The most lucrative moment in investing is an inflection point. The challenging thing is... it is also the most difficult to spot one as it happens. The U.S. stock market has infected. This occurred when the interest rate genie was let out of the bottle, and the 10-year note yield rose dramatically.
On January 27, the closing value of the yield on the 10-year US Treasury note was 1.014%. Today it is trading at 1.58%, after hitting an intraday high of 1.62% after the release of the better-than-expected jobs report this morning. What does that mean? Well, no one wants to do bond math, and I am not always 100% sure I even remember how to do it. So, Okay. Google... this calculator shows that a 10-year bond with a coupon of 0.9% and a market rate of 1.01% generates a fair value of $989.36. Changing that market rate from 1.01% to 1.58% changes the fair value to $937.33. So, that's a 5.25% loss in fair value in the space of five week, in my theoretical calculation. Actual bond pricing will vary, based on the exact number of days until maturity, but I believe that example is illustrative of the situation the markets are facing.
In layman's terms: the bond market has crashed.
The problem is the bond market is never-ending and is the mechanism by which all interest rates are set. Houses, cars, business loans, you name it. Rewind and you have a Fed and Treasury, now led by Powell and Yellen -- who you might have gleaned from reading my columns -- are not my two favorite people in the world. They are trying to control interest rates, and the bond market, through quantitative easing policies. The Fed is actually buying bonds in the open market -- of course, we have all heard of QE -- which is such a deformation of normal market happenings that I can't even find the words to describe it.
But I don't make policy, I just make money. And I have been making lots of it in the past two weeks by betting that 10-year UST prices would continue to decline and that high-flying tech stocks would follow. Sorry Elon and Cathie, but I have been betting against (ARKK) and (TSLA) in dribs and drabs over the past two weeks and making big profits doing so.
This is not my training, and I probably should be doing other things with my time. Or just buying long-dated puts on TSLA and ARKK (writing calls would be an even better strategy to capture time premium), and holding them. But my brain isn't wired that way, and my phone makes it so damn easy to harvest profits as soon as I see them.
But that's trading, not investing. But I am not going to make the mistake of sitting back while sipping a cognac and puffing on a corona and dismissing the current market action by saying "oh, that's' kids stuff, oh, those redditors, oh, those robinhooders, etc., etc." Look at bitcoin and you will understand why that has been a losing strategy.
But that's the difference here. Government bonds do have an intrinsic value and so do companies like Tesla. It can be measured. For crypto it cannot, so sentiment and near-term supply and demand are the only factors that matter. But look at a TSLA stock chart from 4Q2020 and tell me that is different. It's not.
Elon makes cool cars and I like to drive them -- on three continents, so far, in both left-hand and right-hand drive varieties -- and the transportation world is changing. But, at $900 per share, Tesla was sporting a farcical valuation of $900 billion. After delivering $10.7 billion in revenues last quarter. That just made no sense... but TSLA was moving just like a crypto. Fast forward to early 2021, and now that Tesla's 10-K has informed us the company owns crypto... and it all makes sense.
My advice: just keep playing the game. Know when valuations for securities that depend on cash flows have meaningfully diverged from the discounted future value of those cash flows. Then act, don't react. In the past year we have seen two such inflection points: The March 2020 lows and the February 2021 highs. Playing the move after an inflection point, directionally, is the way to make money trading, as opposed to investing. Keep doing it.
