As for the U.S. dollar, we have been bullish on the dollar since its November “lows” (basis the Dollar Index), often remarking that we don’t know if we are going to be bullish on the U.S. dollar for three months, or three years, but we do know that after being bearish on the dollar for six years, we no longer want to be bearish of it!
We would further note that the counter-intuitive strength of the dollar warns that the drivers of the foreign exchange market may be changing. On Treasury Bonds we are manifestly bearish (read: higher interest rates). Indeed, since the yield-yippy low of 3.28% on January 23rd, the 10-year benchmark T’note’s yield has risen into last week’s yield-yelp high of 3.81%. That yield spike was driven by the recent Treasury Bond auction, which at 1.82% was the worst bid-to-cover ratio in years.
Even more worrisome was the lack of foreign buyers, reflected by the 10.7% ratio of indirect bidders. The resulting chart action leaves us thinking the yield on the benchmark 10-year note is on its way to 4.5%, while the yield on the “long guy” (30-year T’bond) should travel above 5%. And that, ladies and gentlemen, is likely why the U.S. dollar strengthened last week.
As for individual stocks, we were pleased to see that the astute BlackRock organization filed on our Delta Petroleum (DPTR), acknowledging that it owns a large amount of shares. For the more timid types, it should be noted that DPTR has a convertible bond yielding 3.5% (terms should be checked before purchase).
We also like our investment position in Strong Buy-rated Schering Plough (SGP); except in this case we are using the 7.7%-yielding convertible preferred “B” shares. While this preferred is a relatively new one, we think the risk/reward metrics are similar to the last Schering Plough convertible preferred we owned, which provided us a total return of nearly 30% per annum over our two-year holding period. Like before, the common shares of SGP have recently been devastated because of the fallible “Enhance” study on Vytorin. Our doctor, as well as our analyst, suggests this study encompassed far too small a sample of participants and that Schering Plough’s Vytorin is still a good drug. As always, the terms of the convertible preferred should be checked before purchase.
The call for this week: We think the equity markets are involved in a downside retest of last January’s “lows.” Our notes suggest that six of 10 such retests “see” a slightly lower “low” combined with a selling volume dry-up. Consequently, we are treating the late-January “lows” as THE near-term “lows” until proven wrong . . .