Inside the Market

7/27/2010

Is it Bubble time to the rescue once again ??

With job growth at a pathetic pace, a continued soggy state of affairs in both residential and commercial real estate and with retail activity also showing sings of slipping, the pundits sounding the alarm for a double dip are growing.  Even the mighty Ben Bernanke voiced concerns in his latest testimony to Congress.

Given all this negativity, it appears that some type of artificial quick fix stimulus may be in order to avoid a natural economic downturn, which would hurt in the short run but help cleanse the system and provide a more healthy system for the long run.  And the quick fix may be??? Either an Equity or Fixed income bubble boost.

During 2009, US Equities posted exuberant and phantom-like gains despite the sputtering US economy.  The result was a mild rebound in the US housing market and consumers picking up their pace of consumption into the end of 2009 and beginning of 2010.  The gains in Stocks almost seemed like a mini-bubble to help boost economic activity.  However, once the bubble move was over, into the end of the 1^st quarter of 2009, so to was the mild economic recovery, where once again things are tipping into another dip down.

But wait….for some odd reason, despite the weakening and uncertain state of economic fundamentals, US equities appear to be on a tear again !!  Unbelievable !! and just in case Stocks can’t manage to continue their upside phantom-like gains, another bubble market could help things out and this is the Treasury market.  A rally from current levels would provide a nice spurt of refinancings and perhaps breathe short term  life into real estate given the rates would be near zero.

7/19/2010

Can the price of Gold withstand yet another bout of artificial selling pressure, where this time it is a desperate European nation playing with fire in the Swap market.

The price of Gold suffered a mild set back over the past few weeks as it dipped below the $1,200 mark last Friday.  Some may attribute the recent set-back to tame inflation numbers or the lack of industrial demand due to quiet summer markets (e.g. seasonality pressure on the metal) but the real followers of Gold know that its strength has more been its value as a safe haven asset in light of the questionable value of the world’s major currencies. 

So why the sell off ?  Market news has reported that one or a few European sovereigns have turned to the swap market to sell large amounts of gold in order to raise cash and improve the liquidity of their credit markets.  An interesting part of the swap market is that the seller agrees to buy back the asset at a future date, where the sale is more of a lending of the asset in return for near term cash. 

In the US capital markets, investors can sometimes predict the future level of interest rates given the activities of major money center banks in the swap markets.  If major players see a future drop in interest rates, they tend to swap into variable rate liabilities; where at some point at lower rates they can reverse their exposures.

The danger with the recent Gold swap activities is that the sovereign nation is most likely selling the gold reserves out of desperation to avoid chaos in their financial markets and not because they think the price of Gold is going down.  If the price of Gold can somehow rally over the medium term, this swap activity could become a major problem for the seller.

7/7/2010

Can an old correlation rekindle a US Stock rebound ?

The major US Stock Indexes have been in a three week slump registering losses in the area of about 9%.  In fact, Stocks have had trouble posting noteworthy gains since reaching their highs back in May of this year.  One of the factors that began to weigh down the major Indexes was the trouble brewing in Europe and the corresponding decline in the value of the EURO currency versus the US$. 

Back in 2009, when US Equities posted exuberant gains, the correlation of note was the rising value of the Euro and falling US$ that helped propel stocks higher as analysts and traders focused on earnings by US multinationals being enhanced by a stronger Euro and the attractiveness of US goods abroad as their priced dropped in foreign currency terms.

6/30/2010

US Equities getting slammed again….Surprised you say?  Wake up and smell the coffee!

Over the past couple of weeks, the major US Stock Indexes have dropped some 5% in price, sending the Dow Jones back under the 10,000 mark again.  The only surprise that this should evoke to market followers is how long it took for the indexes to get back down to more realistic levels. 

The exuberance and hype about an economic recovery have been blown around the world of investments for just about a year now and price action in stocks did support this jawboning for much of that time.  However, the reality of the almost unbelievable rally in Stocks ending just a few months ago is that it was done on thin volume, where speculative trades have dictated direction.  So when the major Indexes suddenly give back over 5% in just over a week, there really should be no surprise. 

Thin volume and speculative forces pushing prices higher are never a solid underpinning for sustained gains.  Stocks remain a high risk sector.  Prices can go up at some point again, but the quality of investment flows needs to be considered.

6/21/2010

It’s time to address the precious metals markets but it’s not Gold we’re going to talk about this week but the cheaper non-yellow metal.

This past week the price of Gold registered a new historic high surpassing the $1260 an ounce mark.  If you have been following the Market Doctor, this would be no surprise as the team has been sounding the bells of higher Gold prices since about $500 an ounce years ago.   Much of the recent up-move in the shiny yellow metal has been the store of value story given the fiat currencies around the globe.  Additional factors include an inflation hedge against the ramifications of huge printing of currencies, and finally, a safe haven during international unrest.

As Gold surged to new highs, the price of a much cheaper metal was still well over 10% under the recent highs established back in 2008 and about 60% lower than the levels established back in the late 1970s’.  The recent lag in the price of the metal has been largely attributed to market players focusing on Silver as an industrial metal, where economic weakness has acted to drag the price down.  However, at some point the market should re-adjust its focus from Silver’s industrial use to its viability as a store of value and safe haven security (simply all the reasons supporting gold).

6/14/2010

Can the World Cup actually have an effect on US Stocks?  Here’s the wild and crazy scenario.

The chaotic state of affairs in the EURO Zone which caused a massive depreciation in the EURO currency managed to knock the steam out of US Stocks as the fear of contagion and general economic uncertainty sent bullish speculators dumping.   The correlation of a weaker EURO to weaker US stocks has strengthened dramatically.  This correlation was evident in the other direction as well.  Over the past week the EURO managed to stage a small rally and the result was a strong US Stock market, with the Dow Jones bouncing some 400 points on the week.

So how does the World Cup fit into the picture?  Well, if you watched any games over the weekend you would have seen the German team dismantle the Australian team, as their performance was impressive to say the least.   Perhaps continued success of the world cup team of the EURO Zone’s core economy (Germany) may provide a spark to EURO Zone economic activity and hence continue to strengthen the EURO Currency. This in turn would reduce risk in the US Markets and potentially send stocks higher.

6/01/2010

So where did that almost 300 point gain last week in the Dow Jones come from?  And if it was magic, can the magicians pull it off again?

After a number of drastic declines in the major US Equity indexes, as news from Greece and the EURO Zone continued to paint a chaotic picture, along came last Thursday when the Dow, S&P and NASDAQ all traded exuberantly higher.  So where did this glimmer of hope come from amidst all the recent doom and gloom.  Well before you get excited about some potential GoldiLocks explanation of a rosy economic scenario that is about to blossom, realty is that one of the major factors that propelled prices higher was the same pathetic Las Vegas gambling underpinning that has reeked havoc on this market and soiled its credibility.

One of the factors that propelled stocks higher and got bulls excited was the breach of an important short term chart point for the Dow and S&P.  The Dow level came in at about 10,190 and the S&P about 1090.  Once price action took these levels out, bullish technical speculators took control sending the major indexes up nearly 3% late last week.  The problem with this scenario is that trading on technical indicators without sound fundamental support is simply like rolling the dice and betting prices go in a particular direction for no sustainable reason.  This is kind of like why Stocks rallied to their historic highs back in 2007 with momentum and technical traders riding the bubble market.  Technical indicators looked good but fundamentals were a house of cards and eventually the market corrected.

5/25/2010

So why does the chaos in the EURO Zone effect US markets?  There are actually a number of reasons and one of them is the Japan connection.

Despite the approved bailout by EURO Zone leaders to address the Greek economy, uncertainty, volatility and chaotic conditions continue to prevail in the EURO currency, Equity and Fixed Income markets. The latest contagion of this turbulence has impacted the Spanish banking sector. 

The result has been continued pressure on US Equity markets as the gains posted during last week's rebound from the lows set in the major Indexes have been quickly eradicated.  So why the connection of turbulence in the EURO Zone to volatility in US markets?  One evolving factor is the Japanese connection.  Continued turbulence in the EURO Zone  will no doubt negatively impact overall economic growth in the region which will include decreased demand from the biggest economies of Germany and France.  These markets provide a significant outlet for Japanese goods.

Unfortunately the Japanese economy has been sputtering for quite some time, as it is mired in debt as well.  So a slow down in the EURO Zone will exacerbate problems in Japan, which has already been evident in the declines posted in the NIKKEI.  This in turn does not bode well for funding of US debt, as Japan has historically been an aggressive purchaser/holder of US sovereign debt.  So the bottom line remains that unfortunately a EURO Zone problem is a US, Japanese, Chinese, etc problem.

5/20/2010

You may ask yourself….why has the EuroZone problem become so chaotic?  And the answer is….poor decision making by key officials in leadership positions.

The US experienced its massive fallout from a declining real estate market and subsequent evaporation of value of related financial products connected to ill devised loans.  The ramifications were drastic, as the US economy continues to suffer from heavy numbers of foreclosures, high unemployment and a general deterioration in wealth of its residents.  However one positive was the ability of US markets to stabilize…that is until the EURO Zone simply dropped the ball regarding the plight of Greece.

Turmoil in the status of the Greek economy was well known several months ago, and although the situation was by no means an easy fix, it was the lack of any type of decision making by leaders that resulted in the extreme market moves that are disrupting the global marketplace today.  Because Euro Zone leaders (especially Germany’s Merkel) waited until the markets turned tumultuous (e.g. rapid decline in the EURO and massive increase in Greek interest rates) before making any tangible decision, the result has been a continued chaotic state in the overall financial system, despite the plan for a significant bailout. 

The lack of timely decision making helped magnify a difficult situation into a global problem for markets.  Analysts are now viewing the massive funds allocated to the Greek financial system as just plugging a short term hole, where the longer term issue is filled with significant uncertainty.  This along with now drastic decision making of changing rules for trading securities (Germany’s termination of naked short selling without aligning its actions with other EuroZone nations) is exacerbating the high and chaotic volatility in the financial markets.

5/10/2010

Last week’s activity in the US Equity market clearly illustrates the massive speculative and risk laden, casino type environment this sector has evolved into…and this should be no surprise for loyal market doctor followers !!

If you didn’t see it, you most likely read about it….the Dow Jones dropped some 1,000 points in a matter of minutes during chaotic trading in reaction to uncertainty surrounding the plight of Greece’s proposed bailout.  Shocked you say?…that a US major Stock index gave up nearly 10% of its value in a matter of minutes and some individual stocks depreciated some 50% in value !!

As we mentioned at the heading of this piece…loyal Market Doctor followers should not be shocked.  Why….because over the past years and especially over the past months we have been highlighting the massive underlying risk associated with gains in the Equity sector and that bubble-like speculative forces were playing a large part in share price valuations.  A natural reaction to such a market underpinning is the potential for air to come out very quickly and come out it did last week.  These massive losses registered last week also shoot major holes in all the positive hype regarding a robust recovery and the illusions of any Goldi-Locks economic scenario. 

A major factor to consider now is, despite the rallies or losses in stock prices that will transpire over the next few weeks and months ahead, should investors continue to allocate significant sums of retirement moneys to this type of market structure….a market that can evaporate 10% of its value in minutes. 

What can be done to bring sound fundamentals back to this market?  Positive real short term rates would help.

5/3/2010

With issues such as bailouts for Greece to save the EURO, allegations and investigations of Goldman Sachs….can it actually be an environmental issue that takes the biggest toll on US markets?

Last week, the US financial markets were in a state of chaotic turbulence as the major Equity Indexes posted significant declines early on, rebounded by mid-week but closed Friday out with another major setback.  The main culprit behind the eventual hammering of Stocks most likely rested on continued pressure on Goldman Sachs and a potential spillover to other Wall Street players by the SEC.   This was followed by European leaders’ indecisive handling of a Greek bailout.  However one issue that, for some reason didn’t get much play by the media, that may add to the negatives for the market, is the catastrophic oil spill in the Gulf which is still spewing oil into the sea.

The direct negatives come from the environmental and economic impact that the massive oil spill will cause (e.g. fishing, clean up, peripheral damage, cost to BP, future increased costs to the oil industry due to new standards for drilling, etc.).  However another result of this is the fallout on future off-shore drilling for oil, where the likelihood of any new drilling is most likely zero for the foreseeable future.

As the media begins to cover this story more and more, the public’s attention to this catastrophe will intensify (as visuals of the damage evolve), especially in light of the incredible profits earned by large oil conglomerates.  Will it rock the market more than any substantial new negatives on Goldman and other Wall Street players?....No, but given the recent broad based problems for Stocks, the markets don’t need any more issues to deal with.

4/28/2010

Are EURO Zone leaders dropping that ball regarding the Greece situation?  Do we really need to answer that?

The plight of Greek solvency within the EUROZone has been an albatross to the EURO currency over the past months and now the continued lack of decision making has caused this issue to spill-over into global Equity markets.  The debate as to whether there is to be a bailout, how much the bailout will be, whether Greece has shown enough fiscal discipline over the past few weeks has become a mess.  Initially, the marketplace permitted European leaders time to deliberate the proper remedy to the situation by gradually adjusting market prices (slow depreciation of the EURO).  However given the ridiculously prolonged time of indecision to the matter, markets have reacted with a vengeance, sending Greek interest rates soaring, where this chaotic volatility only adds difficultly and complexity and perhaps greater aid to remedy the situation.

4/26/2010

Are the financial gurus looking to re-create the mid-1990s bubble economy?

Many look back to the economy of the mid-1990s as the true goldilocks scenario as jobs were plentiful, wages were rising, deficits falling and of course the most important of all, US Stocks were bubbling to historic levels.  Unfortunately, this economic scenario was yet another example of bubble policy as it proved itself to be unsustainable. 

The introduction of dotcoms and new technologies (which had intrinsic macro-economic value as productivity enhancing facilitators) also helped create a hype of massive expected returns and valuations in the Equity sector.  Individuals were ramping up their 401ks into stocks and corporations were riding the Equity financing train as share prices did one thing…go up.  The capital gains in portfolios propelled consumption as the wealth effect kicked in.  The results were significant tax revenues for the government and the posting of a short term surplus.  Unfortunately as 1999 and 2000 rolled up, this unsustainable bubble scenario burst, but many remember the ride as being nirvana like.

Our current economic scenario has involved the sustained policy of negative real short term interest rates with little opportunity for normal yield returns for investors.  As a result, more and more funds are finding their way to Stocks which are beginning to exude the “always going higher” characteristic.  Why push stocks as high as possible?  With little to no job creation, higher stocks can increase consumption and spending due to the enhanced wealth effect, otherwise consumption given high unemployment will continue to sputter.  One problem this time around however is that many investors are very skeptical and have avoided stocks.

4/19/2010

Should an SEC claim against Goldman Sachs result in more than a 1% decrease in the major US Equity Indexes?

Last week the news hit the tape that the SEC was accusing Goldman Sachs of committing fraud in some of its mortgage activities.  At first glance, this news would obviously result in a significant decline in the share price of Goldman, which actually occurred as the stock suffered nearly a 13% decline.  However, the issue that seems to be a bit less clear revolves around the plight of the remainder of the Equity prices of organizations across industry sectors.   Why should negative news regarding the status of Goldman’s activities in mortgages result in a more than 1% decline in the Dow, S&P and tech centric NASDAQ?

4/12/2010

Why is it that the price of Gold is approaching an historic high again?

Over the past few weeks, the hype has been in full force regarding better times ahead and a strengthening of the US economy.  Much of this gained momentum given the last employment report which was spun to the bullish hilt given the slight increase in non-farm payrolls.  The other major source of positive spin has been the slow but relentless gains being posted in the US Equity markets as the Dow Jones closed just a few points below the 11,000 mark.

Despite this return to Goldilocks nonsense, there remain a few rather noteworthy indicators that continue to flash major red flags.  For some reason the Federal Reserve is maintaining near zero percent and negative real interest rate policy and has even suggested that higher rates could derail the economy.  But perhaps the most interesting turn of market events has been the substantial rally in Gold prices despite a strengthening US$ (that is until the Greek bailout hit this weekend).

4/5/2010

Will increases in US Treasury Yields be a result of fundamental economic strength or a lack of Fed purchasing and pure economic hype?

Last Friday, the US payroll data came in with a positive increase in workers hired and as expected by the Doc, this was met with a pop in the level on 10 year notes.  However, March marked the end of Fed purchasing in the Mortgage Backed Security sector as well.  So, what’s the real deal?  Is the US economy really on track for a sustained rebound which should result in an increase in Treasury Yields or is it the lack of Fed purchasing that may cause the move up in rates, where recent positive economic numbers are smoke and mirrors?

Before getting too excited about the employment report, keep in mind the census affect which has been adding jobs starting last fall and will continue to increase the demand for workers into May.  The total effect of this anomaly could result in a drop of the unemployment rate up to almost 1/2 percentage point.  In case you are unemployed….you know the real story of lack of job creation, and in case you are still employed consider the plight of unemployed friends and also the lack of job security you may be feeling. 

                       In Memory of the passing of a family Icon.

                     Stella Wantuch (Aunt Stella) would have been 100 in May.

3/30/2010

Will the Unemployment report be able to change some correlations between markets or will it simply be a yawner.

4/24/2010

Technicals rule US Equities once again !!

Despite the veritable plethora of negative macro economic, financial and political factors that warrant lower stock prices, there is one major shinning star that is keeping this sector alive and kicking.  That factor refers to technical indicators that hedge funds, speculators, bank prop-traders and even mutual funds follow.

Last week the S&P500 managed to close just a few points above the 50 percent retracement level between the historic highs achieved in the index back in 2007 and the lows set in March of 2009.  This 50 percent Fibonacci level on a long term basis generally marks a major resistance level, where a breach through it signifies a change in market trend.  This level came in at about 1150 on the S&P, and the weekly close last week above this level has bullish technicians chomping at the bit.  The confirmation of the breach of this level was this past Monday’s trade down to retest the level as support and it held to a tee, only to see bullish speculators ramp up the index, as was case in point on Tuesday’s session.

What’s the bottom line?  Macro economics are simply pointing at unsustainable economic activity given current spending and borrowing activities around the globe.  However technicals can push markets around, but sooner or later reality produces a viscous readjustment back to real value.

3/15/2010

The story of 2010 thus far….subdued markets.

We’re quickly approaching the end of the first quarter of 2010 and the story across the spectrum of many financial markets is consistent….listless moves and perhaps some risk aversion from confused investors.  US Stocks thus far have posted about a meager 3% gain when considering the S&P, while yields on 10 Year treasuries are about a whopping 10 basis points below their levels at the beginning of the year.  Spot Gold is just about flat on the year thus far, the Yen is a couple of big figures stronger in 2010 and even the much talked about thrashing of the EURO versus the US$ has amounted to roughly an incredible 5% move (that was sarcasm if you didn’t pick up on that) from the levels posted at the end of 2009.

So what’s the story behind these knee jerk, back and forth, grinding and weak trending markets?  Uncertainty, lack of fundamental support to some market levels and perhaps some risk aversion.  The hype has continued to focus on a return to economic growth and a sustained global rebound, however issues grounded in reality such as a bankrupt California, Greece, Unemployment at horribly high levels, negative real US interest rates,  unsustainable debt levels and a continued floundering of real estate tells of a different story.  Stocks are grinding higher but the trust in the move is suspect at best.  Treasury Yields are still a focus to being managed by authorities.  The US dollar recouped some of its massive losses but has recently run out of steam again.

3/8/2010

The Equity market closed out the week with a bang but so did another indicator…bank failures.  So what’s up with that?

The Equity market closed out the week with a bang as the major indexes look to be primed to take another shot at the highs for the year.  However, on the other side of the economic story is a very disturbing indicator in the realm of banking, where last week posted the number of failed US banks which reached 25 in 2010.  This rate just about matches the same pace set in 2009 and far exceeds that pace set in 2008.   Problems such as foreclosures, anemic lending, trouble with existing real estate loans and a looming problem in commercial real estate are a few reasons for the problem.

3/1/2010

Is the picture all that bleak for the EURO currency?  Let’s take a look at things on a relative basis.

Over the past few weeks, the once mighty EURO has been beaten down some 10% versus the US$ as fears over the problems with the Greek economy has many fearing a contagion within the EUROZone.  But perhaps, the situation is not as dire as many think, when considering things on a relative basis.  By relative we mean, relative to the financial underpinnings of the two other major global currencies…the US$ and the Japanese Yen.

Yes, the turmoil in Greece is somewhat disturbing given the doom and gloom scenario of their potential inability to finance their situation.  But let’s put things in perspective.  Greek GDP comes in at a whopping $350 billion (roughly).  The US unfortunately has its own albatross and this comes in the shape of a large state referred to as California which may be classified as technically bankrupt.  According to some calculations, California is considered to be about the seventh largest economy on the planet and accounts for about 13% of US GDP. By the way…that’s nearly 2 trillion US$.  In case you see a safe haven in Japan, just consider that its national debt is in the range of US$ 7.5 trillion which is only about 170% of its GDP.

2/22/2010

Can US Stocks weather higher Yields in Treasuries?

This past week involved a surprise move by the Fed in the form of increasing the discount rate…an action that many see as a beginning to a tightening mode for the US….one that is way overdue to many.  The question at this point however is, will the Fed begin to notch up the Fed Funds target rate which should result in higher Yields for longer dated securities? And will US Stocks be able to continue their bullish ways in the face of rising rates?  Wow…big questions.

Firstly, we need to put these hypotheticals in context.  Remember, if the Fed raises the target Fed Funds rate, it’s really no big deal until the level begins to exceed about 2% (and that’s a long way away), otherwise it’s just window dressing.  So the answer to the first question, will the Fed begin an aggressive tightening stance…not likely in the medium term.  However that doesn’t mean that Yields of longer dated securities won’t go up.  Remember, there has been ample news regarding the potential of China to reduce their allocations to US debt.  Let’s answer the higher longer term rate question with…if 10 Year Yields can get up above 4% over the next couple of weeks (which is not a big move), the likelihood is for continued higher longer term rates, which would begin to suck the steam out of Stocks.

2/16/2010

Will there be a break in the recently correlated moves in financial markets?

It’s been difficult to diversify exposure to market sectors given the “follow the leader” moves that have been transpiring over the past couple of weeks.  The leader of the pack has been the US$ which has managed to post a noteworthy rally via the once unstoppable EURO.  Unfortunately, this US$ rally has helped bring about the hefty correction in the  major US Equity Indexes and has also managed to knock some short term steam out of the shinny gold market.  Finally, US treasuries that appeared to be mounting a Yield surge early in the year, have experienced price rallies that have sent Yields lower.

For the short term much of this makes sense, as a rising US$ makes US goods more expensive on an export basis and profits for multinationals get squeezed, and of course, the carry trade becomes a bit less comfortable for speculators.  The higher buck also naturally puts pressure on Gold, and the culmination of potential reduced earnings for multinationals and reduced exports may send longer term rates lower.  But should these relationships continue over the long term…probably not.

2/01/2010

Probably one of the biggest primers of the US equity bubble ?….that Tech heavy NASDAQ.

In case you didn’t do the calculations, we’ll clarify it a bit for you.  Since the recent bottom set in the Tech heavy NASDAQ in the Spring of 2009, the index has run up in the area of 75 % at its recent highs set just a few weeks ago.  The hype has been outrageous over the wonderful new Tech products that have been introduced into the market that have many excited as to incredible future returns to be achieved by various tech companies.

You know those wonderful products…things that allow consumers to twitter, tweet, are loaded with wonderful APPS that enable gadgets to show movies and even play the piano. Just think, consumers can play chop sticks on hand-held devices.  What wonderful new earth shattering sources of sustained profitability and expansion of new innovation markets.  Stop the Madness.

Here’s a reality check.  Products that are truly innovative, that introduce new ways of conducting commerce can actually be a source of economic growth as their assimilation into businesses can result in the demand for other new complementary products and skilled labor to use these new technologies.  Twittering, hand-held Apps, small additions to email functionality, all on handheld devices, do not fall into this category.  These characteristics fall more into the realm of short term revenue enhancing gadgets that may not produce sustained returns over the medium to long term.

The NASDAQ up 75% in less than a year….well, you’ve already seen what can happen to things filled with air.  The NASDAQ has come back down to earth over the last week or so, giving back some 10% in those lofty gains.  Don’t be surprised if those exuberant earnings expectations for some of these Tech companies quickly evaporate. 

1/25/2010

Pricking of bubbles comes in the least expected ways.

Well it had to happen sooner or later.  The over exuberant gains posted in the US Stock market (lets call it a mini-bubble), despite pathetic macroeconomic fundamentals, experienced some air being released and the needle came from a non-monetary authority.  Obama’s recent comments regarding proposed plans on limiting certain activities that banks would be able to pursue sent jitters through the US Equity markets, which plunged about 4% over a two day period.

Now here’s an interesting thought….should comments regarding restricting some activities of the larger US banks really cause the major US Equity Indexes to plunge 4%, with prices settling near the lows of the session?  Well, some could argue that bank profitability would decrease and there would be a limited fallout in other financial intermediaries…but a 4% sell-off over the mention of “could be plans?” 

1/19/2010

Looking back over the first decade of the new millennium and what you had was a US Equity market largely subsidized by the monetary authorities

The Doc couldn’t just jump into the next decade without taking a look back to a troubling, long term event that seemed to have taken place and unfortunately still exists today.  The turn of events began back in the year 2000 with the pricking of the exuberant Stock bubble with a high Fed Funds target rate in the 6% area.  However the demise of Stocks and the unfortunate event of 9/11 disrupted the economy significantly, which caused the Fed to quickly lower rates below 2%....the start of the Stock and real estate subsidizing process. 

The Fed target level remained below 3% and well into the negative real interest rate zone over the next years (until late in 2005) despite the exuberant activity in the US real estate and Stock markets.  Finally, as the imbalances in the economy were so great with housing prices nearly out of control and Stocks reaching new historic highs, it was time to prick the bubble again.  This time Stocks could only sustain about a 5% Fed Funds target rate before spiraling down, at which point the air came out of real estate as well, and the subsidizing process started again, this time with rates set near zero, where we are today.

We are now entering the second month of 2010 and interest rates remain at near zero levels and well in the negative real rate zone again.  What’s a small investor to do?  CD and T-Bill investments used to provide an OK, conservative return for risk averse and older investors.  However over much of the last decade these investors were almost sucked into Stocks as they are now or otherwise suffer no returns at all.

1/11/2010

So what’s the real reason why longer dated Treasury yields rose over 50 basis points over the past couple of weeks?

After being caught in about a 20 basis point range over the past four months, yields on 10 Year Treasuries suddenly popped up to nearly their highest level over the past year.  Many analysts who are bullish on upcoming economic activity flapped their gums about the impending positive report that the unemployment release would produce last Friday, however much to their chagrin, the report was anemic, at best, and this was during a holiday season. 

So why then the sudden rise in the yields of longer dated Treasury maturities?  Is it the coming of an incredible boom in economic activity?  Stop the madness.  What you may have for the first time in a while are jitters from usual auction participants over the increased supply of paper hitting the streets along with the growing possibility of increased inflation in the pipeline due to massive liquidity injections and a weakening currency.  

If by chance you don’t agree with this position and still side on the cause of higher rates as being from an impending economic boom coming up, take a look at what’s happening in the UK.

1/04/2010

It’s the first week of 2010 and the name of the game is wild uncertainty for the upcoming quarter.

US equities closed out 2009 with impressive gains as did commodities, precious metals and US fixed Income…hey, even the beaten down US$ managed to rally a tad into year end.  But guess what baby…it’s 2010 and its time to allocate money across the spectrum of financial markets all over again.

Stock bulls are riding off of some year end data perks in the form of a short term stabilization in unemployment and OK retail numbers….not to mention momentum and technicals still pointing higher.   The real trick of the tape however will be the post holiday period beginning in February, as retailers no longer need holiday workers, and $ strapped consumers face reality of paying for mortgages and daily expenses rather then holiday presents.

Bond bulls are perhaps the most jittery as the prospect of the Fed ending mortgage bailout purchases, and looming affects of a lower US$ and mounds of stimulus money in the system, could just pop the Bond price bubble.

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