Interest rates for the 10 year Treasury have increased from 2.38% to 3.39%, roughly 100BP, since the lows of October 8, 2010. The labor market has improved today based on jobless claims and the ISM’s PMI index improved to 56.6%. So does this mean that inflation is coming back and thus bonds will crash? Suppose both inflation and a full employment economy returns. Then the Fed would need to raise interest rates which would hurt the stock market. Also corporate profits are at 55 year record margins, which is an unsustainable statistical outlier. Further, the Schiller 10 year CAPE is 22.7 instead of 15, which implies stocks need to decline by 34% even if corporate profit margin remain unchanged.
Regarding using independent investment advice for investors to protect themselves from a crash, does it work? People are aware that an investment advisor who is not on the “sell side” of the securities industry is more independent and objective than someone on the “sell side”. But what about a large independent advisory firm? Can they be objective about making a bearish forecast even though that means losing clients who insist on shopping for a bullish advisor?
Yesterday Andrew Smithers said, using Tobin’s Q, U.S. equities are more than 70% overpriced.
In today’s Wall Street Journal an editorial said that China’s lending exceeded quota by 40%. “Local governments and banks have set up off-balance sheet vehicles to conceal loans and keep the spending boom going.”
The real economy in many ways has recovered since the Lehman crash of September, 2008. So does this mean today’s stock prices with SP500 at 1256 are justified and that the bear case is wrong?
Bond investing during holiday season has been affected by traders going on vacation in last two weeks of December. As a result of holidays some traders have sold off their inventory to protect their profits while they are on vacation.
David Rosenberg was on CNBC 12-21-2010. http://www.cnbc.com/id/40764859.
originally published December 7, 2010 by Don Martin. The Long Term Treasury ETF TLT declined 2.14% today because last night a “tax cut” (in reality an extension of a 9 year old tax law, and thus not a cut) will be approved by Congress and the President. There will also be an actual, but temporary, cut in payroll tax rates. One might be tempted to think this will magically cause employment to recover thus igniting inflation and killing the bond market. However, the big picture is that increasingly both China and the Euro zone are looking like a bubble that will (or already has) burst. Also, according to Barron’s two-thirds of the U.S. homes that need to go through the
Originally published Dec. 7, 2010
China – is it a Bubble?