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Dallas, TX
March 11, 2010, 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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Credit Markets Thaw - But Is That A Good Thing?
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What's Hot Today: |
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U.S. stock index futures were pointing to a slightly lower
opening on Thursday. The trend remains favorable to the up side, although
a pullback can come at any time.
- International Trade 8:30 AM ET
- Jobless Claims 8:30 AM ET
- Quarterly Services Survey 10:00 AM ET
- EIA Natural Gas Report 10:30 AM ET
- 3-Month Bill Announcement 11:00 AM ET
- 6-Month Bill Announcement 11:00 AM ET
- 30-Yr Bond Auction 1:00 PM ET
- Fed Balance Sheet 4:30 PM ET
- Money Supply 4:30 PM ET
News For Thought
Is Kansas City, Missouri, the next Detroit? According to The New
York Times: "The Kansas City Board of Education voted Wednesday night to
close almost half of the city’s public schools, accepting a sweeping and
contentious plan to shrink the system in the face of dwindling enrollment,
budget cuts and a $50 million deficit." Wonder why? Try this: "Less than
a third of elementary students in the city schools read at or above grade
level. And in most of the schools, fewer than a quarter of students are
proficient at their grade levels. District officials say the closings will
improve achievement by allowing the system to focus its resources."
Evidence links senator's activity and influence to helping his mistress. According
to The New York Times: "Previously undisclosed e-mail messages turned over to
the F.B.I. and Senate ethics investigators provide new evidence about Senator
John Ensign’s efforts to steer lobbying work to the embittered husband of his
former mistress and could deepen his legal and political troubles." Senator Eskine
is a Republican from Nevada, and The Times reports: "suggested that a Las Vegas
development firm hire the husband, Douglas Hampton, after it had sought the senator’s
help on several energy projects in 2008, according to e-mail messages and interviews
with company executives."
Senators resist adding student loans to health care bill. In typical Washington
form, the Democrats are trying to add more spending to the health care bill by
throwing in proposals related to student loan funding. According to The Washington
Post: "Democratic leaders in Congress are weighing whether to add another of
President Obama's priorities to the package: a popular proposal to overhaul the
federal student loan program." According to The Post: "Administration officials
and House leaders have pressed aggressively for the addition in recent days.
But key senators are objecting to the move, arguing that political resistance
in the Senate and the rapidly rising cost of the education measure could jeopardize
efforts to push health-care reform to final passage."
The three reports above send a clear message. The bad policy of the last four
administrations and their Congressional compatriots have led to a disfunctional
education system, where the students have been dummed down to the point where
the government can do whatever it wants and spend money in an indiscriminate
fashion. This is no conspiracy theory any more. It appears to be reality.
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Credit Markets Thaw - But Is That A Good Thing?
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Is The Next Credit Bubble Being Seeded?
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Don't look now, but there are plenty of indications that the
credit markets are functioning well once again. And while that is clearly a
positive in many respects, there are no assurances that things will eventually
get out of control once again.
The key question for investors is whether credit is becoming too plentiful too
fast and whether that will eventually mean that the Federal Reserve returns to
a tightening cycle in a more aggressive manner than many expect. One example
of how aggressive central banks could become is China, where the central bank
has made several tightening moves in the last several months and where data suggests
that the economy is slowing, at least to some degree.
According to The Wall Street Journal: "In the U.S., bond sales by companies such
as Bank of America Corp. and GMAC Financial Services are on pace to conclude
their busiest week since the beginning of the year. In Europe, borrowing by companies
so far in March is already more than 60% of February's totals." And the overall
pace of borrowing for the year is rising rapidly as "So far in 2010, U.S. corporations
have issued $195.2 billion of debt, excluding government-guaranteed bonds, according
to data provider Dealogic, up from $166.8 billion during the same period in 2009."
At the center of the improvement are the shrinking spreads, the differences between
corporate debt and treasury bonds. When the spreads shrink, it's a sign that
the bond markets are increasingly confident about the ability of the borrower
to pay the interest on the bonds. And that's a sign of increasing confidence
in the markets about the economy's ability to support company cash flow and earnings.
It all fits quite nicely with the notion that the stock market is rising because
of a rising perception that things are getting better, and it sets up a rosy
scenario for traders.
The problem is that at some point, improvement becomes complacency, and complacency
leads to carelessness, and bubbles tend to form under those conditions. To be
sure, it could take a long time before things get out of hand. Yet, it's important
to get a handle on things before they get out of hand.
What makes this situation interesting at this point in time is the difference
in ease of borrowing between large companies and small businesses. The former
can borrow from the market, while the latter tend to borrow from banks. And it's
still not that easy to borrow from banks, which is setting up a two tiered system
of businesses. Also interesting is the fact that cash strapped states and municipalities
are starting to find it easier to borrow. According to The Wall Street Journal,
demand is so high right now that Detroit and California, well known credit black
holes (our words) were able to tap the markets this week. The Journal reported
that "California closed part of its offering early after strong demand from retail
investors."
In fact, credit conditions in the U.S. are so benign right now that "Foreign
borrowers have also taken advantage of lower rates in the U.S., as both the Bank
of England and Royal Bank of Scotland sold $2 billion in five-year notes this
week."
Yet, there are signs that should make us concerned. Stock investors, especially
retail investors are putting money into bond funds that they would normally put
into the stock market, as they are still fearful of the action in stocks during
the last bear market. This, even as stocks have rebounded quite well and are
in a steady up trend. To us, that's a sign that the individual investor hasn't
learned its lessons, especially about market timing, and understanding the way
markets work, especially the way trends work.
Conclusion
The flow of money into bond funds hasn't stopped. In fact, demand for bonds seems
to be growing, and individual investors, especially retail investors, seem to
be fueling a fairly good portion of the rally through bond funds.
This is worrisome, as most investors don't understand the way bond markets work
and may be thinking that yields are a reasonable substitute for loss of principle.
Where bond fund investing becomes a very dangerous game is when the Federal Reserve
starts to raise interest rates. And if the Fed raises rates more aggressively
than anyone expects, the losses, and the speed at which they will come, in the
bond market will likely spook retail investors.
And where that will become very problematic is in the way retail investors tend
to behave. They don't usually sell until it's too late. And by that time the
losses may be significant. After a bear market in stocks, if a huge bear market
in bonds follows, many who are planning to retire based on their tax deferred
accounts may yet have to postpone that day.
Know when to sell and how to make money when the market falls. Get a detailed
trading plan in your pocket. Read 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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Powershares Dynamic Biotech And Genome ETF (NYSE: PBE) Charts Steady Momentum Run.
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The Powershares
Dynamic Biotech And Genome ETF (NYSE: PBE) is a very hot
ETF at this time.
Chart Courtesy of StockCharts.com
Biotech is showing investors that it can still deliver
a momentum run. The Amex Biotech Index (BTK) is up 21%
since February 25, 2010. PBE is up 11% over the same period.
And although the ETF is up half as much as the index over
the same period, the S & P 500 is only up 5.5% over
the same period.
That means that no matter how you slice it, biotech has been the place to be
over that period. PBE is one of our rated positions at this point, and has captured
all of these gains.
There are few basic caveats to remember about biotech investing. One is that
by owning an ETF or a mutual fund, investors don't have to pick individual stocks
and will capture a good portion of the gains in the sector.
Biotech stocks, can move as a sector, or individually. They are very dependent
on news of FDA action on their drugs. And there is also the potential for disappointment.
By watching the general trend of the sector, via BTK, and piggybacking onto that
trend via a sector vehicle, such as PBE, investors can capture the overall trend,
and as the current market illustrates, sizeable gains could come in short periods
of time.
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