Big Story of 2012: Stampede Out of Bonds into Stocks?

George Brooks |

Investor's first read - Brooksie's edge before the open

Wall StreetThursday, January 12, 2012      9:09 a.m. ET

DJIA: 12,449.45        S&P 500: 1292.48

Stampede out of bonds into stocks ?  Unlikely, according to most of what you read and hear, but you better acknowledge it CAN HAPPEN. The ingredients are in place for a surprise.

TODAY:  Both the DJIA and S&P 500 hit my support level and bounced back, suggesting buyers are there. At 3:a.m. ET this morning, the U.S. stock-index futures were down, at 6 a.m. they are up – not bad for a nervous market. Some of the buying we are seeing so far in 2012 is reinvestment of cash raised from year-end selling, some of it is cash designated for initial investing in the new year. Is this a distortion, or smoke screen for heavy selling that may come in later this month ?

Too early to tell, but what I see in individual charts is positive - steady buying, buying on dips or after brief consolidations.

POSITIVES:

Spain sold 9.98 billion euros of  2015 and 2016 bonds yesterday at 3.384 percent vs. a rate of 5.187 percent  for comparable bonds in December. It sold two times as many bonds as expected. Italy sold 12 billion euros of t-bills, 8.5 billion euros one-year bill at 2.735 percent vs a rate of 5.952 in its last auction.

   Bank stocks had a good day.  Three in particular traded on above average volume: Bank of America (BAC) +3.62%, Citigroup (C) + 4.23% and SunTrust (STI) +2.88%.

Half of the 30 Dow stocks advances and 28 of the 39 leading Nasdaq stocks advanced. More stocks advanced on the NYSE than declined. Advancing issues have been beating declining issues since late December.

Home builder, Lennar (LEN) popped 7%  in face of increasing new orders in Q4

The January Early Warning Barometer* (S&P 500 first five days of January) strongly suggests a plus January, which in turn suggests the likelihood of a positive tone of the market as a whole for 2012.

NEGATIVES:

Bears are not hard to find.  A global head of tactical asset allocation told Bloomberg.com he believes investors will turn to government bonds and away from stocks by week’s end due to Europe’s financial/fiscal problems and especially because Greece may default on its debt.

I don’t agree. Unless we are looking at a prolonged period of  European bank and sovereign debt contagion, the riskiest investment I see now is a long-term government bond. If the person interviewed is  referring to short-term treasuries, I have no problem with that, but long-term, no way.

How long has the global financial community been cowering in face of a Greek default ?

As far as I am concerned they HAVE defaulted.  My hunch here is that part of the European discussions are damage control – what if Greece defaults, what if……Too much at stake guys and girls NOT to crunch these kind of possibilities.

The “WHAT IF” question here should be. what if this issue finds its way to page 10A from Page One ?

That’s when billions come out of hiding in treasuries and stampede into stocks.

That will happen if European leaders come up with a plan that neutralizes the contagion risk, or if we get a catharsis with some bank and country casualties, but at least a diffusion of  global angst.

Sequestration: It is when  the “trigger” for automatic spending cuts is activated as a result of Congress’ inability or unwillingness to make the cuts before the December deadline.  While the press will play this up and it will be a big punching bag for the pols this year, I think it is a minor negative at worst.  The cuts do not go into effect until Jan. 2013 and both the President and Congress can implement changes in the interim.

After last week’s upbeat economic  reports, we get a breather. Comments arising from the Beige Book release may have some impact. Jobless Claims are important in the current cycle to confirm or raise doubts of an economic expansion. Consumer Sentiment reflects the mood of the consumer.

Monday (3 p.m.) Consumer Credit. Surged 10% in November for the biggest one-month increase since Nov. 2001. Revolving credit – credit cards up 8.5% and non-revolving credit (auto loans, etc.) up 10.7%. This suggests an important change in consumer sentiment which can only add to an accelerating economy.

Tuesday:  Wholesale Trade (10 a.m.) Indicates sales and inventories held by merchant wholesalers. Inventories increased well below projections in November with a gain of only 0.1 percent vs. a 1,2 percent gain in October.

Wednesday

   MBA Applications (7 a.m.) Measures applications at mortgage lenders a reflection of consumer intent in the housing area and economy as a whole, ergo it has a “multiplier effect.”  Applications for U.S. home mortgages for the week ended Jan. 6  jumped 4.5%.  Refinancings as a percent of the total dropped to 80.8%  from 81.9%.

Fed’s Beige Book (2 p.m.) Released two weeks before FOMC meeting, it provides insight into business conditions in 12 Federal Reserve districts, which stand to have an influence on policy decisions at the next meeting. Sentiment expressed in the Beige Book were mixed with some opposed and some in favor of further asset purchases.  Balance is good.

Thursday:

   Jobless Claims (8:30) Declined 15,000 for the week ending Dec. 31. Economic bulls want this number to keep declining. Doomsters praying for a big jump. Doomsters get their wish, the claims jumped 24,000 to 399,000 for the week ending Jan. 7. This was worse that expected, though seasonality adjustments are difficult this time of the year.

   Retail Sales (8:30) Comprised of the total receipts at stores that sell merchandise and related services to final consumers. Retail Sales grew at a  0.2% rate in Nov., following growth rates of 0.6% in Oct. and 1.3% in Sept.. Growth rates have been bumping along sideways at an annual rate of 4% to 9% since soaring in the last four months of  2009 from recession lows of minus 11%. December retail sales were reported today at 0.1% vs. 0.4% (revised up from 0.2).

   Business Inventories (10 a.m.) Comprised of the dollar amount of inventories held by manufacturers, wholesalers and retailers. Obviously, a rising inventory to sales ratio suggests a decline in sales or alarming rise in inventories which will have to be worked off at the expense of production. To-date the ratio  is steady and not of serious concern.

   Treasury Budget (2 p.m.) Monthly account of the surplus or deficit of federal government. December expected to run close to breakeven.

Friday:

   International Trade (8:30) Comprised of merchandise (tangible goods) and services. International trade balance has posted a deficit since 1980s. Trend to smaller balance adds to GDP growth, increase is drag on growth.

   Import/Export Prices (8:30) Can indicate inflationary trends.

  Consumer Sentiment (9:55 a.m.)Reuter’s/Univ. of Michigan’s survey of 500 households and is directly related to consumer spending. Improved to 69.9 in Dec. from 64.1 in Nov..  The latest reading implies a strong 72.1 over the last two weeks suggesting momentum will carry into 2012.

CONCLUSION:

I MAY BE ALONE ON THIS, and WRONG, but there is tooo much at risk here globally for the euro-area countries NOT to develop a solution that strengthens the European Union.  I sense this problem is heading at warp speed for a solution that removes the risk of  a global meltdown, and that solution most likely means a reduction in euro-area members. That could mean a week of turmoil and confusion somewhat on the order of a stock market selling climax. It could also be the best buying opportunity since early March 2009.  It could be devastating to long-term bond values as investors bail out and buy stocks.  Then too, solutions could be agreed on that reduce the risk of meltdown without the carnage. This needs to be considered as possible, especially because too few people are seeing it happen.

EUROPEAN UNION/EUROZONE

The European Union [EU] is an economic and political union of 27 sovereign member states    with origins going back to 1958, but which was officially established by the Maastricht Treaty in 1993.  Its goals are a free movement of goods, services, capital and people differing in  life style, language, economies, geography, religion, politics and history.

Its 27 Members include: Austria, Belgium Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.  The EU comprises  a population exceeding 500 million people a GDP exceeding 16.2 billion USD, some 20% of the world’s GDP.

Important components of the EU include: European Parliament, European Commission, Council of European Union, European Council  Court of Justice and European Union, and the European Central Bank.

The euro area [eurozone]  is an economic and monetary union [EMU] of 17 member nations that use the “euro” as their common currency and sole legal tender. Its members include: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain.

While  the goal of single currency originated with the European Economic Community [EEC] in 1969,  it was not until 1993 that members were legally bound to start the monetary union no later than January 1, 1999. At that point,  the euro was launched after which it  was an “accounting” currency until January 1, 2002 when euro notes and coins were issued and national currencies phased out in the eurozone.

The European Central Bank [ECB] is the central bank for the eurozone.  Governed by  its president, Mario Draghi,  and a board of the heads of national central banks, the ECB’s primary responsibility is to maintain the euro’s purchasing power and price stability within the eurozone.

The Eurosystem is the monetary authority of the eurozone comprised of the ECB and the central banks of its member states, which are charged with applying the  ECB’s  policy.

The European Commission, comprised of one commissioner from each  of the 27 member states,  represents the interests of the EU, drafts proposals for laws, and manages the day-to-day business and disbursement of funds.

European Banking Authority [EBA]: Established on Jan. 1, 2011 as a regularity agency to conduct stress tests of banks in order to detect weaknesses in capital structure. It has the power to overrule national regulators if necessary to prevent unfair competitive advantages between jurisdictions. It issues a report, Common Reporting Framework [COREP] covering capital requirements regarding credit risk, market risk, operational risk, fund and capital adequacy ratios.

The European Financial Stability Facility [EFSF]: created by eurozone members to safeguard financial stability in Europe. Authority includes loans to countries in need, intervention in primary and secondary markets pursuant to ECB analysis, finance recapitalizations of financial institutions. It is backed by guarantee from the eurozone members for  a total of 780 billion euros and has a lending capacity of 440 billion euros. (not considered adequate)

One euro = 1.3035 U.S. dollar (12/21)

Prominent names:  European Union  President:  Herman van Rompuy, European Central Bank President: Mario Draghi, European Commission President: Jose Manuel Barroso, German Chancellor: Angela Merkel, French President: Nicolas Sarkozy, Italy Prime Minister: Mario Monti,  EFSF President: Klaus Regling

 SEQUESTRATION – TRIGGER  SPENDING CUTS

While the SuperCommittee failed to agree on cuts, I am keeping this up FYI, since it will continue to get press coverage prior to the “trigger” in January.

Jan. 15, 2012: Date that the “trigger” leading to $1.2 trillion of future spending cuts goes into effect if   the committee’s legislation has not been enacted.

Feb. 2012: Approximate time when first $900 bn of debt ceiling runs out.

Feb./Mar.2012: Deadline for Congress to consider a resolution of disapproval for the second tranche  ($1.2 – $1.5 trillion) of debt limit increase.

Fall/Winter 2012: When additional $2.1 - $2.4 trillion of borrowing authority from this law runs out.

Jan.2, 2013: OMB orders sequestrations for defense and non-defense categories of spending necessary  to meet spending cuts required by the “trigger.”

Recent blog headlines:

Dec. 19, DJIA:  11,866  “BIG Week: Economic Reports – Watch Housing”

Dec. 20, DJIA:  11,766  “ The U.S. Economy – Last Man Standing ?”

Dec. 21, DJIA:  12,103  “ Housing Turnaround = Wealth Effect Rebound = Economic Expansion”

Dec. 22, DJIA   12,107, “Trading Range Intact

Dec. 23, DJIA  12,169  “Don’t Take the Day Off”

Dec. 27, DJIA: 12,254  “Selective Opportunities”

Dec. 28, DJIA: 12,291  “Market Attempting to Break Out of Trading Range”

Dec. 29, DJIA  12,151  “Opportunities, Even in this Muddle”

Dec.30,  DJIA  12,287  “ Strong Stocks Today = Winners Next Year

Jan. 3,    DJIA: 12,224  “Good Start, but Follow-Through Key”

Jan. 4,    DJIA: 12,397  “Buyers Expected on Any Weakness”

Jan. 5,    DJIA:12,418   “U.S. Economy Gaining Traction”

Jan.6,    DJIA: 12,415.  “Long-Term Bonds at Risk Via Euro-Meltdown/Solution –Money Out of Bonds Into Stocks

Jan.9     DJIA:  12,359  “Flight From “Safe” to “Risk” Assets BIG News of 2012 ?”

Jan.10   DJIA:  12,392  “Odds of 600 to 1,000-Point Surge in DJIA Improving”

Jan. 11  DJIA:  12,449  “Buyers on Dips”

 

George  Brooks

*Stock Trader’s Almanac:  The January Barometer was developed by Yale Hirsch in 1972 four years after he began publishing the Almanac in 1968. He and son Jeffrey publish it today. (Must buy – loaded with info that will help make money and preserve capital. – www.stocktradersalmanac.com

**National Journal

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The writer of  Investor’s first read, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
BAC Bank of America Corporation 15.22 -0.16 -1.04 58,609,990
C Citigroup Inc. 45.98 -0.90 -1.91 20,001,820
LEN Lennar Corporation Class A 42.27 -0.93 -2.15 1,244,405
RVLT Revolution Lighting Technologies Inc. 6.67 -0.10 -1.48 36,919
STI SunTrust Banks Inc. 43.16 -0.43 -0.99 1,563,737

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