March 2018 Newsletter: The Great Unwind

0

After a “tumultuous” February, the first month of over a 1,000 point loss for the DJIA in what seems like an eternity, investors seem nervous per various media outlets (cracks me up!). Is the drop in February “the sign” that the 9 year bull market is over? Doubtful in my book given it is corporate buy back season and companies are buying back stock at record rates. For those of you that have no idea what I mean, the headline from an L.A. Times article describing what I am writing about can be found here. The title says it all, “U.S. companies are plowing a record amount of money into buying back stock.” Per the article:

Flush with cash from President Trump’s tax overhaul and bathing in more earnings than they know what to do with, U.S. companies are embarking on a buyback binge of historic dimension. How big will it be? JPMorgan Chase & Co. strategists led by Dubravko Lakos-Bujas estimates that gross share repurchases will reach a record of about $800 billion this year, up from $530 billion in 2017. Just under half is attributable to improving profit growth, lower corporate levies and the repatriation of overseas cash under Trump’s program.

So, to those of you that are bearish and finally believe your time has arrived don’t get too excited, you will likely have to wait until the dog days of summer for an opportunity to take a crack at succeeding on a macro short. Why do I believe the market is headed for a drop in the summer? My answer is simple, who wants to hold debt that is losing value precipitously?

Allow me to expand a bit on that last sentence. The value of a debt security is inversely correlated to interest rates. Therefore, when interest rates rise, the value of the underlying bond decreases, and when interest rates fall, the value of the underlying bond increases. So, for the past 9 years the U.S. Treasury, China, and a slew of others have been buying U.S. Treasury bonds hand over fist as the U.S. was deemed a safe haven for investment. Now, with yields increasing, the value of those “safe” bonds is decreasing and as such the “Great Unwind” begins. The “Great Unwind” refers to the deleveraging which is happening now. China has recently become a seller of U.S. Treasuries and this has caused the ten-year bond to run nearly fifty basis points in just four months. For those of us in the trenches, this is comical and yet another example of psychological weaponry disguised financial awareness. In other words, investors are now shorting treasuries because as interest rates rise, China will be incentivized to sell their U.S. bonds, thus creating an excess of supply and driving the price of Treasuries down further.

The short Treasuries trade might be so obvious that CNBC will begin trumpeting the ETF to profit from this trade in the not too distant future, should that happen, please don’t be fooled! Any time the mainstream media highlights a good idea, you can be fairly certain you are the last to know and this trade is likely going to be a disaster. Deleveraging overall will drive rates higher and that is not good for the broad market, there is no coincidence between the ten-year yield running and the DJIA dropping.

In closing, there is still more time to make hay so have at it but the window is closing. With that said, the window I am referring to is the days of throwing darts at a board with DJIA components and making money on whatever stock your dart hit. The time for stock pickers to shine is upon us and for those of you, who have not viewed our mock portfolio on our website, consider doing so as the portfolio is up 18% YTD while the DJIA is flat.

Clocker’s Corner

I have been thinking of what I should title my personal ramblings for over a year and have finally landed on “Clocker’s Corner”. For those of you that are not horse racing fans, every morning a dozen or so clockers congregate at the various thoroughbred horse racing tracks around the country and clock or time horses training. Clockers provide gamblers with valuable insight into how a horse looks, trains and most importantly how fast a horse is moving.  Betting on a horse without insight from a clocker is like buying a stock because you like the letters in the company name, foolish. For those of you brave enough to navigate the world without our insight, lol, I can’t even finish the sentence because it is so silly. And here we go:

While it pains me to write about this topic, I feel that I have no choice given the attention it has received in the media. The Oscars, which I thought were Monday night (yes I am very tuned into the world, lol), have morphed from a movie award show to a political platform for people who pretend to be other people for a living. Think about that for a second before you bash me for not having any semblance of artistic understanding. Why on Earth is someone who is an actor or actress getting a platform to pitch political ideals? Are we supposed to take these people seriously, I do not. Just curious…

I will get into my Kentucky Derby thoughts next month but one thing is for certain this year, there is no favorite. I have never seen so many horses who were supposed to be “real” lose this early and so badly on the Derby trail. More to come…

March Madness is upon us and our annual pilgrimage to the land of legalized gaming with 15-20 or so fund managers is set for next week. To be honest, I have watched maybe an hour or two of college hoops this year. I have no idea who is real or who is not but I will be focused on two percentages next week while parked in the sportsbook with other like-minded thought leaders, lol. I will be focused on team FG% and opponent FG% and my money will be behind anyone who can play defense and score points, seems obvious but Vegas loves to make offensive juggernauts who couldn’t stop a junior high team defensively favorites (translated OKLAHOMA).

Thank you for reading and good luck!

Disclaimers & Disclosures: For a full list of disclaimers and disclosures, please visit: https://sylvacap.com/disclaimer

Contact: info@sylvacap.com

SHARE
Previous articleThe Impact of Steel and Aluminum Tariffs: Part I
Next articleThe Impact of Steel and Aluminum Tariffs: Part II
Ross Silver is the CEO and founder of Sylva International. Mr. Silver is a Registered Investment Advisor with over 15 years experience in equity research, investment banking, and asset management. Mr. Silver served as a consultant for the National Institutes of Health and holds a Series 65 securities license.

LEAVE A REPLY