Storm Clouds on the Horizon?
Mar 28, 2010
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.
