Barack Obama: T-Bond Salesman-in-Chief
Yet the biggest and riskiest game may be the one President Obama is playing as he tries to finance massive government spending via the sale of Treasury securities. Today’s $35 billion auction of five-year notes came in at 2.31%, slightly lower than traders were expecting, but buyers were sitting on losses by the end of the day as the yield climbed to 2.4%. On Tuesday the Treasury sold $40 billion in two-year notes and tomorrow will try to sell another $26 billion in seven-year notes. If today’s auction is any indication, a growing proportion of buyers will be foreign central banks and other “indirect bidders.” Reports suggest that China wishes to reduce the maturity of its dollar portfolio, and the U.S. seems to be accommodating.
All this new debt is calling into question whether the U.S. can maintain its good-as-gold credit rating. Last Thursday S&P placed a “negative outlook” on the AAA rating of U.K. government debt. Market watchers suggest that the U.S. could soon find itself in the same position. We see no problem, at least for now, but clearly the Treasury will have to accept higher interest rates. Today the ten-year Treasury yield jumped above 3.7% and closed at 3.695%. A week ago this same yield was 3.202%, and as recently as December it came close to breaking below 2%. The Obama administration is boxed in; higher Treasury rates will force mortgage rates higher, cutting off any “green shoots” in the housing market and aggravating an already-deep recession. When the president told a C-SPAN interviewer a few days ago that the U.S. is “out of money now,” he was playing with fire.
The stock market benchmarks are carving out sideways-trending channels. The Dow is stuck between 8100 and 8600, while the S&P 500 is trading between 865 and 930. The Nasdaq and Russell 2000 are producing similar patterns. In percentage terms these are all fairly tight ranges, with the Dow appearing to be the least volatile benchmark and the Russell 2000 the most volatile. Breakouts from these ranges by any of the benchmarks will be a good clue about the direction of the next market leg.
While stocks move sideways, commodities are trending upward and the dollar is trending downward. Crude oil has been particularly strong, with the nearest contracts now trading above $60. Gold is marching higher and is far closer to its old high than oil is, but it will have to overcome significant resistance first. Grains are also showing strength; soybeans rallied to an eight-month high today as demand from China overwhelmed U.S. stockpiles. Commodity prices reflect a lack of confidence in paper money, mainly the dollar. Hence the resource uptrends and the dollar downtrend are really two sides of the same coin.
With the Fed keeping short-term rates close to zero and investors unwilling to buy longer-term Treasury debt, hard assets are attractive to investors around the globe. Yet higher inflation is the last thing U.S. consumers need right now. If they knew it was coming, we doubt they would be so confident.
Technology and Industrials traded places in our relative strength rankings this week, but otherwise there were no significant changes. Materials, Financials, and Consumer Discretionary are still the top-ranked sectors. The Utilities sector is still on the bottom with slightly negative momentum, while Health Care and Consumer Staples round out the bottom three. Energy and Materials are both trending upward, but these equity sectors are not performing nearly as well as their related commodities during the month of May. At one time investors viewed energy and mining stocks as leveraged proxies for crude oil, gold and other natural resources. This relationship seems to have broken down lately, possibly due to the availability of commodity-based ETFs that allow convenient direct access to those markets.
As with Sectors, our Style rankings show only minor shifts since last week. The Growth categories now look a little more attractive, not because of any improvement but because Value stocks lost a little momentum. Mid Cap Growth is still on top of the chart and Mega Cap is still on the bottom.
Strength in commodities and weakness in the U.S. Dollar combined to push Latin America and Canada into the top two spots in our Global Edge chart. Tensions surrounding North Korea’s nuclear activities led to a pullback in South Korea, which comprises about 11% of the MSCI Emerging Markets Index. The British Pound bounced back against the dollar, allowing the U.K to move up by a step in our rankings. China slipped to the middle of the pack while Japan and the U.S. are still on the bottom.
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
WOPR: Shall we play a game?
David Lightman: Lets play Global Thermonuclear War.
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