A few days ago (before the super bailout was mentioned), I made an uncharacteristic comment about the future of the stock market. I stated that we were not at, but close to, a bottom.
While the fundamentals may still erode, I will give you 2 indicators that are surprising:
The first is the Yield Curve for the last 50 days. I’ll let it speak for itself:
That is a normally sloping yield curve. That is not at this time portending a recession like it was when I wrote this back in November 2006:
Imagine if investors caught a whiff of Lacker’s higher inflation, increased risk aversion, and China begins a rebalancing or reduction of US reserves? The result could be catastrophic to our debt-based economy. No longer would borrowing be cheap. No longer would funding be plentiful. No longer would assets be liquid.
This is precisely what happened. The “snap-back” I told about happened over the ensuing 18 months. I believe that pressure is abating.
I also wrote the following:
Our current housing prices are fueled entirely by easy, cheap credit, as is evidenced by our high ARM content, and astronomical house-price to income ratios. If a credit event does occur, we have the most to lose. However, all other unwinding scenarios depends on many other moving parts of our global economy to work in clockwork like precision. While the current slowdown is a manifestation of the bubble stretching under its own weight, it is likely that the added pressure of a credit event (and likely even the perfect unwinding as described) would pancake the entire housing and local retail economies that are so dependent on lending. While I would admit I still don’t believe the residential real estate bubble has yet popped, the true test of future direction will be in the credit markets over the next year, not in the for-sale housing market.
I feel a strong desire to state that once again, we are not too far away from the stock market being an attractive place to invest in. Not yet, but soon.
Housing? At least still 1 or 2 years out to being close to attractive. Almost everything is still overpriced.
The second interesting piece I bring today is news about the Treasury Prices auctions announcing that T-bill rates fell below Zero. Yes, you heard me right, Zero.
Here are some notable quotes:
Elsehwere, Treasury bill rates fell with one-month rates slipping below zero, prompted by an unrelenting migration into cash and low-risk assets amid turbulence in money markets.
Worries about the passage through Congress of the government’s proposed $700 billion bank bailout intensified safety bids for bills as well as longer-dated bonds, traders and analysts said.
“There’s a tremendous amount of anxiety whether this (bailout) bill will get passed,” said Thomas di Galoma, head of U.S. government bonds at Jefferies & Co. in New York.
I believe that at least portends a tradeable bounce coming up when the anxiety is resolved. That will happen whether it passes or not (I hope it doesn’t). However, there is a lot of cash in short-term treasuries now. That’s a significant development.
“There’s still a lot of money trying to find a home on the front end,” di Galoma said.
The thrust into T-bills sent one-month rates a touch below zero percent overnight and three-month rates below 0.50 percent.
The intense T-bill demand could crimp demand for longer-term Treasury paper, so the market will closely watch the Treasury’s auction of a record $34 billion of two-year notes later Wednesday, analysts and traders said.
The only question now is, how long before we hit the bottom. I know I won’t be able to call it when it happens, but things are much more attractively priced today than they were 6 months ago. Much more.
For example, I recently purchased GE sporting a 6% yield (that is, if they can maintain it).
On the flipside, many are calling for a return to the commodities bubble. I don’t see that happening. It’s a gutsy call to make, and I may be wrong, but I think this 6-year long commodities bull has been ridden hard and put up wet. If you want an alternate opinion, go visit Tim Iacono at The Mess That Greenspan Made blog.
And, as a parting gift, I have returned Housing Panic blog to my feed again after a respite. I highly suggest visiting it. Great outrage mixed with comedy. It’s gold, pure gold.
