I wanted to update two posts that I have previously written and add a few other thoughts that seem relevant at the present time.
I posted an article about the timing of any moves up in U.S. and U.K. bond yields and wanted to update the original post, which can be read here.
I suggested a timescale of the fall of 2012 for yields to start rising in the U.K.. I still think that this is going to be somewhere near correct. There are however two changes to that article's hypothesis. These are:
1. I suggested that the poor growth figures would start to become evident in the summer of 2012. It is clear that the U.K. is in recession now. Today, growth for the first quarter 2012 was revised down to -0.3%. There have been a myriad of poor figures out of the U.K. in the last month. I would especially highlight that house prices seem to be falling (albeit very slowly). House prices are the bedrock of British wealth and if they start to fall in the major buying period between April and September, the outlook will become very bleak. However the response by the U.K. deputy prime minister Nick Clegg is to suggest that the U.K. is going to institute a British version of the Marshall Plan and have a house building and infrastructure building spree. There is absolutely no indication of the size of the program and it may yet be just a token effort to make it appear that the government is trying to help. If it is a meaningful program, it will need financing and this will be a problem for the U.K. debt market. This appears to me to be a negative for U.K. bonds. I originally suggested that the government response to falling GDP would be further cuts, which would support the market.
2. The B.O.E. has bought far more gilts (U.K. government bonds) than I had thought it would do. This aggressive stance is a bullish factor for the U.K. bond market and will help to support the price.
The outcome of these two changes seems to me to be neutral. One is bullish and the other bearish and I would suggest that autumn of this year will still be a good time to exit U.K. government bonds. If the 'Gexit' happens the spike lower in yields may well also provide a good exit point. I would expect yields on 10 year paper to rise from their present 1.8-2% yield to around 3.5-4%, between the autumns of 2012 and 2013.
Very little has changed. Congress is still deadlocked. The fiscal cliff approaches. If all of the Bush tax cuts are allowed to expire, I will be wrong and yields will not rise at all, but fall further. I do not expect that the tax cuts will be allowed to expire (except perhaps the payroll tax cuts) and the timing of the yield rise for the U.S will still be in spring 2013. Will the Fed buy up the debt to prop up spending by Congress? I doubt it. Yields will not rise quickly in the U.S., as it still has the ultimate safe haven status. In a world where there are too few safe assets, the rise will be slow. If rates are still around 1.7% for the 10-year in the spring of 2013, expect them to rise to 2.5-3% in the following year.
I wrote an article regarding the first quarter earnings results and their implications. All bullish investors should read it for a different perspective. As U.S. economic data continue to disappoint, the state of earnings seems to me to be crucial. The world economy is slowing and there is talk of a $100 billion fiscal stimulus in China. If this arrives (which I believe is very unlikely) this update will be less important. With 45% of the S&P500 earnings derived abroad it is easy to see why earnings growth is flattening out. However, if U.S. growth starts to suffer as well, earnings stand a chance of going negative. I would add that the data would have to deteriorate much further from here for me to expect this outcome. I presently think that the poor data is the unwind of poor seasonal adjustments and the give back from good weather in the winter. Real GDP growth seems to still be in the 1.5-2% area. I am watching the data closely though and the negative readings on a couple of the regional surveys is worrying. If the U.S. does head toward recession, I repeat my warning - QE will not stop the fall in U.S. stock indices.
1. 'Grexit' looks to me to be a coin toss, which I would not like to call. Its effect will be substantial on the markets, whichever way it goes. If they stay, markets will rally hard. If they exit, markets will fall hard. I don't see how you prepare beforehand for this and polls will most likely be very close right up to the elections.
2. If the relatively weak tax collections seen in May continue throughout the year, the debt ceiling will be hit before the presidential elections. I still expect the fiscal cliff to become a fiscal slope before 2012 is over.
3. As a U.K. observer with no axe to grind, I would suggest that Mitt Romney is not as strong a candidate as Barack Obama. I would think that the economy will have to be quite bad, running up to November, for Romney to be successful.
4. Second tier evidence in China is all pointing to very slow growth. Electricity usage, rail volumes and bank lending are all flat on last year's levels.
5. If you want to short, I still believe that the U.S. is the place to be. This goes against the perceived wisdom that the U.S. is the best place to be invested. So far I have been wrong with nearly all markets performing worse than the U.S. But the fat lady has not yet sung.
6. I have just cashed out my EUR/USD short at 1.2680, looking for a rebound and a better entry level. I haven't got it so far.
7. Gold's break from being a risk asset seems to have lasted two days in total. The yellow metal is now rising and falling with the S&P again. I have closed my long futures position and am waiting, in the hope of an entry around the $1450 level. I would not have believed it, if anyone had told me a year ago that I would have sold gold in the $1500s. The Fibonacci retracement levels of the move in gold from 2008 to 2011 are $1,444 (38.20), $1,306 (50) and $1,169 (61.8). I am starting to believe that we will see at least one of these levels before the next rise.
That's all for now.
Disclaimer - This article is not intended as investment advice. Before taking any action, please do your own research. Do not rely on any opinions or facts included in this article for decision making.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Long RWM, RIMM, USD/JPY, various U.K. corporate bonds.