Dow advances but fails to dent 11,000

Dow gained 46 but could not crack the important psychological level of 11K. Oils, banks & high yield sectors (such as MLPs) led the way higher. Advancers led decliners 5-2 & NAZ picked up 26. Banks had a very good day, the Financial Index is getting close to its intra day high of 120 reached a few weeks ago. Banks had been under performing the averages for 6 months, but in the last 6-7 weeks they have resumed a leadership role.

S&P 500 FINANCIALS INDEX

Value 218.90

Change 2.16

% Change 1.0%

Oil is hot again & the MLPs get to share in the joy. The Alerian MLP Index gained 5.02 to the 311s. Keeping this in perspective, 5 is a very big day for an index with a low beta. It's putting more distance between it & the important century line of 300, but it's also vulnerable. The yield on the index is below 7% & the spread vs the Treasury bond yield is under 300 basis points. The Dow Jones REIT Index gained 4.86 to the 203s, another 2010 high. Junk bond funds were little changed, it's easy to find funds yielding less than 9%. One way junk bond funds add to their investment income is with a leveraged account. They borrow, say $50M, at minimal short rates so they can reinvest in junk bonds yielding 9-10%. When everything is breaking right, that is a big plus but when rates (short or long) go up, it can get ugly. Speaking of high interest rates, the yield on the 10-year Treasury bonds is flirting with 4% (highest level in 18 months). Last Jun it was turned back & Treasury bonds learned to accept 3½% or so. Maybe not this time.


Alerian MLP Index --- YTD




Dow Jones REIT Index - YTD





With all the euphoria about a stronger economic recovery lifting all ships, gold did well but oil is the one that's flying. Oil is at a 17 month high with talk about 90 & even 100 oil. OK, talk is cheap, but the bulls are very happy. For the venturesome, MarketClub offers 10 trading lessons for free (see below):

CLK10.NYM

..Crude Oil May 10

..86.64

.. 1.77 ......(2.1%)

GCJ10.CMX

..Gold Apr 10

..1,131.00

.. 5.90 ......(0.5%)

Oil (ETF) --- 2 years

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With higher oil prices, can prices at the pump be far behind? Prices at the pump are at 18 month highs as we head into the important summer driving season. Higher pump prices are another threat any economic recovery will have to deal with.

	Regular	Mid	Premium	Diesel	85	**E85 MPG/BTU adjusted price
Current Avg.	$2.828	$3.003	$3.111	$2.986	$2.331	$3.068
Yesterday Avg.	$2.826	$3.001	$3.109	$2.977	$2.331	$3.067
Week Ago Avg.	$2.800	$2.973	$3.080	$2.941	$2.339	$3.079
Month Ago Avg.	$2.736	$2.905	$3.010	$2.891	$2.369	$3.118
Year Ago Avg.	$2.040	$2.166	$2.243	$2.268	$1.761	$2.318

Source: AAA



The Fri jobs report was less encouraging for me. Half the jobs created were either temp jobs at the census or (federal) gov jobs. However the data is scaring even bond traders, causing them to sell (on their worries about a stronger economy) & drive up interest rates. Markets are going to have to settle up with higher prices & accept higher interest rates or give in to the threat. Dow tried all day to crack thru 11K, but it couldn't. It was on a roll & after 90 minutes came close but couldn't make a dent in the ceiling. Maybe it's also worried about higher interest rates. But there appears to be no limits to demand for risky investments.

Dow Jones Industrials - YTD

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Markets rally on hopes for refinancing Greek debt

The Dow had a 100 point pop at midday & held that for the balance of the day. Dow rose 105, advancers over decliners 3-1 & NAZ was up an impressive 29. Banks keep slugging it out in the trenches, the Financial Index didn't vary far from break even (at its depressed levels).

S&P 500 FINANCIALS INDEX

Value 187.56

Change 0.41

% Change 0.2%

MLPs has a nice rebound after yesterday's decline, up 4 to the 280s. The REIT index was up 1½, still in the 168s. There was more talk today about a looming crisis in commercial real estate which would back up to problems for many banks. While junk bonds like to see rising stock markets, the funds were mixed today. Treasuries were weak after the Treasury auction (see below). The yield on the 10-year Treasury bond rose 4 basis points to 3.73%, taking it back into the high end of its range in recent weeks.


Alerian MLP Index --- YTD




Dow Jones REIT Index --- YTD




10-year Treasury Yield Index - YTD









Oil was up for a 4th day in a row on strong foreign demand. This rally has taken just over 75, still a magic level but not sure whether it is to be a ceiling or floor. Gold charged ahead trying to get back over 1100.

CLH10.NYM

..Crude Oil Mar 10

..75.26

.. 0.74 ......(1.0%)

GCG10.CMX

..Gold Feb 10

..1,093.60

.. 17.80 ......(1.7%)

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The 30-year Treasury bond was auctioned off at a yield of 4.72%, compared with an average forecast yield of 4.69%. The bid-to-cover ratio was 2.36X versus an average of 2.48X at the past 10 auctions. The auction was rate as "weak." Following the auction, the yield on the current bond rose 4 basis points to 4.68% after touching 4.71%, the highest level in a month. Indirect bidders, including foreign central banks, bought 28.5%, substantially below the 40.7% at the comparable auction last month. The average for the past 10 sales was 43.2%. Foreign investors need greater rewards to lock up money for a long term.

Treasuries Decline After $16 Billion Auction of 30-Year Bonds


Toyota (TM) bulls are trying to make a case for buying the stock. But today there were only a handful of takers, the stock rose 24¢ to $73.53. Toyota still faces tumult & trouble.

Toyota bulls say recall makes its stock a bargain - AP


Toyota --- YTD








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While the main focus today was on resolving the Greek debt problems, the fact that DC was closed should be considered an extra plus. Dow had a successful bounce off the 10K floor, but fundamental problems drag on.

Dow Jones Industrials --- YTD

Dow gains for another 2009 high

Markets closed higher in a very good week, following 2 off weeks. Dow was up 78, good enough for another 2009 high, advancers 25% ahead of decliners & NAZ gained 15. Dow was up over 370 this week. Banks led the way up as has been the case for much of the rally in 2009. But the Financial Index is still just below the high set last month.

S&P 500 FINANCIALS INDEX

Value 205.10

Change 1.65

% Change 0.8%

MLPs had a modest gain, but that was good enough to carry the Index to 255.89 (another 2009 high). REITs & junk bond funds also rose, but not dramatically.

Alerian MLP Index --- 1 month




Dow Jones REIT Index --- 1 month




The big news was the plunge in Treasuries. The yield on the 10-year Treasury bond shot up 13 basis points to 3.38%, an eye popping gain. This corresponded to a plunge (over $1 or $10 per $1000 bond) in its bond price. Selling in Treasuries with other maturities was similar. Ben Bernanke, head of the Federal Reserve, said the FED is ready to tighten monetary policy once the economic outlook improves. With signs that an economic recovery has begun, speculation swirls about how quickly they will start to unwind (sell) their positions in bonds. There are worries it may come sooner (early in 2010 vs prior thoughts that it would come later in the year). When they sell bonds, rates will rise sending a shudder in all investors.

Treasuries Fall, Head for Weekly Drop, on Bernanke Rate Outlook

................................................price...............decline

10-Year

3.625

08/15/2019

101-31+ / 3.39

-1-05½ / .138

10-Year Treasury Yield Index - 1 week





Oil was down pennies in the 71s & gold fell 9 to 1046. Gold was hurt but the stronger dollar today, especially against the Japanese ¥.


Markets had a very good week, following 2 sluggish ones. The increases were good enough for the Dow to eke out a new 2009 high. But NAZ, having an even better year, fell short of a new yearly record close. Next week many more earnings reports are coming.

Dow Jones Industrials --- 1 month




NASDAQ --- 1 month

MLPs soar to another 2009 high

Markets are digesting recent gains with little change today. Dow fell 22, advancers barely ahead of decliners & NAZ is off 9. But banks are having a good day:

S&P 500 FINANCIALS INDEX

Value 169.20

Change 1.75

% Change 1.0%

MLPs are trading as if the the sky is the limit. The Alerian MLP Index gained 3+ pushing the magic 250 level, yet another 2009 high. In just the last 2months, the index is up almost 20%, probably the best run in its history. This is distribution time, some may be buying for distributions going out in Aug. Meanwhile, REITs are up only fractionally while junk bond funds are mixed. Treasuries sold off ahead of the 4 auctions this week. The yield on the 10 year Treasury bond rose 7 basis points to 3.74% & looks to be heading back to 4% reached last month. Oil is little changed today.

Alerian MLP index --- 3 months




10-Year Treasury Yield Index - 3 months





Analysts have become more bullish on earnings estimates, last month more raised earnings estimates than lowered estimates. Of the 204 companies in the S&P 500 reporting earnings for Q2, 75% beat estimates. While these signs are bullish, some point out that the best earnings are reported early, ones with problems tend to be reported later in the earnings season. Also, beating estimates refers to beating already lowered estimates. Higher earnings have more to do with cost cutting than higher revenues, another disturbing trend. But for the time being, optimism sounds good.

•Surging Earnings Estimates Signal 26% Advance for Shareholders of S&P 500


Treasuries are the cheapest they've been in 15 years based on the "real" yield. This yield is defined as the difference between rates on gov securities & inflation. This translates for the 10-year notes to 5.10% today, compared with an average rate of 2.74% over the past 20 years. This gap is used to explain demand for Treasuries after they have had the greatest drop in price (& corresponding rise in yields) in more than 30 years. Demand has been great especially from foreigners which is why Tim Geithner is reassuring Chinese today that the US will reduce deficits going forward. However, this week the Treasury is auctioning off a record $115B in debt.

•Real Yields Highest Since 1994 as Treasury Sells Record $115 Billion Bonds


Stocks are having another stellar month as the Dow crashed thru the ceiling, making 9K its new floor. Buyers are forgetting that the recession drones on. Among other problems, lower tax revenues combined with massive gov spending are forcing record levels of borrowings.

Dow Jones Industrials --- 3 months

Risk is welcome

Dow finally is in gain territory for 2009, after weeks of struggle (while S&P 500 is up over 4% YTD). Following one of the greatest 3 month rallies in history, markets are looking over the valley, anticipating gains in the post recession recovery. This brought an enthusiasm to accept risk in pursuit of more profits, best evidenced in the high yield sector.

Below are charts showing how prominent high yield groups & the Treasury bond yields have fared in the last year. The high yield group sold off sharply in the post Lehman period as frightened investors pursued safety at any cost. For example, Treasury bonds had an enormous rally slashing their yield from above 4% to almost 2% by late last year. The high yield sector plunged while treasury securities soared.

However, during the last 3 months when stocks, & especially high yield securities recovered losses, Treasuries have plunged (despite large purchases by the Federal Reserve) bringing their yields back to near where they were before the market collapse. On the margin, money flowed from the safety of Treasuries to risky high yield investments.

Enthusiasm to accept added risk for high current income may be overextended. The recovery is not beginning quickly. As much as I like them, a very rough period lies ahead for these securities. The tepid performance of the REITs in the last couple of months reflects my views. Vacancy rates on rental leases are expected to rise. Substantially higher junk bond default rates are coming. However, MLPs are harder to figure out because they really don't report how well they are covering distributions. Distribution cuts have been limited so far. Last week, more offerings of units (including the premier Kinder Morgan, KMP) were sold to raise needed capital. Tough times lie ahead for these securities which have the potential to arrive as a rude shock to investors.


Alerian MLP Index --- 1 year




Dow Jones REIT Index --- 1 year




Barclays Capital High Yld Bond - 1 year




10-Year Treasury Yield Index - 1 year

Dow fails again to end higher for the year

Late day selling hurt again. Dow tried & tried but couldn't hold onto its gains. At the close Dow was up only 32, 9 short of taking it into the black for 2009, advancers over decliners 2-1 & NAZ was up 9.


Banks were also hurt by the late day sell-off, the index continues to slug it out in the 160+ sideways zone:

S&P 500 FINANCIALS INDEX

Value 166.39

Change 1.47

% Change 0.9%

The MLP Index rebounded ½ in the 228s (shown in the Yahoo widget on the right), but many companies were up fractions (also shown in the widget on the right). The REIT index fell 3, junk bond funds continue their slow climb & the VIX fell 1 to low 27s (another 2009 low).


The $11B sale of 30-year Treasury bonds drew the highest yield in almost 2 years, luring investors concerned about excessive gov spending. Yields fell as indirect bidders bought the biggest percentage of long bonds at auction since 2006. Ten-year note yields fell after earlier touching 4% (the first time since Oct). The 30-year bond yield fell six basis points to 4.70% after touching 4.84%, the highest since October 2007. The bonds were sold at a yield of 4.72%, the highest since August 2007 & below the 4.80% forecast. The prior sale of 30-year bonds drew a yield of 4.288% on May 7 (showing how far interest have risen in recent weeks). Indirect bidders bought 49% of the bonds, up from 33% in May. However, they bought 65.4% at the Feb 2006 sale, when the Treasury brought back the bond after a five-year hiatus. The bid-to-cover ratio was 2.68X, higher than 2.14X last month. It has averaged 2.21X at the past 10 sales. Overall, this auction was evaluated as "going well." There will be no auctions next week, but many more will follow.

•Treasuries Climb After 30-Year Bonds Yield Most at U.S. Auction Since 2007


The 10 year note yield rallied sharply, taking the yield down to 3.80% at auction time. In the PM it fell back bringing the yield back up to 3.86%, down 7 basis points for the day:

10-Year Treasury Yield Index -- 2 weeks




Meanwhile oil continues to rise, nearing 73. This rise is troubling, especially with the large overhang of supply sitting in tankers waiting to be sold. That alone should limit price advances.

CLN09.NYM

..Crude Oil Jul 09

..72.73

.. 1.40 ......(2.0%)

Watching those congressional clowns grilling Ken Lewis of Bank of America (BAC) showed how they operate as Mon morning quarterbacks. These are the same guys who who went to conventions of BOTH parties 2 weeks before the Sep meltdown without uttering one word about the sorry state of the economy, let alone the financials. Now they're brilliant after approving record deficits (which they didn't have time to read) & find Ken Lewis an easy guy to beat up on. They show how bad they are when their questions take up 80% of the time allotted for the question period! For what it's worth, BAC, a Dow stock, was up 99¢.

All the Dow needs is 6 more to go positive for the year, so close but so far away:

Dow Jones Industrials --- YTD

Markets seesawed

Stocks hovered near the break even line, awaiting news on Mon about how the bankruptcy of GM will play out. There was buying at the close giving the Dow a gain of 96, advancers over decliners 2-1 & NAZ was up 22. Banks as leaders also were higher at the close.

S&P 500 FINANCIALS INDEX

Value 164.44

Change 2.77

% Change 1.7%

This has been a stellar week for MLPs, ending with a gain for the index of 4 to the 226s today:

Alerian MLP Index --- 1 week




REITs & junk bonds were mixed to higher. Oil keeps moving up to new interim highs.

CLN09.NYM

..Crude Oil Jul 09

..66.38

.. 1.30 ......(2.0%)

Treasury bond yields tumbled 20 basis points, down to 3.47%, pretty much wiping out the gains in the yield earlier in the week as fears about supply problems eased. However the yield still remains at high levels which must be troubling to the Federal Reserve.

Treasuries Advance for a Second Day as Supply Concern Eases May 29

10-Year Treasury Yield Index - 1 month





GM's union members (74%) agreed to the their revised contract & the bondholders are urged to agree to their new agreement which will give them 25% of the new company. GM stock is 80¢ (up a few pennies on the strong close).

• GM bondholders urged to accept new debt deal- Reuters
• UAW Members Approve GM Concessions- AP
  

After 2 good months, stocks traded sideways in May. Dow was range bound between 8.2-8.6K. MLPs had a great month:

Apr 30....210
May 29...226

Even the laggard Kinder Morgan stock (KMR) was up 1.91 to 45 going into the close (good enough for a 10% gain in May).

Dow Jones Industrials - 1 month

Markets drift aimlessly

While everybody awaits the GM bankruptcy announcement on Mon, there's not much to do today. Dow is down 23, advancers ahead of decliners 3-2 & NAZ is fell 6. Banks are drifting lower.


S&P 500 FINANCIALS INDEX

Value 160.03

Change -1.84

% Change -1.0%

MLPs are benefiting from higher oil prices & growing acceptance by investors for high yield securities, up 2½ to 225 (another high in 2009). REITs are even today while junk bonds funds are up again. The pursuit of high of high yields is a dramatic turnaround from a few months ago when these securities were being thrown out the window. Junk bond funds are generally at their highest levels since the beginning of the plunge in early Oct.

Alerian MLP Index --- YTD




Oil continues to rocket ahead.

CLN09.NYM

...Crude Oil Jul 09

...66.11

... 1.03 .......(1.6%)

Consumer confidence improved in May reaching its highest level since Sep. Improved optimism may come from expectations about good coming from the stimulus package. The Reuters/Michigan Surveys of Consumers reported a final May reading on consumer sentiments of 68.7, above an early May figure of 67.9 & higher than the Apr reading of 65.1. However, consumers remain nervous about their finances with continuing high unemployment rates.

•Confidence Among U.S. Consumers Increases to Highest Level Since September

The link below gives thoughts from bond guys who are questioning the administration's strategy of quadrupling the budget deficit to almost $2T which they say is responsible for higher yields on Treasuries. The Treasury sold a huge supply of notes/bonds this week with good but not great acceptance. The run up in the high yield sector is narrowing their yield spread over Treasury rates. While the spread for junk bond yields remains high, it's down to "only" 1000 basis points.

•Bond Vigilantes Confront Obama Credibility as Bernanke Housing Aid Falters

10-Year Treasury Yield Index -- YTD

GM stockholders have not seen a sub $1 stock price since the depression:

GM shares fall below $1 for first time in 76 yrs


General Motors --- 1 week




Markets waffle, but bulls seem to be in command. After the run up on Mon, May 4 to 8,426, Dow is about 30 points lower as I write. The problem is that pressure from the rise in yields on Treasuries is not compatible with a rise in stock prices. Something has to give. Maybe GM's bankruptcy on Mon will help clear the disconnect.

Dow remained down after weak opening

Stocks tumbled at the start of trading, remaining at low levels for rest of the day. Dow closed down 184, decliners over advancers 7-1 (widest disparity in a long time) & NAZ was off 51.

Banks have seen a lot of weakness in the last 2 weeks. The Financial Index started this week at 176, but has fallen 24 (13%).

S&P 500 FINANCIALS INDEX

Value 152.50

Change -8.36

% Change -5.2%

Bank of America (BAC) had become a high flier, more than tripling from its low at 4. But enthusiasm has been waning, coming after it announced plans to sell stock & assets. This story is being repeated at most of the other big banks.


Bank of America --- 1 month





This has been a very tough week for high yield stocks. The Alerian MLP Index dropped 7½ today to the 208s. The floor of 210 lasted 2 weeks. The Dow Jones REIT Index fell 9, bringing its weekly loss to 17, the lowest level in almost 4 weeks. Junk bonds funds have also been pulling back this week.

The 10 year Treasury bond had an advance, taking the yield back down to 3.10%. The rally was based on the gloomy retail sales news, making Treasuries look like a better investment (i.e. money flowed out of stocks into bonds).

Treasuries Rise as Retail Sales Drop Renews Recession Concern



Oil is having a tough time assaulting 60, although one trader talked about 62 being a more important barrier..

CLM09.NYM

..Crude Oil Jun 09

..57.89

.. 0.96 ......(1.6%)

Yesterday General Motors (GM), still a Dow stock, fell to 1.09, a 76 year low. The last time it traded at that price was April 22, 1933. GM said that 6 execs sold stock, aggravating the growing pessimism that bankruptcy is around the corner. It's not a confidence builder to find GM execs bailing out, even if the stock is only 1+. Today the stock rallied, up 6¢.

GM Falls to 76-Year Low After Executives Sell Stock


The gloomy news on retail sales was a kick in the head that the markets couldn't handle. They had been getting upbeat news on the economy bottoming out, bringing a sense of confidence about the future. This jolt brought back reality. A few days ago the S&P 500 broke into the black for 2009, going above 903.25. Today it's 883. Dow has been not able to advance after breaking thru the 8K ceiling, making it a new floor.


Dow Jones Industrials ---- 2 weeks

Dow up while stocks are little changed

Dow started weak, but finished strong. It had been in the red for much of the day as shown in the Bigcharts widget on the right. Buyers returned in the PM giving the Dow a gain of 50, but decliners were 20% over advancers & NAZ fell 15. The 3 big gainers (up 1+ points) in the Dow were Chevron (CVX), Coca Cola (KO) & Exxon Mobil (XOM), an odd mix of oil & soda. Below is a snapshot view of the Dow courtesy of Bloomberg:

DOW JONES INDUS. AVG SNAPSHOT

1 YEAR




Banks were weak, generally selling off 2-5%.

S&P 500 FINANCIALS INDEX

Value 160.86

Change -2.99

% Change -1.8%

The Alerian MLP Index dropped 2.42 to the 213s, profit taking after it's long run. The REIT index dropped 1 & junk bond funds were mixed. The yield on the 10 year Treasury was essentially even at 3.175%.


Oil topped 60 for a brief time (highest price in 6 months) as the price for gas at the pump is up to 2.25. But traders are talking about gas prices topping out around 2.30.

CLM09.NYM

..Crude Oil Jun 09

..58.82

.. 0.32 ......(0.6%)

The gov reported the first budget deficit for Apr since 1983. Tax payments usually increase because of tax payments made by Apr 15. This year, the deficit for the month was 21B compared with a surplus of 154B last year. Spending for Apr rose 18%, from the prior Apr, to 287B while revenue & other income fell 34% to 266B. That's to be expected when the budget deficit for the full year explodes 4X last year's deficit of 455B.


US Posts First Budget Deficit for April Since ‘83


The Office of Management and Budget released a report on proposed overhauls of Fannie Mae & Freddie Mac that included the possibility of liquidating their assets. The gov run mortgage companies have cost far more in bailout money than they saved in cheaper mortgages. OMB says that they will need at least $92B more in fiscal 2010 on top of the $78B in aid they've already received since Sep. Fannie & Freddie may have saved Americans as much as $100B in mortgage payments. Now the OMB says they'll need that much just to get them thru next year. Shutting down the money pits is one of the options being considered, but not the most likely as the 2 companies are too well-connected.

Fannie and Freddie Will Need Almost $100 Billion in 2010


Dow has adjusted to accepting 8K as a floor. It has had only had minimal fluctuations in the last week & a half. MLPs & REITs have a similar trading pattern. But the Barclays Capital High Yield Bond ETF jumped 2 (from 32 to 34 with a reduced yield of 14½%) in 2 weeks. Investors continue seeking out high yield junk bond funds.


Dow Jones Industrials --- 2 weeks