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Dallas, TX
May 8, 2009, 08:00 EST |
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Dr. Joe Duarte's Market I.Q. |
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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Is A Bond Market Meltdown Dead Ahead?
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What's Hot Today: |
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U.S. stock futures were pointing to a higher opening on 5-8 before the
employment report. Overseas markets were higher. Crude oil was testing the $58
area in pre-U.S. trading.
Today's Economic Calendar:
- 8:30 a.m. Apr Non-Farm Payrolls: Expected: -628K. Previous: -663K.
- 8:30 a.m. Apr Unemployment Rate: Previous: 8.5%.
- 10:00 a.m. Mar Wholesale Trade: Expected: -1.0%. Previous: -1.5%.
News For Thought
Friedman Out. According to The Wall Street Journal: "Stephen Friedman resigned as chairman of the board of the New York Fed, amid a controversy about his dual roles as a Fed director and a director of Goldman Sachs."
CIA: Pelosi briefed on interrogation methods. According to The Wall Street Journal "Congressional leaders were briefed in detail about techniques used in the Central Intelligence Agency's interrogation program, according to a new intelligence document. The document appears to conflict with recent statements from House Speaker Nancy Pelosi, who was then the top Democrat on the House intelligence committee. Ms. Pelosi has said she hadn't been told that the CIA was using the technique known as waterboarding, or simulated drowning. According to the document, Ms. Pelosi was one of the first lawmakers briefed on the interrogations in 2002."
The Washington Post added: "The memo, issued by the Director of National Intelligence and the Central Intelligence Agency to Capitol Hill, notes the Pelosi-Goss briefing covered "EITs including the use of EITs on Abu Zubaydah." EIT is an acronym for enhanced interrogation technique. Zubaydah was one of the earliest valuable al-Qaeda members captured and the first to have the controversial tactic known as water boarding used against him."
Life may get difficult for the Speaker, as the Post noted: "The issue of what Pelosi knew and when she knew it has become a matter of heated debate on Capitol Hill. Republicans have accused her of knowing for many years precisely the techniques CIA agents were using in interrogations, and only protesting the tactics when they became public and liberal antiwar activists protested."
Pelosi's response was tepid. According to The Post: "In a carefully worded statement, Pelosi's office said today that she had never been briefed about the use of waterboarding, only that it had been approved by Bush administration lawyers as a legal technique to use in interrogations."
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Is A Bond Market Meltdown Dead Ahead?
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Ready For Higher Interest Rates?
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Something extraordinary could be on the way, a very large selloff in the bond market. As investors sense an economic recovery, they are starting to price in the consequences of a 3.4 trillion dollar budget and the huge increase in U.S. government debt. The net result is likely to be a significant decline in bond prices and a rise in market interest rates.
If the action in the bond market on 5-7 is any clue as to what's ahead, look for investors to start selling U.S. Treasury bonds. The yield on the U.S. Ten Year Note, the benchmark for a significant number of mortgage products rose to 3.3% on Thursday. Overnight, before the release of the all important U.S. payroll data, bond yields had risen further. The U.S. 30-year T-bond yield (TYX), barring some kind of sudden reversal looks ready to make a move toward 4.5%, its highest yield in 5 months.
Chart Courtesy of StockCharts.com
There are certain things that are suggested by the fact that bond yields are rising. And all of them have significant potential implications for markets, consumers, and the overall economy.
First, the 30 year bond auction in the U.S., carried on Thursday, got a tepid, if not terrible response. That suggests that appetite for U.S. treasury debt has slowed. That's not exactly what the government wants when it's going to finance its stimulus package with new bond sales.
Second, rising bond yields are a sign that the market is starting to factor in some kind of economic recovery in the near term, and perhaps some inflation further on down the road. Right now, both things are good. At some point in the future, they won't be good. But let's not worry too much about that just yet.
And third, the potential for a huge asset allocation from bonds to stocks, and perhaps other asset classes, such as commodities and real estate is increasingly likely.
The next thing(s) to consider is what could throw a wrench or two into this scenario.
In the short term, the employment report will be the key. Expectations for some kind of improvement are high. Lots of data this week suggests that the bottom in job losses has either been put in place or has to be close. If there is any evidence to the contrary when the report is released, we would expect a significant reversal of the current scenario.
Over the long term, though, the potential for a bear market in bonds will eventually take its toll on many things, especially a burgeoning economic recovery, especially if mortgages and business loans carry larger interest rates.
Politically, an economic recovery is likely to give a boost to the Obama administration and its agenda, which will mean higher taxes and more government spending.
Conclusion
Most investors ignore the effect of the bond market on life in general, despite the effects of the recent credit crisis. But bonds are more important than stocks, as they are the source of credit and interest rates on which commerce is built.
If what we're seeing is the beginning of a significant rise in interest rates, then we could be on the threshold of a very dramatic change in the overall scenery for consumers and investors.
As traders, this dynamic, once it is well established, will give us the opportunity to short the bond market. Already we have a profitable short position via the Proshares Trust Short Bond ETF (NYSE: TBT). Visit our bond trading section for more details. Dr. Duarte owns shares in TBT.
Get Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for All Seasons. Also Available As Kindle Books.
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Market Moves - Stock Of The Day
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Currency Euroshares (NYSE: FXE) Holds Up Surprisingly Well
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The Currency Euroshares (NYSE: FXE) ETF is holding up quite well despite
evidence that the European economy is far from any sustainable recovery.
Chart Courtesy of StockCharts.com
Currencies mirror the economic and political health of their country or region. Weakness in one or both of these variables usually leads to a weak currency. Yet, the Euro, despite a weak economy is not falling out of bed, especially with regard to the U.S. Dollar.
Meanwhile, the dollar, which reflects the state of the U.S. economy and its political health, is weakening, despite a popular president and an economy that is showing improvement.
So what gives? The answer is likely more complicated than we can figure out. But one or two things are clearly involved. One is the huge amount of U.S. debt that will be piled on as a result of the deficit spending that lies ahead. The other is the fact that the U.S. political system is polarized beyond repair.
When you put those two things together, you get uncertainty. Sure, Europe is weak. But that's not a surprise. And neither is the outcome. Things will either get better or worse.
With the U.S., though, it's different. How will the rising debt affect the economy? And is the Obama government going to be able to make good on its promise to "spread the wealth" and to keep the world's economic engine roaring with all that it plans to spend and to attempt to accomplish.
The market, rightly or wrongly, seems to be betting that a weak Europe is more predictable than a U.S. in transition to something unknown.
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