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We Would Exploit a Grantham/Dent Spring Crash

In this year’s Note 3 of The Kelly Letter, sent to subscribers on January 17, I wrote about Jeremy Grantham’s bearish call: At the beginning of the year, he wrote that we’re in a “real humdinger” of a stock bubble that will burst in spring.

The co-founder of Boston-based asset management firm Grantham, Mayo & van Otterloo (GMO) ignored the usual valuation argument and said, “A bubble peaks when you reach almost unbearable levels of ecstasy.” He believes the US stock market swims in froth on froth, and that the only safe place to hide is cheaper foreign markets.

I wrote: “If you and I could vote on this, here’s what we’d request: Another bang-up quarter to nosebleed heights at the beginning of April, followed by Grantham’s crash in late spring or early summer. This would have all three of our plans selling again on April 5, boosting buying power to take advantage of burst-bubble buy signals in July and October.”

Last week, Harry S. Dent Jr. threw in his lot with Grantham.

Dent is an infamous contrarian, almost always dour—and usually wrong. When he’s right it’s generally by repeating wrong calls until eventually they come true, at which point he says he was right. Examples of this include Japan’s 1989 bubble burst and the dot com crash.

His new book is What to Do When the Bubble Pops: Personal and Business Strategies for the Coming Economic Winter. It rails agains Federal Reserve stimulus, claiming that “the Fed cannot keep the bubble from popping much longer…” The Fed wins almost every headbutt with Dent; it repeated the tradition after his book came out last April 21. The S&P 500 has risen 45% since then.

In an interview with ThinkAdvisor published last week, Dent said by phone from his base in San Juan, Puerto Rico that this is “the riskiest market since 1929. The difference is that ’29 wasn’t as global. … This may be the biggest bubble crash ever—stocks, commodities, real estate. The next crash is the initiation of the next big [economic] downturn, which will be much worse than the one in 2008-2009.

“It will likely come by the end of June, probably sooner. The S&P falls to 2,100—lower than the March 2020 low—and that would be a 47% to 48% drop from recent highs, though it may go to 4,000 first.”

You’ve read for most of this year that bonds will crash as interest rates rise. Dent is a rare bear who disagrees. He thinks long-term Treasuries are the place to hide:

“…what’s better than sleeping with 30-year Treasury bonds—the safest investment in the reserve currency of a country that’s in big trouble—but not as much as Europe and Japan are in and nowhere near as much as China is in. We’re in the best house in a bad neighborhood.

“[The 30-year Treasury bond will] fall to half a percent and maybe zero. It will expand your money 30%, 40%, 50%, while stocks are crashing 70%, 80%, 90%, [along with real estate and commodities]. Everything is going to default. Cash will preserve your money. The 30-year Treasury will magnify your money.”

Bears are usually wrong, but if Grantham and Dent got lucky this time it would favor our predefined quarterly trading schedule. Dent’s call also affirms our longstanding policy of keeping buying power in bonds rather than cash.

Conclusion: We would exploit a Grantham/Dent spring crash.

Posted in Stock Market Forecasts | Comments closed

Any General Bond Fund Will Work In Your Sig Plans

Many subscribers ask why The Kelly Letter uses three different bond funds across its three Sig plans. The funds it uses are:

3Sig: BND
6Sig: SCHZ
9Sig: AGG

The only reason I use three different funds is to illustrate that any general bond fund will do. If I used only one bond fund across the plans it would imply that I endorsed that specific fund. No, I am agnostic.

The above three bond funds are representative of their class, and nearly identical. They are as typical as general bond funds get. The takeaway is that whatever general bond funds are available in your accounts are fine for use in your Sig plans.

In fact, any of the Sig plans could use any of the bond funds used in the letter, and the letter could use any one of the bond funds in all three of its plans. Note their shared profiles, with data from Morningstar:

3/9/21 3-Year Trailing Returns (%)
–  –  –  –  –  –  –  –  –  –  –  –  –  –  –

+5.05 BND
+4.98 SCHZ
+5.01 AGG

12-Month Trailing Yields (%)
–  –  –  –  –  –  –  –  –  –  –  –  –  –  –

2.22 BND
2.44 SCHZ
2.15 AGG

Expense Ratios (%)
–  –  –  –  –  –  –  –  –  –  –  –  –  –  –

0.035 BND
0.040 SCHZ
0.040 AGG

For convenience, I prefer running my Sig plans in separate accounts, each with its own stock/bond fund pairing: IJR/BND for 3Sig, MVV/SCHZ for 6Sig, and TQQQ/AGG for 9Sig. The fund pairings are easy to conceptualize and easy to track.

Some subscribers ask whether it’s permissible to run all three Sig plans in one account, with each of the stock funds sharing the same bond fund. Yes, but it’s a hassle to track what portion of the bond fund balance belongs to which Sig plan, and tempting to let allocations slide as the market moves.

If the plans were in a shared-bond-fund environment, performance would not be meaningfully affected. It would just be a pain in the neck. Give yourself a break and separate your plans into different accounts.

Conclusion: Any general bond fund will work in any of your Sig plans.

Posted in Bonds | Comments closed

High Bond Yields Do Not Hurt Stocks

I wrote in last Sunday’s Kelly Letter:

“Even if the 10-year yield rivals the yield of the S&P 500 for a sustained period, we probably won’t see a mass exodus from stocks to bonds. There’s more to the investing equation than yield, and the price appreciation potential of stocks will keep them a necessary portfolio ingredient.”

I spoke with several seasoned investors about this concept, to double-check that I wasn’t crazy for disagreeing with analyst consensus that TINA—there is no alternative (to stocks)—is leaving the building.

That was the view put forth by Savita Subramanian at BofA Global Research last week. She wrote that the tipping point for investors moving funds from stocks to bonds is a 10-year yield of 1.75%.

One friend reminded me that TINA did not start with the pandemic, but actually way back in 2009. Even the taper tantrum of 2013, when the 10-year yield reached 2.98% on September 5, did not end it. He asked, “Where are these hypothetical yield-at-all-cost investors who supposedly rush into stocks when bond yields are low and back out of stocks when bond yields are high?”

He pointed out, correctly, that bond yields have been higher than stock dividend yields for most of history, but it hasn’t prevented stocks from rising most of the way.

FactSet data back this up.

Since 1995, the 10-year treasury yield has exceeded the S&P 500 dividend yield on just four occasions:

<> The end of the subprime mortgage crash bear market

<> For most of 2012 and into 2013

<> For much of 2016

<> The past year, since the Covid crash

Were those the only times that stocks did well since 1995? Of course not. Stocks did well in these times and in most periods outside of these times. There is no correlation suggesting the stock market needs low bond yields in order to thrive.

Eagle-eyed subscriber Greg added another observation discounting the idea that rising bond yields mean the end of the bull market.

If the only people driving the stock-market rally of 2020 had been yield chasers, we would expect high-dividend stocks to have done best. However, the MSCI USA High Dividend Yield Index returned only 1.7% last year compared with 21.4% for the MSCI USA Index and 18.4% for the S&P 500:

2020 Performance Comparison
– – – – – – – – – – – – – – – – –

+21.4% MSCI USA
+18.4% S&P 500
+1.7% MSCI USA High Div Yield

Conclusion: Pure yield chasers do not exist. High bond yields do not hurt stocks.

Posted in Dividends, Yields | Comments closed

My New Audiobook is Out!

Jason Kelly in studio to record the audiobook for 'The Neatest Little Guide to Stock Market Investing'

I finally did it!

Many readers asked me over the years for an audiobook version of The Neatest Little Guide to Stock Market Investing. I discussed it with my publisher, Plume (a division of Penguin Random House), and we produced it last summer.

It was my first time recording an audiobook. I loved it!

I recorded at a studio in Tokyo. The producer and director worked in Los Angeles; other members of the team in New York. Such a global effort is easy these days, and the pandemic presented no additional challenges.

Even though the written words are mine, it took practice to get their spoken intonations right. When I made a mistake or didn’t like the way something sounded, we went back and did it again. The result, thanks to everybody at Penguin Audio, is a high-quality recording that I think you will thoroughly enjoy.

It’s available everywhere audiobooks are sold, including:


(via my Amazon Associates link)

Thank you for your interest in my writing over the years. I hope this new format provides another appealing way for you or somebody you know to learn about the stock market.

Happy listening!

Audiobook cover of 'The Neatest Little Guide to Stock Market Investing'

Posted in Books | Comments closed

Q2 2020 3Sig Calculator Demonstration

This video demonstrates how to use the calculator on The Kelly Letter subscriber site, with real data for the 3% Signal plan from Note 26 sent June 28, 2020.

Kelly Letter subscriptions include access to the signal calculator.

Use it to generate your own quarterly Sig system signals using price change only. No guesswork or pundit opinions required.

Want more videos like this? Subscribe to The Kelly Letter YouTube channel.

Thank you for watching!

Posted in Video | Comments closed
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