Friday July 13, 2012
Ten Year Yield
A bond rally is a demand, yes, an international chorus of investors demanding to be paid less for the privilege of letting the government hold one's money. I admit I had not anticipated a return to the June 1 lows in rates but here we are. As a result prices of many commodity based stocks also returned to those levels.
The fire sale prices were extended through Thursday of this week. As I write markets are mildly up. Note our admonition to watch crude oil which has remained strong in spite of a new high on the Dollar.
I have been reading Mark Steyn's After America the sequel to America Alone. In the foreword to After, Steyn makes the point that sure enough, Europe has collapsed, leaving America as the lone Strong western democracy, though the strength of Europe was problematic. He notes that China has shrewdly invested heavily in American debt. Once rates begin rising back to the long term norm of say even 6-7%, America will essentially be financing the cost of China's military. At those levels the sheer interest expense of our trillions of debt will crush our Federal Budget's ability to pay interest and entitlements. Britain is of course his example of decline. Steyn's point is that the trillions of dollars of Western Debt aimed at stimulating the economy has purchased nothing in terms of real infrastructure. California borrows to fund its pension requirements. When interest rates rise, China will come to collect. He notes that Ike wanting Britain to back down in the Suez Crisis of 1956, threatened to dump British debt. The potnetial for a fun on the pound meant Britain had to give in. Soon America will be in the same position with China, he who holds the debt calls the tune.
As investors demand to be paid 1.5% on ten year notes. GDXJ trades for half of its value just one year ago, now $18, then $36. This is incredibly irrational. This is the same lack of interest that prevailed for a couple of years around 2000 as gold went for fire sale prices while the public piled into dot.coms which of course were all eventually worthless. There is no such thing as a worthless bar of gold. The lack of interest in this blog accompanying the decline speaks volumes about the lack of enthusiasm to buy at fire sale prices.
XES has returned to its uptrend line trading at late 2009 prices. Considering the potential to continue the shale gas production this is a marvelous opportunity to play the energy uptrend.
After trading just above its low of 16.50 in mid March, SIL found buyers late yesterday.
Despite the uniformly negative horror stories about the stock market, it made its third higher low yesterday. So the demand continues for 1.5% ten year notes continues even as the stock market finds buyers from its June low. That sort of disparity and divergence is how a real rally begins.
The rush to the Dollar and low yielding bonds exceeds what we saw even in March, 2009. Some commodity firms are trading at late 2009 levels. The stock market is slowly moving up not down, finding buyers on each pullback. We still anticipate a rally in commodities. The stock market is not going to reward millions of investors for their Safe Harbor status in low yield bonds. Instead they must be dragged back into the stock market before a meaningful decline can begin.