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With Bond Yields Continuing Their Push Higher, What To Expect For Stocks Next?
The big story this morning is that Treasury yields continue their grind higher - this despite the strong 30 Year auction last week which many expected had put a bottom on bond prices at least for the short-term. As can be seen on the attached chart, the 10 Year has resumed its drift lower, with yields once again touching multi-month highs, not to mention the 10s30s continue to flatten and is about to hit 100 bps. The move prompted an early wake up call for David Ader, head of government bond strategy at CRT who sent out the following note earlier: "Just when we thought it was safe to say something nice about the market, we get a sharp move lower (alas in price, not yield) in an active overnight session. We say active as volumes were 114% of the average, but to be sure it’s harder to find a new reason for the weakness other than the price action itself. Thus we’ll caution that the weakness is in part a function of liquidity and fear." There are two schools of thought as to what is causing the gap lower: i) the realization by various bondholders that nobody is concerned about US funding levels and that the next target of the bond vigilantes will be the US itself, and ii) that courtesy of the latest round of fiscal stimulus, the economy may have bought itself a short-term bounce and it is time to fade the deflationary move in bonds which was the prevalent trade of 2010. Either way, the inflationary threat is now all too real, and with rates jumping and mortgages surging, it is difficult to envision a nascent recovery in which the prevailing price of housing just dropped yet again courtesy of higher rates. So what does this mean for stocks? Once again, courtesy of some historical perspectives by Sentiment Trader, we look at what happened in the past to stock prices when bond yields started a gap move wider.
April 23, 1971:
In the spring of '71, yields rose quickly from their March low. By late April, they had risen more than 10%, but the S&P 500 was still hitting new 52-week highs on an almost daily basis. That stopped immediately, and equities went into a deep seven-month correction.
May 27, 1986
In 1986, yields jumped quickly and severely from their April low. The bounce was short-lived, but traders didn't know that at the time. When the S&P hit a high in late May, it quickly pulled back, thrust back up to a marginal new high, then fall into a four-month sideways correction before resuming an impressive rally.
November 27, 1992
This time the run-up in yields, and stock prices, didn't end so well. The S&P immediately fell back from its 52-week high, then jumped higher in a quick spasm, putting in a formation on the chart that looks like the S&P was giving everyone the finger. That next spike was the end of the bull run, and the S&P started to slip precipitously. During March of 1994, it crashed nearly 7% over a period of just a couple of weeks as yields continued to shoot higher.
November 23, 1998:
Once again this time, a new high in the S&P, after yields had already risen at least 10%, led to a short-term correction. Stocks pulled back for about three weeks, then shot higher and made new highs once again. After that, the S&P went into a two-month trading range, before breaking out and making its final bull run of the miraculous 1990's bull market.
September 2, 2003:
After the 2000 - 2002 bear market ended, bond yields bottomed after stocks did. By early September 2003, the S&P was making one-year highs, and yields by that time had rallied substantially from their lows. The S&P went into a multi-week correction, but that was erased quickly in an early October rally. Stocks never really looked back until the January 2004 peak.
August 2, 2005:
The last occurrence was more than five years ago. This time, stocks once again fell into a correction immediately, but unlike the last couple of times the initial decline wasn't made up right away. Stocks continued to decline for about two months, with the S&P suffering a loss of about 75 points. Coincidentally, that 75-point correction began with the S&P at almost exactly the same level it closed at on Friday.
So no major surprises: with one exception, the market tends to run into a bond hike, only to realize that such moves end up being driven by permissive monetary policy and rarely by actual economic moves (assuming fundamentals news is even remotely relevant to market formation... the alternative of course would finally put an end the seemingly endless fallacies spewed forth by every Chicago school of thought). And unlike now, at least in the past the US was not saddled with an amount of debt that on a gross basis is substantially greater than GDP. Sooner or later the market will finally need to come to grips with the realization that it is the jump in yields that is the black swan, nothing more and nothing less. At a time of record deficits, when the Fed will soon own over $1 trillion in Treasurys, the smallest marginal moves on rates will have a disastrous impact on what is already an unsustainable deficit. Add to this the fact that we now anticipate that the debt ceiling will have to be raised not once but twice in 2011, and we, just like everyone else who is not a sellside Koolaid peddler, are scratching our heads as to just how it is possible that stocks continue to show the kind of dogged momentum chasing determination that virtually every buysider realizes will sooner or later end in tears.
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Charts
10Y http://99ercharts.blogspot.com/2010/12/10y_13.html
TF http://99ercharts.blogspot.com/2010/12/tf_13.html
you do some great chart work
the 30 year a black swan!!! why would anyone own any???
people that don't read newspapers, have a television and no computer :)
OR
people who are just plain stupid... you know: 99,9% of the population.
It will be interesting to see if the yields climb to levels that lure the herd in before the world changes enough for the sheeple to notice that something is very, very wrong...
The clock is ticking. Not gonna get me, unless gold and silver dump too.
This move in rates is not positive. 90% of pundits are calling for rotation from treasuries into equities. They have watched this move in treasuries with obvious glee. That is NOT happening, this move is a negative move out of treasuries without a full shift into equities. The other 10% of pundits have been calling for a rally in treasuries coupled with a sell-off in stocks. I tend to be more in that camp, but for the past 3 months I have been asking, why is no one calling for a sell off in treasuries AND equities! This move in treasuries was sparked by the 'compromise' on taxes, which really just comprised our integrity and any hope of convincing investors the U.S. really cares about its debt. At some point the talking head on CNBC and the like will get their head's out of their asses and realize that no amount of QE2 will help once the world doesn't want to own our shit, and equities will follow. Its even more distressing when you look at how much of our own funding is now at the short end of the curve.
Ha, CNBC pundits. I recall during the go-go internet boom leading to the 2000 crash. Abby Joseph Cohen was on CNBC 20 times a day saying "It's differnet this time. Forget PEs, the new paradigm is Price to Revenue, earnings are unimportant!!" She was right all the way until that first step off the cliff.
Gold and silver are going to suffer in the short term. Reasons:
1- Double top in silver;
2-Gold and eur/usd mimicking every tick;
3-Stocks fall =euro falls= gold shits the bed
Gold above $2000 by December 2012 though
i agree.. i cant say for sure the price of gold at any point but its going to see new highs many times in the coming years..
Agree. Gotta make as many people suffer and run around in fear as possible to keep that beta up, or SquidCo can't make those bonuses!
Long term... $2000 gold in Dec 2012 IMO is wildly conservative. Things are going to unwind a lot faster than most expect (historically speaking).
IMO by Dec 2012 gold will be priceless in USD terms.
Gold prices rise for very few of the traditional reasons that an investment might become more valuable, this is especailly true today. Unless you are talking about the nominal retraces we've already seen repeated in the last 30-60 days, I will have to disagree with much of your analysis.
1 - I think silver is much more likely to rise toward its traditional gold ratio because I think gold is very stable above $1350/oz, the JPM/HSBC silver ETF scandal/class action just getting started, and the relative scarcity of silver vs gold at this point makes silver more valuable not less. So, silver prices will likely go up not gold prices down.
2 - Not sure what you meant here...
3 - Your cause and effect is a bit off here, IMHO: The Euro falls (sovererign debt crisis, rioting) = retreat to USD = Stocks fall (overseas revenue worth less). So what? Temporary, reactionary retreat to the USD is of little concern to most gold investors when the Fed is monetizing the US debt out in the open! The effect of the USD price on physical gold is very limited under these conditions.
I see most of the drop in price recently as due to the sale of large paper short contracts (by the powers that be), with the express intention of driving the price down, and nothing more. This will never be able to achieve anything but these 3-5 day $50-$60/oz price retraces, which will require exponentially higher inputs as price approaches ~$1350/oz. The escalator will resume its upward movement as soon as they stop, case-in-point; this morning's movement on gold and silver. The Fed and the banks do not have enough enertia available to them to get any large downward movement out of the market. At the core of this upward pressure on gold price, is the plain truth that the world is on fire, and we aren't even trying to get ourselves out of the blaze yet. Until we start doing that, I will be looking at $1350 as the new $0/oz price for gold.
In the mean time, if you want to play Russian roulette by buying and selling physical gold or trading in the insolvent ETF market to make $50-$75/oz on these artificial dips, be my guest. Eventually, the music is going to stop and when it does I will still be holding all of the gold and silver I'm holding now, will you?
What does this mean for interest rates across the board. If I am servicing my customers fine now, but could become more efficient with some new technology, should I invest now? What sort of debt to income ratio should I be shooting for? Excluding and including hard assets like property, fermentation tanks, and intellectual property etc. After saying this I realize some of these assets are treated differently as some are a lot easier to liquidate. The tax environment could be looking pretty favorable for the investment.
Any insight is greatly appreciated. Thanks.
If the bernanke QE2 is an epic fail
as it looks to be, equities will crash.
Did anyone notice that on the 20th there will be 2 POMOs at about 16B total?
I'm thinking the market will want to rally straight into that day at least. But then again some people think selling will come in with the S&P at 1250 which should easily be reached today. The rest of this month will be interesting.
It would be amazing if we went from worrying about deflation to an inflationary environment without the intervening honey-moon period Bernanke was planning for -- looks like we will NOT get that six months of low interest rates that the Fed was shopping for. Instead, the market has already discounted the inevitable result, which is inflation and booming interest rates. Amazing how a million market participants are smarter than one asshole at the Fed.
plz provide a larger avatar, or a link to the original. ty.
Here you go, this should keep you busy http://www.google.com/images?q=giant+boobs&hl=en&client=firefox-a&hs=ukB...
Charts, aren't they used in some kind of voodoo called technical analysis? Throw that stuff out! None of this matters. Just keep buying the dips in the S&P and especially load up on Solar stocks. This is an order
All this market needs is ONE big participant to realize they want to be the first one out of the ponzi...when that happens there will be no out for anyone else...
This is simple minded analysis. It overlooks an elementary fact in an attempt to advance a bearish case...the yield spread between stocks and bonds.
On the dates selected:
Date Earnings Yield Ten Year Spread
4/23/71 5.58 6.01 -.43
5/27/86 7.37 7.73 -.36
11/27/92 5.04 6.93 -1.89
11/23/98 2.68 4.84 -2.16
9/2/03 3.96 4.61 -.65
8/2/05 3.83 4.34 -.51
11/1/10 7.04 2.66 4.38
It appears that stocks are the more undervalued asset class with a 438 basis point spread in their favor.
The type of analysis in this article is not worth the time it takes to read.
What sale price are you expecting in gold as you wait in the bushes, hoping to pounce on that low price? 1%, maybe 2-3%? People in other parts of the world who have huge savings wont let you have any.
Perhaps someone more knowledgeable in these matters can enlighten me,if The Bernank is just going to throw money at bonds to get the rates he needs at any point on the curve,why then, is he allowing the 10's and 30 year yields to rise?
Is it becuase he or the PD's are trying to create confusion or because things are getting out of his control?
Steep yield curve = very profitable carry trade for PD's, other banks and insurance companies.
If this is intentional, then "things" are MUCH worse than any of us think.
Smart money is fleeing bonds, they have to be invested somewhere. If they are fleeing bonds, they have no choice but to go to Equities, and that is where the Fed wants them to go. Not that complicated, except that it has no basis in fundamental valuations.
The ONLY 2 things people can do with their money is either put it in bonds or stocks?
To clarify, I am talking about instituional investors, pension funds and the like. They don't have a lot of choices, they can't go too heavy on precious metals for example, they have by-laws and limits in exposure. A good deal IS a choice between stocks and bonds and some degree of cash.
QE 2 a fail? LOL. How many market down days since QE2?
Um? Down? Oh wait, that would be in an actual market. The Fed will keep the market up for a while longer.
Bonds have started to rally in the past hour. What gives?
looks like shades of 1995 when bonds dropped 30% in value on the long end and then stocks continued their march higher..... shawn a. mesaros, pamria, llc