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Signs Of A Slowing Economy


Graph above courtesy of

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I wanted to share with you the current investment strategy activity as its been presented to our board of directors.  It includes some strategic changes based upon the technical indicators we follow and changing fundamentals of the economy.  The graph above shows you how investor sentiment has moved into the zone where we normally see stock prices pull back.

‘With the stock market approaching its all-time high, and the various technical indicators we follow telling us that the market is over-valued, breadth is weakening, momentum is waning, sentiment has gotten complacent, and the near-term trend appears to be rolling over to the downside, we have begun to book profits in positions that have moved above their calculated Intrinsic Value and/or positions that have significant gains since the January lows.  We have moved client portfolios up to maximum cash levels as outlined by their individual investment policies.  This is consistent with our view that the economy has begun to slow over the past three months and that corporate earnings growth has slowed significantly now that the impact of lower taxes is built into quarter-over-year-ago-quarter estimates.


With the Federal Reserve on hold with further interest rate increases questionable, plus the flattening of the yield curve with the spread between 2’s and 10’s at just 14bps, we have lengthened durations in bond portfolios and moved client portfolios up to maximum fixed income allocation as outlined by their individual investment policies. We have closed our positions in adjustable rate and floating rate government bonds, reduced our allocation to short-term fixed income corporate and government bonds, and increased our intermediate term holdings.  Additionally, we have moved a small percentage of the bond portfolio to long-term treasury holdings as a hedge against the downside risk in the stock market.  In accounts that allow both mutual fund and individual securities, we re converting mutual funds to individual bonds to lock in current rates for income clients.  This is consistent with our view that the economy has begun to slow over the past three months and that we risk an inversion of the yield curve that often presages a recession.”


The graph above shows the spread between the 2 year treasury yield and the 10-year treasury yield.   It has moved below the 14 basis points discussed above down to 13 basis points.  That means if you are a treasury investor, you are only paid 13/100’s of one percent more to tie up your money for 10 years than 2 years.  Because the yields are being crushed at the longer end of the maturity offerings, you are paid virtually the same amount of money on either maturity.

When the longer term maturities really fall like we have seen with the 10 year treasury yield, that is indicative of a slowing economy where investors a driving the yield down with demand for that maturity in spite of the shorter term paying the same return.  They are willing to do that because of the safety factor of being in a US Treasury Note and the opportunity to make capital gains on the principal because they believe yields will continue to fall (as yields fall, other investors are willing to pay you more than you paid for your note thereby providing you with capital gain income if you sell to them, which is a strategy the big bond investors like mutual funds and pensions use to enhance their returns).

Now is a time for caution, and we are positioning client portfolios accordingly so that when we get a correction we have cash on-hand to reinvest at lower prices.