A Down Monday???

Tuesday’s Wall Street Journal is running an article on the Credit Markets section entitled “Interest Rates Keep Climbing; For How Long?”  This article scratches the surface for possible reasons for higher interest rates and it is recommended reading from the Wednesday Update.  We aren’t sure that they have the story 100% correct but the themes are important in recognizing what is going on in the world today as far as interest rates go.

One thing that is glossed over is the near term decision in Japan of its willingness to end the absurd interest rate situation in place there for the last decade or so, that being the 0% interest rates on the short end of the curve.  We mention this due to the recent unwinding of the US carry trade we have discussed in the past.

Briefly, the carry trade allows someone to borrow money at the short end of the curve in order to carry a longer dated and higher yielding asset out on the curve a ways.  In Normal yield curves, longer maturities have higher yields due to the uncertainty of the coupon payments.  As you know, recently the yield curve in the US has trended to an inversion, meaning rates on longer dated maturities yield Less than shorter dated maturities.  Typically, this has foreshadowed a recession due to people Not wanting to borrow short due to the higher rates and therefore not borrowing and spending leading to the recession.

We here at the Wednesday Update have become more and more convinced that the seeming invincibility of the stock market in the face of an inverted yield curve is based on the possibility of borrowing in Japan with those exceptionally low rates and investing in, say, the US markets.  We have No conclusive evidence to provide but if the Markets think this may be true, then any change in that status may be important.  This change is indicated in the article but the implications are not as vividly described as we have here.

I would welcome any comments on this subject in any form, in the comment section would be the best so all of our readers can get a chance to benefit from your comments or questions.  

Back to Monday’s market:  We had a down Monday, something I find very unusual normally but not anymore due to the change in the wind, the direction of the market.  There were supportive news items like the Blackberry settlement from last week and oil dropping nearly two dollars today but the market managed to dig down a bit today and the Dow fell below 11,000 again.  

There have been signs pointing to a weaker market over the past couple of months and now the prices have started to reflect them.  We don’t have the space tonight to describe all of those signs but you can review the archives of this blog for further information.  The biggest sign is the strength in the Dow not confirmed by the broader indexes.  The only index that has tried to stay with the Dow is the Russell 2000, an index that is now very frothy and ready to lead the decline.  This index is associated with the many small cap growth funds that have become so popular over the past couple of years, especially in those 401(k)’s.

We recommend that you heed these signs and be very careful out there…

Dow Industrials:  10,958.59  -63.00
RYVNX:   18.92
RYAIX:  22.15
TLT:  88.55
BEGBX:  13.09