US FEDERAL DEBT YIELDS
Like most people we knew this day would come, maybe later in the year , but it was coming... It was not a question of if but when and today March 24th, 2010 the market started to balk at yet another massive treasury issue. The government's auction of $42 billion in 5-year notes went poorly, pressuring an already sagging Treasury market and driving yields higher and Thursday issue of the 7 year notes will show the same thing as today...
So the first conclusion is if the 5yr NOTES is MOVING UP , the SEVEN YEAR won't be far behind ALL the WAY to the 30 year...
The FED has announced the end of March for buying MBS... so in effect Quantitative easing is going to be seriously curtailed
SO FIRST TAKE AWAY: FED TIGHTENS CREDIT AND US LONG RATES WILL MOVE BEFORE THE FED MOVES ON RAISING RATES
CURRENCIES
↓EURO: We still believe that the Euro is going towards USD parity but first it will have to go through 1.20... We have seriously complained about the undue interest in Greece knowing too full well that this is the least of the European union's problems. Everybody will soon realize that no partner nation can leave the union and like all bad marriages, there are still of lot of noise, demonstrations etc. to come out of Portugal and the unemployed Spaniards... There will be at least another 12 months of pressure on the EURO
↓YEN: Japanese traders will go for the carry trade chasing US raising rates, so the YEN WILL FALL VS THE USD in 2010 but EXPECT this in the JUNE to SEPTEMBER PERIOD
↓CDN: We believe commodities are going to move sideways if not lower in the next two years so the Canadian dollar is going to retrace towards 90 cents...
↓AUD & NZ: WE think tightening in China is going to put Chinese commodity buyers and these currencies will be under pressure vs the greenback...
COMMODITIES
↓PRECIOUS METALS With all these rates and currencies gyrations , we have become extremely BEARISH on ADDING TO GOLD POSITIONS HERE. We think that a rate rises in US RATES ON the LONGER END will have traders leave GOLD and ESPECIALLY SILVER to look for rising yields in carry trades. GOLD IS going to be below 950 in the next TWO years
↓METALS: We believe CHINA will be more interested in securing MINING rights over taking delivery. So you can expect some companies that fail to deliver their earnings forecast to be subject to takeovers...
↔OIL and NG. We see Oil trading in a range of 68-82 for the next two years. NG at $4.00 is pretty much at the bottom range and the summer should see it rebound.
↑FOOD: We think that as a basket this is still the best place to invest.
INDICES
↑DJIA will defy pundits and still has 100-250 points to the upside UNLESS FED moves rates 100 BPS (VERY unlikely)
↓TSX: with some commodities about to seriously correct, AVOID
↓NIKKEI: With Carry trades out of the yen and lousy export picture the Nikkei may not be your favorite market for now
↓SHANGHAI: With the central bank tightening, this will a picker's market but the indices will retrace
In conclusion, From Oct 11 2007 when the S&P 500 hit 1576.09 to March 6th 2009 saw the S&P 500 low of 666. That was a 57.7% retracement from the 2007 highs. THE SECOND worse drop. By march 2010, helped with the largesse of Washington yet backed by the taxpaying public, the FED and its free money policies have largely concentrated powers into fewer hands. The market is now around 1167 and the party is pretty much over.
From a rising tide to save a quasi bankrupt banking system, we now have to contend with FED tightening and many bets out there are about to face the reality that NOT ALL countries (or banks) will survive. The US is leading the way with banking reform and the next few weeks will give us a good indication on the NEW pricing of RISK Hold and wait won't work in this market and if you don't keep a tight lid on erosion the rest of the year will have you fighting the tape at every bump in the road!
Good trading to you!
DCW
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