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It's good to have you back.

The Days Ahead:
European elections. Bonds sill taking the headlines.

This was always going to be a quiet week. School holidays and Easter week, when most of Europe closes for at least two trading days, means volumes were low and large positions unwound. So, when the high profile pivots from the president on trade, China, rates and Yellen all hit, markets dived for cover. Welcome back to the bond bull. First up:

1. Whoa, on the 10-Year Treasury: We've always held to the old saw that bond investors are pessimists and equity investors optimists. Bondholders want to get paid back and shareholders just wanna get paid. In 2017, we viewed the bond market as looking over at stocks rising on the back of reflation, fiscal stimulus, know, all the nice stuff equities like, and blowing one big raspberry. So, when the 10-Year Treasury dropped below 2.3% it got our attention. This is what it looks like over the last year:

Now there are some strong tactical stories going on in Treasuries. Here’s a partial list:

  1. Investors taking advantage of the low issuance of T-Bills to go long. Here and here.
  2. Japan lowering its purchases of U.S. bonds and notes. Here
  3. Major short positions…Treasury shorts have been the major pain trade of 2017.

Add to that the geo-political risk and potential gridlock in a quiet trading week and we were set up for surprise. The chart shows the recent decisive move below the resistance point of 2.3%. The next chart stop is 2.0%. So far this year, long Treasuries have risen around 3.4% making them among the best performing fixed income instrument.

What does it all mean? It’s not quite a flight to quality, nor a fear trade. It’s somewhat seasonal and tactical. And none of this has changed our Fed view. But in the short term, we think bonds are very well supported.

2. Nothing either way on the Economic front: The core-ex food and energy Producer Price index fell a bit to 2.3%, some of which was held down by lower transportation costs, which are, of course, a second derivative of oil costs. It’s not a concern for now but medical costs jumped (they are the green line) and they could spill over into the CPI and consumer spending.

Elsewhere, the Job Openings report held few surprises and the NFIB survey (a measure of small company confidence) showed the best measure in earnings in nearly two years. 

3. U.S. Equities: We saw the first back-to-back weekly decline in the S&P 500 since January. We ran the numbers on how many companies are due to report earnings increases over 10% this quarter (we excluded loss-making companies because that exaggerates the improvement). How many? 101 out of 500. And they are across industries, not just the obvious energy and finance companies. In fact, the only standout is the airline industry, which will report much lower earnings because of dollar strength and higher fuel costs. Oh, and throwing passengers off planes.

We generally expect earnings to be their highest since 2011 and for companies with more than 50% of sales outside the U.S., growth could be as high as 15%.

Bottom Line: European stocks will be in the front line over the next few weeks. Meanwhile, U.S. Treasuries and the dollar are the main event.  


How Private Equity works

First London to China train (sorry freight only)

Man who predicted 36,000 Dow runs the CEA. It fell 35%.

--Christian Thwaites, Brouwer & Janachowski, LLC


Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice.  We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security.  The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended.  Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data.  Past performance is no indication of future results.

All charts from Factset unless otherwise noted.