Monday, November 15, 2010

Mixed markets while Treasury yields soar

Stocks were higher all day sold but off in the PM, as the rally was not convincing.  Dow ended up 9, decliners barely ahead of advancers & NAZ fell 4.  Bank stocks gave up most of their early gains & finished with a small advance for the Financial Index.


Value201.79One-Year Chart for S&P 500 FINANCIALS INDEX (S5FINL:IND)
Change  0.82  (0.4%)

The MLP index rose 2 to the 361s but the REIT index fell 2 to the 216s.  Junk bond funds fell on comments that junk bonds are overvalued (see below).  The plunge in Treasury bond prices is the big new story today.  The yield on the 10 year Treasury bond soared, I repeat soared, 16 basis points to 2.91%, or up more than 50 basis points in a month. Changes in bonds are expected to be mild, not today.

Treasury yields:

U.S. 3-month
U.S. 2-year
U.S. 10-year

Alerian MLP Index   ---   6 months

Dow Jones REIT Index   ---   YTD

10-Year Treasury Yield Index   ---   6 months

Oil was little changed, reversing an earlier gain of as much as 1.1%. Gold rose, rebounding from the biggest loss in 4 months, on bets that mounting sovereign debt problems will erode currencies & boost demand for the precious metal.

CLZ10.NYM...Crude Oil Dec 10...84.76 .....Down 0.12  (0.1%)

GCX10.CMX...Gold Nov 10.....1,364.20 ...Down 1.20  (0.1%)

$$$ Gold Super Cycle $$$  

Stocks are returning more than junk bonds after trailing them for a decade, as valuations have fallen to a record low compared with credit & investors are pulling more money than ever out of equity funds.  The S&P 500 Index rose 17% (including dividends) since Jun, compared with "only" a 10% gain for the Barclays Capital US Corp High Yield Index. The equity gauge is on pace for its biggest 6-month gain against the bond index since 1999. At the same time, the more than 120% rally in junk bonds (since 1998) has left them more expensive than ever versus stocks, based on earnings yields measuring annual profits as a percentage of price. Junk bond funds are hot but this comparison suggests there is a point at which hot can be overdone. However individuals are ignoring the advice, pulling $55B from stock mutual funds since the end of Jun after $11T was erased from US equity values between Oct 2007 & Mar 2009. Q3 withdrawals came as the S&P 500 rose 11%, the first time a 3-month advance failed to spur investments.  Stocks remain cheap compared with bonds even after the rally. Debt rated below Baa3 by Moody’s & BBB- by S&P pays an average yield of 7¼% compared with an earnings yield of 6.64% for the S&P 500, the smallest gap since the Barclays index began in 1991.  Goldman Sachs (GS) advised clients last month to begin raising the proportion of equity assets as GS lowered its rating on investment-grade corporate bonds to “neutral,” saying they were likely to return next to nothing while equities gain 14% over 12 months.  When junk bonds return nothing, that really means prices will fall around 8% which will be compensated for by interest. After 2 stellar years bringing junk bond yields down to only moderate levels, it will be very difficult for them to follow thru with a 3rd profitable year.

Stocks Beat Junk by Most Since 1999 Amid Fund Flight

General Motors IPO

Photo:  Bloomberg

GM's IPO & sales from 4 private equity-backed companies are leading the biggest week for IPOs since before the collapse of Lehman Brothers in Sep 2008.  10 companies plan to raise $12½B, the most since Visa's (V) $19.7B sale in Mar 2008, the largest IPO in US history. Its chart below shows the stock has done well thru the recession period.  GM, 61% owned by the Treasury, may sell over $10B of stock on Nov 17 to help repay its bailout.   GM will sell 365M shares, a 24 % stake, at $26-29 each & will also offer $3B of preferred shares that will become common stock.  The IPO, which would be the 3rd-largest in US history, comes 16 months after GM emerged from bankruptcy. The company reported Q3 net income of $2.16B last week, bringing the its earnings this year to $4.77B, topping the $4.46B profit by Toyota (TM).

GM's Offering Leads Biggest Week for U.S. IPOs Since Lehman

Visa   ---   3 years

Toyota   ---   3 years

Markets had a difficult time last week when they discovered that stocks can also head lower & the advance today went nowhere fast.  The success of the IPOs this week will be a good test to see if markets want to head higher.  The rapid rise in Treasury rates while the Federal Reserve is buying this debt suggests stock markets may have problems going forward.  Meanwhile MLPs continue their advance undistrubed.

Dow Jones Industrials   ---   6 months

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