Wednesday, March 30, 2011

Dow nears a multi year high

Since Mar 16, markets have risen on most days. Today Dow gained 71 (bringing it within 40 of setting a multi year high), advancers over decliners almost 3-1 & NAZ went up 19. Banks finally had a good day (in what has been a sluggish month). But the Financial Index slipped from its highs with selling in the PM.

S&P 500 FINANCIALS INDEX

Value	221.69
Change	1.62 (0.7%)

The Alerian MLP Index rose 3 to 378+, 6 short of a new record. The graph below for AMJ (which tracks AMZ) shows Q1 has been another good qtr after 2 stellar years. The Dow Jones REIT Index rose 3 to 235, 6 short of setting a multi year high. Junk bond funds were flattish at lofty levels with yields around 8%. Treasuries rose, taking the yield on the 10 year Treasuries down to 3.44%, near where it's been for several months. Oil fell pocket change in the 104s while gold rose but has been near 1420 in the last week. .

JPMorgan Chase Capital XVI (AMJ)

Price at the pump rose to $3.59 yesterday. Rising prices are a hidden tax on the economy which will hurt all retail business.

	Regular	Mid	Premium	Diesel	85	**E85 MPG/BTU adjusted price
Current Avg.	$3.587	$3.726	$3.857	$3.960	$3.037	$3.997
Yesterday Avg.	$3.584	$3.728	$3.857	$3.960	$3.033	$3.991
Week Ago Avg.	$3.547	$3.688	$3.820	$3.934	$3.006	$3.956
Month Ago Avg.	$3.354	$3.460	$3.595	$3.699	$2.824	$3.717
Year Ago Avg.	$2.800	$2.973	$3.080	$2.941	$2.339	$3.079

Source: AAA

I came from a meeting with a junk fund manager & learned a lot about the market. The outlook is very favorable for junk bonds although the days of double digits yields are long gone. A key factor for junk bonds is the default rate which is presently around 1% (i.e. essentially at record lows) & low rates are expected to continue. During the recent recession, default rates were not high as problem loans were largely related to high yield mortgages. Higher interest rates on Treasuries are coming, but they may not have a large impact on junk bond funds yields (affected by other factors). Many funds yield around 8%, low by traditional standards. But past periods of low yields have lasted for many years, this period could also last for some time (especially with low default rates).

Dow has a similar story to MLPs. The chart below shows Dow is up almost 800 in Q1 after a spectacular rise from its lows 2 years earlier. With so much turmoil in the world, it's unclear how long this rally will last.