We’ve got one more day of window-dressing in Q1 (but don’t expect much, judging by the market action today, we wonder if fund managers have fired all of their bullets).
Then starts Q2 and April, which should usher in all kinds of new worries.
April will be a key month
… no fooling
Last week’s bond auctions did not go well. It seems that Japan and China did
not show much interest. The lack of bids was no better underscored than in
the 7-year Treasury note auction where the median yield was 3.29% versus
3.05% a month earlier. April is a cruel month for the U.S. Treasury market,
with 10-year yields rising in each of the past 4 Aprils and in 6 of the past 7,
and by an average of 25 basis points. (As Alan Greenspan said on Bloomberg
News last week, higher yields are “the canary in the mine”.)
• That, in turn, could spook the equity market since another 25bps of upside
pressure could then generate a fund-flow spiral as was the case in the
summer of 2007 — 3.85% (where we are now) ostensibly is a trigger point for
selling of mortgage bonds. As rates rise, homeowners are less likely to pay
their mortgages early, which extends the life of the mortgage and that in turn
encourages mortgage investors to neutralize the duration of their portfolios by
selling T-bonds and notes. We have seen this happen before and while it will
likely provide a nice buying opportunity given the deflationary headwinds the
economy now faces, the prospect of a spasm in the Treasury market is worth
considering. Every equity market correction in the past — 1987, 1994, 1998,
2000, and 2007 — was preceded by what turned out to be a brief but
significant runup in yields. See Stock Rally at Mercy of Rising Rates on page
C1 of today’s WSJ). And, the more overvalued the equity market is, the more
the downside risks if bonds begin to provide greater yield competition in the
near-term. Jeffery Hirsch over at the Stock Trader’s Almanac is in today’s NYT
predicting a 20-30% correction ahead (see Stocks Soar, But Many Ask Why on
page B1) — he notes the modest number of stocks hitting new 52-week highs
with every new interim peak being reached by the overall market.
• The leading indicators are all pointing to a slowdown, and this could show up in
a critical data-release week in mid-April with retail sales on the 14th, industrial
production on the 15th, and housing starts, as well as consumer sentiment, on
the 16th. The broad money supply measures are contracting again as the Fed is
no longer boosting its balance sheet at a time when both the money multiplier
and money velocity are showing no signs of turning higher.
• Greece will be put to the test in April when €15 billion of bonds have to be
rolled over (through the end of May).
• The Fed ceases to buy mortgage securities on Wednesday and this is
happening at a time when mortgage rates have already climbed back above
5% and the housing market is showing signs of rolling over again. See Spike
in Treasury Yields Jolts Mortgages on page C2 of today’s WSJ. There is also
pressure from within the Fed (Plosser the latest) to soon begin to sell
securities outright. One thing that is very likely on its way again is another
50bps hike on the discount rate — has anyone noticed the TED spread
beginning to widen ahead of this? The banks, going forward, will not have
easy access to the window and will have to rely on each other for funding.
April 15 looms as a critical day from a geopolitical standpoint. It is the day that
the Treasury Department will issue its report concluding whether or not China is
a currency manipulator. If it is viewed as such then trade sanctions are likely to
ensue and very likely some bilateral tensions. This could be very good news for
the bullion market (as well as the Bloomberg News report today stating that gold
imports in India are surging right now — up six-fold from a year ago — as there
are an expected 1 million marriages planned for April and May).
• Speaking of geopolitical risks, President Obama has allowed U.S. relations with
Israel to deteriorate to such an extent, and is handling the Iran nuclear situation
with such a kid-gloves approach, that disturbing columns like this are now
popping up in newspapers like the NYT (Rift Exposes Larger Split In Views On
Mideast — page A4), the National Post (Iran Preparing to Build Two More Secret
Nuclear Sites in Mountains, Experts Say — page A8), and the WSJ (How the Next
Middle East War Could Start — page A23). Even the prospect is enough to
underpin the energy stocks, which are currently priced for $69/bbl on WTI.
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