Rates Jump Higher…Now What?

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                                Rates Jump Higher…Now What?

One of the most important principles in effectively investing properly, growing and protecting your portfolio, is price momentum or price direction.

It’s not earnings, price-to-earnings, price-to-book or fundamentals.  It is the direction that the stock, bond, commodity or currency is moving that is most important.  Because, those items will continue to move in that same direction until something stops them.

Right now, rates are going up, while bonds are going down.  I want to touch on this because I placed a small bet last week that went against me about 3% – 4% on the interest rates.

I will elaborate on why I did that, and why I got out of it.  We will also review why you want to get out of things when they are moving against you, and why you want to stay in things that are moving with you.

So, the main thought for this week is: “Super low rates are gone…now what?”  I want to discuss rates, because they started moving up in a significant form at the beginning of May.  However, they accelerated with Bernanke’s comments on May 22nd.

The direction of rates bottomed a year ago, and now it looks like they’ve broken out to the upside.  So, what happens to bonds (both rates and prices), housing prices, stocks, the U.S. Dollar, and other currencies now that super low rates are gone?

To begin answering some of those questions, take a look at the chart below that shows the 10-year U.S. Treasury yield.  On the right of the chart, look at the small black box that indicates 27.15.  Move the decimal to the left one position.  This means that right now, a 10-year Treasury in the U.S. is yielding about 2.7%.

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Historically, 2.7% is really low, but if you look at July 2012, rates have almost doubled from 1.4% to 2.7%. The 33-year lowering-yield trend in bonds seems to have ended in July of 2012 at 1.4%. Super low rates are gone. But low rates are still here.

I have previously stated that if we went above the 2.4% mark in yields for the 10-year treasury, and stayed above it, that super low bond rates would be gone.  And, as of this writing, it looks like they are gone.

Below is the same price chart of the 10-year Treasury, but I have zoomed out about eight years.  The middle horizontal line is the same 2.4% mark that was shown on the previous chart.  If you look at the bottom horizontal line on the chart below, you can see that the bottoming out period took place in 2012 and 2013.

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It appears that as of close-of-market in the first week, of the second half of 2013, super low rates are gone…and probably forever.  It looks like the new range will be rates between 2.5%-3.5%.

The top horizontal line on the chart above is 3.75%.  So, the range between the top line at 3.75% and the middle horizontal line depicting 2.4%, could very well be the new range that bonds move in for the foreseeable future.  The rates will still be low, but that super low rate is gone.

While all of this was happening, stocks peaked (topped out) right around May 22nd, as you can see on the chart below (the vertical line).  It is impressive that they peaked simultaneously with Bernanke’s comments.  Stocks are only down about 2%, which is not bad in comparison to municipal bonds (down 6%), and TIPS (Treasury Inflation Protected bonds) down 6%, as well.

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The horizontal line on the top of the chart above indicates the old, all-time high of the S&P 500 in 2000 and 2007.  Stocks recently broke above it, sat back down on it, and are staying above it; which is very bullish.  The momentum of stocks is up, and the interest yield is also up.  This is new.  In the past, when rates went up, stocks fell.  Right now they are highly correlated. This is not good for anyone who owns bonds.

I also wanted to check to see how the 30-year mortgage rate has been affected.  As you can see by the chart below, the 30-year was bottoming from October of 2012 until the very end of April this year.  From there, the sub-3.5% rate for a 30-year, fully amortized mortgage went up to about 4.5%.

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We have 30-year mortgages above 4.5%, now.  For an individual to borrow money for 30 years and only pay 4.5% interest is still ridiculously low.

How does all of this affect housing?  Look at the chart below that shows the Exchange Traded Fund (ITB), which is all of the residential housing stocks.  As you can see, it is down 15% from May 22nd.  So, the overall market is down 2%, and housing stocks are down 15%.

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It is safe to say that higher interest rates are going to put downward pressure on the housing stocks.  This is not opinion or guesswork; this is a fact as you can see in the chart above.  This is also going to slow the increase of house prices.

Overall, the higher, more stable rates will give the housing market more stability and health long-term, than a lower rate at 3.5%, which will promote speculation and house-flipping.

Avoid residential housing stocks right now.  They may have seen their best, most recent runs.

So how have Bernanke’s comments affected currencies?

Next, I want to look at two currencies: the U.S. Dollar and the Australian Dollar.  I want to look at the U.S. Dollar because when people get scared or concerned (regardless of where they live: Wales, UK, Canada, China, Australia, Chicago, etc.), people still move to the U.S. Dollar.

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When Bernanke’s statement came out on May 22nd, you can see by the vertical line on the chart above, the U.S. Dollar immediately fell.  Then, Bernanke came out with his FOMC meeting and stated that if things stay good, they are going to start taking their foot off the money-printing-gas pedal, and print less.  Since then, the U.S. Dollar has gone back up.

This last chart below is the Australian Dollar.  It fell from 105 to about 90 earlier this month.  That is a pretty significant 14% drop.  The reason I chose the Aussie Dollar opposing the U.S. Dollar is that when people take the “risk on”/”risk off” trade (or polarity investing), people move into the Australian Dollar for “risk on” and out of the Australian Dollar for “risk-off”.

Clearly, based on the chart below, we are in a “risk-off” move.

 

 

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As you can also see on the chart above, when it fell, it broke through its old support of 94.  Its next major support is at about 82.  If this price momentum continues (rates continue to go up), we could see the Australian Dollar go down to 82.

So, how do Bernanke’s comments and actions affect your portfolio and investments?  For this month’s Strategy Gathering, I will show you which sectors and investments are doing well in this new higher interest rate environment.

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I mentioned in my Market Situation Report last week that certain areas of the Financial sector are doing well.  However, there are a few other sectors that are doing well that I am excited to share with you.  

Together, we are growing and protecting your wealth,

RCPeck-Dig<br /><br /><br /><br />
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RC Peck, CFP  

Fearless Wealth | Investment Independence
Helping Individuals Reach Financial Independence Sooner, Faster, Safer.

A Note from RC: I have spent the two last decades, and nearly $1 million, designing a system that takes the human error out of investing…and help you beat the market over the long-term.  It’s simply called The Fearless Wealth System.  Click here to learn more about how regular investors are using it to profit right now.

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