6 BARRON’S August 5, 2019
But according to the same data, the Dow
and S&P 500 then rallied into year end.
The same pattern is also seen in the
Nasdaq Composite, but with even wider
swings and an even bigger surge into New
Year’s. So the question is where to hide out
for now. There are lots of credible calls for
still lower bond yields, notably by longtime
bond bull A. Gary Shilling, who ultimately
sees the Treasury’s 10-year note hitting 1%
(down from 1.85%) and the 30-year bond
reaching 2% (down from 2.41%).
In the short term, however, just a small
reversal from current (high-price, low-
yield) levels could be painful. For those
playing at home in the popular iShares
20+YearTreasuryBond exchange-traded
fund (ticker: TLT), a return to mid-May’s
levels would translate into a 7% loss, equal
to a roughly 1,800-point drop in the Dow.
Not exactly a haven.
Those who have practiced what they
thought was a safe relationship with TINA
through “bond proxies” shouldn’t be com-
placent. Société Générale strategist An-
drew Lapthorne points out that the global
stocks most correlated with bonds have
vastly outperformed the least correlated.
But these proxies provided scant protec-
tion in the Great Financial Crisis of
2008-09, as their profits plunged 30% to
40%—less than the 60%-plus drop for cycli-
cals, but painful enough, he adds.
BTIG’s Emanuel similarly observes that
bond proxies, such as utility shares and even
software stocks (recently viewed as members
of this cohort) have benefited in this environ-
ment. But given the euphoria in global bond
markets, they could be vulnerable, he writes
in a client note.
He recommends buying put options, which
increase in value as prices of the underlying
asset declines. (For more on these options,
see The Striking Price column on page M7.)
Specifically, Emanuel likes September $
puts on the Utilities Select Sector SPDR
(XLU) with the ETF trading at $60.16, and
November $220 puts on the iShares Ex-
panded Tech-Software Sector (IGV) with
the ETF changing hands at $221.76.
Those are worthwhile ideas for traders.
For longer-term investors, JPM’s Panigirt-
zoglou suggests that cash is a worthwhile
alternative to TINA. The Vanguard Fed-
eral Money Market fund (VMFXX) has a
seven-day yield of 2.23%, more than half
again that of global bonds. More impor-
tant, it provides a magazine of dry powder
to put to work if risk assets swoon from
their current highs amid the markets’
mounting dangers.
email: [email protected]
Up & Down Wall Street continued
investments, such as private equity and
hedge funds, are TINA’s version of a private
dancer, promising an exclusive performance
for those sufficiently well heeled to pay for it.
For us hoi polloi who are guided by a typical
financial advisor or who let our fingers do the
walking on keyboards to our online brokers,
listed stocks or funds are TINA.
But TINA has a rival in TIAA, as in
There Is An Alternative. And it’s U.S.-
dollar cash equivalents, according to JP-
Morgan’s Global Markets Strategy team,
led by Nikolaos Panigirtzoglou.
Even after the quarter-point reduction in
the Federal Reserve’s target range for over-
night federal funds, to 2%-2.25%, those
equivalents compare favorably to fixed-
income alternatives, where yields have been
crushed by investors’ headlong rush into
bonds. That puts them at risk for credit
downgrades, or the potential of steep price
declines if yields rise from their current his-
toric lows.
That stampede has been motivated, in no
small part, by the burgeoning of bonds with
negative yields; in other words, paper that
guarantees that investors will receive less
than their original investment.
To Julian Emanuel, BTIG’s chief strate-
gist, this suggests perhaps the biggest bub-
ble in history. German 10-year Bund yields at
minus 0.4%, 100-year Austrian bond yields at
1%, 10-year Italian bonds at 1.6%, and the
equivalent United Kingdom gilts at 0.6% re-
call some of history’s great investment bub-
bles. Among those of recent memory: the
Japanese stock market in the 1980s, the dot-
com bubble of the 1990s, and U.S. residential
real estate in the previous decade.
What’s different this time (always a dan-
gerous phrase in financial markets) is that
global bonds’ thoroughly irrational valuation
is a result of central banks’ imposition of
low or negative interest rates, as Mark
Grant, chief global strategist for fixed in-
come at B. Riley FBR, constantly reminds
readers of his Out of the Box missives. That
has created a wonderland more bizarre than
the one Lewis Carroll conjured.
Even with low and negative bond yields,
though, it might not be the season for
TINA. As the past week’s price action dem-
onstrated, we’re heading into what histori-
cally has been the stock market’s version of
hurricane season.
According to the Stock Trader’s Almanac,
in years preceding presidential elections
since 1971, the July-October span marked
the worst four months. The Dow Jones In-
dustrial Average and the S&P 500 index
have tended to peak in July, bounce around
in the next couple of months, and drop in
October, ending with losses by Halloween.
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