From Briefing.com: Weekly Recap - Week ending 10-Dec-10
The yield on the 10-year Treasury note settled at 2.92% on Monday. When the stock market closed on Friday, the yield on the 10-year note rested (and we use that word loosely) at 3.32%. If one had been told before the week started that there would be a 40 basis point spike in the 10-year yield, it would have been understandable if they thought volatility would also spike and that the stock market would have a bad week.
As it turned out, volatility, measured by the VIX Index, dropped 2.2%, while the S&P 500 gained 1.3% this week. In fact, the S&P 500 broke out to a new 52-week high and is now sitting at its best level since September 2008.
Various theories abounded for the sudden reversal of fortune in the Treasury market, which hit the back end of the yield curve particularly hard. Some suggested it was a reflection of growing concerns about inflation. Others indicated it was a statement of concern about the U.S. budget deficit that was exacerbated this week by a tax compromise plan announced by President Obama (more on this in a bit).
Our sense of things is that the bond market is working its way through an adjustment phase, not so much because it is overly fearful at this time of rising inflation and a higher deficit, but because it understands a reflation of the U.S. economy is under way and that an extraction of the safe-haven/recession premium is in order.
If the "old normal" of double-dip recession fears supported yields closer to 2.50%, the "new normal" of economic recovery trends probably supports something closer to 3.00% to 3.50%.
It is easy of course to get caught in the echo chamber of negativity on this matter. To wit, things have been good in the bond market for so long that there is a magnetic resonance to claims that this is the initial popping of the bond bubble, or that it is a clear indication that bond vigilantes are starting to circle the wagons, or that it is a harbinger of scary inflation numbers coming our way.
There is a bit of panic selling going on we think as some holders are daunted by the thought of seeing nice-sized profits being quickly eroded in emotional sell offs. In any event, added volatility in the Treasury market is probably something we will have to get used to seeing in the months ahead.
The coming week should be another week of active trading in the Treasury market. Participants will return Monday armed with the latest inflation reading out of China. They will also contend with a bunch of important economic data released throughout the week in the U.S., including the PPI, CPI, Retail Sales, Industrial Production, and Housing Starts reports. Not to be outdone, there is an FOMC meeting on Tuesday that will certainly hold the market's utmost attention.
So, the week ahead will bring no rest for the weary.
Getting back to the week that was, it was underpinned in our estimation by a recovery theme. That is, there were several happenings that were consistent with the ongoing recovery from the great financial crisis.
The government sold its remaining stake in Citigroup (C); AIG (AIG) said it would pay back all amounts owed under its credit agreement with the Federal Reserve Bank of New York, which total approximately $20 bln; General Electric (GE) said it will increase its quarterly dividend by 17%; and volatility dropped sharply.
2011 GDP forecasts, meanwhile, were revised upward with economists factoring for the effects of a tax compromise plan the president reached with Republican leaders that included the following provisions:
--Every American family will keep their lower tax rates for the next two years
--A 2% employee payroll tax cut for workers next year
--The top rate of 15% for capital gains and dividends remains in place for another two years
--A maximum 35% estate tax with an exemption up to $5 mln
These provisions were agreed to by the president, contingent on the extension of some other tax cuts and a 13-month extension of unemployment benefits.
Democratic leaders have expressed their disappointment in the compromise plan, although it was generally accepted by the market that a bill would be passed before January 1 that would ensure the lower tax rates remain intact for all taxpayers. An inability to pass such a bill is a near-term risk then for the market, which has shown little fear of late.
To the latter point, the stock market's ability to move higher this week in the face of rising long-term rates is a telling sign that a belief in the recovery trade, which should lead to higher rates, was stronger than the fear of a rising deficit and/or uncontrollable inflation.
Fittingly, the financial sector (+3.8%), which benefits from a steepening yield curve, powered this week's advance and was followed by the telecom services (+2.0%), technology (+1.4%) and industrials (+1.3%) sectors.
Index Started Week Ended Week Change % Change YTD %
DJIA 11382.09 11410.32 28.23 0.2 9.4
Nasdaq 2591.46 2637.54 46.08 1.8 16.2
S&P 500 1224.71 1240.40 15.69 1.3 11.2
Russell 2000 756.42 776.83 20.41 2.7 24.2
09:15 am OmniVision target raised to $40 at Oppenheimer following checks in Asia: . Oppenheimer's recent channel checks in Asia leave us incrementally positive on OmniVision. It believes the co's main challenge today is keeping up with demand, which is running well ahead of capacity. While capacity expansion will be limited through early 2011, Opco believes revenue momentum will re-accelerate mid-2011 as incremental BSI-2 capacity is added. Design and supply chain activity around OmniVision's 8MP BSI-2 sensor appears to be intense, which is suggestive of a steep ramp in the summer of 2011. Tgt to $40 from $32.
09:14 am Intel tgt raised to $26 at Auriga: . Auriga is raising its INTC tgt to $26 from $22 partly because its sees less risk to numbers here than elsewhere (CY11 EPS estimate to just under consensus), and partly to recognize the multiple expansion that is now evident throughout the semiconductor space. Investors seem to be focused on a potential slowdown on the client PC side due to cannibalization from tablets, but firm's work suggests that this ignores the increased data center requirements that such relatively under-powered mobile devices will drive over the next several years. Firm's sense is that it's less than halfway through a multi-year server cycle in which INTC has a distinct advantage over its main competitor, AMD.
10:34AM GT Solar receives $47.3 mln order for its current generation SDR400 CVD reactors (SOLR) 8.88 -0.16 : Co announced that it has received a $47.3 mln order from South Korea-based polysilicon producer OCI Company, for its newest SDR400 CVD reactors. This is OCI's third order for GT Solar's SDR400 CVD reactors. The new systems will be installed as the first phase of OCI's new polysilicon capacity expansion plan, which OCI announced on December 8, 2010. The order will be included in GT Solar's backlog for its current Q3 FY11, which ends on January 1, 2011.
SunPower (SPWRA, SPWRB) announced that the company has received a $2.5 million investment from the Texas Enterprise Fund and a $900,000 grant from the City of Austin to expand operations with a major new corporate operations center in Austin, Tex. SunPower will create 450 jobs in the region over the next four years, beginning with 115 jobs created in 2011.
6:24AM JinkoSolar Holding Achieves 600 MW Integrated Capacity and 546 MW 2011 Supply Contract Backlog (JKS) 21.26 : Co announces it has increased its in-house annual solar cell and solar module production capacities to ~600 MW each, ahead of schedule in order to meet the demand for co's products. To date, the co has secured solar module supply contracts, including downpayments, totaling 546 MW for 2011, mainly from leading global solar companies.
3:39AM LDK Solar increases cash consideration for exchange offer (LDK) 10.60 : Co announces it has amended its previously announced offer to exchange up to $300 mln in aggregate principal amount of its currently outstanding 4.75% Convertible Senior Notes due 2013. |
