Tuesday, February 10, 2009

Treasuring the Moment

I want to add a very quick note about the stock and bond markets. Everyone has been talking about how we've entered a bear market for Treasuries. I think this is starting to happen, but I don't buy it yet.
The yield on the 10yr note has risen more than 80 basis points in less than a month. (Yields go up when prices go down.)
This represents a big selloff, coming after a massive run that traces its days back to the early 1980s when Paul Volcker raised interests rates to slay the inflation dragon. During that time, yields fell from more than 15% to barely over 2%.
In my opinion, this is the most significant bull market in history. It provided enough liquidity to fuel two private-equity bubbles, a stock market bubble, a hedge fund bubble, a telecom bubble and a life-transforming housing bubble.
A bull market like this in Treasuries doesn't just meekly go away. It will come back. That's why I remain bearish on stocks. I think pretty soon, investors are going to look at the rising Treasury yields and remember how bad the economy is. They're going to realize that prices are falling in the economy... CPI is at -1%, the lowest sustained rates since the 1930s. That boosts the "real return" on Treasuries. Money will come back into Treasuries and leave stocks.
This week the government is selling an obscene amount of debt, more than $100bln. But the normal pattern after these auctions is for yields to fall. I have heard this from countless people on CNBC recently. Furthermore, I heard one commentator on CNBC say that every stock manager is buying heavily so he doesn't miss a rally and look like a fool. I also heard that the put/call ratio of stocks is now quite low, showing that pessimism is waning.
To me, this is rubbish. When sentiment is better, it's bearish because it means that all of them can potentially become sellers.
I have been bearish for a while and frustrated by the selloff that hasn't come yet. But, the market is still failing to do anything bullish so far. The S&P 500 remains stalled at its 50-day moving average. If it doesn't break out of this range soon, I think stocks have to move south.

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