Yo. Happy Friday People.
All summer we have been preaching that markets have paid no attention to fundamentals. We've been relentlessly relaying that ITS A TRADERS WORLD...technical trading strategies dominate...range bound...waiting for guidance...wait and see....day traders paradise. These are all phrases you are no doubt tired of hearing. Although we have adequately alerted you of speculative strategies and their implications over future rates....most of our time has been spent posing curious questions and exploring the expected outcomes....
This week the Treasury Department successfully auctioned off $75 billion 3s/10s/30s...raising about $14 billion in new cash. So the latest round of auctions have come and gone (dont worry there will be more). Considering many expected the market to force higher returns from the Treasury (higher interest rates)....these auctions did not go bad.
Has anyone noticed what the yield curve has been trying to tell us? Perhaps bond traders are telling stock traders that their bullish optimism is a bit overheated?
While stocks have relentlessly risen...
Treasury traders have chopped their way to profits...steepeners then flatteners then steepeners then flatteners then steepeners....timing strategies with Treasury auctions. Yet...even as stocks tick higher.....WE HAVE RETURNED TO STATUS QUO. Treasury traders are trying to tell stock traders that their green shoots arent so green just yet.
Actually...we dont think the market reallly ever believed the consumer would lead us from this recession. We dont think the market was pricing in recovery. We think the "worst case discount" has been recovered...
From October 08 to March 09 equity markets priced in the possibility of systematic failure and depression....since hitting March equity lows, economic data has implied that the "worst case" scenario has been avoided and a stabilization was indeed occurring. The previous month's price action was nothing more than a corrective rally. Previous equity market price action doesn't illustrate forward looking optimism...it illustrates a return to status quo.
NOW WHAT?
Yesterday we dared to discuss the possibility that juuuuuust maybe we were seeing a return of fundamentals in the marketplace. Now that status quo has been baked in and seemingly confirmed by a better than expected earnings season (cost cutters)....markets should begin to more closely examine the extent to which they have priced in a "correction" and consider whether or not companies will be able to generate stable revenues while the labor market is weak and consumers are attempting to recover lost wealth. We should start to see market participants looking ahead and attempting to place a present value on future cash flows. How will those cash flows be generated? Consumers?
Weak retail sales, continuing job losses, SLUGGISH INCOME GROWTH verbiage from the FOMC, falling consumer seniment...its becoming painfully obvious that the notion of a consumer led recovery isnt a reality...
If fundamentals imply markets haven't quite avoided a downward spiral of deflation...maybe stocks test March lows again. If the theme of stagnation sticks....maybe this "STATUS QUO" 980-1020 S&P range holds. (September and October are historically tough months for equities). Change is in the air...
My point.
Even if stocks dont move much lower...the massive amount of unknowns and uncertainties keeps demand for RISK AVERSE ASSETS high....thatll increase the effectiveness of the Fed's $500 billion MBS money money.
Onto this morning....
The FN 4.5 is rallying right along with the yield curve.
HEY LOOK AT THAT!!! A RETURN TO STATUS QUO.....muhuhahahahhaha PARNERTIA!!!! (thats my evil speculator laugh)
Although it took a little longer to get rate sheets...mortgage rates are lower this morning.
Colonial Bank has been taken into recievership by the FDIC. BBT will take over...
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