Warning Signals from the Markets

Last week’s market reaction is attributed to the lack of details in the Geithner proposal. The basic issue revolves around the valuation of the bad /toxic assets. A low price while taking the asset of the bank balance sheet will also cause further charges to be taken and may require further capital. Bloomberg quoted an expert saying that … “Through this whole process, it seems as if the government needs to take a course in marketing.” It is unclear if he will come out with the details.

Thursday’s movement of US stock prices will tell us a lot about it! Just when one thought that the supports were to give way the market rebounded and bulls took-off.

And there appears to be some tactical work behind this. As one writer put it –

I figured out why Geithner was so vague in his speech Tuesday... now each time the market is weak and about to fall off a cliff they can release another piece of "salvation" - this methodology could last for months. Why shoot your load all at once?? Genius! I tell you there must be an army of technical analysts employed somewhere in the bowels of government. Their timing is beyond impeccable; below S&P 800 and the panic would have begun.

Any major move by the market on the down side is likely to be manipulated with timed releases/leaks it appears. Well the market will turn out to be savvier. If it reads the emerging situation is not to its liking and decides to go down – it will! Experience tells me it can find its way if that is what is right in its perception. It will probably consolidate downwards instead of making a big move.

There was a feeling that the markets were stabilizing and credit in some measure was beginning to flow. Some liquidity it appeared had started flowing towards to the equity markets as players booked profit in treasuries - treasury yields improved. But last week’s market behavior probably indicates that some more turbulence is likely. This Bloomberg report brings out the point:

Ten-year note yields fell the most in two months as investors, disappointed at the lack of details in Treasury Secretary Timothy Geithner’s bank-bailout plan and doubtful a stimulus package will spur growth, sought the safety of government debt. Stocks tumbled. The government, meanwhile, sold a record $67 billion in notes and bonds.

The benchmark 10-year note’s yield dropped 10 basis points, or 0.10 percentage point, the most since the five days ended Dec. 19, to 2.89 percent, ... Yields on the two-year note fell three basis points, the most since the week ended Jan. 9, to 0.96 percent. Thirty-year bond yields slipped two basis points to 3.67 percent.

The 10-year note yield touched 2.04 percent, the lowest according to data going back to 1953, on Dec. 18, the same day the 30-year bond yield fell to a record 2.51 percent. The declines came two days after the Federal Reserve cut its target overnight rate to a range of zero to 0.25 percent and said it was considering buying “longer-term” Treasuries to lower consumer borrowing costs and stimulate the economy.

On Feb. 9, as the government readied the week’s auctions, the yield on the 10-year note reached 3.05 percent and the yield on the so-called long bond touched 3.76 percent. The yields were the highest since November.

The sale of 10-year notes on Feb. 11 drew a yield of 2.82 percent, while the yield at the 30-year bond auction on Feb. 12 was 3.54 percent. The sale of three-year notes on Feb. 10 drew a yield of 1.42 percent.

The Fed’s custodial holdings of Treasuries for foreign institutions including central banks rose 0.5 percent to a record $1.743 trillion, central bank data show. The holdings had slipped the week before to $1.735 trillion, the first decrease in 24 weeks.

Custodial holdings of agency securities dropped for the first time in two weeks, decreasing 0.3 percent to $817.9 billion.”

The liquidity moving to treasury securities and gold’s current behavior is definitely a warning signal.

Disclosure: No Positions.

Comments

[MarvinMBA:]

Anybody buying Treasuries longer than one year needs to have their head examined. Considering inflation any Treasuries are a losing proposition. I suppose nobody can figure out where to profitable place cash and it seems that the US Government with its bailout plans have the same trouble...all I can say is there is no free lunch for anybody including Uncle Sam and even he will have to pay up to get my money for longer than 30 days..MarvinMBA

Feb 16 04:56 PM

[kelm:]

Be very careful with the narrative that you hear in the press as to why bond prices are moving one way or another because most of it is nonsense.

We were told last week that bond prices rose (yields dropped) because Geithner's speech was badly received meaning that the crisis would last longer and hence depress economic growth. Well yes, but it also means that the government will have higher deficits,less revenue, more stimulus needed etc which will add to the already massive volume of debt we plan to unload on the market this year.

This was further capped by a well attended auction. Then Friday - lo and behold, rates are back up as the dealers who bought the paper Tues, We, and Thurs couldn't unload it to their clients at the rates they bought it at.

Best advice is to formulate your macro thesis and stick to it adjusting as news warrants but with a smoothing function on the news.

Too much supply is out there and the investors globally are starting to get concerned about the US fiscal position and the path we are on.

You can see my site for more details. I've published multiple posts over the last weeks analyzing this for my readers.

Feb 17 09:37 AM