Sunday, January 20, 2019

Bond Yield Correlation And Use Of Macroeconomic Data

With the bond yield talk recently, I had done up a simple statistical research on the relationship between the United States (U.S.) 10-year treasury yield and our Singapore Government Securities (SGS) 10-year bond yield. Using annual average yields between the years 1998 and 2018, here are the results in Fig.1:

Fig. 1 – Annual average yields of U.S. 10-year treasury and SGS 10-year bond between 1998 and 20181,2.

Looks closely related, doesn’t it? To give the relationship a number, I had derived the correlation between them with all the data available, and that is 0.799.

So what does this mean? Statistically speaking, the U.S. 10-year treasury yield and the SGS 10-year bond yield are quite correlated with each other (close to 1.0), meaning that there is a positive relationship between them, though I have to stress that correlation does not imply causation.

So In What Way These Data Are Useful?

According to the Bedokian Portfolio’s fundamental analysis model, such macroeconomic data belongs to the economic conditions tier3. While all these data can be overwhelming, we can classify them as general knowledge that can be fetched from the back of our brains in an instant.

For example, it is known that the US Dollar and gold have an inverse relationship, so when the price of gold goes up, we will know that the value of the US dollar will go down, and vice versa. Using the bond yield example, we can assume statistically, if we see a rise in U.S. 10-year treasury yield, we are expecting to see a rise in the SGS 10-year bond yield as well.

Though this “instant general knowledge” is useful, we have to take note of two related issues. The first is confirmation bias, which is interpreting information that confirms one’s preconceptions. A good way to mitigate this bias is to update yourself with new data, so as to check the relevancy of your general knowledge.

The second issue will be the ceteris paribus clause, which means “other things equal” in Latin. You could find out more on ceteris paribus in my post here.

1 – Macrotrends. 10 Year Treasury Rate – 54 Year Historical Chart. https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart (accessed 19 Jan 2019)

2 – Singapore Government Securities. SGS Prices and Yields – Benchmark Issues. https://secure.sgs.gov.sg/fdanet/BenchmarkPricesAndYields.aspx (accessed 19 Jan 2019). 1998 is the earliest data available for the 10-year bond yield.

3 – The Bedokian Portfolio, Chapter 11 – Fundamental Analysis

Saturday, January 12, 2019

Stay Focused, Stay Calm And Stay Invested

Speaking about volatility; just three weeks ago, there was talk of doom and gloom in the markets, with the Straits Times Index (STI) nearly touching the 3,000-point mark on Boxing Day. As of today, the STI closed at 3,198 points, almost a 7% increase.  Along the same time period, the S&P500 had recovered some 10%; from 2351 to 2587 (before the U.S. markets opened on 11 Jan 2019).

Looking back during the two weeks that straddled between 2018 and 2019, quite a number of fundamentally sound companies’ share prices were at a low, which meant buying opportunities. However, we are able to make this observation and conclusion on hindsight. If we were able to turn back the clock and time-travel back to that fateful fortnight, do you think we could still make the buy call confidently?

This brings up the oft-mentioned trait about the financial markets which I harped on like a broken record, and that is no one is able to predict the future correctly. Sure, one can get it right some of the time, but no one can get it right all of the time. During the Christmas period and the run-up to the New Year, with the indices heading south, there were strong expectations that they could go further down, and very few would think they could go up. Some may had bought in, while others kept their reserves at hand, waiting to swoop at even lower prices; I guess the former group has won this round. To be honest, for myself I had only bought into one counter this round, and only after careful deliberation (and no, I did not buy in at a low).

To add, I had encountered some cases of panic selling, liquidating their shares, only to see it rising back up just days later. I guess the willing (and lucky) buyers were the ones that I mentioned in the previous paragraph.

So what is next? That is a very good question, but unfortunately I do not have a very good answer. I can give some good advice, though, and that is stay focused, stay calm and stay invested.

Tuesday, January 1, 2019

2018 Review, 2019 Preview and Bob

I had written something similar on the last day of 2017 (see here). I felt from now on, it would be a good tradition for me to write an annual review, preview and of course, about our dear friend Bob. So here it goes for this round.

2018 Review

If 2018 was a roller coaster, it would be a hell of a ride as compared to 2017 which was just a normal uphill climb. The S&P 500 Index fluctuated heavily between 2350s and 2920s this year1. For the Straits Times Index, it went to as high as 3610s and as low as 2960s2. A lot of factors had attributed to the volatility of the markets, but the main ones most people point to were tariffs and the related trade wars, and the rise of interest rates.

A year ago I had mentioned that I would look into cybersecurity, payment solutions and alternative energy. Using three United States (U.S.) based ETFs; HACK for cybersecurity, IPAY for payment solutions and ICLN for alternative energy, the year-to-date returns as at 31 Dec 2018 were +6%3, -0.12%4and -9.39%5respectively. They are still relevant in my opinion, as I foresee they are long-term trends rather than short-term fads (see here for my article on trends and fads). Do your due diligence and analysis before committing.

2019 Preview

If using the trade wars and interest rate hikes as basis, I would expect 2019 to be less volatile than 2018, provided that full resolution is achieved between the United States (U.S.) and China on trade issues, and the U.S. Federal Reserve adhere to its two-rate-hikes as announced6. Overall, 2019 will be a challenging year for the financial markets, local and overseas, therefore it is advisable to adopt a diversified portfolio stance and be prudent in your fundamental analysis.

In my humble opinion (and educated guesses), technology will continue to make inroads, especially on the disruption, artificial intelligence and blockchain areas. If you wish to venture further into them, do perform analysis on which sectors/industries will benefit from their development. You could use my associative investing method (see here) as a guide.

Bob

Compared to 2017 (+12.13% XIRR), Bob’s Bedokian Portfolio did not fare well for 2018 (-1.94% XIRR), though he had collected SGD 909.64 in dividends. Bob knows that his investment horizon is long term, so this “down” is just a kink in the journey. On 2 Jan 2019 he will inject another SGD 5,000 to the portfolio, so watch out for this space in the next few days.

That’s it for me. Wish you a happy 2019!

1 – Yahoo Finance. S&P 500 Index. https://finance.yahoo.com/quote/%5EGSPC?p=%5EGSPC. (accessed 1 Jan 2019)

2 – Yahoo Finance. STI Index. https://finance.yahoo.com/quote/%5Esti/ (accessed 31 Dec 2018)

3 – ETFDB.com. ETFMG Prime Cyber Security ETF. https://etfdb.com/etf/HACK/. (accessed 31 Dec 2018)

4 – ETFDB.com. ETFMG Prime Mobile Payments ETF. https://etfdb.com/etf/IPAY/. (accessed 31 Dec 2018)

5 – ETFDB.com. iShares Global Clean Energy ETF. https://etfdb.com/etf/ICLN/. (accessed 31 Dec 2018)

6 –Transcript of Chairman Powell’s Press Conference, p2. 19 Dec 2018. U.S. Federal Reserve. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20181219.pdf(accessed 31 Dec 2018)