Global carmakers to invest at least $90 billion in electric vehicles

DETROIT (Reuters) – Ford Motor Co’s plan to double its electrified vehicle spending is part of an investment tsunami in batteries and electric cars by global automakers that now totals $90 billion and is still growing, a Reuters analysis shows.

That money is pouring in to a tiny sector that amounts to less than 1 percent of the 90 million vehicles sold each year and where Elon Musk’s Tesla Inc, with sales of only three models totaling just over 100,000 vehicles in 2017, was a dominant player.

With the world’s top automakers poised to introduce dozens of new battery electric and hybrid gasoline-electric models over the next five years – many of them in China – executives continue to ask: Who will buy all those vehicles?

“We’re all in,” Ford Motor Executive Chairman Bill Ford Jr said of the company’s $11 billion investment, announced on Sunday at the North American International Auto Show in Detroit. “The only question is, will the customers be there with us?”

“Tesla faces real competition,” said Mike Jackson, chief executive of AutoNation Inc, the largest U.S. auto retailing chain. By 2030, Jackson said he expects electric vehicles could account for 15-20 percent of New vehicle sales in the United States.

Investments in electrified vehicles announced to date include at least $19 billion by automakers in the United States, $21 billion in China and $52 billion in Germany.

But U.S. and German auto executives said in interviews on the sidelines of the Detroit auto show that the bulk of those investments are earmarked for China, where the government has enacted escalating electric-vehicle quotas starting in 2019.

Mainstream automakers also are reacting in part to pressure from regulators in Europe and California to slash carbon emissions from fossil fuels. They are under pressure as well from Tesla’s success in creating electric sedans and SUVs that inspire would-be owners to flood the company with orders.

While Tesla is the most prominent electric car maker, “soon it will be everybody and his brother,” Daimler AG Chief Executive Dieter Zetsche told reporters on Monday at the Detroit show.

Daimler has said it will spend at least $11.7 billion to introduce 10 pure electric and 40 hybrid models, and that it intends to electrify its full range of vehicles, from minicompact commuters to heavy-duty trucks.

“We will see whether demand will drive our (electric vehicle) sales or whether we will all be trying to catch the last customer out there,” Zetsche said. “Ultimately, the customer will decide.”

A 1979 Mercedes G-Class SUV encased in 44.4 tons of synthetic resin greets guests as they arrive at the North American International Auto Show in Detroit, Michigan, U.S. January 15, 2018. REUTERS/Jonathan Ernst

For now, Nissan Motor Co Ltd’s 7-year-old Leaf remains the world’s top-selling electric vehicle and the company’s sole battery-only car – an offering soon to be swamped by new rivals bringing tougher competition that could add pressure to pricing.

“Everybody will find out that if you push you will have a lot of bad news on residual values,” Nissan Chief Performance Officer Jose Munoz told Reuters.

Jim Lentz, chief executive of Toyota Motor Corp’s North American operations, said it took Toyota 18 years for sales of hybrid vehicles to reach 3 percent share of the total market. And hybrids are less costly, do not require new charging infrastructure and are not burdened by the range limits of battery electric vehicles, he said.

“What’s it going to take to get to 4 to 5 percent” share for electric cars, Lentz said. “It’s going to be longer.”

The largest single investment is coming from Volkswagen AG (VOWG_p.DE), which plans to spend $40 billion by 2030 to build electrified versions of its 300-plus global models.

In the United States, General Motors Co has outlined plans to introduce 20 new battery and fuel cell electric vehicles by 2023, most of them built on a new dedicated, modular platform that will be introduced in 2021.

GM Chief Executive Mary Barra has not said how much the automaker will spend on electric vehicles. Much of the investment will be made in China, where GM’s Cadillac brand will help spearhead the company’s more aggressive move into electric vehicles, according to Cadillac President Johan de Nysschen.

In an interview on Monday at the Detroit show, de Nysschen said Cadillac would “play a central role” in GM’s electric vehicle strategy in China, and will introduce an unspecified number of models based on GM’s future electric-vehicle platform. Some of those Cadillacs could be assembled in China, de Nysschen said.

Chinese automakers, including local partners of Ford, VW and GM, all have publicized aggressive investment plans.

Not every multinational automaker is moving so aggressively into electric vehicles.

In Detroit on Monday, Fiat Chrysler Automobiles NV Chief Executive Sergio Marchionne said it did not make sense to announce a specific number of new electric vehicles – and he said the company was not under pressure, but working to meet emissions requirements. “We do not have a gun to our head,” Marchionne said. He said EVs will likely become mandatory in Europe because of emissions rules.

Additional reporting by Joseph White, David Shepardson, Norihiko Shirouzu, Nick Carey, Laurence Frost, Alexandria Sage and Andreas Cremer in Detroit; Editing by Matthew Lewis

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The Top 3 Dividend Growth Stocks For A Weak Dollar

One of the more under-reported pieces of economic news last year was the surprising weakness of the U.S. dollar against the Euro. Despite monetary tightening and interest rate hikes in the U.S., in 2017, the dollar had its worst performance in the past 14 years.

It was a particularly bad year against the Euro. Since reaching a high of 0.953 Euros in 2017, the U.S. dollar is now worth under 0.82 Euros, for a 14% decline. Strength in the Euro came as a surprise, especially since the European Central Bank is still much more accommodating than the U.S. Federal Reserve, and economic growth in the U.S. is heating up.

A weaker dollar isn’t necessarily bad news — in fact, many large U.S. companies would benefit from a falling dollar. This article will discuss three dividend growth stocks that generate a large percentage of revenue from Europe, and would see a boost from a weaker U.S. dollar against the Euro.

Weak Dollar Stock #1: Philip Morris International (PM)

Dividend Yield: 4.1%

First up is tobacco giant Philip Morris International, which generated approximately 30% of its total revenue from Europe over the first three quarters of 2017. PM has an attractive dividend yield slightly above 4%, and has increased its dividend each year since its 2008 spinoff from domestic tobacco giant Altria Group (MO). PM is a Dividend Achiever, a group of stocks with 10+ consecutive dividend increases. You can see the entire list of all 262 Dividend Achievers here.

PM sells tobacco products outside the U.S., with brands including Marlboro, L&M, Chesterfield, Parliament, and more. The company enjoys leading positions across its brand portfolio, particularly in Europe.

Source: Earnings Presentation, page 13

The strong U.S. dollar had been a major source of stress of PM prior to 2017. To that end, the strong U.S. dollar wiped away $1.3 billion from PM’s revenue in 2016. The good news is, the underlying operations of the company continued to perform well in that time — organic revenue excluding excise taxes, and adjusted earnings-per-share, increased 4.4% and 12% in 2016, respectively.

Strength in the U.S. dollar continued to weigh on the company to start 2017. Reported revenue increased 3.8% over the first three quarters, while organic revenue increased 6% in that time. As the foreign exchange market has become more favorable to PM, net revenue growth could see a meaningful boost in 2018.

PM has excellent profitability. The tobacco business is highly lucrative due to economies of scale, as well as pricing power from selling an addictive product. PM operates 48 production facilities in 32 different countries. Going forward, PM’s growth will be fueled by its collection of products it refers to as reduced-risk. These are products that do not burn tobacco. According to the company, this results in fewer adverse health effects, and are designed to address changing consumer preferences.

Source: Q2 Earnings Presentation, page 10

The reduced-risk portfolio is steadily becoming more important for the company. The RRP is set to contribute nearly 10% of total revenue, up from just 2% in 2016. PM’s biggest growth opportunity is its line of IQOS products, such as HeatSticks, which are growing rapidly. Heated tobacco shipments reached 10.8 billion units in the first half of 2017.

IQOS is already growing market share. Continued growth of the reduced-risk portfolio will help PM counter the decline in cigarette shipment volumes. Plus, a weaker dollar could also add to growth, and help improve the company’s dividend growth as well.

Weak Dollar Stock #2: McDonald’s (MCD)

Dividend Yield: 2.3%

Next up is McDonald’s, which has an even more impressive track record of dividend growth than PM. McDonald’s is a Dividend Aristocrat, a group of stocks in the S&P 500 Index with 25+ consecutive years of dividend increases. You can see all 51 Dividend Aristocrats here.

McDonald’s is the largest publicly-traded fast food company in the world. It operates over 37,000 locations, in more than 100 countries. The company no longer breaks out revenue according to individual geographic regions. But the last year it reported financial results by specific geographic market, Europe accounted for 40% of total sales. As a result, McDonald’s would see a big windfall from a stronger Euro and a correspondingly weaker dollar.

2016 was a comeback year for McDonald’s. After a difficult turnaround in the preceding few years, McDonald’s global comparable-restaurant sales increased 3.8%. 2017 was another strong year. Revenue declined 6% over the first three quarters, but this was driven mostly by the sale of its businesses in China and Hong Kong, and increased franchising.

However, these initiatives have improved McDonald’s profitability. Adjusted earnings-per-share increased 16% through the first three quarters. McDonald’s has enjoyed a successful turnaround, driven by increased franchising, and new menu initiatives such as all-day breakfast.

Going forward, higher franchising, cost cuts, and new menu items are expected to drive continued growth. McDonald’s will also increasingly utilize digital capabilities and technology, as well as delivery. By 2019, the company expects to cut 5%-10% from its cost structure. From 2019 and onward, McDonald’s expects sales growth of 3% to 5% per year, operating margin to expand from the high-20% range, to the mid-40% range, and high-single digit earnings growth.

McDonald’s isn’t a cheap stock. After its impressive rally in 2017, the stock has a price-to-earnings ratio of approximately 25. Its dividend yield is also relatively low. At 2.3%, McDonald’s dividend yield has fallen significantly from its recent highs above 3%. That said, McDonald’s will continue to increase its dividend each year. According to ValueLine, the company has increased earnings at roughly 7% per year over the past 10 years. With a payout ratio below 60%, there is sufficient room for high single-digit dividend growth each year.

Weak Dollar Stock #3: Walgreens Boots Alliance (WBA)

Dividend Yield: 2.1%

Like McDonald’s, Walgreens is a Dividend Aristocrat, with a long history of dividend growth. Walgreens has increased its dividend for 42 years in a row. It has a current dividend yield of 2.1%, and is one of 350 dividend-paying stocks in the consumer staples sector. You can see the full list of all 350 consumer staples dividend stocks here.

It also has a large presence in Europe, particularly after the 2014 acquisition of Alliance Boots, which made it the largest retail pharmacy in the U.S. and Europe. It operates over 13,000 stores in 11 countries. It also has 390 distribution centers that supply approximately 230,000 pharmacies, doctors, health centers, and hospitals.

Source: 2017 Earnings Presentation, page 21

In addition, Walgreens has a large Pharmaceutical Wholesale division, mainly operating under the Alliance Healthcare brand. This business supplies medicines, other healthcare products, and related services, to more than 110,000 pharmacies, doctors, health centers and hospitals each year. The business operates in 11 countries, primarily in Europe.

As a result, Walgreens would be a major beneficiary of a weaker dollar versus the Euro. The company is already performing well, so a currency tailwind would only add to growth. Walgreens is firing on all cylinders. Last quarter, Walgreens reported adjusted earnings-per-share of $1.28, up 7.2% from the same quarter last year. Quarterly revenue increased 7.9%.

However, Walgreens is still generating strong growth from pharmacy sales, its most important business by far. Last quarter, Walgreens generated comparable sales growth of 7.4% and 8.9% in pharmacy sales and prescriptions, respectively.

Source: Q1 Earnings Presentation, page 6

Its retail business as a whole did not perform well, with total retail sales down 2.8% for the quarter. Poor performance in the retail segment was due to consumables, personal care products, and general merchandise. Walgreens continues to be squeezed in these categories by e-commerce retailers such as Amazon (AMZN).

Along with first-quarter earnings, Walgreens raised guidance for the upcoming year. For fiscal 2018, Walgreens expects adjusted earnings-per-share in a range of $5.45 to $5.70. This would represent an increase of 6.9% to 11.8% for 2018.

Final Thoughts

The weak U.S. dollar caught many by surprise last year, and there are reasons to suspect further weakness could be in store for the U.S. dollar in 2018. According to a recent article on CNBC, reasons for continued weakness could include President Trump’s stated desire for a weaker dollar, and the uncertain fate of NAFTA, which could add to instability of the dollar versus the Euro.

Fortunately, investors can position their portfolio to capitalize on any continued drop in the U.S. dollar against the Euro. Philip Morris International, McDonald’s, and Walgreens Boots Alliance all have huge operations in Europe, and would be among the biggest beneficiaries of a falling dollar and stronger Euro in 2018.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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The Bond Bull Market Is Over

The financial media headlines have been dominated over the past week by the latest bold declarations. Treasury yields are on the rise, and “the bond bull market is over!” Except that it’s not over. Not even close to starting to be over as a matter of fact. At least not yet. For despite its extraordinarily advanced age and recent fall coupled with the bold proclamations from some notable bond gurus, the 37-year old bond bull market still remains very much alive today.

Bonds Under Fire

Now it should be noted that the bond market has been very much under pressure as of late. Consider the following chart of the 10-Year U.S. Treasury yield (IEF). At the start of September, 10-Year U.S. Treasury yields have risen from a low of 2.05% to as high as 2.55% on Friday.

Knowing that as bond prices fall, bond yields rise, this chart looks bad, right?

Let’s continue by taking this recent rise in yields and put it in the context of the bond bull market. With the latest pullback in bond prices, 10-Year U.S. Treasury yields have inched above their long-term downward sloping trendline.

It’s official. The bond bull market is over, right!?! This sentiment was confirmed by none other than the Bond King himself just this past week.

“Gross: Bond bear market confirmed today. 25 year long-term trendlines broken in 5yr and 10yr maturity Treasuries.”

–Janus Henderson Advisors, Bill Gross, January 9, 2018

Sure, bonds have had a tough stretch as of late. But the bond bull market is not over. It’s going to take a whole lot more than the recent rise in yields to kill off today’s bond bull market.

Not So Fast

Let’s begin by pulling back and taking a look at the bond bull market through a much wider lense. The bond bull market first began in late 1981. This was the first year of the Reagan administration at a time not long after the first flight of the space shuttle Columbia. It was also a time when the then Cinderella story San Francisco 49ers were gearing up for their first Super Bowl run under then third year coach Bill Walsh and the Motor Trend Car of the Year was the Chrysler K Car (love those white wall tires!).

In short, the bond bull market has been going on for a long time now. So what about this upside break in Treasury yields in this longer term context? Pull out your microscopes and look at the following chart. See it? Right there in the bottom right corner? See it? Yeah, neither can I.

But what I can see is a number of other instances over the past 37 years where 10-Year U.S. Treasury yields moved more measurably above this downward sloping trendline in yields including late 1999 into early 2000 as well as all of 2006 into most of 2007. Yet despite these supposed trendline breaks, the bond bull market remains still alive today.

So what is the first key takeaway? That breaking a downward sloping trend line for a few minutes one trading day or for several months for that matter is simply not enough to declare a bull market in anything dead, particularly when it has lasted as long as the bond bull market. It takes a whole lot more.

But what about the proclamations of the Bond King? Shouldn’t he know what he is talking about? Don’t get me wrong. I have a ton of respect for Bill Gross and has listened to what he has to say for decades now. But as demonstrated by the tweet below from a few years back now, even the best of ‘em can miss the mark with their bold proclamations.

“Gross: The secular 30-yr bull market in bonds likely ended 4/29/2013.”

–PIMCO, Bill Gross, May 10, 2013

The same can be said of similar proclamations from other respected bond gurus, some of which were out in force in late 2016 declaring that 10-Year Treasury yields could top 6% in the next few years. Indeed, this outcome may very well come to pass, but A LOT of things need to happen between now and then to lead to this end result. And to date, many of these things remain decidedly elusive. Moreover, it is important to note that many of these very same bond gurus making bold calls such as declaring the bond bull market being over in 2012 also understandably maintain openness in their predictions. This includes suggesting that bond yields could fast track their way lower to 1% back at the start of 2015, only to see them turn and steadily rise throughout the rest of the calendar year.

As a result, while they remain worth respecting and listening to closely, remember that the bold prognostications by market gurus of any ilk are nothing more than pieces of worthwhile information that should be considered in a broader context when continuing to map out one’s own investment journey that takes place step-by-step over long-term periods of time.

Bond Bull Market – Alive And Well

When it comes to today’s bond bull market, sure it has struggled recently, but it remains very much alive and well today.

Bull markets do not die all of the sudden. Instead, they die a slow death over time. And the longer they have been in place, the longer it takes to kill them off. When it comes to bull market durations, 37-years is definitely on the very long side of the historical spectrum. As a result, the bond bull market is not going to simply end overnight. Instead, it is going to be a process that will take months if not years to fully play itself out.

In order to officially declare the bond bull market dead and the arrival of a new bond bear market to take its place, we are going to need to see A LOT of accompanying events take place along with it. And virtually none of these things exist today.

Let’s begin with the trendline break itself. Yes, we inched across the downward sloping trendline for the 10-Year U.S. Treasury yield. But we are not even close to seeing a confirmation in this trendline break for the 30-Year U.S. Treasury yield. In fact, this remains locked in the very middle of its long-term range. Bond bull market very much alive and well here.

With this point in mind, it is worthwhile to compare the path of the 10-Year and 30-Year bond yields (TLT) since early September. While the 10-Year yield has steadily risen, the 30-Year yields remains well below its highs from late October. This implies not that something is going on with the bond market more broadly, but instead that something may be taking place more specifically with 10-Year Treasury bonds.

Now consider the same 10-Year Treasury yields against their shorter dated brethren in 2-Year Treasury yields. Here we see 2-Year yields are rising even faster than 10-Year yields.

This, my friends, is further evidence of the yield curve flattening that we have been hearing so much about. This is shown differently in the chart below as the spread between the 10-Year U.S. Treasury yield and the 2-Year U.S. Treasury yield (the 2/10 spread), which has been falling like a rock since late October to new post crisis lows.

While the 2/10 spread increased marginally in recent days, the trend remains definitively lower. And most other spread readings across the yield curve including the 5/30 spread have not even moved marginally higher but instead have fallen to fresh new lows in recent days.

Why do these spreads matter? Because in order for the bond (AGG) bull market to end, we almost certainly need to see steadily rising inflation along with sustained economic growth. And the leading signal from the bond (BND) market that inflation is steadily on the rise and stronger economic growth is on its way is a steepening yield curve. Put more simply, we would expect to see 30-year yields rising faster than 10-year yields and 10-year yields rising faster than 2-year yields. But instead, we are continuing to see the exact opposite. The yield curve is flattening. And 2-year yields (SHY) are rising faster than 10-year yields, which are rising faster than 30-year yields. If anything this suggests signals of disinflation and a weaker economy, which is supportive of a bond bull market picking up steam in the next few years instead of coming to its demise today.

OK. So the trends in the bond market itself do not suggest the bull market is actually ending. But let’s take this a few steps further.

Let’s suppose the bond bull market was indeed ending and 10-Year U.S. Treasury yields were set to fast track their way to 6% in the next two years as some experts are suggesting. Now before going any further it should be noted that a move in 10-Year U.S. Treasury yields from today’s levels at 2.55% to 6% in two years means that we are going from current levels that are still roughly -1 standard deviations below the long-term historical average to +1 standard deviations above the long-term historical average. In other words, this suggests that something radical is about to happen in the U.S. economy in order to realize this outcome – either that economic growth is going to run so hot that it’s going to bring rapidly escalating inflation along with it, which is likely to cause the U.S. Federal Reserve to start slamming on the monetary policy breaks, or that we have a bond market riot that comes without U.S. economic growth. Either way, the outcome would be decidedly negative for capital markets in general across the board. So if this was indeed the case that such an outcome was nigh, we would expect to see commensurate ripple effects across the capital market landscape.

With this in mind, let’s consider high yield bonds (JNK). This is an asset class that has seen its absolute yields under 6% fall to their lowest levels on record and its yield spreads relative to comparably dated U.S. Treasuries at just over 3% also approaching their tightest levels in history last seen in 2007. Put more simply, high yield bonds are priced at a considerable premium today. Now recognizing the fact that investors are not likely to wish to receive a negative premium for the considerably greater default and liquidity risks that come with owning high yield bonds versus a comparably dated U.S. Treasuries (put more simply, investors are not going to own a high yield bond yielding 5.7% if they can get U.S. Treasuries with the same time to maturity yielding 6%), we should expect high yield bond prices to also be moving sharply lower in anticipation of this bond bull market coming to an end. But how have high yield bonds been doing lately amid these calls that the bond bull market is now over? Just fine as a matter of fact.

Either high yield bond (HYG) investors are absolutely oblivious, or something else is going on in the bond market other than a bull meeting its imminent demise. Even during the immediate aftermath of the U.S. Election, which was the last time that the bond gurus were out on the streets in force declaring the end of the bond bull market, we saw a reflexive action in high yield bonds to the downside that ultimately proved to be unfounded. And this same lack of response same thing can be said today for investment grade corporate bonds (LQD), emerging market debt (EMB), senior loans (BKLN), convertible bonds (CWB), or any other spread product whose valuation is directly or primarily reliant on U.S. Treasury yields including – wait for it – U.S. stocks (SPY). If the bond bull market has officially come to an end, apparently the rest of capital markets has not gotten the memo as of yet.

Now have we seen a rise in inflation expectations as of late? Sure, as the 5-year breakeven rate, which is a measure of expected inflation over the next five years derive by 5-year Treasuries (IEI) versus 5-year inflation indexed Treasuries (NYSEARCA:TIP), has risen from around 1.56% at the start of September to 1.89% as of Friday. This is notable and is a development worth monitoring in the days, weeks, and months ahead. But this same reading remains below the late January 2017 highs of 1.96% and is still well below the expectations toward 2.4% throughout much of the post crisis period up until a few years ago when the realization started to set in that the sustainably higher inflation anticipated from extraordinarily aggressive monetary policy might never actually materialize.

So while we do have some evidence of increased inflation expectations lately, they should still be considered marginal at best to date.

Let us take another step and consider U.S. Treasury (TLH) yields relative to their global counterparts. Much has been made about the corresponding rise in government bond yields from comparable global safe havens such as Japan (NYSEARCA:EWJ) and Germany (EWG) and how they are also supporting this end of bond bull market days theme. Yes, 10-Year government bond yields in Japan recently to as high as 0.09%, but this is still notably low and we have seen this script a few times before over the past year.

Same with German Bunds. We have seen 10-Year yields rise to 0.58% on Friday at a time when the European (VGK) economy is supposedly continuing to improve and the ECB is taking their foot away from the monetary policy accelerator. Yet we even higher yields touched back in July 2017 only to see them fall back again in the second half of last year.

And even with the recent rise in yields across the safe haven bond world, it is still important to note that the premium that global bond investors are getting paid to put their money in U.S. Treasuries remains about as attractive as it has been in recent history.

This relatively attractive valuation for U.S. Treasuries relative to their global safe haven counterparts suggests that a source of demand should remain to stem the onset of any bear market tide and hold the bull market in place at least for the time being.

But what about the blow out in the deficit and the increased U.S. Treasury issuance expected to result from recently passed tax legislation? The world has shown repeatedly in recent years including Japan over longer-term periods of time that governments can borrow like drunken sailors and still maintain historically low interest rates. This is an important issue worth monitoring, but we need to see evidence of such pressures actually showing up in bond prices and yields first before actually taking action on such expectations.

What about the fact that the Fed is set to increasingly shrink their balance sheet going forward as part of quantitative tightening, or QT? It is important to remember two things. First, the Fed to this point is shrinking its balance sheet by allowing some of its existing maturities to roll off without reinvesting the proceeds. Put simply, they are not selling, instead they are no longer repurchasing as much as they were before. This is an important difference. Moreover, even when they finally do start selling outright at some point in the future, it is critical to remember that they are only one participant in a large and vast global marketplace for U.S. Treasuries. And they will be one seller in a market that could be filled with many buyers along the way, particularly if the global economy is not doing so hot in the future. This helps explain why U.S. Treasury yields consistently rose throughout much of QE1, QE2 and QE3 despite the fact the Fed was buying massive sums of U.S. Treasuries all along the way.

Lastly, let’s come full circle and consider the technical aspect once again. In order for a bull market in anything to be over, we need to see a successive series of lower lows and lower highs. In the case of U.S. Treasury yields, this would be higher highs and higher lows. But when looking at 10-Year U.S. Treasury yields, we don’t even have the first higher high as of yet, as the 10-Year Treasury yield at 2.55% remains below the high of 2.62% from early 2017. We would need to see multiple higher highs and higher lows over the course of a year or more before we can even begin to conclude anything about a 37-year bull market in bonds being over.

And when considering the same chart for 30-Year U.S. Treasury yields, we don’t even have any signs of a reversal in trend, much less anything even resembling a higher high of which to speak.

I’m Still Alive

Putting all of this together, the recent talk of the bond bull market being over is grossly overblown. Could this be the very beginning of the end for the bond bull market? Sure, anything is possible. But we are going to need to see A LOT, and I mean A LOT, of confirmation not only from 10-Year U.S. Treasuries, not only from the U.S. Treasury market in general, not only from the broader bond market, but also from the capital markets and economic data spectrum as a whole before we can even begin to consider that the bond bull market that is running at 37-years and counting is even close to being over. If anything, it is the latest attractive buying opportunity in a long series of buying opportunities that have presented itself in the bond market over the past four decades.

What then explains the recent selling in the belly of the U.S. Treasury curve and the corresponding rise in yields? I will be interested as I have been in past years to take a look at the Treasury data on major foreign holders of Treasury securities when it is officially released in a few months, as I suspect we will be able to find our answers in this data has we have so many times in the past when the mainstream financial media is still talking about things like “taper tantrums”.

Of Stocks And Bonds And Bulls

Before closing, I am compelled to raise a related point. Just as I am writing in defense of the bond bull market still being alive today, I would almost certainly be writing something very similar about the U.S. stock market that closed on Friday at yet another new all-time high at 2786 on the S&P 500 Index (SPY) if it ended up falling sharply below 2200 in the coming months. And this comes from someone in myself that has been a proclaimed long-term stock market bear for many years now (just because I think something will ultimately end badly does not mean that this bad ending will arrive tomorrow and be fully felt overnight).

Some would be out proclaiming the start of a new bear market in stocks as supported by the fact that the S&P 500 Index (IVV) had fallen by more than -20% from its peaks. But just as long lived bond bull markets do not suddenly die with a simple short-term break in trend, long lived stock (NYSEARCA:VOO) bull markets such as our second longest in history today to date will not simply die with one sharp pullback to the downside even if it ends up being a fleeting drop of more than -20% from its all-time highs.

The bull market topping process in any asset class, whether it is stocks (DIA), bonds, or anything else, is something that takes place over extended periods of time and is filled with various escape routes along the way for those that need them. The key in navigating any such transitions is to be prepared and stand at the ready to take not only gradually evasive but potentially even countercyclical action when the time comes. And while their time will eventually come, when considering both the 37-year bond bull market and the 9-year stock bull market, we have yet to arrive today at such a junction for either asset class. At least not yet.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

Disclosure: I am/we are long RSP,TLT,TIP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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