The next few weeks will see the stock market officially enter the strongest seasonal trading period. The market has risen 25 out of the last 30 years from mid-December to January 10.
If traders think there’s a greater than 80% chance of the market rallying over the next few weeks you can be sure to see strong buying on the back of it.
Ultimately the Santa rally can become self-fulfilling. And fund managers dressing up their books for the end of year reporting can also add to the fun.
Let’s be honest, everyone loves a rally.
The excitement created by the thought of easy profits can soon turn into a feeding frenzy. Especially in the smaller stocks which can trend hard when the buying pressure swells.
All I can say is enjoy the ride while it lasts… but keep your eyes firmly on the escape hatch. There are far too many reasons why this rally is hot air rather than the real thing.
Recently I’ve issued buy recommendations in my trading services on the back of a change in the technical picture.
I respect the Santa rally stats and am happy to go along with it, but I’ll be jumping ship at any signs of trouble.
So where could the trouble come from?
Easy, have you watched the US bond market lately?
If not, you should. US bonds have now sold off a full percentage point since November when Benny boy – that’s US Federal Reserve chairman Ben Bernanke – started buying bonds. In the bond market, that’s a huge move:
US 10 year notes
Source: Slipstream Trader
If you’re wondering why that’s such a big deal, you need to remember that as bond prices fall interest rates rise. That means the borrowing costs of the US government have risen 40% in the past few months from 2.5% to over 3.5%.
Amazingly, the mainstream media are trying to sell this as good news. They’re saying bond yields are rising because the economy is showing signs of improvement. So, investors are selling bonds and switching to riskier assets such as shares and commodities.
What does the Fed have to say about this? Not surprisingly, it has gone silent on the issue.
Bernanke wrote an article in the Washington Post a day or so after starting QE2. In it he said, “This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth.”
Six weeks later and long term interest rates have risen 40%. Good one Ben. If easier financial conditions promote growth, what will tighter financial conditions do?
Mortgage rates in the US are priced off the long bond (10 year Treasury bond) and have started to rise. This will add pressure to a sector of the economy that’s already lying on its back crying uncle. And expect foreclosures to begin rising again.
Bond investors stepped up the selling pressure after the farce of a compromise between the Democrats and Republicans in Congress. The deal extends tax breaks that will deny the government of $900 billion over two years.
While we’re in favour of tax cuts, they aren’t much good if the government doesn’t cut spending too.
And so far the federal government has shown its hand that it’s not serious about reining in spending. The political temptation to continue spending money they don’t have is too strong. They will need a train smash to wake up to the fact that they’re broke.
And the bond vigilantes may be the ones driving the train. They revolted after the announcement of the “compromise” (i.e. I’ll give you what you want if you give me what I want and we’ll borrow another $900 billion to pay for it!)
The recovery we’re seeing at the moment is tentative at best and a smoke screen at worst.
Government stimulus worldwide and money printing in the West has created the illusion of growth. Bernanke’s pumping up of the stock market with funny money is filtering through into the general economy.
He’s basically using the virtual economy to prod the real economy back to life. But the patient is still only wiggling his toes and a spike in interest rates won’t do him any favours.
A recent Reuters article stated ratings agency Moody’s has warned that it “could move a step closer to cutting the US Aaa rating if President Obama’s tax and unemployment package becomes law.”
We all know by now the US Government has no intention of paying back its debts. Not with today’s money anyway. The Fed is effectively printing enough money to cover the US deficit. This means that the Government is basically spending printed money. Who knows how this story ends but it’s not going to be pretty.
To show you the scale of the problem, the Fed is now the biggest holder of US Treasuries. See the chart below:
Top Holders of US Debt
Source: glibandsuperficial.blogspot.com
Will the Fed keep buying treasuries with printed money until they own them all? Well, of course not, I’m just making a point.
If you were China would you be happy about this situation? Or would you use this opportunity to offload some of your holdings before everyone realises the US Dollar is turning into toilet paper?
In the face of this the Stock market is continuing to trade higher. It’s now at the highest point of what I believe will turn out to be a bear market rally.
Some of the money coming out of the bonds must be going into stocks. But this doesn’t look like the usual “economic recovery” switch.
To me it looks more like investors saying, “I need to find a home for the cash and at least some companies have hard assets and stable franchises so my cash should survive whatever’s coming.”
So far the stock market has been supported by the super low bond interest rates on a valuation comparison basis. In other words, the low dividend yield on stocks has looked attractive compared to the even lower bond rates.
That means, as bond yields rise, the current dividend yield isn’t going to be as compelling for investors. And so share prices should fall.
If the bond market continues to sell off as aggressively as it has in the past few weeks we’re going to see the stock market react. You can bet on that.
And as for Europe, well it’s still a basket case. 5 year CDS (Credit Default Swaps) on the PIGS (Portugal, Italy, Greece, Spain) have started rising again after a few weeks of reprieve. This followed the ECB decision to continue its unlimited liquidity provision to the banking system:
5 year CDS for PIGS
Source: acting-man.com
Look, the European issues haven’t gone away. They’re simmering below the surface and will erupt at some point.
And another issue to keep your eye on is Municipal bonds in the States. They have gone into free-fall in the last few months:
NPI Nuveen Premium Income Municipal Fund
Source: globaleconomicanalysis.blogspot.com
Municipal bonds are debt issued by local authorities in the US, such as a city council to fund roads or other infrastructure.
A whole years’ worth of gains have been wiped out since the start of November.
The upcoming end of the Build America Bonds (BAB) program will add to their woes. But a realisation of the rising default risk and the lack of any insurers in the market with high enough credit ratings have investors running scared.
If a municipality goes into bankruptcy, others will follow and Muni’s will continue to get hammered.
Finally, don’t forget China. It’s continuing to work at engineering a soft landing for its overheating Economy. One misstep and that bubble could pop over their and our heads.
There are always risks present in any market, but as I look around I see a whole lot of cracks. The Central Bankers and Politicians are frantically trying to hold the whole thing together but it’s only a matter of time before the whole thing blows sky high.
By all means buy this Santa rally and party like it’s 1999, but just remember what happened to the NASDAQ in 2000.
Regards,
Murray Dawes
Editor, Slipstream Trader
{ 44 comments }
← Previous Comments
Fitch – Would you mind elaborating on that one? What are the dynamics behind RMBSs? And are we talking about the US ones, or those raised and packaged here in Australia? Thanks.
cb @ 32 – regarding their agenda. I found this post on the Ron Paul website about the CFR which is another top tier organisation. I think it accurately sums up the overall agenda of these psychopaths. I’ll post the other threads tomorrow.
http://www.dailypaul.com/node/35685
“As others have stated – the goal of the cfr — is to do away with the United States Constitution, and merge all of the governments of the world into one.
They promise — no war — peace forever — food for all — energy for all. The reality is that every generation of the world raises up her own dictators and tyrants. It is almost impossible to remove a wicked king or queen, save with the sheding of much blood. If cfr becomes the law of the land, and a dictator becomes their king — then we go back into slavery, torture and no personal freedoms. Horror beyond any movie.
One of their goals — as I interput their writings — is to do away with the right of people to worship God; they will take away your Bibles and Book of Mormons, and whatever else you consider as the Word of God.
I view the cfr agenda folks as satanic. Anyone who supports this organization, or as a member has sold their soul to satan — in degrees.
To show how they control the media — and the world — google “David Rockefeller 1991 Bilderberg” and see what he says; read his quotes. His bio says similar — but his speech there is more dramatic.
These people have no moral base. their speeches about morality and morals are just to fake out and manipulate the people — so they can stay in power and get more money — and power.
Because they have no moral base — they send our sons and daughters to fight for oil, when we have all of the free energy solutions already discovered — but kept back from the public so the cfr agenda folks rake in the dough. This is why they do stuff like 9-11 — and do not even lose sleep.
Before you call me a troll — I worked with the Intel community and related, for 30 years. Those on the inside know — but keep quiet for the safety of their lives. “
Yes, that is a good find, DC. Fits in with our discussion in Friday’s thread.
But, still, remember: “There is no bloody conspiracy!”
← Previous Comments
Comments on this entry are closed.