Last week we marveled at the contortions that (generally bearish) market commentators were twisting themselves into to explain the recent bond selloff. It’s a failure of QE! It’s everyone turning bearish on global sovereign debt all at the same time.
There’s a much-easier explanation though, which is exactly what GaveKal addresses (via Jeff Saut’s latest):
“The sell-off in government bond markets (U.S., Japan, and Germany) is becoming rather impressive. While government bonds are massively overvalued, the timing of recent disposals is nevertheless surprising given the unresolved troubles in Europe. Why are all government bonds selling off just at the time one would think risk appetites should be muted? The simplest explanation is that the believers in the double-dip are throwing in the towel as the numbers out of Northern Europe and the U.S. continue to point towards expansion. This may be amplified by the fact that we are coming into the year-end and as ‘long bond’ bets move from being winners to losers, fewer investors want to have the bet on as their books close on the year. The other explanation is that market participants are realising that the U.S. and Germany will continue to follow accommodative policies (e.g., Obama’s tax-cut extensions) until growth is seen to be massively booming . . . so with that in mind, why be long bonds?”
Jeff Saut adds more:
Plainly, the rise in interest rates, copper prices, and crude oil is suggestive of stronger economic strength than is currently envisioned. That view is reinforced by the purchasing managers’ report that anticipates factory sales will grow at 5.6% in 2011 with a concurrent ramp in capital investment of 15%. As often argued in these missives, the 2009 – 2010 corporate profits explosion has led to an inventory rebuild that is being followed by a capital investment cycle. Once companies start spending money on capital equipment (capex), hiring will increase with an ensuing “hop” in consumer consumption. That is the way the business cycle has historically worked, and I see no reason it will not play again. Indeed, despite the headlines, if you talk to temporary help agencies you find hiring, except for construction, is booming. This is being reflected in the JOLTS report, which shows job openings increased by 12% in October. Consumer sentiment is also improving, as are retail sales, punctuated by October’s $3.3 billion expansion in consumer credit. So I’ll say it again, “To the underinvested portfolio manager (PM) the current economic and stock market environments are a nightmare!” Not only do such PMs have performance risk, but bonus risk and ultimately job risk. Accordingly, my sense is the S&P 500 (SPX/1240.40) will probably rise to above 1250 this week and then consolidate before embarking on another leg higher.
Have you seen Dr. Copper? It is remarkable.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.