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Long-Term Bond Bubble to Burst

Investor’s first read - an edge before the market opensDJIA: 13,558.92S&P 500: 1459.78Nasdaq Comp.: 3160.78Russell 2000: 851.76The U.S. Fed has opted for QE3 and governments in Europe,

Investor’s first read – an edge before the market opens

DJIA: 13,558.92
S&P 500: 1459.78
Nasdaq Comp.: 3160.78
Russell 2000: 851.76

The U.S. Fed has opted for QE3 and governments in Europe, Japan, China, India, Brazil, United Kingdom, and Canada have all launched programs to stimulate their respective economies. It is now a matter of waiting to see if these efforts work.

U.S. investors wanted QE3, and got it. As a result, investors are buying. Obviously some computers on the Street were programmed to buy in the event the Fed acted, as evidenced by the inability of the stock market to decline. The S&P 500 is up 13.5% from its June 4 low and up 4.6% since September 4 when the Street began to buy aggressively in expectation of the September 13th announcement of QE3 by the Fed.

Stop for a moment and consider the dilemma of the institutional money manager. You have clients’ cash to invest, where do you put it?

T-Bills? Money markets? CDs?

Unless you can justify sitting on cash, you have no alternative but to buy stocks, and that is what some have been doing, but with some risk.

While the Fed has promised to keep short-term interest rates near zero, there is no guarantee long-term bonds aren’t risky.
If the QE3 works, or if the economy simply gains traction on its own, inflation and interest rates will have to rise, adversely impacting long-term bond prices.

Between September 2011 and July 2012, investors have been putting an average of $16.6 billion per month into bond mutual funds while taking $10.9 billion per month out of stock funds.*

Odds favor the bond bubble will burst, it is now a question of “when.”

Can’t happen? Like Lehman Bros. couldn’t happen. Like the stock market couldn’t plunge 57% between 2007 and early 2009!

Economic reports today:

S&P Case Shiller Home Price Index (9:00), Consumer Confidence, FHFA House Price Index, and the Richmond Fed Manufacturing Index (10:00).

CONCLUSION: The sideways consolidation between DJIA 13,500 and 13,650 (S&P 500: 1450 and 1467) is still intact. The Nasdaq Comp. is less buoyant and the SPDR S&P 500 ETF actually in a downtrend. This is becoming a stock picker’s market and a selective one at that. While we have begun to cross the threshold of the “Best time to buy and own stocks” (Nov. 1 to May1,** risk of a correction is increasing in spite of the money managers’ dilemma of having no where else to invest clients’ cash.

Odds favor a correction would trace out a sideways-to down pattern, OK for nimble traders and “timers.” Expect some euro-discord, more unsettling fiscal cliff news, and global recession chatter.

George Brooks

** Stock Trader’s Almanac

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.

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