As usual, some prudent market observations from Rosie.
A good friend, and long-time reader, was kind enough to pass along these thoughts yesterday. Basically, the stars are starting to align for something really big to happen.
First, the Shanghai index peaked in August 2009 and had a secondary top in December 2009 (global demand slowing?). Many emerging markets are all negative year to date.
Second, gold peaked in the first week of December 2009 (and now breaking down) while the U.S. dollar index (the DXY) is breaking higher (Greece has not been resolved).
Third, TIPs (ETF) peaked the first week of December 2009 (and just broke to a new four month low).
Fourth, commodity prices peaked in the first week of January and appear to be rolling over. Head-and-shoulders top from October 2009 peak?
Fifth, could we be in for a March peak in equities? The NYSE new high list peaked six trading days ago. Recall that a market correction followed in October of last year and January of 2010 following similar peak in new highs.
Sixth, despite signs of economic cooling in Q1 (around 2.5% growth and half the Q4 pace) and lower inflation expectations, the 10-year Treasury note yield is ratcheting up (in a destabilizing fashion) and devoid of any bearish economic data (for a range of technical/fund flow reasons as was the case in the summer of 2007 — we never said at the Grant’s conference in New York that it was going to be a straight line down). But in technical lingo, it does look as though the yield is breaking out from a triangle since the December 31, 2009 yield peak —go back to that period in December and January, 3.85% on the 10-year Treasury-note served at least three times to be major technical support — a break of that this time around would mean some serious near-term trouble (the nearby high closing level was 3.98% back on June 10, 2009).
Rates may be rising because:
- Of added supply concerns from Obamacare;
- Sovereign credit quality;
- Heightened fears over a looming trade spat with China (if the Treasury accuses China of being a ‘currency manipulator’ next month);
- Hedging related to the most recent huge wave of corporate bond issuance;
- Swap rates have also become unhinged (they traded at an unprecedented 8bp discount to 10-year Treasuries yesterday) ….
… but yields are NOT rising from inflation (in fact deflation signs are re-appearing again). Hence, real yields are on the rise ... not typically what an equity bull would like to see with real growth now softening. Rising real rates as real growth slows means it is time to get more defensive, not more cyclical (especially with small-cap stocks up nearly 10% year-to-date, doubling the performance of the large-caps. This will not be sustained as the global and domestic economies cool off through the balance of the year.)
Bottom line: Stronger U.S. dollar. Rising bond yields. Lower commodity prices. Slower growth. And the stock market is flirting at post-crisis highs. Bond yields are rising temporarily and this will very likely prove to be a good buying opportunity; however, over the near-term, higher yield activity may well persist and the question is how the equity market is going to handle this backup in market rates. Recall that the 10-year yield had a March to June 2007 spike of 90bps before the rate and credit collapse took hold in the back half of 2007! Could it be that history is rhyming again? The March-June period has been seasonally weak for the Treasury market in five of the past six years.
Add to all that is the further extra intrigue of the S&P 500 having just ‘celebrated’ the 10th anniversary of the first bubble peak reached in 2000. As painful as it is for the bulls to see, the equity market is still down 23.5 % from those March 2000 highs, not to mention still in the red by 25.4% from the record high posted in October 2007. The Nasdaq is still a Japanese-like 53% shy of its 2000 all-time high.
And lastly, there is no V-recovery anywhere, except in the Fed-prodded stock market.
Look at the consumption/housing subindex (see Chart 3) and tell us what sort of V-shaped recovery we have going on. The equity market needs a reality check in a major way — this is 75% of GDP we are talking about that is still flirting with record lows. No traction at all.