You’ve Got Mail

“You’ve Got Mail” is a 1998 romantic comedy-drama starring Meg Ryan and Tom Hanks. The film is about two people involved in an online romance who are unaware that they are also business rivals. In this morning missive, however, we are not referring to the movie, but rather some recent emails we have received. One of the cool things about my job and Andrew’s is the people we interface with, via both emails and phones as well as face-to-face conversations. Said exchanges occur with financial advisors and their clients, portfolio managers, the media, the international crowd, and the list goes on. Consequently, we thought we would share a few of the more interesting ones with our readers this morning. This one came for a portfolio manager last week in response to our recent quip about the yield curve:

The flattening of the yield curve (YC) is getting tons of attention, as you know and have pointed out in missives. But, what is too often not mentioned by media is there's a big difference between a flattening YC and a flat or inverted YC. In fact, as you showed via Rich Bernstein research, some of the market's best gains occur when the YC is close to, but not yet flat (between 0-50 bps spread). The point being anticipating the YC becoming flat or inverted is a waste of time and even counter-productive for investing. In this case, it's an all-or-nothing event that until the YC actually does become completely flat or inverted, no problem, continue as you were. It's not something where as the YC becomes flatter, you likewise should gradually become more bearish – wrong! It's more like a light switch, when on we have light, when off, darkness. There's no in between. And even when the YC does finally invert, you typically have 6-12 months of lead time for a recession, i.e. no need to panic.

Obviously Andrew and I agree. This one is from one of our financial advisors (FAs):

If this ends up being the “pause that refreshes” and we get a pullback in early/mid-February, would this be the end of the second leg, or only a pause? I know Leon Tuey and you maintain the second leg is the strongest and longest. If not, what typically ends a second leg? Some time ago you wrote about the three legs of a secular bull market. I thought you said the first leg started in 2008. Then again, I thought you had said that the secular bull market didn’t start until later (April 2013?). Can you help me out here?

Our answer read:

We think the first leg began on October 10, 2008 and ended in May 2015. The second leg began In February 2016 and is ongoing. Nobody knows when the second leg will end, but when it does, we will go through another upside consolidation (like the one from 5-2015 to 2-2016) and then breakout to the upside beginning the start of the third, or speculative, leg. In the 1982 to 2000 secular bull market, the third leg began in late-1994 or early-1995 and lasted into the spring of 2000.

Then there was this from an FA’s client:

I have been putting my 401k contributions to cash for now to avoid buying high but I have not trimmed any of my holdings to generate cash since September.

Jeff, I get nervous when I hear terms like Wednesday Wilt and February Flop suggesting a pull back. However, I also think about the extra money in paychecks that may spur earnings even more going forward. What do you think about the tax reform stimulus making any February Flop a flop and bounce?