Summary
Few analysts expected a 5% handle on the 30-year Treasury bond -- perhaps at all but certainly not by last Friday. Nevertheless, that is what took place, and for that day at least, it did some noticeable damage to stock prices.
_____
Foreword
At the end of January, "Market Thoughts" replaced "Last Week in the Markets..." The successor publication will be very much like the former one, but it carries what I think is a more appropriate title.
_____
Interest Rates
NOTE: For people reading this missive who may not have had an opportunity to read
"The Potential Horror of Fixed-Income Total Return" (dated 3/31), it would be good to do so within the context of some of what follows.
* I've been vociferously bearish about longer-term, open-market interest rates. Therefore, I will exclude myself from the plethora of analysts who were surprised, even shocked, at the level reached by long-term Treasury obligations by the end of last week.
* Although yields at the longer end of the Treasury curve have backed down a bit since, the Treasury 4.50s of 2/15/2036 traded and closed above the 5% level last Friday. This was one of the three issues comprising the Treasury's February 2006 refunding operation, and it was auctioned at an average yield of 4.53%. Thus, to finish last Friday at 5.05% represented some serious price erosion since its February 15th settlement date.
* The 4.50s of 2/15/2016, the 10-year note the Treasury auctioned in February, have had a similar experience. They were issued at an average yield of 4.54% and ended last week at 4.98%. If you are an investor concerned about total return -- one of thousands of hedge funds, for instance -- the 51 days between 2/15 (payday for the Treasury auctions) and last Friday were a rough period. How rough? Here's how rough:
Treasury 4.500s Treasury 4.500s
of 02/15/2016 of 02/15/2036
---------------------- ----------------------
04/07 02/15 04/07 02/15
2006 2006 Return 2006 2006 Return
------- ------- ------ ------- ------- ------
Orig. Cost $996.81 $995.10
Princ. Value $963.44 -3.35% $914.84 -8.06%
Inc. Accrual 6.38 0.00 0.64% 6.38 0.00 0.64%
------- ------- ----- ------- ------- -----
Total $969.82 $996.81 -2.71% $921.22 $995.10 -7.42%
======= ======= ===== ======= ======= =====
* Losing a net of 7.4% of your money in 51 days on a "safe" Treasury bond is at least mildly ugly. Uglier yet if you employed a lot of leverage in owning it, as most hedge funds would have. And even the "modest" net 2.71% loss in the 10-year note was not an especially pleasant experience.
* The fact is, though, that the safe Treasury bond with a 30-year maturity isn't as safe as many people think, simply because these people do not fully understand bond-market mathematics. (In this regard, I again suggest a reading of the 3/31 missive referenced above, for those who may have missed it at the time.)
* Clearly, one of the problems facing the bond market recently has been the changed expectations regarding where the Federal Reserve is heading with additional increases in the target rate on federal funds (currently 4.75%). The language coming out of the FOMC's policy meeting of 3/28-29 left open the strong possibility of additional increases sooner than bullish analysts had hoped and had predicted would be the case. The table below shows some of these shifting expectations.
Federal Funds Futures
-----------------------------------------
04/10 03/31
Contract Yield Yield FOMC Meetings
-----------------------------------------
Apr. '06 4.78% 4.77% No Apr. Meeting
May '06 4.95% 4.92% May 10th
June '06 5.02% 4.98% June 28th-29th
July '06 5.14% 5.08% No July Meeting
Aug. '06 5.19% 5.12% August 8th
-----------------------------------------
* With a 4.75% funds rate in hand, and the stronger possibility of another 25 basis-point hike at the FOMC's May meeting, government bond dealers simply had to become more cautious about "cost-of-carry" considerations in their market-making activities. (Remember that all three issues auctioned by the Treasury in February carried coupons of 4.50%, a quarter-point below the current Federal Funds Rate.) In addition, borrowing costs also have been rising for the investors, primarily hedge funds, involved in so-called "carry trades," which are often highly leveraged in their composition.
* As it relates to the thrashing the longer end of the Treasury curve has taken, Greenspan got out of town just in time, as the following table indicates. Approximately 78% of this year's yield rise in the 10-year note came after Uncle Al left the Fed to pimp big speaking fees and multi-million-dollar book deals. In the case of the 30-year bond, about 82% of its 2006 yield increase came after Greenspan's exit.
-------------------------------------------------
TREASURY YIELD CURVE AS OF 04/07/06
-------------------------------------------------
90-Day 2-Yr. 5-Yr. 10-Yr. 30-Yr.
Date Bill* Note Note Note Bond
-------------------------------------------------
04/07/06 4.68% 4.90% 4.91% 4.98% 5.05%
02/03/06@ 4.46% 4.57% 4.48% 4.52% 4.63%
12/31/05 4.08% 4.40% 4.35% 4.39% 4.54%
03/31/05 2.78% 3.78% 4.17% 4.48% 4.75%
-------------------------------------------------
BASIS-POINT CHANGE TO 04/07/06 FROM:
-------------------------------------------------
02/03/06 22 33 43 46 42
12/31/05 60 50 56 59 51
03/31/05 190 112 74 50 30
-------------------------------------------------
YIELD-SPREAD DIFFERENTIALS
-------------------------------------------------
90D-> 02Y-> 05Y-> 10Y-> 90D->
02Y 05Y 10Y 30Y 30Y
---------------------------------
04/07/06 22 1 7 7 37
02/03/06 11 -9 4 11 17
12/31/05 32 -5 4 15 46
03/31/05 100 39 31 27 197
-------------------------------------------------
*Coupon-equivalent yield. @Friday closest
to Greenspan leaving Fed chairmanship.
-------------------------------------------------
* And speaking of Uncle Al, it was pretty much assumed that he wrote the FOMC's post-meeting statements. Reflect, therefore, on how strongly the Fed (Greenspan) expressed the view around the time of its first rate increase in June of 2004 that the rise in energy prices was a "transitory" phenomenon. To save people the trouble of looking, the price of a barrel of West Texas intermediate crude at that the time was under $40!
* In my opinion, the on-balance prognosis for long-term, open-market rates is not particularly good. The rise in commodity prices appears to have a ways yet to run, plus, I suspect that more and more people are realizing just how shabby the government's numbers are in accurately and honestly reflecting existing US inflation realities.
The Stock Market
* As everyone is probably aware, I put out an unequivocal sell recommendation on stocks the morning of Monday, March 20th. The fullness of additional time will make this either a prescient or a stupid thing to have done. Using the DJIA, S&P 500 and NASDAQ 100 as market proxies, here is the result so far (through yesterday's close):
Summary of Stock-Market Sale
Recommendation Made on 3/20/06
--------------------------------------
04/10 03/20
Close Value* Change
--------------------------------------
NASDAQ 100 1,719 1,687 1.9%
S&P 500 1,297 1,306 -0.7%
DJIA 11,141 11,275 -1.2%
--------------------------------------
*Level of respective measure
at time of recommendation.
--------------------------------------
* I'm not at all uncomfortable about either having issued the recommendation or where the market currently stands vis a vis when the recommendation was made. As I said at the time, I would not have done this unless I felt there was a decline of at least (emphasis on "at least") 5% to 10% in the works. In turn, this works out to ranges of 10,148 to 10,711 for the DJIA, of 1,175 to 1,241 for the S&P 500, and of 1,518 to 1,603 for the NDX.
* Last week showed a pattern similar to a few 2006 occasions for most of the seven measures in my stock-market tracking group, to wit: some new yearly highs but only ones of a marginal variety. This continues to suggest to me a general distribution pattern. If this is what it is, it surely is not one of the market's more constructive portents.
----------------------------------------------------------------
SELECTED STOCK-MARKET MEASURES
(GRA Seven-Measure "Tracking
Group," Listed by YTD Returns)
----------------------------------------------------------------
From
04/07 Week Year Most Most Recent
2006 Ended To Recent 2006 Top* Prior Top*
Close 04/07 Date Top Close/Date Close/Date
===== ===== ===== ====== ============ ============
Russ. 2000 756 -1.2% 12.3% -1.3% 766 04/05 765 03/31
Value Line (G) 446 -0.2% 8.1% -0.9% 450 04/05 447 03/31
NYSE Comp. 8271 0.5% 6.7% -1.2% 8369 04/05 8272 03/30
Wilsh. 5000 13139 -0.1% 5.0% -1.2% 13292 04/05 13205 03/29
NASDAQ 100 1723 1.1% 4.7% -2.0% 1758 01/11 1709 12/02
DJIA 11120 0.1% 3.8% -1.7% 11317 03/22 11280 03/17
S&P 500 1296 0.1% 3.8% -1.2% 1312 04/05 1307 03/17
----------------------------------------------------------------
Average +0.0% 6.3% -1.4%
Median 0.1% 5.0% -1.2%
----------------------------------------------------------------
*Measured using closing prices.
----------------------------------------------------------------
* And while I am at it, I want to reaffirm that I remain solidly in the secular bear camp. Which means I believe the bear market could have years yet to run. Yes, yes, I know -- measures like the Russell 2000 and the reconstituted NYSE Composite have recently hit all-time highs, and serious ones at that. However, I want to see something like the S&P 500 much closer to its 2000 high, and the DJIA at a new high. As of yesterday's close, matching 2000 closing highs for the DJIA and the S&P would have required gains of 5.2% and 17.8%, respectively. As for the NDX, it closed yesterday 2,986 points or more than 63% below its 2000 closing high!
From Today's "GRA Running Commentary
& Data" Section Regarding Gold and Politics
* Gold: With spot gold finally cracking the $600 level, my forecast of December has been fulfilled -- about six weeks late. Nevertheless, it was a brave call at the time, with bullion around $500 and my opining the possibility of a $600 handle by the end of February. It did make it into the $570s by the end of February, though.
* That spot bullion finally made it to the $600 number in no way ends or diminishes my enthusiasm for additional gains in coming months. I remain very constructive on gold into the foreseeable future.
* Politics: As the son of a legal Irish immigrant of the Ellis Island variety, I was outraged yesterday, listening to the moronic ranting from the likes of Hillary Clinton and Ted Kennedy. Blacks should have been outraged, too, listening to Kennedy liken what was going on yesterday to the civil rights movement of earlier times. It is nothing like it at all, and I suspect Dr. King was doing many revolutions in his grave. Moreover, Blacks in particular are being economically harmed by the Mexican government's out-and-out invasion of the United States.
* I wonder just how many Depublicans and Remocrats in Fantasyland on the Potomac have any idea of how infuriated the vast majority of US citizens are about the political prostitution now in evidence on the illegal alien matter? This situation not only will be a huge factor in November's elections, it very well may determine who is elected President in 2008. And if Republicans continue to follow Bush's misguided lead on this issue, it will not likely be a Republican President in 2008!
_____
|
