Broker Check

Staying Out of the Doghouse During the Age of Releveraging

April 22, 2015
Staying out of the doghouse during the Age of Releveraging

•    “There’s a bubble in the confidence that the Federal Reserve can get us all out of this without adverse consequences.”  Doug Kass – December 2014 

•    “Own high quality bonds and low P/E, high, quality stocks if you want to stay out of the doghouse.”  Bill Gross – March 15, 2015 

•    “The high-yield market has never faced a rising-rate environment, and investors have little historical data on which to base forecasts.”  Jeffrey Gundlach - April 14, 2015 

•    “The reason for the remarkably slow expansion over the past decade and a half has to do with the accumulation of too much debt.”  Dr. Lacy Hunt – April 17, 2015 

•    “U.S. banks have collectively run down their holdings of cash and Treasuries at over a 13% annual rate over the past 13 weeks to fund a near 11% run up in net new loans to households and businesses.  We are now seeing a very tentative uptick in core inflation and in median measures of inflation.”  David Rosenberg – April 21, 2015

The Age of Releveraging

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Commercial real estate releveraging its way to 2007 levels

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"Consumers have now racked up close to $180 Billion in credit card debt [alone] following the nearly debt-neutral [deleveraging] years of 2009 and 2010."

Quote source:  Card Hub statistics 2014 credit card debt study

- - - - - - - maybe with HELOCS...but that's about it...

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"From Sep 1985 to Mar 1986, the oil price went from $28 per barrel to $12 and the savings rate jumped from 6.7% to 9.3%; the six-month trend in real consumption throttled back from over 8% at an annual rate to barely more than 2%.  But look at what happened next - the oil price consolidated for a long while and when households saw that we were indeed in a more durable lower energy cost environment the savings rate receded and then guess what?  The pace of consumer spending in real terms rebounded sharply - as in, over a 9% annual rate."  David Rosenberg - April 10, 2015

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Chart of 30 year U.S., Treasury bond yield (12/31/09 -3/31/15)

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German 10 year bonds headed for negative yields?

  • Currently yields 0.07% (as of April 21, 2015);
  • Swiss equivalent yields -0.18% (as of April 21, 2015);
  • ECB's Draghi pledges to continue massive QE program designed to mash down rates.

Source:  Trading Economics 4-15

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Can we get negative rates in the U.S.?  Yes.  Most likely, no.  But with the ECB and Japan and maybe soon China buying all of the net new security issuance, it is technically possible.

With the quiet, but real measures of inflation increasingly nearly everywhere (in the U.S.), this dip in yield (if it occurs), should be very temporary.

  • Overnight Reverse Repurchase Agreement Operational Exercise - Federal Reserve Bank of New York (effective January 14, 2015)
  • The Desk has been testing ON RRPs since September 2013, and the Committee has indicated in the normalization principles released in September 2014 that it intends to use an ON RRP facility as a tool in the normalization of policy as needed.  In that regard, it has directed the Desk to continue testing to further examine how the ON RRP facility might be best structured to help control the federal funds rate while also limiting the potential for unintended effects in financial markets.
  • These operational exercises will be conducted daily thru the Desk's FedTrade system from 12:45pm - 1:15pm ET, until January 29, 2016.
FAQ:  Can negative rates be submitted?

  • Yes, the rate submitted as part of each bid is subject to a maximum, referred to as the "offering rate", but rates below this level, including negative rates, are permitted.

Source:  Federal Reserve Bank of New York - 2015

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Cumulative change in inflation versus average annual change

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We shouldn't kid ourselves about the correlation between the Fed Funds Rate and stock performance (see next slide)

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0.25% to 2% (Fed Funds Rate), on its own not likely to derail economic expansion (could gyrate financial markets)

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For Vickery Creek clients, the bond portion of their portfolios earned 5%+ (after fees), in 2014. Parenthetically, and by comparison, most bond funds were flat or down in 2014.  For 2015, high yield (namely BB- to BB+ rated bonds), is an area of the bond market that is more reasonably priced now and should have a decent performance year despite a possible increase in Fed Funds Rate later this year.  People afraid of high yield bonds should be aware that most high-yield drawdowns are recovered in less than a year.  

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Areas of growth to highlight April 2015

  • Our Large cap value focus;
  • Singapore small caps; and emerging market iShares (lower forward PE ratios than U.S., plus currency tailwinds);
  • US small caps (strong US dollar doesn't affect small caps as much as larger, multinational corporations facing currency headwinds (EPS));
  • Japan (significant savings with lower energy costs (due to fact that Japan is net energy importer in every category)), plus stimulus, plus corporate credit growth>great way to invest conservatively is with Blackrock Global Allocation (overweight Japan);
  • Technology:  price / sales ratio matters (example:  Trade your Apple shares for Cisco);
  • U.S. Healthcare stocks;
  • Financials

Attractive bonds (corporate and municipal)

  • Wolverine World Wide symbol: WWW - brands like Sperry, Stride-Rite, Saucony, Keds, Chaco, Merrell, Wolverine Boots:
6.125% coupon, BB rated, maturity 10/15/20
Yield 4.6% (5 year bond), YTW (Yield to Worst - if called),
10/16 (effectively an 18 month bond), 2.873%;

  • Dallas / Fort Worth TX Intl., Airport Rev municipal bonds:
5% coupon, A+ rated, maturity 11/1/34
Yield 4.051% (19 year bond), YTW (Yield to Worst - if called),
11/1/20 (effectively a 5 year bond), 2.55%.
Taxable equivalent yield (assuming 39.6% Federal rate), 4.29% (YTW).

The Next Bubble (s)

  • Government Bonds;
  • Investments w/ leverage (esp. recently created bond funds w/ leverage);
  • CCC- rated high-yield bonds and high yield floating rate loans;

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Highlighting Jasper National Park, Alberta, Canada

As you may know, I love the national parks and this includes Canadian national parks as well and I wanted to share this photo of Folding Mountain overlooking the Athabasca valley in Jasper National Park - Alberta, Canada.

I have a great job and people like you make it possible.

Thank you so much for your trust and your business.  Have a wonderful day!



Jack Parsons CTFA, AEP

President - Vickery Creek Capital Mgmt., LLC