Update 1:05 p.m.:
After the Dow fell from +87 points very early down to -110, bullish traders spent the rest of the day talking the market back up. CNBC paraded out a number of “experts” to declare that Bullock’s comments (see earlier update) were overstated. CNBC even put Barney Frank on camera to assert that Bullock was too negative. That has to be a first, having Barney Frank on camera to help the market. I still contend the recent rallies, after any and all declines, have more to do with those high-frequency traders than anything else. Traders worked the Dow up to +25 with about 30 minutes in trading left, but the Dow did weaken toward the close to end the day at -31 points. Volume remained light again today.
The bond market performed very well in light of the equity comeback. The 2-year closed at .59%, the 5-year 1.68%, and the 10-year was unchanged at 2.99%. The 30-year bond loss was pared back to a mere 4/32s to yield 4.08%. Some of the late-day buying in bonds was likely due to indexed fund managers who had to extend to match the index for month-end purposes.
We’ll get the Chicago ISM and the revised University of Michigan consumer sentiment survey tomorrow. But the spotlight will belong to the release of 2nd quarter GDP. The consensus forecast is for a gain of 2.6%. But economists already have their excuses lined up if the number falls short. I’ve read several estimates from economists today, and they all say the same thing. If GDP comes in less than expected, that merely means that some growth in 2nd quarter will be shifted into the 3rd quarter. What is more likely to happen is that GDP will come in better than expected, only to be revised lower in the future. GDP is old news, but stock traders will try to use it to their advantage regardless of the number.
Update 10:05 a.m.:
The results of the Treasury's 7-year auction are out and the results were just okay. The bidding was adequate but considerably less enthusiastic than the 5-year note yesterday. This is no surprise given the yield declined by 10 basis points in less than 24 hours. The 2-year is .60%, the 5-year 1.69%, and the 10-year is down 4/32s to yield 3.00%. The bond market had little reaction to the auction results, but prices are back-pedaling due to the rebound in stock prices.
The Dow is now down only 55 points, and traders are touting the fact that the S&P fell near 1090 and rebounded from there. Traders are now attributing the more extreme weakness in stocks earlier to those Bullard comments. (see below) Volume is light.
Update 9:20 a.m.:
The Dow is now down 67 points but dropped as low as -110. There seems to be no definitive reason for this, but some comments from St. Louis Fed President Bullock might have had something to do with it. He said, "The U.S. is closer to a Japanese-style outcome today than at any time in recent history." He followed those comments by saying he didn't think that would happen, and the most likely outcome is a growing economy with moderate deflation. But, his first comment seemed to the one that stuck.
As stocks are recovering, the bond rally is losing momentum. The 2-year note is .60%, the 5-year 1.67%, and the 10-year is back to unchanged at 2.99%.
Update 8:40 a.m.:
It wasn't surprising to see stocks ease back off of the early +87 on the Dow (see below), but the Dow is now down 60 points - a full 157 points from the high. I'm at a loss to explain that big of a move. There is no news out there. I suspect there might be some sort of rumors lurking about though. European stocks are also turned down.
The short-end of the bond market continues to outperform the long-end, but the early losses in the long end are either gone are pared backed. The 2-year is .59%, the 5-year 1.66%, and the 10-year is now higher by 4/32s to yield 2.97%. The 30-year bond, down a point earlier, is now off by only 11/32s to yield 4.09%.
Update 7:35 a.m.:
The pre-opening enthusiasm among stock traders resulted in the Dow trading to +87 very quickly. But the market is struggling again today to find any support other than from the early traders. The Dow is now higher by 30 points. Volume is light, as it has been all week.
On the bond side we're seeing buyers in the short-end through the 5-year note, and sellers longer than that. This is mostly yield curve traders betting that the yield curve will steepen on rising long-term rates in a positive equity market environment. The 2-year is .61%, and the 5-year note is higher by 5/32s to yield 1.69%. The 10-year note is down 5/32s to yield 3.00%, but the 30-year bond is down sharply losing a full point to yield 4.12%.
Morning Comment:
After three very, very dull trading days, bulls will try again today to generate some excitement today. European stocks are providing the biggest boost as stocks are rallying there on the rising euro (1.308 vs. the dollar) and some positive confidence numbers. In early pre-opening trading Dow futures are higher by 50 points.
The report on Weekly Jobless Claims didn’t hurt or help. Claims were in line with expectations as 457k claims were filed vs. the expected 460k. The CNBC talking head actually said this was good news because the number didn’t go over 500k. That’s pure spin.
Bond prices are flat to slightly lower after yesterday’s surprising rally. The 2-year is .61%, the 5-year 1.72%, and the 10-year is lower by 3/32s to yield 3.00%. The Treasury’s hugely successful 5-year auction surprised the bond market yesterday, and the Treasury is back today with a new 7-year auction. Although the 5-year demand was much better than expected, that doesn’t necessarily mean that demand will transfer to the 7-year note. Dealers will be cautious heading into this auction.
RealtyTrac has another report on surging foreclosures this year. The rate seems to have peaked (albeit at horrendous levels) in most of the hardest hit areas like California, Florida, and Arizona, but foreclosures rates are spiking in areas like Utah that weren’t hit in the first wave. The report says it is no longer toxic mortgages or resets on adjustable loans causing foreclosures, the foreclosures now are almost strictly related to job losses. This is showing up in a big way in the surge in foreclosures on once-prime borrowers who held on for a while but have been forced to throw in the towel.
The article also mentions something I talked about a few weeks ago regarding prime jumbo loans. The foreclosure rates in this category have surged mostly on job losses but also due to strategic defaults. Those in the high end homes upside down by $200,000 or more are simply making a financial decision to walk away, and the numbers are growing. RealtyTrac says this is becoming more common among these financially “savvy” borrowers. Savvy? Really? How savvy were they if they bought a house that was 40% overvalued? People used to buy homes as places to live, but over the years homes became "investments." To this day most realtors talk about homes as good "investments." I suppose that buyers of homes a few years ago merely made a bad investment and some are merely opting out.
There are no other economic releases today. We’ll get 2nd quarter GDP tomorrow. I’ll be back with updates.
Dwight Johnston
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