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Bonds are the Wildcard

1/30/2018

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​Let me preface this post by informing my audience that I am in need of a job.
With over five years of trading experience, a degree in finance, as well as partial-completion towards the CFA Charter, I am well-equipped. I am a hard-worker with the knowledge and passion it takes to thrive in the financial services industry. This is a labor of love, but now it is time to take it to the next level with a professional career. If you are aware of any opportunities related with Equity Research, Portfolio Management, and/or Trading; Please reach out to me at rjsullivan@bigskyinvestments.com
 
The risk of quantitative easing has always been primarily concerned with the bond markets.
Bonds have experienced a 30-year bull-market, commensurately characterized by steadily declining interest rates.
 
In response to the financial crisis of 2008 the authorities at the Federal Reserve reacted by lowering interest rates to the lowest levels historically documented.
*Bond Prices are inversely-correlated to Interest-Rates.
Rates got to such an extreme deviation from the ‘norm’ that sovereign bonds of various European countries traded at negative nominal yields. This is a condition in which bond investors willfully lose money for the privilege of holding the note.
Needless to say this development in markets fundamentally goes against core structural tenants of finance. Specifically, this violates the notion of time-value-of-money, e.g. ‘a dollar today is worth more than a dollar tomorrow.’
 
There are risks underlying the market that are not easily quantifiable, understood, indeed even understandable. We are truly in uncharted territory. Sitting out, let-alone attempting to short and bet-against this historical bull market has been a terrible strategy. This is precisely why I caveat to speculate on much of this ‘top-down’ macro analysis. Global-macro hedge funds have been gutted with many legendary funds dropping like flies in recent years. It is my opinion that a fundamental-based bottom-up analysis is a far more actionable approach to building a survivable lucrative portfolio.
 
That said, no analyst or investor worth his salt would ignore major inter-market developments. The bond market dwarfs the equity market in terms of gross capital. Reverberations in the bond-market and movements of interest-rates can have sizable and far-reaching effects across many asset classes.
For one, there is the issue of collateral and the mountains of derivatives piled upon 30 years of appreciating bond prices.
Another way to think of it is that if money leaves bonds, where will that money migrate?
There are no obvious answers to these questions.
 
I have been documenting the inversion of the yield curve. Certain market anomalies, such as suspiciously low rates being commanded for Greek sovereign bonds may well suggest material mispricing.
Charts have been appearing on my radar that from a technical analysis perspective suggest change of trend. The authorities at the federal reserve continue to threaten further increases in the Fed-Funds rate.
 
My plan moving forward, apart from hunting for a job & studying for the CFA will be to continue to focus energy towards discovering hidden gems in the form of over-looked and undervalued equities. Indeed, there is a universe of companies that are not Apple, Google, and Facebook that present great opportunity. However, a close eye will be watching the bond market.
 
If we can successfully identify trends, we can profit from them.
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Bottom-Up pt.I

1/14/2018

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Upon graduation, I have a newfound respect and approach to looking at markets.
Gazing down at 50,000 feet, the cities blur. Detail is lost to broad sweeping landscape. Geographical features clear enough, but what of the sticks & stones, flora & fauna?
There are certain truths to finance and investing that must never be lost-sight-of or disrespected.
This marketplace is not a casino. A weighing machine perhaps. A mechanism for commerce, certainly. These corporations are not merely stock-tickers flipping themselves up and down. These are living breathing entities, with vision, innovation, trials, tribulations and life spans to each their own.
Which brings me to my next point. Real Companies Survive.
I’m not talking about flash-in-the pan momentum movers, story stocks or seedy message board pump-and-dumps. I’m talking about companies with cash-flow, EBITDA, Net Income. I’m talking about operational-excellence and societal advancement. I’m talking about investments that pay dividends. Those whose equity represents a genuine asset.
There are No Shortcuts in finance.
Easy-money is a dangerous myth. Fast-Money exists, but by its very nature it’s come-and-go.
Wealth is earned, accumulated: Methodically. Through focus, patience, and discipline. You must put in the work to reap the rewards and there is no escaping the risk-reward paradigm.
Diversification is the most important tool in finance. This is because diversification unequivocally and mathematically reduces risk.
That said, the one advantage given is time. What you do with it is up to you.
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    R. J. Sullivan IV

    Equity Research
    Portfolio Management
    ​Trading

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