Archive for March, 2010
Storm Clouds on the Horizon?
Posted by Jody Eisenman | Filed under Uncategorized
As we have stated several times, the stock and bond markets have staged a tremendous and far reaching rally for over a year. The markets have shrugged off weak housing starts, a rising unemployment rate, numerous credit problems in Europe as well as many other negative economic news. Since March 8 of 2009, the Dow has risen over 4000 points off its’ low. In the last 4 weeks, the Dow has closed at a new high. In fact, when I listen to the talking heads on CNBC (which I usually have on in my office), it seems that the vast majority of analysts and money managers are quite bullish, which is pretty amazing considering the run we have had. Despite, it seems to be that it could very well be time for a pullback.
Why do I think this way? First of all, it is highly unusual to have such a steep climb without profit taking. More importantly, it could be that the enormous debt that we have built up may finally be taking its’ toll. Last week, we had a $32 billion seven year treasury note sale. There are always more buyers than inventory, which leads to a coverage ratio. A coverage ratio of 3 to 1 means that there were three times as many buyers as bonds that were offered. The ration last week was 2.61 to 1, which was the lowest number since last May. Already, the Chinese have cut back on purchases, and they are no longer the largest foreign buyer of our debt. US marketable debt is now $7.4 trillion, which is an all time high.
The move in treasury prices is starting to become significant. In the last month, 2, 5 and 10 year treasury yields have all increased between 16 and 24 basis points. I believe that there this a good chance this will continue. In fact, I believe that the reason it hasn’t happened yet is due to the fact that the Euro has declined and the economic situation in several European countries is deteriorating. Portugal just got downgraded, and Greece is still in crisis mode. Ireland is in a severe economic depression with real estate prices collapsing. The US has been seen as a safe haven, but now it appears that this may be coming to an end. It is clear that low interest rates have certainly fueled higher stock prices. What will happen if interest rates continue to rise? I would be cautious in the near term until we see a clearer picture.
Over the Weekend…
Posted by Jody Eisenman | Filed under Uncategorized
Several events should have affected the financial markets.
- The first managing director of the IMF, John Lipsky, stated that all G-7 countries with the exception of Canada and Germany will have debt to GDP ratios that may exceed 100% by 2014. This has not happened since 1950, which came as a result of spending following the conclusion of World War 2. In addition, the US budget deficit will probably surpass $1.4 trillion for this fiscal year.
- Federal Reserve Chairman Ben Bernanke called government bailouts of large financial firms “unconscionable” and must end. While I agree with this, it seems paradoxical for him to state this after presiding over the largest financial bailout in history.
- The situation in Greece got somewhat murkier.
- The landmark health care bill passed the House of Representatives.
Based on these events, the futures were down sharply on Monday morning. Despite this, by the close of the day, the Dow Jones rose 44 points to an 18 month high.
The scope of this move in stock prices has been incredible. The market seems to shrug off almost every bit of bad news to constantly move higher and higher. As I stated last week, I still believe that we are severely overbought on a short term basis. In addition, the S and P 500 is right up against a technical top. However, based on the moves in the last year, it’s tough to bet against this market. It will be interesting to see how the market reacts over the rest of the week.
An Incredible Run
Posted by Jody Eisenman | Filed under Uncategorized
The Standard and Poors 500 index, as measured by the Exchange Traded Fund (ETF) known as the spider (symbol:SPY) finally closed lower today. Although it was only a six cent drop (from 117.10 to 117.04), this marked the first time since February 23 that this ETF had a losing session. I believe this has never happened before. Meanwhile, the Dow closed up 45 and a half points, marking the eighth straight session the index has closed higher.
By almost every technical measure, the stock market is overbought, at least short term. However, markets can stay way overbought or oversold for extended periods. Witness the beginning of 2009, where the markets dropped consistently, day after day, until we finally bottomed about a year ago. Although a pullback would hardly be surprising here, I think that the end of the quarter is keeping stocks higher. In other words, since the equity markets have advanced so much this quarter, any mutual funds and money managers that are not substantially invested will tend to do so before the quarter ends. This is due to the fact that they only show their investors their quarterly positions, and they don’t want to show them that they are sitting on the sidelines when the market is moving higher. The VIX volatility index is down to 16.62, which is the lowest close since May of 2008. The index hit almost 90 in October 0f that year.
