Ed, all,
Hope I don't get in trouble with the copy right police, but here's a TSCM article that bears on the 30-year bond elimination discussion: Kinda mirrors KB's (and my) thoughts of yesterday.
The market--for now--is definitely on a "Don't-confuse-me-with-the-facts,-my-mind-is made-up," tack. How long it stays in that direction is anyone's guess. While it was oversold ST, and we are in a bounce back, I don't see how anyone (unless of course you are James Cramer) can say that the worst is over, all the bad news is priced in, and the market is going up from here. There's been money to be made ST on the long side, but I see absolutely no basis that just because the economy is awful now, it has to be better 6 months from now.
I believe it will be eventually, but just because bad economic indicators start leveling out does not mean that revenues and earnings are going to quickly return to growth that support still high PE's overall. And the feds are running out of dials to twist. I don't believe that folks have all that much patience for a continuing stream of bad news or lack of good news.
. Just a thought, but I wonder how much of the market "feel good" response of the past couple of days has to do with the Yankees incredible comebacks in the last two games. I am generally not a Yankee fan, having lived through way too many 2nd place finishes for my beloved White Sox in the late 50's (It was awful enduring the 2-1, 1-0 losses by Billy Pierce to Whitey Ford), but if ever a team, and a city NEEDED to win, this is it. And they are doing it (so far) in the most dramatic way imaginable. It couldn't be better if it was scripted.
As for spending, until it craps out, I'll probably keep plunking away at my 3 yo, 32 MEG laptop w/ Windows 95 for awhile longer. My major impetus for a new puter is the DVD drive for watching movies when I travel. How's that for priorities?
And for cars, sorry, the Porche Boxter is THE hot ride, IMO--although dagonnit--my Cherokee seems to be bullet proof at 160,000 miles, and for the stuff I do and haul, more practical. But I AM doing my bit for the economy. Flying across country the end of Nov. for a writer's conference in upstate NY, and just got off the phone to confirm my reservation for my timeshare in Cozumel in January. Diving with the fishes in those crystalline waters--catching the drift yet on my priorities?
Jim
.
Death of the Long Bond Brought Some Life to
Averages
By Aaron L. Task
Senior Writer
11/01/2001 06:30 PM EST
Depending on one's perspective, the Treasury Department's landmark decision
yesterday to eliminate the 30-year bond was either a masterstroke or an act of
desperation.
Certainly, few on Wall Street believe the official version of the story: That the
decision was made because government officials really believe huge budget
surpluses will return, obviating the need for the 30-year.
As my colleague Justin Lahart detailed, most market participants believe the
decision to eliminate the 30-year bond was made because multiple Federal
Reserve rate cuts had failed to lower long-term lending rates sufficiently enough to
reignite the economy.
But whatever the government's motives (and whatever you think of them), the
bottom line is that the gambit appears to have paid off, at least for now. Building on
yesterday's monstrous rally, the price of the 30-year Treasury bond rose 1 3/32
today, its yield falling to 4.81%. The benchmark 10-year Treasury couldn't sustain
its big early price gains, but still saw its yield dip to 4.23%.
Stocks also advanced today, with the Dow Jones Industrial Average up 2.1%,
the S&P 500 higher by 2.3% and the Nasdaq Composite up 3.3%. The move
came despite news the National Association of Purchasing Management's index
fell to its lowest level since February 1991.
One day does not a trend make, but the performance of equities today warrants an
examination of the link between the elimination of the 30-year bond and the stock
market's rally.
To Bill Fleckenstein, president of Fleckenstein Capital in Seattle, there is no link.
The development is "a nonevent" for equities because the earnings calculations
used in most valuation models are "wildly off," according to the famously bearish
money manager.
Certainly, as Fleckenstein noted, developments other than the elimination of the
30-year could have accounted for the market's rise -- including speculation of a
settlement between the Justice Department and market-cap heavyweight Microsoft
(MSFT:Nasdaq - news - commentary - research - analysis), which rose 6.4%.
Nevertheless, valuation models used by many Wall Street participants seek to
assess the "fair value" of equities relative to Treasury securities. Most incorporate
the 10-year Treasury note's yield rather than the 30-year. But given the 10-year has
rallied demonstrably the past two days, the decision to eliminate the 30-year has
directly affected the attractiveness of equities -- or, at least, the perception thereof.
"The huge rally [the 10-year] has experienced in the past couple of days has
certainly impacted valuation," according to Thomas Van Leuven, a strategist at J.P.
Morgan. "If the 10-year becomes the unrivaled long Treasury, there would be a
step-up in demand for it," resulting in still higher prices and yet lower yields.
That, in turn, would suggest equities are more attractive: Using a target of 4.50%
for the 10-year yield, J.P. Morgan has estimated 1100 as fair value for the S&P 500
for year-end 2002. But a 10-year yield of 4.25% brings the fair value for stocks to
1160, he said.
However, Van Leuven said the firm is not yet adjusting its target for the S&P 500.
"We're not moving away from 4.50%" as a target for the 10-year's yield, he said.
"We'll probably wait and see how it calms down a little bit."
Given that J.P. Morgan's market strategist Douglas Cliggott has become the poster
boy for prudent equity analysis (and issued another dour outlook on CNBC this
afternoon), it's probably not surprising the firm isn't jumping the gun on revising its
targets. Furthermore, many market participants are waiting to see whether the
decline in yields is sustainable, or merely a function of short-term gyrations due to
traders being caught wrong-footed by the Treasury's decision.
But "most people on the street who are using a discounted cash-flow model or
dividend discount models are going to be raising their fair value targets, to the
extent the elimination of the 30-year impacts the 10-year," according to Brett
Gallagher, who oversees management of $3.5 billion as head of U.S. equities at
Julius Baer Asset Management.
But Gallagher expects the positive implications for equities will be fleeting. First, he
believes lower interest rates are an indication of the market's expectations for
economic growth and inflation. Yet most market forecasters won't adjust their
expected growth rates when recalibrating fair value based on lower 10-year yields.
"I think their modes are going to give them an erroneous" reading, he said.
Second, as lower rates provide a stimulus to the economy -- mainly because of
mortgage refinancings -- a "self-correcting" process will occur, bringing rates back
up, the fund manager said.
Long term, then, Julius Baer hasn't changed its fair value assessment of 880 for the
S&P 500. But, short term, Gallagher had been getting more optimistic about
stocks; on Sept. 24, the firm reduced its cash from 15% to 5%, due to a view the
market had become technically oversold and that "traditional" fund managers would
be unable to stay on the sidelines.
Gallagher has since been rotating out of smaller, less-liquid names into bigger,
more-liquid names such as Citigroup (C:NYSE - news - commentary - research -
analysis), IBM (IBM:NYSE - news - commentary - research - analysis), J.P.
Morgan Chase (JPM:NYSE - news - commentary - research - analysis), Bank of
America (BAC:NYSE - news - commentary - research - analysis) and Chubb
(CB:NYSE - news - commentary - research - analysis).
"It's uncreative but I think the index is going to be tough to beat for the next month
or two," he said. |
