The Bond Bubble Will Burst

George Brooks |

The Bond Bubble Will BurstLooks like the market is tiring of the news whipsaw, though a slightly optimistic statement here would trigger a rally until a denial was announced, then it would go back down.
I think the market will top out before an announcement regarding a fiscal cliff solution, or the day one is announced.
I don’t see the divide between parties narrowing enough to facilitate amicable decisions on key issues.
We may see piecemeal decisions in coming days on issues like the “Doc-fix and charitable contributions
The debt ceiling debate will surface in early 2013 and that is where the Tea Party may once again take a stand. President Obama has promised he won’t allow the country to be taken to the edge on this issue like it was in mid-2011.
That sounds like a fight to me with the threat of another downgrade in the U.S. credit rating, which would raise the cost of future government financing, especially when interest rates climb back up.
TODAY:
An optimistic statement on the cliff stands to run the DJIA up across 13,230. No statement, or a pessimistic statement takes it down to 13,068,
DJIA: 13,170.72
S&P 500: 1419.45
Nasdaq Comp.: 2992.16
Russell 2000: 824.20
Friday, December 14, 2012 (9:07 a.m.)
WARNING: BONDS ARE A BUBBLE THAT WILL BURST
Yes, I am aware of what the Fed has said about keeping interest rates around “zero,” but this economy will not be bumping along at a slow rate of growth indefinitely.
When it accelerates, interest rates will climb. Before that happens the BIG money will exit long-term bonds, government and corporate.
When that happens the value of long-term bonds will plunge. I have warned about this in the past and have been wrong.
While the U.S. economy has struggled to gain traction, that is normal following a recession of the magnitude as the 2007 – 2009 massacre.
A dysfunctional Congress, unable to address our increasing national debt and Europe’s sovereign debt woes, created so much uncertainty over the last two years, that companies and institutions stockpiled cash, unwilling to spend and hire. This adversely impacted the economy.
Once the uncertainty lifts and economic contractions abroad yield to recoveries, our economy will begin to hum.
A plunge in bond prices can wipe out years of interest income, and I doubt we will ever see interest rates this low in decades.
One of the main reasons people, institutions, and foreign governments bought U.S. government bonds was as a refuge from catastrophe, clearly NOT for the paltry yield they were getting.
When that need no longer is dire, they will move their money elsewhere where they can get a better return.
Just be on the alert.
Quadruple Witching Friday hits the Street tomorrow when stock index futures, stock index options, stock options and single stock options expire. In the past, these expires were disruptive to the market, but not so much anymore. It wouldn’t hurt to be cautious about a sharp increase in volatility tomorrow and Monday.
APPLE (AAPL: $529.69)
Wednesday’s rally failure was a bad omen. Yesterday’s drop confirms there are still sellers. Today, it is trading off $10 a share before the open.
If a 23% drop from its September highs cannot attract more buying than that with it selling at 12 times earnings, AAPL may have to go lower to attract buyers. AAPL needs a buyer now, or a test of December 6, $505 low is in the offing. Penetration counts to $485 in coming days.
There is a big difference of opinion in terms of fundamentals for Apple, and I am only focusing on the “technical” action of its stock here.
A break below $505, counts to around $485.
FACEBOOK (FB - $27.58): . The overhead supply (resistance) between $27.80 and $27.40.was penetrated yesterday on above average volume. While I have said FB would have trouble moving past $28.60, it gave it a good shot yesterday. The question now is, will any of the 156 million post-IPO lock-up shares that are eligible for sale today have an impact ?
Bear in mind this is December and some institutions want to show FB in their Annual Reports now that it has rebounded from the teens, so there will be some buying to offset any selling that occurs. So far, the stock has run up in spite of the lock-up share risk.
If it can break through $29, FB has a chance to go to $30.60.
Near-term (today) it looks like there are buyers at $28.12. If it breaks up past $28.35, it can run across $29, assuming the overall market doesn’t damp enthusiasm.
FB is not perceived as a “loser,” owing to its 10-point rebound since mid-November. Institutions may not hesitate to show it as a holding in their year-end reports. Bulls have the edge. Risk here is a drop to $25.30.
I don’t own, nor have I ever owned FB. Generally, I don’t recommend or comment on individual stocks. I started covering FB technically after its IPO because on May 21. I felt at $34 it was very vulnerable in face of all the misunderstanding and hype. I warned of a drop to $24-26, which it did shortly thereafter. Following a rally back into the 30s, FB dropped into the low 20s where on August 2, I forecast a low of $16.88. On September 4, it hit $17.55, its low since its IPO at $38. I’ll continue technical coverage for a while to accommodate readers.
ECONOMY:
Note: I am going to list the economic reports but not include the numbers from the last report, since those numbers are often revised and therefore potentially misleading.
I suggest you access the website: www.mam.econoday for details reports on this week’s calendar and an excellent recap (plus graphs) of last week’s reports.
FRIDAY:
Consumer Price Ix (8:30)
Industrial Production (9:15)

George Brooks
“Investor’s first read – an edge before the open”
sensiblesleuth@gmail.com

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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.

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Symbol Name Price Change % Volume
MER.P.E Merrill Lynch Trust IV 7.12% TOPrS n/a n/a n/a 0

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