On this week’s show, Karl discusses the bond market collapse this week and the effect it had on the stock market. Plus, it’s getting more and more important as the market cycle matures to know what you own.
Hey everybody, welcome to The Eggerss Report. It’s your investing playbook. Thank you very much for joining me. We appreciate it. Our website, eggersscapital.com, E-G-G-E-R-S-S Capital.com. Our telephone number, 210-526-0057. This is the weekly podcast, so we do this every Saturday morning and you could be listening to it on Saturday, Sunday, Monday, Tuesday. I don’t know, you can pull it up on demand. All of them are on our website and they’re available on iTunes, so you can go straight to iTunes, go to the podcast, pull up Karl Eggerss. You’ll find The Eggerss Report there. We’re on Stitcher Radio. We’re on Spotify. We’re on iHeart Radio. Lots of ways to get the podcast, or you can go straight to our site. Anytime we post one, if you want to just get it in your inbox email, go to eggersscapital.com and go to the blog and you will be able to put in your email address and there it will be.
That goes for anything we post, articles, any video we post, etc. Speaking of video, if you haven’t checked out our new and improved YouTube channel, make sure you do that. Just search Karl Eggerss, K-A-R-L, and subscribe to it. We do one probably once every couple of weeks or so, so make sure you go check out our new and improved YouTube channel. All right. Pretty crazy week in the markets. We’re going to get to that in just a minute, but before we do I have a little confession to make. I’ve had my iPhone for a little over two weeks. It’s the XS Max. It’s the big boy. Originally, when I got it I told you, “It’s okay. It’s got a better camera, obviously, and it’s okay.” After having it for a couple of weeks, it’s pretty awesome. Really, what it is is obviously the apps are the same, things do move a little quicker, but if you’ve upgraded to the new iOS you’re getting a lot of the features that this phone has.
However, this phone has unbelievable 4K video at 60 frames per second, which looks really cool. Takes up a ton of storage, so be careful about that. But the video’s amazing, really amazing. The camera on it, both cameras, actually there’s three cameras. One on the front, two on the back. Taking low light pictures and things like that, it’s amazing. You can also do post editing, post-production so to speak, where you take a picture and then after the fact can doctor it up in terms of the depth of field. Really awesome phone, so enjoying it. I haven’t had a chance to really play with it a lot when I did the last podcast, because I’d just got it, but yeah. The face ID works really well. Works with sunglasses too, by the way. Anyways, that’s my little synopsis on the new iPhone XS Max, the big boy.
All right. Let’s shift gears to the stock market. It was really the financial market, I should say, because the bond market had just as much attention this week as the stock market. Some are blaming the bond market for the stock market’s woes. By the way, pretty funny, some of these headlines you get on your phone from various news agencies, various financial networks. The one that came out after the bell on Friday was Stocks Lose the Most This Week in Almost a Month. Well, there’s only four weeks in a month. Basically, it had its worst week out of the last four weeks. I don’t know if that was newsworthy. But I did see another headline this week that I just have to share. I tweeted it out and said, “This is the new breaking news.” Here was the headline, I’m not making this up. This came from Reuters. “Trump boards Air Force One with something hanging off his shoe.” That was the headline that came across.
What? I mean, was it a piece of toilet paper stuck to the bottom of his shoe? Was it gum? I would imagine it’s not like his shoe’s torn or the sole’s coming off. I’m sure he wears a new pair of shoes every day. But these are the headlines we’re getting, so we’ve seen crazy news things going on the last few weeks, as you know. Mostly political. I won’t even get into that. But let’s shift our focus back to the financial markets. Okay. Let me tell you first what was moving and then we’ll get into why it was moving and what we’re doing or not doing about it currently. The big movers this week, and let me first start off with kind of the major indices. First, we saw interest rates move up quite a bit. The 10-year treasury up to 3.22%. We’ll get back to that in a minute, 3.22. The VIX was your big winner up 24%, which really on Friday kind of came back down, so it could’ve been much bigger than that. The Dow Jones, believe it or not, for the week was flat. The S&P was down about 1%.
The NASDAQ, on the other hand, was down about 3%. That’s where you started to see some deterioration as more in small caps, more in technology. In fact, small caps were down 3.79% this week, 3.79%. Here’s the deal, I think that … Well, before we get into it, let me give you the rest of the numbers. As we mentioned, volatility up a lot. Aluminum up 7%. Brazil bouncing back up 9%. Remember Brazil’s been in a slump. I think we may have mentioned Brazil on the podcast a couple of weeks ago as something that could potentially rally a little bit as a short-term trade. I can’t recall if we mentioned it here or not. You can check the tape on that one. Interest rates up a lot, as we said. TBT, if you are short treasury bonds, which a lot of people have been short treasury bonds for some time and have been wrong for some time, you made some money this week. Up about 7% as interest rates went up. Oil and gas went up about 2%. Utility stocks up almost 2%. Let’s see, what else here? Oil itself up about one and a quarter percent. Gold was up 1%, which the banks were up because of interest rates.
Commodities in general. Commodities, hey, we’ve been talking about commodities. Take a look at commodities, they’re creeping higher the last couple of weeks almost every day. Commodities looking really interesting. Industrial’s actually up this week. The gold miners up. All those things were in the green this week. Now on the downside, India down almost 9% this week. Not an Indian stock, the Indian Stock Market was down 9% this week. Big nasty week for India. Bitcoin down 7.5%. We saw the Biotechs also. Biotechs, I wrote about this actually on Thursday. I put a picture out on Twitter. I also put a picture out on Instagram on the Eggerss Capital Management page and said, “Look, biotechs were either at a buy, or they’re just about to break trend, because they’re at the low end. They’ve really been in an uptrend from early 2016 up until now.” We’re talking almost three years of a nice little uptrend, tight little channel and they’re in the bottom end. Well, they broke through to the downside on Friday and they were down for the week about 5.5%.
Airlines, we took some profits in airlines a week or two ago and airlines had a rough week as well. Down 5% as well. We had those in our aggressive strategy. Pharmaceuticals down 5%. Retail down 5%. Emerging markets down 5%. Consumer discretionary down 4%. Home construction down 4%. Semiconductors, 4%. As we mentioned, Russell 2000, 4%. TLT, the treasury bond ETF almost down 4%. You get the gist here what was going on. There was some stuff that was some places to hide, but a lot of places got hit really, really hard this week. What was really driving that? What was moving the markets? Well, we saw on Monday that the … Quickly, Elon Musk had settled with the SEC, a $20 million fine. Can’t be chairman for three years. Then later in the week he comes out basically putting up different acronyms for the SEC, Securities and Exchange Commission. Although, he uses some different words. He just keeps poking and prodding. Really, you’re starting to have to wonder, or maybe most of you aren’t wondering, you already know. But is something wrong here? What is he doing?
Of course, when it got settled Tesla jumped up. Then he comes out and keeps tweeting weird stuff, stock goes back down. Again, be careful with Tesla. Monday, as we’ve been talking about, we thought this would happen. Canada and the U.S. agreed on a trade deal. The theme of the week for the early part of the week was the market popped and then faded. We saw small caps and mid caps starting to show some weakness. They’ve been showing weakness for a while. Everybody’s waiting as a large cap’s going to catch the fever on the downside. Then oil went up to over $75 a barrel, which was the highest it had been since November of 2014. Tuesday we saw the Italy bond market signaling some trouble. Now, it’s Italy.
Remember, it was Turkey a few weeks ago and you don’t hear a lot about Turkey right now. Now it’s Italy. In the second day in a row, the Dow’s up, but everything else was down. Small caps, midcaps, retail got hit. Airlines got hit. It was kind of bifurcated market. If you’re just focusing on the 30 Dow stocks, you aren’t getting a complete picture of the overall market, which is kind of how 2018 has gone. Then some signals started popping around of some fear that we’re seeing a lot of IPOs coming to market, but unfortunately most of those companies are losing money. In fact it’s the most money losing IPOs since, you guessed it, the dot com bubble in 2000. So what does that say? Are companies saying, “Hey we got a crappy company here and we need to take it public and crash in while we can?” Maybe so. That’s something that was circling around this week.
Wednesday, another rally and then it faded. It’s been the theme all week. Brazil rallied hard. Interest rates went up on the 10 year treasury to over 3.15% and then here’s where things started to turn. I think Wednesday was that day we got the Presidential tweet on your phones where the whole country’s phones went off at the same time, which is kind of weird to think about. When that happened, the market peaked. That’s called a coincident indicator. It didn’t have anything to do with the market peaking, but it did. FED Chairman Pal came out and said the Central Bank may raise interest rates above an estimated neutral setting. He said, as the “remarkably positive” US economy continues to grow. Immediately the market starts selling off, saying uh-oh, as they usually do, the FEDs are going to go too far with this. We’re raising interest rates and everybody’s been saying they’re normalizing them. We hear they’re normalizing them and Pal says, “You know what, the economy’s grown so hot we may not go to normal. We may go past normal.”
Well, first of all, he doesn’t know what normal is ’cause none of them do and at the end of this sentence of what he was talking about he kept saying probably. He had a lot of unknowns in there. The market took it as, oh no, the FED’s going to be too aggressive, which is one fear we’ve been talking about for months. That one thing that could derail this is if the FED jumps ahead of the game. Now if you look at a lot of different measurements, interest rates should be higher, but it doesn’t matter. It’s what does the market perceive and the market has been used to low interest rates and now we’re seeing short term rates going up. Remember the inverted yield curve everybody was worried about? Well, all of a sudden the long end of the curve, the 10 year, 30 year bonds started going up their rates. That started the sell off. Thursday the market opened weak, it went down. Rates stayed at a seven year high.
Then we heard something interesting. That China has been spying using tiny little devices, or little chips that they’ve been embedding into technology, into some major US companies. The size of the end of a pencil. When you start seeing that, I think the market took that as, that’s very discouraging because we’re trying to do a trade deal, but how do you do a trade deal with country that is spying on you? That’s been what President Trump has been saying is that, trade secrets and intellectual property, all the stuff that they’re stealing, how does that get solved in a trade deal? That’s my issue. That looks like the trade deal we’re trying to get with China is getting further and further apart and some people are predicting a new Cold War that could last five to 10 years. That was more disappointment.
Then JP Morgan came out on Thursday and said, “Look, an all-out trade war is coming.” It was just pushing things further down. By the way, the Chinese stock market was closed for a week for a holiday which is kind of cool. That’d be kind of nice for our markets at some point. So what will happen next week when their markets open because they haven’t digested some of these interest rate moves that we saw in the US. That will be something to watch for Monday. Then Friday, the selloff continued. We did get a jobs report. The unemployment rate dropped to the lowest since 1969 and the jobs were weaker than expected, still pretty good overall report. In fact, rates just went up even on that.
We saw some interesting things this week in terms of first since this, first since that, right? The lowest unemployment rate since 1969. We have interest rates at seven year highs. We have the most money losing IPOs since 2000. We have oil over 75, the highest since November of 2014. Very jam-packed news week.
Look, I think we probably talked about it last podcast about the next bear market might be in rates. Boy was that timely because we wrote about it in our client newsletter. We talked about it on the podcast that everybody’s worried about the next stock bear market, what about the next bond bear market? The definition of a bear market’s very different. I believe a bear market looks more like duration or time than I do how far something goes down. In other words, do you consider 2011 a bear market for stocks? The stock market fell right around 20%. Technically, Wall Street calls that a bear market. I don’t think that was a bear market. I think that was a fast, swift correction. I don’t believe that you’re going to see bonds fall 10%, but I think you could see them lose two or three percent several years in a row. That is a bear market to me. That’s what I could see happening.
As soon as we wrote that, we started to see interest rates rise and the bond market is down this year. That’s why, as we’ve been discussing, if you are diversified this year, as you should be, most people, I’m not going to say everybody, but most people should be diversified. If you are, it hasn’t worked very well in 2018. Why? Because you said, well I’m supposed to own value stocks and growth. Well, value hasn’t done well. I’m supposed to own large cap and small cap, well small cap’s been getting hit lately. I’m supposed to own commodities to protect against inflation. Kind of flat this year. I’m supposed to own foreign stocks, down this year. I’m supposed to own US growth stocks, up this year. That’s the one bright spot. If you put all those things together, it’s been a mediocre year. By the way, if you own bonds, down quite a bit this year.
That was really the news this week, was interest rates rising. There’s so many things that can cause interest rates to move all over the place, right. All it took was General Powell to say we may go a little tighter than people think. We don’t know if they will or not. It’s being priced in that we’re going to have a December rate hike, and some people think we’re going to have four next year. They’re going to wait and see. I mean, if things start to get weaker, I don’t think they will, but could they? They may. They seem to sometimes go over where they should. That has a big ripple effect. Remember, this economy that’s been growing has been because of low interest rates primarily. That’s a big reason. A lot of people like free money, they borrow to do real estate. They borrow to buy cars. They borrow to buy new iPhones. They borrow for everything.
Now, it’s time to pay the piper and rates are going up and you’re starting to see. Lumber prices have fallen. Homebuilding stocks got hit this week. Although, we’re still not to really normal levels. We’re kind of just now getting back, homebuilding doesn’t look like it’s doomed yet. We’re seeing some of the effects of higher interest rates already and they’re not that high, but look they’ve doubled. The 10 year bond for new technicians out there made a double bottom. If you go look at the 10 year bond and you go back to the 2012, middle of 2012, the 10 year bond when down to 1.4, we’ll call it 1.5% for a 10 year treasury. Went all the way up to three in ’14 and then by the time middle of ’16 came, it went back down to 1.5% again, and now where is it? It went to three, but it went past three. It was a tipping point, ti went to 3.2.
Now JP Morgan has some interesting stats that show that until the 10 year gets to five, it shouldn’t affect the stock market. It hasn’t in the past. That’s okay except we have been so used to low rates that maybe the tipping point is 3.2, not five. So 3.2 may be the tipping point. At least it was this week.
Now I did find something interesting this week because there was a lot of, I would say a lot of stocks that held up very well this week. It was primarily in the areas of really the defensive names. If you look at some of the telecom, you look at some of the drug stocks, the bank stocks, there was a lot of stocks up this week. What got hit? Technology. Some of the industrial titan names. Those are the ones that really got hit. It’s kind of an interesting week to watch and they’re never fun, but I’ve always said I like, and those of you that are new, pay attention to this because I’ve seen this before. I would much rather have the Dow Jones fall 500 points three days in a row than 100 points for fifteen days in row.
When you get the sell off, it accelerates, you get the VIX spiking, you get opportunities, you get stocks that you’ve been wanting to buy all of sudden fall into your lap because they fall more than they’re supposed to fall, so people are making irrational decisions and you tend to get a bounce back. Here’s what I would be looking for. Remember, the last two days of the week, Thursday and Friday. The market did not finish at its lows. In fact, some would say it had hairy bottoms. Before you run out and cover your kid’s ears because I said hairy bottoms, what that means is, if you look at candle charts, you will see, it tells you intraday what a stock or a market did and sometimes when it doesn’t finish on the lows it makes this little tail and it looks like hair and occasionally when you get few of those, it can mean that the market’s trying to reverse and come back.
I kind of didn’t like the action on Thursday and Friday. That we were down 300 and something and then finished down 170. I don’t like to lose money, but the point is that when the VIX is spiking like it did and when there’s that much fear, what I like to see is an intraday reversal. I like to see down hard Thursday, down hard Friday, come in Monday down and then in the middle of the day with no news, a huge reversal and then just straight up where people are panic buying. That’s what marks a bottom. I don’t know if we’ve got that yet. Again, I think there’s a lid on the market with interest rates and I think there’s a lid on the market with China. Both of those could resolve themselves, we could get a China trade deal, even though it looks unlikely right now we could get one. And, if we get one I think the markets will obviously like that, number one. And number two, interest rates. Well, are interest rates going to go straight up, no, could we handle 3.2% on a 10 year, yeah we can, we can handle that. The fear is that it’s going to keep going. 3.2, 3.4, 3.6, that’s the fear. So, but if rights just peak here and maybe even come down a little bit and we get a trade deal with China I think the market keeps going higher. And I still think we are in a bull market, not only because of the data I’m seeing, but I also think because we don’t have euphoria yet. We’ve talked about this many times, but we don’t have euphoria, and bull markets don’t end when everybody’s like eh, I think a crash is coming. And that’s what we keep seeing right now, we keep hearing that. When’s the next crash?
And really I would say right now you almost have two types of investors and they’re on opposite ends of the spectrum. You have some people that come … And we talked to dozens of people every week. They come and talk to us and some of them say, “When’s the next crash coming? When’s the next bare market?” And they don’t even ask. It’s going to come, they know when it’s going to come. Then, you get the other folks, the ones that expect 10% a year with no volatility. Why? Because that’s what 2016, 17 looked like. We’re starting to get a little volatility in 2018, but we went like 80 trading days with the Dow Jones not moving more than 1%. The calmest market in history. And, so people get used to that and go well I’ll just stick it in a target date 2045 fund and I should make 10%. Markets don’t work that way.
And I think some people think that. Either they’re new to the market, they haven’t been through ’08, they haven’t been through dot com, they haven’t been through ’94, they haven’t been through ’87. Whatever they haven’t been through they expect that. And so, we’re meeting both those people. So you got complacency on one side, or ignorance, and then you have uber fear. And I think that, again, doesn’t mark a top. What does mark a top is if everybody came in saying how do we get margin on our account? Can I participate in more IPOs? That’s what I was hearing in the dot com bubble. I don’t hear that right now. Now I do think a bubble is forming in certain areas. Look, Microsoft is a great example. I had somebody come in this week, heavy concentrated position in Microsoft, new person. What do you think of Microsoft? Microsoft to us is one of the most overvalued stocks out there. I shouldn’t say the most overvalued, there’s thousands of stocks.
As far as a big cap name brand company, love the company, love the subscription model they’re on, but there’s no doubt the last time it was expensive was the dot com bubble. It spent a decade … Well first it went down, then it spent a decade going sideways. And now, it’s run up and it’s going at a clip that if they don’t grow their earnings at 30% a year it’s overpriced. And I think there’s a few stocks like them. I’m just picking on one, Microsoft. But, it feels that way and I see that. But there are plenty of stocks that are cheap that are not overpriced. And so I think what you have to do in this market as it’s a maturing market, not at the top, but it’s a maturing market, is again, keep knowing what you own. And it’s hard to do that if you own the SNP 500, which has been phenomenal the last few years. But again is a risky place to be because it’s so heavily cap weighted, and the most popular, and the most in style stocks.
And so what you have to do is say okay, do I want to own that or not? And so if you want to own stocks you got to go to some areas that are out of favor, cheaper, that are just a good deal. I was listening to Howard Marks earlier this year, he’s kind of a famous investor, and he was basically saying it’s interesting, number one it’s not what you buy it’s what you pay for it. Great example. It’s not that Microsoft’s a bad company, but what are we paying for it. It’s too much in my opinion. He also talked about the nifty 50. For those of you that remember that back in the late 60s it was 50 stocks that were the most loved companies, nobody could figure out what could go wrong, let’s pay whatever price is out there because these companies are great, who wouldn’t want to own this basket of companies? And you think about how many of those companies don’t exist anymore, how many of them went down 50, 60, 70%, not because they weren’t good companies, it’s because people paid too much for them and they fell hard.
Fast forward to 2018, do you know any companies like that? I think we do. I just talked about the phone that I have, and I’m not knocking Apple, we’ve owned Apple, we sold it earlier in the year, but I’m not knocking it, and it’s not crazily over expensive, but it’s loved, and Amazon’s loved, and Netflix is loved. I wouldn’t call Facebook loved anymore. In fact, the fang stocks are in correction territory. They’re down about 100%. So, I’m not saying that, but some of these companies are really loved, and some of them are loved because they pay a good income and that’s what people have needed the last few years. That’s the part of the market I’m concerned about, and I’m concerned because a lot of money’s going into certain areas blindly. People that are buying these target date funds, they’re buying index funds without knowing what they own.
And, why do they keep doing it? Because it’s been working the last few years, and it continues to work, and I don’t know when it’s not going to work. I just know that I will not compromise risking somebody’s assets to go chase momentum in the hot stocks. It’s a recipe for disaster. It always has been and it always will be. And let me tell you something, when you look at some stocks right now, and everybody doesn’t want them, and everybody hates them, maybe you should look at that stock. And on the flip side when you can’t figure out what could go wrong with a stock and it’s gone straight up you might want to look the other way because there could be something that goes wrong and blind sights everybody. Again, we’ve talked about Facebook probably down 25 to 30% recently, very quickly. So know what you own as this market’s maturing, because again we don’t think the bull market’s over because we don’t have the euphoria yet. That’s usually how these markets end.
But we need to watch some of these things. There are some concerning things out there, we’re not blind to that. But would you rather own things that are already beaten up, or would you rather own things at the top, or close to them, or at their highs? So watch that because there are some things that are down 50, 60% that go back and look at cycles. They’ve already fallen, they’re already at a discount. Hey, don’t forget our telephone number 210-526-0057, our website eggersscapital.com. E-G-G-E-R-S-S capital.com.
Hey, by the way, if you’d like, if you want to be one the podcast with your voice send in a question, record yourself on your phone. All you got to do is if you have an iPhone or an Android there’s a record option, voice recorder they call it, just record yourself, email it to info@firstname.lastname@example.org, and we’ll put it on the podcast. We’ll put the question on and I’ll answer it. So, if you want to do that feel free to do that. By the way, we did have one listener question basically asked on Friday, what do you think of small caps? And my answer was there are better areas out there that I like more. I like international more, I like commodities more. Remember, the small caps, if the market begins to deteriorate, the small caps are usually the first thing to go down, then the midcaps, then the large caps because people are going to sell what they don’t know first, and they’re going to keep the things they know last.
So they’re going to keep the big household names in their portfolio if they have a choice. So, there are other areas beside small caps I like. Now, if it’s part of asset allocation you have some small caps, fine. But if I had some limited dollars what would I buy today? What would not be it today. Now, technically it’s at a spot where it could bounced assuming that things just resolved themselves pretty quickly, but again, around their 200 they move an average. So technically I think they look interesting, but I just there’s some other areas I just like more. So, but thanks for the question. So again, info@email@example.com. You can use the voice recorder and just send that right on over and we’ll stick it in the podcast. Alright guys, have a wonderful weekend. We will talk to you next week on the Eggerss Report, your investing playbook.
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This show is for entertainment only and information provided by the host, guests, and this station should not be deemed as advice. Your investment decision should be based on your own specific needs. You should do your own research before you make those decisions. As president and CEO of Eggerss Capital Management, Karl Eggerss may hold securities mentioned in this show for himself and his clients. Just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment or get yourself a trusted advisor.