Top Picks 2018: ProShares Short High Yield Bond (SJB)

01/23/2018 5:00 am EST


Ziad Jasani

Managing Director and Partner, Independent Investor Institute

Global Equity Markets are transitioning to another “experimental-policy” from Central-Bankers in 2018: Quantitative Tightening (QT) and “interest-rate-normalization," explains Ziad Jasani, editor of Ziad Jasani's Trading IDEAS Program.

Think of this venture as a polar-opposite-force to the last decade of Quantitative Easing (QE) and crisis-level-monetary-policies (ZIRP, NIRP). The natural questions into this global-transition are:

1) Will QT will be as negative for Global Equities as QE was positive?

2) Will the Federal Reserve “break” the bond market by raising rates while wages persistently stagnate?; or

3) Has Economic-Growth reached escape-velocity, such that the addict (Equity Markets) no longer needs their drugs (Monetary-Policy-Stimulus)?’

Equity Markets have arguably “priced-in” the benefit of US-Tax-Reform and have likely discounted most of 2018’s upside within current prices. How does that figure when most indicators are pointed up? Evidence lies in the 65% premium of S&P 500’s P/E ratio (~26) to historical norms (15.6).

Furthermore, the average Bull-Market lasts 9 years, and we’re about to complete year 9 in March of 2018. Bull-Markets have lasted as long as 15.1 years, but were under-pinned by major geo-political transformation (i.e. Bretton Woods after WWII) or technological innovation (i.e. Micro Chip, PC, Internet).

Our current Bull-Market was “funded” by Biblical-Levels of debt-creation and money-printing, at the tax-payers’ expense; but the growing trend towards Nationalism is likely to “plug-that-well.” However, this Bull-Market may be temporarily bolstered (one or two quarters) by the repatriation of capital abroad, utilized in share-buy-backs or dividend-bump-ups.

But domestic demand growth (revenue) is a less likely outcome. Why? Rising interest rates usually mean a slowdown in corporate-debt-creation, especially within the leading-edge of Hi-Yield Bonds (HYG) or Junk Bond Markets (JNK); which are now more grossly overvalued than Equities. Slower debt-creation leads to lowered business investment, leading to slower growth.

Add to this protectionistic trade policies emerging from the populist-uprisings we’ve seen from BREXIT to Trump and we’re pointed towards contraction of global-trade and a stronger US dollar. The “easy-money” regime is transitioning to “tighter-money”, and Equity Markets alongside Hi-Yield Bond Markets are dangerously priced-for-perfection heading into this transition.

US Families are facing highly inflated costs of living (housing, rent), medical care and transportation, while wages stagnate.

As Central-Bankers pull-liquidity-out and attempt to push-interest-rates-up, US Families are less likely to consume the potential ~$3,000 in tax-reform savings, but more likely to “spend it” on their growing debt-repayment obligations and managing real-life inflationary pressures.

Furthermore, companies remain hesitant to pay higher wages as they trade-off labor for robots. If the majority of Folks aren’t getting paid more, how are they going to consume more on tighter credit? Prices for goods and services would have to come down, which means margin-compression and lower equity valuations.

QT and rate-normalization suggest that toplines (revenue) struggle through the back-half of 2018, which in turn lowers the growth out-look and demand for Bonds. The poster-child for Markets Breaking-Bad on Quantitative Tightening is a contraction in Hi-Yield or Junk Bond demand.

As we approach March 21st, 2018 - the next “scheduled” rate hike - we’re expecting trouble for equities and more likely bonds. As such we intend to short Bonds and Equities via ProShares Short High Yield Bond (SJB) along with ProShares Ultrashort 20+ Yr Treasury (TBT), ProShares Short S&P 500 (SH) and ProShares Short MSCI Emerging Markets (EUM).

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