Mexico who is going through a divorce and wants to make sure she's properly protecting herself.  We finished up hour one by answering a handful of email questions. 

On to hour two...

What’s a portfolio without a bond position? It’s incomplete and potentially riskier than necessary.

We field so many questions about your portfolios and asset allocation and while stocks may seem sexier because of their upside potential, you always hear me stress that everyone needs exposure to bonds as well.

We rarely dive into bonds in great detail--what they are, how they work, and why you absolutely need them, which is why I thought it would be time for a little Bond Boot Camp. Our leader for this mission on today’s show is Justin Land, aka the ultimate bond guru.

Justin is the Director of Tax Exempt Portfolio Management at Wasmer, Schroeder & Company, an investment advisory firm based in Naples, FL.

In the current environment where it seems like the Dow is setting records on a daily basis, there’s probably a lot of people out there who want to be 100% invested in stocks. But what happens when the Bull turns into a Bear -- what will help protect you then?

What if I told you that by owning a bond position, you’d only miss out on a little of the upside, but in return, your downside would look far better when that eventual correction occurs. 

And make no’s coming. It’s a matter of when, not if. 

After hearing this chat with the bond guru, if you don’t already, I hope you add some to your portfolio and start out 2018 on the right financial foot!

Have a finance related question? Email us here or call 855-411-JILL.

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Will 2016 Stock Gains Continue in 2017?


2016 is in the record books and given the dreadful start of the year for US stock markets (in February, all major indexes corrected, falling more than 10 percent from the end of 2015,) the closing numbers were impressive. Total return results for 2016, which includes price appreciation and dividends showed the Dow up 16.5 percent and the S&P 500 ahead by 12 percent. The 2016 action occurred in three distinct phases:

  1. January to middle of February: Fear of recession (S&P 500 -10% from Dec 2015 highs)
  2. Mid February to Election Day: Recovery and slow growth (thru 11/4, S&P 500 +2%)
  3. November 9th – December 31: Post election rally (S&P 500 +9.5%)

The end of year rally was fueled by President-elect Trump’s pledges to reinvigorate the economy with a mix of fiscal policy changes, which include: A public-private infrastructure spending plan; corporate and personal tax reform; and the loosening of regulations across a number of sectors, including banking and energy.

The combination of these three potential initiatives could boost growth, as the economy enters the eighth year of the expansion. (In the first seven years, annual growth ranged from 1.6 to 2.6 percent.) Presuming that some form of each idea comes to fruition, most economists have penciled in growth of 2.5 to 3 percent for 2017, with two asterisks.

The first is that the plans could spark inflation, which could prompt the Fed to raise interest rates faster than anticipated and could snuff out some of the growth. The second asterisk is more dangerous—if Trump’s trade rhetoric were to escalate into a full-blown trade war, the economy would suffer dramatic negative effects, potentially leading to a toxic combination of a recession and inflation.

What lies ahead for the economy and markets in 2017 will be directly linked to the details of the broad themes that President-elect Trump and the Republican Congress are able to enact.

MARKETS: While stocks grabbed headlines, bond investors endured a wild ride in 2016. After starting the year at 2.273 percent, yields of the benchmark 10-year Treasury tumbled to 1.366% in early July-the lowest yield on record. Then in Q4, prices fell and yields increased by the largest amount in more than a decade. The total return from the so-called safe haven was DOWN 0.2 percent on the year.

  • DJIA: 19,762, up 13.4% (The blue chip index topped 19,000 on Nov 22nd and made a run late-year run at 20,000, but came up 13 points shy of the next round number milestone.)
  • S&P 500: 2238, up 9.5% YTD
  • NASDAQ: 5383, up 7.5% YTD
  • Russell 2000: 1357, up 19.5% YTD
  • 10-Year Treasury yield: 2.446%, down 0.2% (including interest payments)
  • February Crude: $53.72, up 45% on year, the best annual gains since 2009. Early year recession worries caused crude oil to bottom out at $26.21 a barrel, the lowest level since 2003. December 31, increasing demand and an agreement by OPEC to curtail production, propelled the commodity higher.
  • February Gold: $1,151.70, up 8.5% on year (snapped a 3-year losing streak)
  • AAA Nat'l avg. for gallon of reg. gas: $2.33 (from $2.00 a year ago)

THE WEEK AHEAD: The last employment report of the year is due this week. It is expected that the economy added 175,000 jobs in December and the unemployment rate will edge up to 4.7 percent from 4.6 percent. For 2016, job growth will likely be about 2.2 million, down from 2.7 million in 2015 and just over 3 million in 2014, the peak year for this cycle.

Mon 1/2: Markets Closed

Tues 1/3:

9:45 PMI Manufacturing Index

10:00 ISM Manufacturing

10:00 Construction Spending

Weds 1/4:

Light vehicle sales for December

8:15 ADP Private Sector Employment

2:00 FOMC Minutes

Thurs 1/5:

10:00 ISM non-Manufacturing Index

Friday 1/6:

8:30 Employment Report

8:30 International Trade

10:00 Factory Orders

Does Black Friday Matter?


As we prepare for the retail launch of the holiday season, here’s a question worth tackling: Does Black Friday (or Gray Thursday) matter? If you’re the kind of shopper that delights in the adrenaline rush of shopping in the wee hours of the Friday after Thanksgiving, go for it. For the rest of us, it may be better to just enjoy a long weekend. Although you are likely to be barraged by offers, according to the New York Times, “the chances of snatching a great deal for a quality item are slim, largely because Black Friday is mainly designed for retailers to clear out unwanted goods, and because best-selling products rarely drop much in price.” Those warnings are unlikely to deter the throngs--Black Friday is still expected to be the Number One shopping day of the year, despite a drop off in sales estimates over the past two years.

Overall, Americans are expected to increase holiday spending, which includes all of November and December, by 3 to 3.5 percent from a year ago, according to the research firm eMarketer. Warning: don’t pay too much attention to the estimate from the National Retail Federation (NRF), which calls for a 3.6 percent increase in holiday spending in 2016. The NRF’s projections tend to overestimate sales growth because of its shaky methodology, which relies on asking consumers how much they spent last year, and how much they plan on spending this year.

With the election settled and wage growth strengthening, there could be an upside surprise to retail results this holiday season. Regardless of whether sales increase by more or less than expected, the focus will return to the growth of digital. In a report last week, the government said that overall e-commerce jumped 15.7 percent in the third quarter from a year ago, while total retail sales increased 2.2 percent in the same period. Still, most shopping still occurs in physical stores. Last quarter, E-commerce accounted for just 8.4 percent of overall retail sales.

But these numbers are somewhat misleading, because overall retail sales include the big-ticket automobile category, as well as gas and groceries. According to consultancy Strategy&, these groups are responsible for almost half of total retail sales. Without them, online’s penetration of its “addressable market” is closer to 16 percent.

The subset of digital commerce that continues to power sales is mobile. According to Adobe Digital research, in 2016, “mobile will overtake desktop for the first time in terms of driving visits to a website during the holiday season.” But consumers are using their phones more to research than to make purchases.

If you do plan to get busy this week, here are few things to keep in mind:

  • Make a list of products you want to buy and start tracking their prices on Google and Amazon and then on PriceGrabber or PriceJumpon
  • The hottest gifts this season are expected to be VR devices (Oculus, PlayStation VR and HTC Vive), Pokémon, Barbie, Lego, Hot Wheels and Frozen toys, as well as Google Home and Amazon Echo.
  • When you log on is important. The Monday before Thanksgiving is good for electronics; if apparel is on your list, the biggest discounts will be highest on Tuesday; and the majority of Walmart’s Black Friday deals, are available to online shoppers starting at 12:01 a.m. on Thursday. Thanksgiving Day is the best day for jewelry purchases.
  • Black Friday deals: Cheap electronics, video games, DVDs, and gaming systems. And while it may not exactly be on Santa’s list, Friday may also be a good day to close a deal on a new car, as dealers seek to clear out inventory and boost sales. Cyber Monday can be ideal for toys, which are 13 percent less expensive than they were in October, according to Adobe.
  • Don’t be loyal: Despite the ability to find steep discounts, 25 percent of customers will end up paying higher prices because they are loyal to a retailer.
  • Download ShopSavvy, before you hit the brick and mortar stores…the app can scan barcodes and compare at other big retailers.
  • Check out CNET’s Black Friday Guide, which highlights the best deals at many of the nation’s top retailers and Consumer World’s Black Friday Week Tips for Bagging a Bargain.
  • Sobering reminder: The best deals always occur AFTER the holidays.

MARKETS: The post-election selloff in the bond market continued, as investors bet that the Trump administration will boost spending, cut taxes and as a result, spark an increase in inflation. The yield on the benchmark 10-year note closed at a 12-month high and logged the biggest two-week gain in 15 years. The Treasury bond market is on pace for the biggest monthly negative return since December 2009 and the overall bond market has seen the biggest two-week rout in data going back to 1990.

  • DJIA: 18,868, up 0.1% on week, up 8.3% YTD
  • S&P 500: 2182, up 0.8% on week, up 6.8% YTD
  • NASDAQ: 5321, up 1.6% on week, up 6.3% YTD
  • Russell 2000: 1315, up 2.6% on week, up 15.8% YTD
  • 10-Year Treasury yield: 2.34% (from 2.12% week ago)
  • British Pound/USD: 1.2356 (from 1.2593 week ago)
  • December Crude: $45.54, up 5.3% on week
  • December Gold: $1,208.30, down 1.3% on week, 9-month low
  • AAA Nat'l avg. for gallon of reg. gas: $2.15 (from $2.18 wk ago, $2.12 a year ago)


Mon 11/21:

8:30 Chicago Fed National Activity Index

Tues 11/22:

10:00 Existing Home Sales

Weds 11/23:

8:30 Durable Goods Orders

10:00 New Home Sales

10:00 Consumer Sentiment

2:00 FOMC Minutes


Large stores open:

3pm JC Penney

4pm Old Navy (some locations only)

5pm Best Buy, Toys R-Us, Macy’s

6pm Wal-Mart, Sears, Kohl’s, Target

7pm K-Mart

Large Stores Closed:

TJ Maxx, Marshall’s, Staples, Office Depot, BJs, Costco, GameStop, Lowe’s, Nordstrom’s, Neiman Marcus, Christmas Tree Shop

Friday 11/25 BLACK FRIDAY

1:00 Stock Markets close early

Bond Market Bingo


The promotion for the 1965 movie, “Beach Blanket Bingo” was simple: “Frankie (Avalon) and the gang are hitting the beach for some good old-fashioned shenanigans!” There happen to be some strange shenanigans in the bond market this summer, as some global investors are willing to accept negative interest rates for the bonds that they are purchasing. It’s the financial equivalent of BOND Blanket Bingo! Why would someone choose to automatically lose money? That is what occurs when investors buy bonds with negative yields, and hold them to maturity. Yet, with worldwide growth petering out, persistent low inflation and uncertainty about everything from Brexit to the US Presidential election, money has been pouring into government debt, pushing up prices and driving down yields.

Currently there is about $13 trillion worth of global sovereign debt yielding less than zero. Last year, Switzerland became the first country to sell debt at negative yields, followed by Japan, which did so in March. And then earlier this month, Germany became the first eurozone country to sell 10-year bonds with a negative yield in a government auction.

Under normal conditions, you would purchase a bond at a discount, meaning that you would pay $99.50 for a bond. Then at the end of the term, the government would send you $100 at maturity. But in the topsy-turvy negative yield world, you buy the bond at a premium, say $101 and only get back $100 at maturity.

Why would anyone lend money to a government for ten years, only to be contractually obligated to see less than the total amount returned? There are a number of reasons that this market quirk is occurring. Many investors believe that global central banks, like the European Central Bank, the Bank of England and the Bank of Japan, will continue to buy bonds to stimulate economies and therefore, the price of bonds will keep rising. In that case, an investor might accept a negative interest rate because she thinks that she can sell that same bond for even more money to someone more desperate for safety.

Others purchase negative yielding debt because they need a safe, liquid investment, amid uncertain conditions. These investors equate buying a negative yielding bond with paying for portfolio insurance against future economic disaster. For them, it is cheaper to lose a bit of money on a government bond than to park vast sums in a vault and then pay a guard to watch over the stash.

There is another point to consider: with little or no inflation to erode purchasing power, some accept lower yields, because “even if you earn zero percent or less on your savings, you still come out ahead,” according to Capital Economics. That’s why when compared to negative rates, receiving only 1.6 percent for a 10-year US government bond doesn’t sound too bad.

But low yields are tough to take for retirees who need to create an income stream from their savings. Many of these folks had planned on generating something closer to 3 percent from their “safe” assets, which is why many are turning to riskier, corporate junk bonds, which are yielding a comparatively juicy 5.5 percent.

But what seems great today can quickly seem terrible if/when the economy turns south and enters into a recession. At the end of 2008, after the financial crisis hit, junk bond yields soared to over 20 percent, which meant that the prices of these once-sought after instruments, had plunged. That’s why in Bond Market Bingo, the risk is not just that your number was not called, but that you could lose money in the process.

June Jobs Take Off: Stocks Surge


The better than expected June jobs report was a much-needed shot in the arm for the recently sagging labor market. The economy added 287,000 jobs, including the return of about 30,000 striking Verizon workers, and the unemployment rate rose to 4.9 percent, but did so for a good reason: more people entered the labor force in search of work. Along with a terrible May (revised down to just +11,000 jobs, the weakest month of hiring since the job recovery began in 2010) and a mediocre April (revised up to +144,000), June’s numbers brought second-quarter average monthly job creation to 147,000 – that’s down from 196,000 in the first quarter, 229,000 last year and 260,000 in 2014. The big question now: is the recent trend portending weakness in the economy or is it a natural slowdown, as we begin the eighth year of the recovery?

Other parts of the report complicate the answer. The broad measure of unemployment U-6), fell to 9.6 percent, down 0.9 percent from a year ago, but more than a percentage point above its pre-recession level. Meanwhile, hourly pay increased by 2.6 percent from a year ago, matching the highest level of the recovery.

My guess is that the labor market is tightening and that something weird occurred in May. That said, more data is necessary to determine the direction of the labor market, which also means that the Fed is unlikely to take any action at its policy meeting at the end of this month.

Next question: Would a strong summer hiring season encourage the Fed to consider an increase at the September meeting? Maybe, but European politics may again force a delay in the Fed’s rate hike cycle. If you liked “Brexit,” you’re going to love “Quitaly”. In October, Italians will head to the polls to vote on whether to oust the current prime minister, potentially leading to a general election in which the anti-European Five Star Movement could gain ground and advance their call for Italy to withdraw its membership of the euro, though the party supports EU membership. As the vote nears, Italy is once again confronting the possibility of bailing out the world’s largest bank, Monte dei Paschi, which continues to hold nearly $400 billion of non-performing loans on its books, by far the largest in the EU.

According to Capital Economics, a survey in May “showed that 58 percent of Italians wanted a referendum on their EU membership. Granted, only 48 percent said that they would vote to leave. But the final UK opinion poll last week also suggested that only 48 percent would vote to leave the EU.” In other words, add you should probably add “Quitaly” to your summer lexicon.

MARKETS: Last week, the yield on the 10-year U.S. Treasury note touched a record low of 1.321 percent and the 30-year also checked in with its own record low of 2.098 percent. Yes, that means that if you lend the US government money for THIRTY years, you would receive a paltry 2.1 percent in interest. Meanwhile, stock indexes charged higher on the week, nearing all time highs reached in May 2015. As earnings season begins this week, investors will have to reconcile current prices with a likely fifth straight year-over-year quarterly profit decline.

  • DJIA: 18,146, up 1.1% on week, up 4.1% YTD, now above pre-Brexit level (18,011)
  • S&P 500: 2130, up 1.3% on week, up 4.2% YTD, 1 point below 05-15 record high
  • NASDAQ: 4956, up 2% on week, down 1% YTD
  • Russell 2000: 1177, up 2.2% on week, up 3.6% YTD
  • 10-Year Treasury yield: 1.366%, a record low close (from 1.45% a week ago)
  • British Pound/USD: $1.295, a 31-year low
  • August Crude: $45.41, down 7.3% on week, largest percentage loss since Feb
  • August Gold:  at $1,358.40, up 1.5% on week
  • AAA Nat'l avg. for gallon of reg. gas: $2.25 (from $2.28 wk ago, $2.76 a year ago)


Mon 7/11:


10:00 Labor Market Conditions

Tues 7/12:

6:00 NFIB Small Biz Optimism Index

10:00 Job Openings and Labor Market Turnover

Weds 7/13:

8:30 Import/Export Prices

2:00 Fed Beige Book

2:00 Treasury Budget

Thursday 7/14:

BlackRock, JPMorgan Chase, Yum! Brands

The Bank of England interest rate decision (the first post-Brexit announcement)

8:30 PPI-FD

Friday 7/15:

Citigroup, U.S. Bancorp, Wells Fargo

8:30 CPI

8:30 Retail Sales

9:15 Industrial Production

10:00 Business Inventories

10:00 Consumer Sentiment

Back to School for Your Money: Bonds


Now that the kids are back to school, it’s time to hit the books for you and your money, starting with one of the most misunderstood asset classes: BONDS. Companies have two basic ways to finance their operations: through stock and through bonds. When you purchase stock (“shares” or “equity”), it represents ownership of a publicly traded company. As a common stock holder, you get a piece of what the company owns (assets) and what it owes (liabilities). You are also entitled to voting rights and dividends, which are the portion of a company's profits it distributes to its shareholders. Stock prices move based on supply and demand: if more people think the company will deliver future financial results, they will buy it and the stock will rise.

When you buy a bond, you are actually lending money to an entity -- the US or a foreign government, a state, a municipality or a company -- for a set period of time — from 30 days to 30 years — at a fixed rate of interest (the term “fixed income” is often used to describe the asset class of bonds.) At the end of the term, the borrower repays the obligation in full.

Bond prices fluctuate based on the general direction of interest rates. Here’s how it works: if you own a 10-year US government bond that is paying 5 percent, it will be worth more now, when new bonds issued by Uncle Sam are only paying a little more than percent. Conversely, if your bond is paying 2 percent and your friend can purchase a new bond paying 5 percent, nobody will be interested in your bond and the price will fall. That’s why bond prices move in the opposite direction of prevailing rates, regardless of the bond type. So, if you hear that interest rates are on the rise, you can count on your individual bond or bond mutual fund dropping in value.

Although often hailed as “safe,” bond investors face a number of risks, in addition to the interest rate risk described above. One is ­credit risk, which is the risk of default or that the entity does not pay you back. That is a pretty low risk if the entity is the US government, but can be a high one if it’s a company or town that is in trouble. Another risk is inflation. Even if the bonds are paid in full, the promised rate of interest can turn out to be worth less over time due to inflation, which eats into the fixed stream of payments.

Because bonds deliver a consistent stream of income, many investors view them as the perfect retirement vehicle. But as mentioned above, bond prices can fluctuate. The worst calendar year for the broad bond market was 1994, when returns were -2.9 percent due to an unexpected upward shift in interest rates (prices dropped more, but the interest from bonds helped defray some of those losses). So you CAN lose money in the bond market, though the magnitude of the fluctuations tends to be smaller than those in stocks and other riskier asset classes.

The magnitude of a bond loss is partially tied to the duration of the holding. Duration risk measures the sensitivity of a bond’s price to a one percent change in interest rates. The higher a bond’s (or a bond fund’s) duration, the greater its sensitivity to interest rates changes. This means fluctuations in price, whether positive or negative, will be more pronounced. Short-term bonds generally have shorter durations and are less sensitive to movements in interest rates than longer-term bonds. The reason is that bonds with longer maturities are locked in at a lower rate for a longer period of time.

For those of you who own individual bonds, the price fluctuations that occur before your bonds reach maturity may be unnerving, but if you hold them to maturity, you can expect to receive the face value of the bond. If you own a bond fund, it may be scary to see the net asset value (NAV) of the fund drop when rates increase. To soothe you a bit, remember that when NAV falls, the bonds within the fund should continue to make the stated interest payments. As the bonds within the fund mature or are sold, they can be replaced with higher-yielding bonds, which could create more income for you in the future. Additionally, if you are reinvesting interest and dividends back into the fund, you may benefit from purchasing shares at lower prices.

To help protect your portfolio against the eventual rise in interest rates, you may be tempted to sell all of your bonds. But of course that would be market timing and you are not going to fall for that, are you? Here are alternatives to a wholesale dismissal of the fixed income asset class:

Lower your duration: This can be as easy as moving from a longer-term bond into a shorter one. Of course, when you go shorter, you will give up yield. It may be worth it for you to make a little less current income in exchange for diminished volatility in your portfolio.

Use corporate bonds: Corporate bonds are less sensitive to interest-rate risk than government bonds. This does not mean that corporate bonds will avoid losses in a rising interest rate environment, but the declines are usually less than those for Treasuries.

Explore floating rate notes: Floating rate loan funds invest in non-investment-grade bank loans whose coupons "float" based on the prevailing interest rate market, which allows them to reduce duration risk.

Keep extra cash on hand: Cash, the ultimate fixed asset, can provide you with a unique opportunity in a rising interest rate market: the ability to purchase higher yielding securities on your own timetable.

Week ahead: Fed Up, geopolitical risk reemerges


The Labor Department said the U.S. economy created 195,000 jobs in June and the unemployment rate remained at 7.6 percent. There was something for everyone in the report. Optimists focused on the fact that employment is trending higher. The previous two months were revised up, bringing total monthly job creation to just over 200,000 this year, ahead of last year’s pace of 175,000. And although the unemployment rate remained steady, it did so by absorbing 177,000 new workers into the workforce. Pessimists will underscore that there are still 11.8 million Americans out of work and the quality of many of the jobs was weak, with 75,000 new positions coming from low paying jobs in the leisure and hospitality industry. As far as the rate holding steady, pessimists note that a slew of part-time workers (360,000), many of whom would likely prefer full-time employment, boosted the workforce. As a result, the broad unemployment rate (unemployed, disgruntled and part time workers who would prefer full-time) jumped from 13.8 percent to 14.3 percent in June.

On a low-volume day, the optimists won the day, interpreting the report as proof that the economy was improving, but not by so much that the Fed would alter policy before its September meeting. Stocks gained ground, but the bond market was less convinced as 10-year treasury prices slumped and yields increased to 2.72 percent, the highest level in almost two years.

Is this what the rest of the year is going to be like? Since May 22nd, after Fed Chairman Ben Bernanke testified before Congress and raised the prospect that the central bank could downshift from its accommodative policies if economic data were to improve, investors have been throwing a “Taper Tizzy.” Every day is highlighted by the question, “When and by how much will the central bank taper its bond buying?”

This week, the Fed-funk is likely to continue, after the release of the minutes from the last policy meeting. You might recall that was the meeting after which Chairman Ben Bernanke attempted to soothe investors with more details about the conditions under which the Fed would take its foot off the gas. Instead of the intended calming effect, Bernanke inflamed the situation and volatility spiked across all asset classes.

Taking the Fed at its word, we know that the exit strategy is a work in progress, which will be driven by economic data. Capital Economics sees five stages of the Fed’s exit plans. From an investor perspective, these stages might seem to match Elisabeth Kübler-Ross’ “Five Stages of Grief”:

(1) Taper monthly asset purchases this fall (DENIAL)

(2) End bond purchases completely by mid-year 2014 (ANGER)

(3) Modify forward guidance language included in FOMC policy statement (BARGAINING)

(4) Raise short-term interest rates in 2015 (DEPRESSION)

(5) Begin to sell Fed’s holdings of Treasuries starting in 2017 (ACCEPTANCE)

Regardless of the exact timing and staging, these steps will occur and the quicker investors adapt and accept them, the better off they will be.

For those who were getting sick and tired of the constant Federal Reserve naval-gazing, there is something new to agitate raw nerves: geopolitical risk. In the two years since the Arab Spring, there hasn’t been much discussion of geopolitical risk, which is loosely defined as the risk that an investment's returns could suffer as a result of instability in a country, due to a change in government, legislative bodies, other foreign policy makers, or military control. The situation in Egypt has all of the components necessary to qualify and has already pushed up crude oil prices -- NYMEX crude breached $100 per barrel for the first time in over a year. Thankfully, those increases have not translated to higher prices at the pump yet.

As a reminder, Egypt is not a major oil producer and has been a net oil consumer of oil since 2008. However, its control of the Suez Canal and its proximity to large Middle East oil exporters puts investors on alert whenever there is political unrest. Approximately 2.5 million of barrels of crude oil pass through the Suez Canal or the Suez-Mediterranean (SUMED) pipeline each day. Any disruption to the flow of oil could have ripple effects throughout the region.

Markets: In a holiday-shortened week, stocks benefited from a surprise announcement from across the pond. For the first time, both the Bank of England and the European Central Bank provided investors with forward guidance. Both central banks will maintain their aggressive policies for an extended period.

  • DJIA: 15,135, up 1.5% on week, up 15.5% on year
  • S&P 500: 1631, up 1.6% on week, up 14.4% on year
  • NASDAQ: 3479, up 2.2% on week, up 15.2% on year
  • 10-Year Treasury yield: 2.72% (from 2.49% a week ago, yield now at 23-month high)
  • Aug Crude Oil: $103.22, up 6.9% on week
  • August Gold: $1212.70, down 0.9% on week
  • AAA Nat'l average price for gallon of regular Gas: $3.47

THE WEEK AHEAD: Q2 earnings season kicks off this week. S&P Capital IQ predicts earnings to increase by 2.9 percent from the same period a year ago and for the full year to rise by 6.3 percent from 2012.

Mon 7/8:


3:00 Consumer Credit

Tues 7/9:

7:30 NFIB Small Business Optimism Index

Weds 7/10:

2:00 FOMC Minutes

4:10 Ben Bernanke delivers speech commemorating 100th anniversary of the Federal Reserve

Thurs 7/11

Bank of Japan rate decision

8:30 Weekly Jobless Claims

8:30 Import/Export Prices

Fri 7/12:

JP Morgan Chase, Wells Fargo

8:30 Producer Price Index

9:55 Consumer Sentiment

Week ahead: Halftime for economy: Bumpy ride ahead, jobs in focus


The first 6 months of the year is in the books, so it’s a perfect time to check in on the U.S. economy’s progress thus far, and to look ahead to the second-half of 2013. Economic growth: Recovery from the Great Recession has been sub-par (the post World War II growth rate for the U.S. is 3-3.5 percent), with growth averaging about 2 percent since 2010. Q1 growth was revised down to 1.8 percent from 2.4 percent and Q2 is expected to be similar to Q1, due to the lingering effects of sequestration. But economists believe that activity should pick up towards the end of the year and that total growth for 2013 will be between 2 and 2.5 percent. The pace of growth is due to accelerate to 3 percent next year, but this seems like a long way off.

Jobs: 5 months into the year job growth has been good, not great. The economy has added an average of 192,000 non-farm positions per month in 2013, ahead of the 175,000 monthly pace seen in the previous two years; and the unemployment rate has edged lower to 7.6 percent from 7.8 percent in December. Still, there are 11.8 million Americans out of work, 4.4 million of whom have been unemployed for more than 6 months. So while layoffs have tapered off, economic growth has been too weak to spur widespread hiring. Most economists predict that June job creation will be approximately 150,000 – 160,000, due to recent softness in manufacturing data.

Housing: Housing is finally recovering from the abyss. Sales have increased and prices have made great advances, though from low levels. The recent Case-Schiller house price index showed increases of 12 percent from a year ago, but housing experts note that double-digit advances are not sustainable, especially as mortgage rates have spiked and sellers will likely to return to the market in greater numbers. The slow down should not be read as another leg down in the housing market, but a new phase in which growth is normalized.

Consumers: The first half of the year has been pretty good for consumers. Americans' debt obligations have eased as a percentage of their disposable income, household net worth has surpassed its 2007 peak and consumer confidence shot up to the highest level since 2008. Still, incomes have remained mired at similar levels to where they were 10 years ago. But for tame inflation, stagnant wage growth would be a bigger concern.

Federal Reserve: We can divide Q2 into two periods: before May 22nd, which I propose we call “BB” or “Before Bernanke” and after May 22nd, which can be referred to “AB”, or “After Bernanke”.

  • BB: From April to mid-May, stocks marched higher, due to the Fed’s easy monetary policies; a surprise announcement from the Bank of Japan about its own stimulus plans; better than expected corporate earnings; the continued recovery in housing; Europe stepping back from the precipice of disaster; and the much-feared hard landing in China never coming to fruition.
  • B-Day (Bernanke Day): On May 22nd Fed Chairman Ben Bernanke testified before Congress and raised the prospect that the central bank could downshift from its accommodative policies (which were intended to drive down borrowing costs, push up asset prices and encourage more investment, spending and hiring in the broader economy) prior to Labor Day, if economic data were to improve. On that day, the Dow reached a fresh intra-day nominal high of 15,542. The bond market had already started to price in future Fed action, as the yield on the 10-year treasury spiked to 2.12 percent at the end of May, from 1.62 percent earlier in the month.
  • AB/Stocks: The balance of the quarter was highlighted by huge gyrations in all markets, due to worries about when the Fed might pull back on its bond-buying. The height of the anxiety occurred after the June 19Fed Open Market Committee meeting. The S&P 500 index fell 7 percent from its intraday record high, before recouping some of those losses and finishing the quarter 3.8 percent below the record high. The AB period was marked by rampant volatility, with the Dow logging 16 triple-digit moves in June, the most in a month since Oct 2011.
  • AB/Bonds: The 10-year bond yield climbed as high as 2.66 percent, before settling at 2.49 percent at the end of the quarter. . Treasury bonds handed investors a loss of 2 percent this quarter, the worst quarterly decline since the fourth quarter of 2010. While the jump in yields and drop in price has been sudden, 2.5 percent is still considered a low level.

More on bonds: Historically, the yield of the 10-year runs 1.5 to 2 percentage points higher than the inflation rate, which would suggest yields should be closer to 3 percent, even higher than the current 2.5 percent. While the move in bonds has probably been more violent than the Fed would have expected, the central bank would like to see both stocks and bonds return to more normal pricing. For those worried that the recent rise in long-term interest rates will derail the recovery, it is worth remembering that when the bond market plummeted in 1994 and yields surged, the subsequent five years saw unusually strong economic growth and large gains in stock markets.

What to expect in the second half of the year: Market volatility is likely to remain elevated, as each economic report will be parsed through the lens of “What will the Fed think about this report?” Global markets have become dependent on the Fed's unprecedented accommodative policy, including its monthly purchase of $85 billion worth of bonds (QE3). Due to the unusual nature of the Fed’s stimulus plans, it is difficult to draw on previous periods to help predict how the change in policy will impact the economy and markets. The very fact that we have not been here before is creating investor uncertainty, which is why the anticipated shift in Fed policy will likely remain the chief investment concern for the balance of the year.

Markets: June was the first losing month of the year for stocks, but all three major averages logged their third winning quarter in four and remain solidly ahead for the year. The Dow has seen its strongest first half of the year since 1999 and the S&P 500’s first half performance is its best since 1998. Volumes could be light this week due to the Independence Day holiday, but there will be plenty of action on the calendar, including policy committee meetings by the Bank of England and the European Central Bank, and the monthly jobs report in the U.S.

  • DJIA: 14,909, up 0.8% on wk, down 1.4% on month, up 2.3% on quarter, up 13.8% YTD
  • S&P 500: 1606, up 0.9% on wk, down 1.5% on month, up 2.3% on quarter, up 12.6% YTD
  • NASDAQ: 3403, up 1.4% on wk, down 1.5% on month, up 4.1% on quarter, up 12.7% YTD
  • 10-Year Treasury yield: 2.49% (from 2.514% a wk ago, biggest quarterly selloff since Q4 2010, worst first-half  return (-2.1%) since 2009)
  • Aug Crude Oil: $96.56, up 3% on week
  • August Gold: $1223, down 5.3% on wk, down 23% on quarter (worst quarter since the start of modern gold trading in 1974), down 30% YTD)
  • AAA Nat'l average price for gallon of regular Gas: $3.50


Mon 7/1:

8:58 PMI Manufacturing Index

10:00 ISM Mfg Index

10:00 Construction Spending

Tues 7/2:

Motor Vehicle Sales

10:00 Factory Orders

Weds 7/3:

7:30 Challenger Job-Cut Report

8:15 ADP Employment Report

8:30 International Trade

1:00 US markets close early for Independence Day


Bank of England and ECB rate decisions

Fri 7/5:

8:30 Employment Report

8:30 Weekly Jobless Claims

Week ahead: Economic growing pains: Fed to remove punchbowl


I thought about this 2003 Roz Chast cartoon “Worry Tank,” as global markets collapsed in the aftermath of the Federal Reserve policy meeting and the Chairman’s subsequent news conference. It’s as if we are all worried that the economy is actually stronger than we thought - gasp! As a result, the Fed should be able to stop spiking the punchbowl later this year and eventually, it will remove the punchbowl altogether, and we will somehow learn to muddle through on our own. Poor Bernanke: Even when he’s trying to tell everyone that the economy is improving and Fed stimulus will eventually not be necessary to boost growth, asset values crater.

There is an irony in the timing of the market’s first 2013 convulsion and the Fed’s upgraded view: It comes on the four-year anniversary of the end of the recession. The Business Cycle Dating Committee of the National Bureau of Economic Research “Determined that a trough in business activity occurred in the U.S. economy in June 2009.” The 18-month recession that began in December 2007 was the longest of any recession since World War II.

Of course it wasn’t really the end: The ensuing four years have been highlighted by a slow and painful recovery, during which job losses continued, housing prices kept dropping and every step forward was met with at least two steps back. Even today, it’s hard to feel upbeat about an economy that will likely grow by about 2.5 percent this year and still has 11.8 million people out of work.

The Fed acknowledges that things aren’t all rosy, but four years into the recovery, the FOMC “sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.” Progress, right? Not exactly, according to the reaction of global markets. After learning more details about how the central bank would taper its bond buying and the conditions under which a change in policy might occur, investors freaked out by selling stocks, bonds, commodities and just about anything else where a bid existed.

Was the sell-off an overreaction? Maybe not; after all, but for the Fed’s open-ended bond buying program launched last September, risk assets like stocks likely would not have soared to their recent highs and 10-year bond yields, which dropped to 1.62 percent in early May, would likely have been higher, according Scott Minerd, global chief investment officer at Guggenheim Partners. He recently noted that Fed buying had badly distorted the bond market and that “The yield on 10-year Treasuries would be roughly 150 basis points higher than it is today” without the Fed’s actions. (This comment was made prior to last week's pop in yields.) An improving economy plus the eventual exit of the Fed from the market may mean that the sell-off in bonds this week (the steepest weekly selloff in price and jump in yields in a decade) was warranted. As noted last week, a healthy economy should be able to manage a steady and expected rise in yields, versus a steep and a surprise one.

Mark Spindel founder and Chief Investment Officer of Potomac River Capital LLC in Washington, DC says without QE3, “The economy would be in worse shape than it is today. Unemployment would be higher - and inflation, which was already low and falling, would have been even lower and we may have even seen deflation.” That would obviously be an ugly backdrop for stocks, so in Spindel’s mind “QE3 has been responsible for almost the entire move higher in the equities market since last fall.” If he is correct, then the Fed’s policies may have delivered what was promised and we should quit complaining about a 5 percent drop from the recent highs.

Going forward, the ability of the stocks to recoup whatever is lost during this period will hinge on growth. If the economy can manage to power ahead, despite the lingering effects of sequestration and higher bond yields, then companies will make money and stocks will rise. If the economy slows, it may mean that the Fed keeps policy as is, which may not provide stocks with the same boost that we just saw, due to investor fear over “the Fed’s next move.”


  • DJIA: 14,799, down 1.8% on week, up 12.9% on year
  • S&P 500: 1592, down 2.1% on week, up 11.7% on year
  • NASDAQ: 3357, down 1.9% on week, up 11.2% on year
  • 10-Year Treasury yield: 2.514% (from 2.126% a week ago)
  • Aug Crude Oil: $93.69, down 4.5% on week
  • August Gold: $1292, down 6.8% on week
  • AAA Nat'l average price for gallon of regular Gas: $3.58

THE WEEK AHEAD: It will be a fairly active week on the economic calendar, highlighted by regional manufacturing surveys, durable goods orders, personal income/spending and updates on housing. The third and final reading of first-quarter growth is expected to remain at 2.4 percent.

Mon 6/24:

8:30 Chicago Fed Manufacturing Survey

10:30 Dallas Fed Manufacturing Survey

Tues 6/25:

8:30 Durable Goods Orders

9:00 FHFA House Price Index

9:00 S&P Case-Shiller House Price Index

10:00 New Home Sales

10:00 Consumer Confidence

10:00 Richmond Fed Manufacturing Survey

Weds 6/26:

8:30 Q1 GDP

8:30 Corporate Profits

Thurs 6/27:

8:30 Weekly Jobless Claims

8:30 Personal Income and Spending

10:00 Pending Home Sales Index

10:00 Kansas City Fed Manufacturing Survey

Fri 6/28:

8:30 Chicago PMI

9:55 Consumer Sentiment

Week ahead: It’s all about the Benjamin’s (Bernanke)


After weeks of conjecture about the Fed’s next moves, guess who is in the spotlight this week, ready for his close up? Ben Bernanke and the Federal Reserve Open Market Committee convene a two-day scheduled policy meeting on Tuesday and Wednesday. While there is no expectation of any change to monetary policy (short-term rates should remain at 0-0.25 percent, which is where they have been since December 2008 and the central bank will keep buying $85 billion worth of bonds each month), Fed watchers will parse every word of the accompanying statement; pour over the updated economic forecasts; and listen closely to Bernanke’s subsequent press conference. Investors have been gripped by Fed-fever since Bernanke’s May 22nd testimony on Capitol Hill, when the Chairman had the temerity to suggest that the central bank could taper its bond buying it the economy were to perk up. Suddenly, it was as if every trader feared what the rest of us have craved for over four years: economic improvement!

While there has been progress (jobs, housing, retail sales), chances are that the Fed will not taper until the September or December meetings. Don’t tell that to bond investors, who are trying to get a jump on the Fed by selling in advance of any announcement. And of course they are right: whether its September, December or early next year, the Fed will determine that the economy is strong enough to go it alone, without the central bank’s intervention.

When the government stops buying bonds and eventually starts to sell them, will it be the death-knell of the bond market? According to Capital Economics, the Fed absorbed 38 percent of the treasury bonds issued between the end of last September (when QE3 was launched) and the end of May 2013. When QE1 and QE2 ended, the damage to the bond market was muted, because anxious investors stepped in and filled the void. This time, there is no European debt crisis to create a “flight to quality” nor is there the belief that the Fed will act again. That said, if the rout in emerging stocks and bonds continues, there could be a uptick in foreign demand for US debt.

The whole idea of the Fed shifting gears is a good thing – it means that the economy is strong enough to go it along and frankly, if the economy can’t absorb higher interest rates, we have bigger problems brewing. In a “normal” economy, the benchmark 10-year yield usually runs close to the pace of economic growth. With most projections showing the economy returning to trend growth of 3 to 3.5 percent in 2014 and 2015, it would stand to reason that the 10-year yield would rise.

Some have been suggesting that the economy can already manage higher rates and that the Fed should get out of the way. Scott Minerd, global chief investment officer at Guggenheim Partners recently noted that Fed buying has badly distorted the bond market and that “The yield on 10-year Treasuries would be roughly 150 basis points higher than it is today” without the Fed’s actions.

“Won’t higher rates kill the housing recovery?” You would think the world had ended when 30-year mortgage rates increased from 3.375 percent to 4 percent, you know where rates were way back in 2011 and early 2012. It’s hard to imagine that 4 percent will stymie the housing recovery, though it may slow down the re-fi market, which has dropped by over 35 percent over the past 6 weeks.

Markets: The first three-day losing streak of 2013 came and went and we survived…and really, it wasn’t all that bad because despite falling in three of the last four weeks and losing 2.5 percent from the recent highs, U.S. stocks remain solidly higher on the year.

  • DJIA: 15,070, down 1.2% on week, up 15% on year
  • S&P 500: 1626, down 1% on week, up 14.1% on year
  • NASDAQ: 3423, down 1.3% on week, up 13.4% on year
  • July Crude Oil: $97.85, up 1.9% on week
  • August Gold: $1387.60, up 0.3% on week
  • AAA Nat'l average price for gallon of regular Gas: $3.62


Mon 6/17:

G-8 Meeting in Northern Ireland

8:30 Empire State Manufacturing

10:00 Housing Market Index

Tues 6/18:

FOMC Meeting begins

8:30 CPI

8:30 Housing Starts

Weds 6/19:

2:00 FOMC Meeting announcement

2:00 FOMC Forecasts

2:30 Bernanke Press Conference

Thurs 6/20:

Euro zone finance ministers meet

8:30 Weekly Claims

10:00 Existing Home Sales

10:00 Philadelphia Fed Survey

10:00 Leading Indicators

Fri 6/21:

Quadruple Witching: When stock index futures, stock index options, stock options and single stock futures all expire. Because investors must close out of their positions, trading volume and volatility can increase on quadruple witching