PrudentBear.com Market Summary
by Lance Lewis
Bonds Get Busted
The unemployment rate rose again, and even more importantly and more meaningful, the news was sold. After all, it's old data and thus doesn't tell us a thing about tomorrow, which is what the market is interested in. But by selling the news, the market is making the statement that things are likely to get worse. The only real action of consequence today in stocks was that even after INTC's "good" news last night (as expected) the news was ignored, and the stock was sold. Elsewhere, where the news was not so good, as with SUNW's call last night and a revenue warning out of IDTI, bad news seemed to matter as the stocks were sold and in IDTI's case, fairly aggressively. Even more interesting, people seemed to be thinking for once and connecting IDTI's warning with stocks like BRCM, AMCC, and PMCS, which also supply CSCO with chips (IDTI's largest customer is CSCO.) So, the market "action" seemed to be a little more reality based than the "buy anything and everything that moves" market that we've watched over the last couple months. Of course, one day of thinking and fading good news doesn't exactly make a trend.
But, the big move of the day was in fixed income where treasuries were hammered in the long end once again (even after the bullish employment data.) The 5yr,10yr, and 30yr were all pounded to new lows for the move (taking out some pretty important weekly trendlines, for those who care about that sort of thing.) The yield on the 10yr soared to 5.14%. I said a few days ago that the bond market appeared to be setting up for an "accident," and this may be be the beginning of it (one could even argue that an "accident" has already occurred.) We'll see what next week holds. The last 3 or 4 weeks have been absolute killers in the bond market. Bond managers have given back their entire year in a matter of a few weeks. Can it happen in stocks? Sure it can. The big question now is does this break in the bond market spook the Fed yet? I think the answer is most definitely "yes." For the first time since 9/11 when the Fed began flooding the system with confetti, the Fed drained reserves from the banking system yesterday and again today. Now, maybe that was nothing, but we've also seen various Fed heads out over the last few days trying to talk the bonds up by reinforcing that the economy will be slow to recover (i.e.- don't sell off the bond market), or at least that's what they think is causing the bonds to break. The stock bulls look at the carnage in the bond market as bullish because they think it is forecasting a recovery in the economy. To me, the break in the bonds is bearish (especially since it comes on the heels of a weakening dollar) and has nothing to do with a strengthening economy. It's just another symptom of US "liquidation." Interest rates can rise and the economy weaken at the same time. Just ask Brazil or Argentina. The Fed only controls short-term rates, not long-term rates. The market controls the long end of the curve. To me, this is just another phase of the ongoing liquidation process in the US financial markets. Unfortunately, the Fed may finally be cornered and playing out the ultimate no-win scenario. All the confetti Uncle Al is printing up in order to levitate the stock market is killing the bond market (along with a whole host of other factors), and he can't turn around and try and bail out the bond market without killing stocks. Meanwhile, the economy is still showing very little (if any) signs of a recovery. Oh what a tangled web we weave... Next week's FOMC should be interesting. |
