Monday, November 26, 2007

Will we ever hear the Fat Lady sing?

Today was another brutal day for those of you in the markets, if you are heavy into stocks waiting for a chance to get out with a bounce. A positive day if you only owned Treasuries. (None of us has enough: well except Noelle) Most people own some Treasuries, but not enough and as each day sees a decline in the stock market, we wish we had more.

One down two to go

The S&P 500 index turned negative as of today in terms of price for the year-to-date time-frame. The Dow Jones is less than 300 points from turning negative for the year and the NASDAQ is within 90 points of turning negative. Could the latter find new lows tomorrow? At some point in time, I would expect a bounce just because the sellers will run out of steam. When will that happen? Your guess is as good as mine is. We are in a momentum market now the momentum is negative and something has to turn the momentum.

Bonds Smoked

Up until today, all the action was in the short-end of the Treasury market but look at the results as of the close today. The 30-year T-Bond was up two and seventeen thirty-seconds, this is a huge move and one of the largest I have seen in a long time. Look at the yield on the rest of the curve. The 10-year is approaching 3.75%, which would be significant if we had a housing market.

2-Year 3.625 10/31/2009101 2.89 103/4

3-Year 4.5000 5/15/2010103-30 2.84 14 .

5-Year 3.875 10/31/2012102-31 3.21 28.

10-Year 4.250 11/15/2017103-11 3.84 1-10

30-Year 5.000 5/15/2037111-29 4.28 2-17

What if the Treasury doesn't expand the supply of 90-day T-Bills

As long as the bond market continues to rally as it has with a flight to quality, the equity market will continue to be volatile. At some point in time, the bond market will run out of gas like the stock market and there will be more pain. The short end of the yield curve will have the least amount of pain for investors, but what happens if the Treasury does not offer any more bills?

If you wanted to fund long-term obligations and you look at the yield above were would you want to sell bonds? One thing going on in the background that not many people are talking about is the declining Federal Budget deficit. Do not be surprised that sometime soon the Fed says they are only going to rollover the existing T-bills and not add to supply.

The demand will out strip supply and we could see the 90-day T-Bill below 3%. Keep in mind that momentum does run its course and this to will pass it will just take time. These market gyrations sure make it difficult to go Christmas shopping when your portfolio just went down again. Look at what you own if it was good when you bought and after review, it is still good then keep it you do not need to participate in a fire sale.

Dan Perkins

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