Weekly Update: 1.12.18

January 12, 2018 Tobin Smith

End of the 30-Year Bond Rally is Near: HOLD MORL & BDCL

Dear Subscriber,

Well the stock market is off the best start since 2003...I remember March 14 2003 VERY WELL--it was the day our macro research at my first macro/equity research firm ChangeWave Research put out our first energy investments in natural gas based on the supply/demand imbalance (and before fracking!). 40,000 subscribers later we added Apple in 2005 at split adjust $6...ahhh the memories.

Wow...our NVDIA CAll Options KILLED IT! THAT $12.50 Bid on our CLOSE Nvidia $215 Call options yesterday at the open was a nice gift eh? As you know, on sell advice I assume you we are closing the position on the first closed trade price that is reported 20 minutes into the open (the time when delayed market pricing is delivered to free finance sites and apps).

On our $5k $8.25 first bite we scored $4.25 gross profit per contract or 54% gain or $2700 on our $5k.
On our SECOND BITE of $5k at $2.25 our gross profit was $10.25 per contract or 450% on our $5k or $22,500 on our $5,000.

All in and out? $25,200 profit on top of our $10,000 in...I'll take that every day..sure beats working.!

Action to Take: We are up 15% on our $192 entry point on Nvidia stock. NEW BUY Under $220 with $325 target. BUY ON next pull back to 20-day...that means YOU $Hyde (inside joke). On the next 5-10% under $200 on market correction we will repurchase January 2019 long term call options and hold them till NEXT year.

10-Year Bond Breaking OUt: BUY FINU Under $115

We are FINALLY seeing a slow and coordinated Central Bank reversal of QE forever...and for the right reasons!

As we discussed in the December newsletter, the US corporate tax cut does NOT HAPPEN is a global vacuum. The other major economies will HAVE TO bring their marginal corporate tax rates down to keep the US from becoming a tax haven. The reflationary economic knock-on effects for global growth are getting priced into the $100 trillion global bond market.

This increase in 10-year rates means global and regional banks are getting a significant boost in loan yield spreads (fixed cost of funds divided by fixed and floating loan portfolios) and that means higher EPS all around.

Action to Take: The Leveraged Financial Index Note FINU has finally broken out--let's buy under $115 on pullbacks and pound the table buy under $110 (which would happen on the next North Korea nuclear holocaust scare).

Make no mistake: the technical chart evidence of a major upturn in Treasury bond yields continues to grow.

The weekly bars in Chart 1 show the 10-Year Treasury yield ($TNX) nearing a test of its late 2016 intra-day peak at 2.62%. A decisive move above that chart barrier (which appears likely) would put the TNX on a path to a much more important resistance barrier near 3% which was the peak formed at the start of 2014. And that's when things really get interesting from a longer-term perspective.

Chart 2 show a major downtrend line drawn over the 2000/2007 peaks for the TNX sitting right at 3%. That makes the 3% level extremely important. ANY close above that level would end the major downtrend in yields (and uptrend in bond prices) that helped start the deflationary trend in financial markets that began at the turn of the new century.

It gets even better.Chart 3 shows that a decisive move over 3% would also end the three decade long downtrend in the 10-Year Treasury yield that started in 1981 near 15%. [Chart 3 uses a logarithmic scale which is more suitable for longer-term trendline analysis]. There's a lot of discussion about how high the Treasury yield would have to climb to start having a negative impact on the stock market. The recent climb is already hurting certain bond proxies like utilities and REITS. I suspect, however, that it would probably take a decisive move over 3% to really start getting stock investors worried.

I wouldn't be surprised if it got there before the end of this year.

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Chart 1

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Chart 2

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Chart 3

TEN-YEAR GERMAN BUND YIELD NEARS TWO-YEAR HIGH... One of the major forces pushing Treasury yields higher is the corresponding upturn in foreign yields. Ultra-loose monetary policies by foreign central banks have held foreign G10 bond yields lower which has weighed on Treasury yields. And those yields are starting to climb. Japanese yields (although extremely low) climbed to the highest level in six-months this week when the BOJ cut back on longer-dated bond purchases.

Canadian yields are climbing faster than in the U.S. on expectations for a possible rate hike later this month. The German 10-Year yield is also climbing faster than in the U.S. The 10-Year German bund yield has climbed 30 basis points over the last month which is nearly double the 17 basis point climb in the U.S. Chart 4 shows the 10-Year German yield jumping another 4 basis points today to 0.58 which is a few basis points away from a new two-year high.

The jump in eurozone yields is being attributed to release of minutes of the December ECB meeting which mentions the possibility of a shift in monetary guidance in early 2018, which is being interpreted as possibly signalling a hawkish turn. That's also pushing the euro closer to an upside breakout.

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Chart 4

EURO NEARS THREE-YEAR HIGH ... Any hint of a tighter monetary policy by the ECB (which started cutting its bond purchases in half this month) would put upward pressure on eurozone bond yields and its common currency. The weekly bars in Chart 5 show the euro trading just shy of a new three-year high. An upside breakout would also put the common currency above long-term resistance around the 1.20 level.

Any upside breakout in the euro would have several intermarket implications. For one thing, a rising euro is bearish for the U.S. dollar. That's because the euro carries the biggest weight (57%) in the Dollar Index. [The yen which has the second biggest USD weighting (14%) jumped against the dollar this week, while all G10 currencies are bouncing against the dollar today].

Net Net: A weaker dollar would lend more support to all commodity prices traded in dollars which have been rising recently. WTIC crude has reached a three-year high, while Brent crude today reached $70 for the first time since December 2014.

So...rising commodity prices are of course inflationary which usually pushes global bond yields higher. In return higher inflation supports the case for higher Treasury yields. While inflation may become a problem for stocks later in the year, the current rise in bond yields is more reflective of a stronger global economy and the gradual removal of QE FOREVER by the major central banks which is supportive to rising stocks, especially those tied to stronger economic growth and the reflation trade.

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HOLD MORL AND BDCL Buy Under $16 With 22% monthly yields if you don't use the income REINVEST the dividends in shares and in a 5 years you will made your money back and have at least 2 TIMES the yield...hard to beat. The underlying mREITS get 20% deduction on pass-through distributions...that is going to get income investor interest aroused..."trust me."

All in all a GREAT START to the new year for us Transformity Investors!

Cheers, Toby

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