Thursday, June 07, 2007

Dow Breaks Down on Interest Rates

Market Action:
We couldn’t resist writing another post this evening due to the massive sell off in the stock market on Thursday which drove the Dow down nearly 200 points. Some of the action in the stock market was a reflection of the action in the bond market where bonds were punished as the 10 year bond moved above 5% for the first time since last July. Going back to March, the 10 year Treasury yielded 4.5% and after Thursday’s jump now yields 5.13%.

Late in the afternoon, stocks were rallying from the Dow being down 180 points to the Dow being down less than 100 points. Then the bond king, Bill Gross of PIMCO, affirmed his position that the bond market was in a bearish phase and rates may go up to 6.5%. The stock market did not like this news and promptly sold off into the close going out at the lows of the day down nearly 200 points.

Other than that, not much happened on Thursday. The bond market seems to have taken the upper hand here and is now starting to dictate the stock market more. The complacency in the stock market has been aided and abetted by the low interest rates available in the market. All of the LBO’s (leveraged buyouts using borrowed money) have taken place in the idyllic interest rate environment with 10 year Treasuries under 5%, not any more. Now, they will be paying more for those deals.

Alas, higher interest rates will affect the mortgage market and should help to increase mortgage rates by a similar 60 basis points and possibly more if rates continue to move up in a bond sell off. Higher mortgage rates will squeeze even more buyers out of the housing market which will cause some additional headaches for those sellers/flippers out there. With the bond market large and in charge, stocks decided to take the opportunity to sell off.

In yesterday’s post, we mentioned a possible low being formed that might lead to another high before the whole thing fell apart. Today’s sell off confirms (again) that the market wants to go down and this was confirmed by price, breadth and volume. The volume on the NYSE was over 1.9 billion shares with breadth a whopping 280-3081 advances to declines. That’s the largest number of decliners in a day since May, 2004 when the Dow was trading right near 10K. This day was significantly bearish and brings the three day decline to over 400 points in the Dow.

Erick asked us to compare and contrast this market with earlier markets. We will make some comments about that in future posts. Thanks for the suggestion, good idea. Any more out there?

No comments: