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  • #145,301
  • Nov 15, 2016 3:39pm Nov 15, 2016 3:39pm
1 Move to bonds and short sell equities. safer
2 Higher rates not good for equities. less value of money with higher rates
3 dont know how the relationship between these work
  • #145,302
  • Nov 15, 2016 3:40pm Nov 15, 2016 3:40pm
Quoting sisse
Would you start relocating your portfolio between Bonds or Stocks for next years or your will keep it the same until all factors expected are confirmed? What do you think is the impact between interest rates and stocks? What do you think is the impact between inflation and stocks? sisse
1. I'd relocate to bonds ASAP, because when the factors are confirmed, then it's probably too late (and simply, get in early, and trade expectations)
2. My guess is interest rates directly translate to yields, ie if rates go up, yields do too -> therefore they become more attractive to invest in, so that puts pressure on stocks
3. Toughest question... I think if prices go up, so should the company value, so I'd say positive impact on higher inflation but really not sure
  • #145,303
  • Nov 15, 2016 3:42pm Nov 15, 2016 3:42pm
sorry on phone so short answer.

We trade the expectations, so Id be moving to bonds. But thats not what Im seeing in the charts...so it seems they are waiting until confirmation.

(I see you described the expected investing climate we are already in)

stocks to interest rates would be negative coorilation because yields to interest rates are positive and yields to bonds prices are negative. therefor bond prices should go down and thus so should stock prices when yields and interest rates are going up. So the answer to my chart is a resounding YES the bond prices are leading the equities for a coorrection based on expected interest rate hikes

right??? Boom!
  • #145,304
  • Nov 15, 2016 3:42pm Nov 15, 2016 3:42pm
...Assumptions: -> We are in country ABC and 10yr yield is expected to increase 3 fold in the next few years -> Stock XYX is ATH (all time high), inflation and rates as expected to increase for at least 2 points in the same period -> Global Risk is expected to sharply increase next years and international trade to severely decrease at the same time:....sisse[/quote]

1- Would you start relocating your portfolio between Bonds or Stocks for next years or your will keep it the same until all factors expected are confirmed?
Wait for confirmation because the current interest rate for bonds is Nil. Or just withdraw the money and keep the cash until confirmation to avoid being catch in the drop of stocks.
2- What do you think is the impact between interest rates and stocks?
Increase in interest rate has an immediate impact on stocks: an immediate drop.
3- What do you think is the impact between inflation and stocks?
Higher inflation will push for a higher interest; hence a drop in stocks and vice-versa.
  • #145,305
  • Nov 15, 2016 3:45pm Nov 15, 2016 3:45pm
That would also go to say that if FED wiffs in december the bond market will be caught on the wrong side....the equities market too but to a lesser extent so far
  • #145,306
  • Nov 15, 2016 3:45pm Nov 15, 2016 3:45pm
Quoting Pharm0r
thank you for the inputs as well @fool
sure, just remember that it's complicated, and don't expect to grab onto some monolithic truth, because everything is changing, always. The best you can do is try to pay attention to the bond market and see how it is acting relative to the currencies and other things you trade. There's all kinds of bonds, too - short term Treasurys vs. longer term T-bonds, high yield (junk) vs. high grade corporates, etc, etc.....The old saying, "Credit anticipates, equity confirms" simply means that the bond market generally will be ahead of the equity market in terms of its reaction to risk influences.....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #145,307
  • Nov 15, 2016 3:48pm Nov 15, 2016 3:48pm
My 2 cents

1. would start, with a progression
2. In general High rates should be negative for stocks, because higher cost of money -> higher debt cost -> lower profit. Plus Consumer less prone to spend because loans are more expensive
3. Higher rates are used to keep inflation low so it should be the same effect but i doubt there is a perfect correlation because inflation is more tricky: has bad effects but if not too high can even be a stimulus to economy and job creation (in fact ECB has 2.0 inflation target)
  • #145,308
  • Nov 15, 2016 4:19pm Nov 15, 2016 4:19pm
SPX companies have been buying their own asset with debt, if interest rates go up, the party is over, the veil uncovers, the music stops.
Live and Keep Calm
  • #145,309
  • Nov 15, 2016 4:24pm Nov 15, 2016 4:24pm
Quoting Pharm0r
s..So the answer to my chart is a resounding YES the bond prices are leading the equities for a coorrection based on expected interest rate hikes right??? Boom!
Ok yes and no.

Look don't go (also to others above your post) over board with the analysis. The idea here is to keep things very simple and ceteris paribus so its very clear to understand the basic macro correlation concepts.

Try to switch your brain to 'economist mode' for a minute just until the basic macro relations click. We will keep adding layers on top and things will get a lot more complex but if you are not very clear on the basic fundamentals things can get very hard on the FA side. You wont be able to explain all macro interrelation at once with simple concepts like that but you will be able to build a very solid ground to build upon and dig into more advanced concepts.

As for now:

--> Bonds and Equities have inverse correlation push and pull factors via basic yields and returns.

This is a fact.

Does it explain every single move in each? Absolutely NO. Each has a million other internal and external reasons for moving.

Is this is the only correlation between both? NO

--> The second major correlation we discussed is via RISK.

  1. Bonds are the ultimate haven in case of major risk. Less risk is positive for Equities.
  2. We also have the investment risk. Between equal returns, the less riskier assets will always weight heavier (in this case Bonds)

The other basic channels between both are via inflation and simple asset allocation in a general portfolio. Thats for later...


When one moves to one side, does the other must follow through? NO. Not always. Not most the time

  1. Bonds always LEAD macro flows so when macro flows are in play the general correlation will be in play but DO NOT expect 1 tick up here ...therefore 1 tick down there ...THAT IS NOT HOW IT WORKS. We are talking about macro correlations not trade correlation in a chart!!!.

To wrap it up for now using a relevant and current case.

 

  1. Right now Yields are flying high? Why? because first markets are pricing in higher interest rates in the US. That is a fact !!! (dec hikes is irrelevant for this)
  2. Why do you think Equities are still at the highs?:

a. The will catch up soon ...
b. Higher rates means a confirmation the US economy is on track which is v. good for equities ...
c. Both...
d. Macro mumbo jumbo ...markets act randomly, economist are just talking bs...

sisse

Pending conversations? PM for a chat...I am mainly in OTM now
  • #145,310
  • Nov 15, 2016 4:39pm Nov 15, 2016 4:39pm
I think c, which is why I said correction. In general good economy plus Trump expansion = good for equities, but current issue at hand is interest rate hikes and Trumps expansions are a year or more in the future...and still a big ??? in regards to trade. So correction followed by grinding upwards so long as trade stays intact

But I think thats the same reason equities are coughing at the highs, as bonds are weighing in via interest rates and possibly risk? (trump ?s)

you cant deny that the bond movement is extreme though, and so a greater than normal movement in equities should be expected. right? we arent talking small day to day movement here, we are talking about a large leg in very little time
  • #145,311
  • Nov 15, 2016 4:42pm Nov 15, 2016 4:42pm
Your D option is funny
A is my choice as you explained above. There is a delay and bastards want to take the maximum advantage of free money.
  • #145,312
  • Nov 15, 2016 4:54pm Nov 15, 2016 4:54pm
A option, the problem whith this correlations is that soon can be 4 months from now. One thing that comes to my mind, if everybody was on the boat in equities because rates where at 0, then, who is left for buying now?
Live and Keep Calm
  • #145,313
  • Nov 15, 2016 4:57pm Nov 15, 2016 4:57pm
Quoting Pharm0r
... you cant deny that the bond movement is extreme though, and so a greater than normal movement in equities should be expected. right? we arenr talking small day to day movement here, we are talking about a large leg in very little time
Quoting Fadhl
Your D option is funny A is my choice as you explained above. There is a delay and bastards want to take the maximum advantage of free money.
A good analogy will be a pan with milk on a stove:

-> If you put pan with cold milk on the stove, the correlation at the beginning shows very little ... nothing seem to be happening.

-> The more heat, the warmer milk gets and the clearer the correlation become to the touch.

-> ...until the first bubble breaks and it reach boiling point then correlation becomes crystal clear...

-> It's gets so clear that after a few seconds milk boils over ....

-->... the correlation reach 'boiling point' (pun intended) that as soon as you switch the heat off... milk suddenly stop bubbling ....until it completely cools down ....and the correlation becomes harder to see again ....

Point being. Yes macro moves in Equities never come alone. When something big is cooking in the background Bonds will lead, the rest of the board will follow.

@Pharm0r NO it doesn't have to be a sharp and quick one. With risk moves translate faster, in macro moves things take time as legs are pointing to major or minor economic cycles that could last years or even a decade. When large portfolios are rebalancing and relocating ..takes time fck lots of time and a lot of effort....

sisse
Pending conversations? PM for a chat...I am mainly in OTM now
  • #145,314
  • Nov 15, 2016 4:58pm Nov 15, 2016 4:58pm
There is something slipping under my hands...
but I'd say b., just trying to figure out why and when would the outflow go from equities to bonds - I guess when the Yields are attractive enough to purchase the bonds and the stock prices are flying high, so pretty soon in our case?
  • #145,315
  • Nov 15, 2016 4:59pm Nov 15, 2016 4:59pm
Quoting Pharm0r
.... you cant deny that the bond movement is extreme though, and so a greater than normal movement in equities should be expected. right? we arent talking small day to day movement here, we are talking about a large leg in very little time
I'm with you there, which is why I am fishing bull spreads out as far as SPX 2,235, well into new ath's territory, and I see that coming within the next 2-3 weeks. I am also short TLT, via put spreads. There are all kinds of risk clouds out on the horizon, associated with a Trump presidency, but for now, a sunny honeymoon....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #145,316
  • Nov 15, 2016 5:18pm Nov 15, 2016 5:18pm
Quoting The Fool
{quote}I'm with you there, which is why I am fishing bull spreads out as far as SPX 2,235, well into new ath's territory, and I see that coming within the next 2-3 weeks. I am also short TLT, via put spreads. There are all kinds of risk clouds out on the horizon, associated with a Trump presidency, but for now, a sunny honeymoon....
Only magic and random lines at these levels. SPX 234x as extension on a pop is the theoretical target but calling a high at ATH is just a pointless exercise and more importantly no break, no shake, no nothing.

I am expecting to close above ATH highs this month before ECB/FED combo but it will become 'unswingable' (just quick in and out with the herd but extremely hard trading environment) to the long side on a break at this time and with the current circumstances.

I still think Europe will trigger the global selloff in Equities sooner rather than later. Trump will just add to the fire and potentially trigger the a downtrend later on the chain...

sisse
Pending conversations? PM for a chat...I am mainly in OTM now
  • #145,317
  • Nov 15, 2016 5:24pm Nov 15, 2016 5:24pm
Thanks for the lesson sisse

So....where do currancies fall into the mix? I guess first point would be via RISK
  • #145,318
  • Nov 15, 2016 5:29pm Nov 15, 2016 5:29pm
Quoting Pharm0r
Thanks for the lesson sisse So....where do currancies fall into the mix? I guess first point would be via RISK
Thats for you to tell us ...and keep discussing on the thread ...

Asia is going to have some action today.... GL all

sisse
Pending conversations? PM for a chat...I am mainly in OTM now
  • #145,319
  • Nov 15, 2016 5:34pm Nov 15, 2016 5:34pm
Quoting sisse
Only magic and random lines at these levels. SPX 234x as extension on a pop is the theoretical target but calling a high at ATH is just a pointless exercise and more importantly no break, no shake, no nothing.
no, not pointless - the point is to speculate and make some money, just because we're at or near an ath is nbd. Look back on this bull market in equities - there are months-long runs in there when there were new ath's multiple times per week. Ask PTL why his name is PayTheLimit sometime....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #145,320
  • Nov 15, 2016 5:49pm Nov 15, 2016 5:49pm
Quoting The Fool
{quote}no, not pointless - the point is to speculate and make some money, just because we're at or near an ath is nbd. Look back on this bull market in equities - there are months-long runs in there when there were new ath's multiple times per week. Ask PTL why his name is PayTheLimit sometime....
Its pointless to call the ultimate high in equities. It always has been it always will be.

Its pointless to trade to the long side after the current leg as all macro fundamentals are not aligned at all and major flow are short-circuiting in the background with hikes on the horizon.

If we break we will be entering in a sucker rally mode ...gl holding longs with that. Swinging (or buy and hold for that matter) I pass just quicks short lived in and out with the herd but better bang for the buck picking cherries in stocks instead rather than macro moves...

It will be pointless to search for volatility plays to the long side in those circunsqnces. We are inches away from entering in cluster fck in the mid term in Equities.

...and as I mentioned before, no break, no shake, no nothing. If you are not already in long, there is nothing to see in US Equities until the pop (or flop) with the FED.

sisse
Pending conversations? PM for a chat...I am mainly in OTM now
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