Friday, February 10, 2006

Long Bond Returns

We need to correct something we said in yesterday’s post.  Clinton’s administration did promote the idea of pushing more 10 year bonds versus 30 year but do you remember the actual timing of the dismissal of the 30 year bond?  I thought you may need a refresher.  Back in 2001 there were many things going on not the least of which was 9-11.  During the months prior to that fateful day, the stock market had been losing ground and then that day generated a lot of economic upheaval as well as many other upheavals.  At that time there was serious consideration that a major recession would result from the fallout of 9-11.  And, in early November, the GDP was estimated for the third quarter and it had shrunk from the quarter before, quite an event considering what had been happening in the US economy for that past several years. But, what else was going on?

Yes, the stock market had been in a bit of a drop for the better part of the year.  The big news at that time was the Enron collapse.  Mr. Kenneth Lay had appealed to the government (and his friend Bush) to lend a hand.  The Bush administration didn’t think it could help Enron directly but one of the things it could do was distract the investor world to the bond removal.  This was supposed to bring stability to the economic conditions and interest rates in particular.  You may not have read the story or remember these two events being tied together in this fashion because no large media attention tied these two events together.  We do find it coincidental that the long bond is being reinstated just as the trial for the Enron players is starting.

To review the long bond auction, you may want to reach for the WSJ and read the “Return of Long Bond Hits All the High Notes” scheduled for Friday’s paper.  In the article it says that the auction went so well that the rate on the offering dropped 0.14% below the old bond.  And, it briefly fell below the rate of the fed funds overnight lending rate of 4.5% ending at a yield of about 4.511%, now that is what you call a flat yield curve.  

Okay, back to the stock market.  Thursday represented a negative bearish day even though the Dow itself managed to have a positive close.  The other indexes we follow, namely the SP500 and the NASDAQ Comp and 100, all fell, with the NASDAQ 100 falling about 1%.  The market opened strong following through from Wednesday’s strength but about an hour into the session started losing momentum.  The Dow managed to outperform the other indexes for the two trading days on Tuesday and Wednesday making the world think that it was off to the races again.  The problem is that the broader market didn’t have the same type of up move.  

The Dow put in a weaker intermediate closing high of 10,953 on February 1st than it did on January 11 at 11,043.  Thursday the Dow traded as high as 10,952 (I am not kidding, but this is the intraday high and the February 1st number is the closing figure) but it didn’t manage to close any where near that at 10,883.  This is after trading down to 10,737 late Tuesday.  Summary, along with similar numbers for the NASDAQ Comp:

Early January closing high        Dow 11,043      Comp  2331
February 1st closing high           Dow 10,953      Comp 2310  This failure is similar
Thursday’s trading high     Dow 10,952     Comp 2284  This failure is different

This last line is very telling about the market in general.  The Comp failed by 1.5% to match its February 1st close while the Dow almost matched it.  Thursday was very negative day.  The market has failed to follow through on Wednesday’s rally which should shake some confidence.

You might have seen the article on ORCL laying off 2,000 workers.  The article just said something about how GOOG and YHOO could hire that many people in a day so it wasn’t a big deal.  I think it’s a little arrogant to be waving off 2,000 jobs like it’s no big deal.  We call it whistling past the graveyard.

Friday may be a volatile day with the turn that we saw on Thursday.  Be careful out there and have a good weekend…

[We had another problem with the website last night so we are having to post this morning.]

Dow Industrials:  10,883.35  +24.73
RYVNX:  19.22
RYAIX:  22.29
TLT:  90.80
BEGBX:  13.08

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