"Imagine there is a bank account that credits your account each morning with $86,400. It carries over no balance from day to day. What would you do? Draw out every cent, of course? Each of us has such a bank, its name is time. Every morning, it credits you 86,400 seconds. You must live in the present on today’s deposits. Invest it so as to get from it the utmost in health, happiness, and health. The clock is running. Make the most of today."
Admittedly, this will oversimplify many fundamental bond concepts. When it comes to the world of credit investing, purposely making it simple can be a very bad idea. Bond math is difficult because bonds have many moving parts and are often traded via complex strategies. Whether the bond market is “smarter” than stock investors is debatable. What is not debatable is that US stock investors must pay attention to the US Treasury curve in times of asset price volatility.
Between the closing price on Friday, October 10th, and the closing price on Wednesday, October 15th, the US 2 Year Treasury Note yield declined over 27%. In this same time period the US 10 Year Treasury Note yield declined 9.5%.
Those are massive moves and obviously spilled over into the equity markets. The point is that stock investors should pay attention to both the front and back end of the US treasury curve to understand how economic health, inflation readings and systemic risks are being quantified by the bond market. Seeing the US 10 Year at 2.21% on Tuesday should have made stock investors very interested in bond market signals.
Hone in on the 2 Year and the 10 Year Notes pricing differently in times of stress. Curve flattening and steepening moves are important to equity investors because they obviously transmit investment themes into the equity markets as well as affect the cost of capital and discounting rates.
One thing to note is that after Wednesday’s (somewhat) panicked selling, the US 2 Year rebounded sharply while the 10 Year has stayed at a very low level. This may imply that the prospect of longer term growth is still unclear while the expectation of changing Federal Reserve interest rate policy has not been completely discredited by recent volatility in risk assets. That should be a part of stock investors calculus for many trading strategies.
DISCLAIMER: NOTHING HEREIN SHALL BE CONSTRUED AS INVESTMENT ADVICE, A RECOMMENDATION OR SOLICITATION TO BUY OR SELL ANY SECURITY. PAST PERFORMANCE DOES NOT PREDICT OR GUARANTEE FUTURE SIMILAR RESULTS. SEEK THE ADVICE OF AN INVESTMENT MANAGER, LAWYER AND ACCOUNTANT BEFORE YOU INVEST. DON’T RELY ON ANYTHING HEREIN. DO YOUR OWN HOMEWORK. THIS IS NOT A RESEARCH REPORT. THIS IS FOR ENTERTAINMENT PURPOSES ONLY AND DOES NOT CONSIDER THE INVESTMENT NEEDS OR SUITABILITY OF ANY INDIVIDUAL. THERE IS NO PROMISE TO CORRECT ANY ERRORS OR OMISSIONS OR NOTIFY THE READER OF ANY SUCH ERRORS OR OMISSIONS.
“The thing that most affects the market is everything.” – James Playsted Wood
While it’s never fun to lose money, the past couple of weeks reminded me once again why I love the stock market. Mr. Market is basicallly a crazy person that takes pride in frustrating people on a consistent basis. Every investor feels the market’s wrath at some point.
There’s always a chance that investors will get caught flat-footed. In 2013, anyone that was too negative got left behind in the relentless rise. This year the market slowly built up double digit gains over nearly nine months, only to turn on a dime and give most of the gains back in a month.
The stock market is always somewhere on the continuum of panic, fear, complacency, greed or euphoria, but it’s tough to guess where and when the mood will shift from one to the other. This week it happended on a day-to-day basis.
Over the very long-term the stock market tracks the fundamentals — company earnings, dividends and the growth in the economy to some extent, but over the short-term it’s really just a huge experiment in human behavior and emotions.
If you take away the money-making or losing function of the market, it’s really a fascinating system. Sometimes I still wonder how it all works. It’s built on trust, because no one really knows what this stuff is worth with any degree of accuracy. If they did, we wouldn’t have 5 billion shares trading hands back and forth every day on the NYSE.
Last week billionaire Carl Icahn said that Apple, one of the largest, most closely followed companies in the world, was undervalued by half. Sure, why not? A case could be made for or against Icahn’s claims and you could probably talk me into both with enough data and narrative.
The reason the market functions is because it’s a collection of different opinions that are always at odds with one another. And investors can never agree on anything. There’s a buyer for every seller, as they say. The market provides capital for corporations, but also brings together a hugely diverse group of traders, individuals, institutions, speculators and even Mila Kunis to voice their opinions depending on their current investment stance.
And EVERYONE has an opinion (myself included). Now more than ever you can see those opinions in real-time on 24 hour financial news networks, finance websites, blogs, Twitter and other social media outlets like Stock Twits. During this minor four week pullback I’ve heard hundreds of different takes on where we go from here. They all sound good, for the most part, but who knows what will happen over the next few months or even years?
Also, we never really know the real reason for the movements in the market. There are 2-3 legitimate-sounding reasons every day that are thrown out there for the market’s move one way or the other, but they seem to change constantly. One day those 2-3 things “matter” to investors but the next day it’s a completely different set of reasons and no one has any recollection of what happened the day before.
The psychology of the market’s participants is by far the most important aspect for investors to understand. Yet the economy, the markets and businesses involved are constantly evolving. Plus, there’s the fact that investors themselves are always changing with divergent objectives, motives, incentives and strategies.
That means that the market will always and forever be interesting, which is why I love it.
Photo: Brian Glanz
Steve Covey is my favorite self help guru. Investing in the emotional piggy bank to establish trust is something I always think about…..
After last week’s market scare, investors are hoping upcoming corporate report cards offer more treats than tricks.
from Latest stock market news from Wall Street - CNNMoney.com http://rss.cnn.com/~r/rss/money_markets/~3/k0O3NWzDtDA/index.html