Update 1:15 p.m.:

Although stocks closed off their highs for the day, the market is definitely in the hands of the bulls.  The Dow closed the session higher by 1.44% and the NASDAQ was stronger still with a gain of almost 2%.  The earnings season is in full swing, so break out the party hats.

Bond yields moved higher at the time of the 10-year auction and remained there for the rest of the day.  The 2-year closed at 0.66%, the 5-year at 1.89% and the 10-year remained at 3.11% for the afternoon.  Tomorrow brings the 30-year bond.  After an anemic performance today, Treasuries should remain defensive going into that auction.

Tomorrow brings news on Mortgage Applications, Advanced Retail Sales for June (where a small loss is forecast following a big drop in May) and later on the minutes of the last FOMC meeting.  I don't see any of these having the sort of impact that stock earnings reports will.  Tomorrow should be interesting.

Update 10:24 a.m.:

The 10-year Treasury auction produced less-spirited bidding than we have been seeing.  The awarded yield was 3.119%, above the early expectation of 3.08%.  There seems to be some confusion about the results, however.  On one site, Bloomberg reports the amount awarded to the indirect and direct bidders at just 30.8%, well below the 50.5% from last month.  This left the street having to underwrite almost 70% of the notes.  In another report, Bloomberg lists the indirect/direct result much higher at 50.5%.  Since this is the exact total from last month, I assume they made an error and the results were on the weak side.  If the first numbers are true, the street ended up with more than they bargained for and the dealers are in a distribution mode this afternoon.  I will update this report as soon as the correct data are posted. 

Bloomberg is noting that the Treasury bond prices are headed for their fifth straight lower close.  This would mark the first time that has happened in eleven months.  Stocks on the other hand are set to post their sixth straight higher close.  Hmmm, I see a pattern here.  As we enter the new quarter, portfolio managers may be repositioning themselves out of a winning trade from last quarter (bonds) into a losing trade from last quarter (stocks and other risk assets).  Even though the "beats expectation" game is rather transparent, we might have to endure it for a while longer.  The Dow is now higher by 145 points, just off the highs for the day.

The 2-year is 0.66%, the 5-year is 1.90%, and the 10-year is 3.11%.  We may get a look at better yields over the next couple of days than I thought we might see.

Update 7:55 a.m.:

Stocks have been open for about an hour and a half and are trading near the highs of the day.  The Dow is higher by 135 points as of this writing.  One might have guessed that Alcoa would be leading the rally, as it "beat expectations" on the earning front.  Alcoa's results have been highlighted as a key reason for the market's feel good attitude today.  Yet Alcoa is up just a few cents.  Manufacturing firms and banks are the winners today.  The railroad firm, CSX, also "beat expectations" yesterday, but strangely the stock is down over 1% in today's trade.  I guess the news is nowhere near as much fun as the anticipation.   

Bond yields continue to whistle past the rally in stocks.  The 2-year remains at 0.65%, the 5-year is sticky at 1.86%, and the 10-year is 3.08%.  

An anecdotal coconfidence report showed a slide from last month.  Consumers are reported to remain worried about the job market as they look into the future.  Gold has rallied on the news about Moody's downgrading the debt of Portugal.  Crude Oil futures have bounced in today's trade, but this follows a selloff yesterday.

In a sad note, George Steinbrenner has died.  He turned 80 on July 4th (an apt birthday for a powerful force in the nation's pasttime).  Under his tutleage the Yankees won 7 of their 27 World Series crowns. 

Morning comment:

Stocks are staging a nice rally in Europe with U.S. stock index futures following suit.  Bloomberg has a story that cites as reasons for this: “Alcoa’s earnings beating estimates, BP Plc rallying, and Greece selling bills at a rate below the distress rate at which they have been borrowing from the European bailout fund.”  Talk about some strange bedfellows.  On the distaff side, Moody’s downgraded Portugal’s debt by two notches to A1.  Alcoa “beat estimates” on both the top and bottom line of revenues, and is hopeful that things will get better in the future.  The BP rally has to do with a story that the Abu Dhabi sovereign wealth fund is considering an investment in BP.  Why you would announce such a thing before actually buying the stock is not clear, as the announcement in itself has driven the price of the stock higher.  But we might get some good news today on the new cap that BP installed yesterday.  This doesn’t speak to all of the oil that has already belched into the Gulf.  The Greeks sold a six-month bill at 4.65%, below the posted rate of 5% being charged at the bailout window.  One analyst was quoted, “It’s a step in the right direction, but it’s too early to say if the situation has turned in the Eurozone". 

The U.S. Trade Deficit for May unexpectedly widened as we imported more than we exported.  But both imports and exports increased leading some to point to this as a sign that world trade is expanding. 

The bond market has been cautiously reacting to the equity bounce.  The 10-year note yields 3.08% to start the day, but this is just 16 basis points above the lows reached just a week ago.  Stocks are some 500 points higher over that period and will likely add to this gain today.  All in all, bonds are holding up remarkably well.  Not to mention, the Treasury is selling 21 billion 10-year notes at auction today.  The market may just be making room for that offering.  The current talk is for an auction award at the 3.08% level.  Other rates are a little higher as well, with the 2-year at 0.65% and the 5-year at 1.85% this morning. 

The 3-year auction from yesterday was awarded at a yield of 1.055%.  I gave the auction a B+ yesterday, but the higher equity move overnight has pushed the yield to 1.07% this morning. 

Jeff Smith