Good morning to you all. Stock markets were moving steadily along yesterday,
in continuation of a small relief rally after Alan Greenspan's comments
indicated interest rates would not immediately rise. However, the bond market
was not as impressed by Greenspan's comments, as many investors concluded two
things:
a) Any further and hoped for interest rate cuts were now unlikely; and
b) The next move by the Federal Reserve Board, though timing is uncertain,
would be to increase interest rates.
Some indication of this could be seen in the activity of the US 30 year
long-bond (long bond), which saw prices move down and interest rates (the
yield) move up over the last couple of days. However, the first real price
shock came yesterday afternoon at 2:00 when the US Treasury sold a fresh $15
Billion supply of two-year bonds and could not find enough buyers to sustain
current levels. Said one analyst:
"A poor two-year auction pulled the trigger on the selling Wednesday afternoon
and produced a veritable bloodbath. Before that, bonds were mired in a
razor-thin range."
This immediately caused the Dow and other indices to fall sharply. To
illustrate how sharp the sell-off was, we have provided you with the following
chart for your convenience. Please note the direction of the stock market
between 9:30-2:00 and the change in sentiment shortly after 2:00.
<http://quote.yahoo.com/q?s=^DJI&d=1d>http://quote.yahoo.com/q?s=^DJI&d=1d
THE CONNECTION BETWEEN THE BOND MARKET AND THE STOCK MARKET
Contrary to popular belief amongst many stock market investors, the treasury
bond market is in fact many times larger and, therefore, much more influential
over the general direction of markets. The reason is based on the fact
treasury bonds provide investors a fixed rate of return with no risk as they
are guaranteed by the US government. Thus, at some point, the higher yields
go, the more reasonable of an alternative they provide to stocks. Thus,
investors start pulling money of out equities in order to buy bonds.
In the alternative, the lower yields go, they provide a less attractive
alternative to stocks and investors, therefore, tend to purchase equities.
This lower interest rate environment has been the catalyst to stock market
gains over the last 12 months. In fact, interest rate cuts in late September
and early October were primarily responsible for the 33% gain in the S&P 500
between October and the end of Janaury.
As of yesterday's close the long bond was yielding 5.51%, surpassing a level
reached on August 21 of last year, just four days after the Russian government
effectively devalued the rouble. This was enough incentive for many to sell
stock holdings that had performed exceptionally in the last 6 months and
purchase the more secure bonds.
WHERE DO WE GO FROM HERE?
The AGORA Portfolio has been preaching a more conservative and defensive
approach to these markets for some time now. We believe that many large
investors and institutions have continued to ride the stock market gain BUT
only while holding their hands very close to the trigger. Yesterday, many of
those large investors flinched and secured some of their profits by investing
in the attractive return offered by bonds.
Going forward, we do not see any overnight switching between bonds and the
stock market but we do believe the markets are trading at such lofty levels
that investors will continue to slowly protect thier gains made to date. At
the very least, we see no reason for investors to continue pouring money into
the stock market and we can expect sideways movement for the foreseeable
future. In the meantime, expect the kind of volatility that can make trading
very profitable for The AGORA Portfolio.
<http://www.agoracorp.com/portfoliosuccess.htm>http://www.agoracorp.com/por
tfoliosuccess.htm
Have a great day.
Regards,
AGORA
agoracorp.com
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<http://www.agoracorp.com/portfoliosuccess.htm>http://www.agoracorp.com/por
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