Sunday, May 4, 2014

"If You're Not Confused, You're Not Paying Attention"

What a wonderful quote from Tom Peters and his book "Thriving on Chaos: Handbook for a Management Revolution."

On Friday, May 2, we got some important economic numbers. Without getting too technical, the numbers pointed to lower unemployment and a higher number of jobs created in the US. Good stuff, right? Well, as you know, the bond market really doesn't like "good stuff" and tends to fall rather dramatically when "good stuff" walks into the room.

In addition to the "good stuff," we also recently got an announcement that the Fed will again reduce its bond purchasing. The Fed's goal is to slowly wean itself of supporting the US bond market and it has been telegraphing its exit strategy and pace for over a year now. That too ought to signify a weaker bond market.

However, bonds on Friday rallied, ie, went up in price. Why? Well, things in Ukraine don't seem to be getting any better, and many in the US are worried that the jobs people do have are in positions that are beneath their abilities. Yes, the old "he was in middle management but is now working the counter at a fast food restaurant" argument.

The negative Nellies outweighed the positive Petes, and bonds rallied. We consider this a classic bear market rally and are loath to put money to work when 10s are trading a 2.57%. In fact, we were much better sellers on Friday than buyers.

For those who feel their bond portfolios are a bit long, look for days like we had on Friday to jettison some of the longer duration paper. If you are comfortable with your bond portfolios, use a day like Friday to go for coffee. But by all means, don't use a day like Friday, when unemployment is going down and the Fed is announcing less market intervention, to buy bonds.