“The only time we’ve ever seen a confluence of risk factors anywhere close to those of today was the week of March 24, 2000, which marked the peak of the technology bubble.” – John Hussman, Hussman Funds, in his October Market Commentary
The yield on the 10-yr Treasury has broken out, hitting its highest level since July 2011:
By the end of June 2011, the Fed had only reached its half-way mark in money printing. It was shortly thereafter that the Fed had implemented its “operation twist.” Operation twist consisted of selling the Fed’s short term holdings and using the proceeds plus extra printed money to buy Treasuries at the long-end of the curve – primarily 10-yr bonds. That program is what drove the 10-yr bond yield from 3.40% in July 2011 to as low as 1.33% by mid-2016. At one point the Fed owned more than 50% of all outstanding 10-yr Treasuries. The Fed’s massive money hyper-stimulated the housing and auto markets.
What should frighten market participants and policy-makers – and really, everyone – is that the 10-yr yield has soared the last Thursday and Friday despite the big sell-off in the Dow/SPX. I say “despite” because typically when stocks tank like that, the money flows into Treasuries as a “flight-to-safety” thereby driving yields lower. When stocks drop like last Thursday and Friday in conjunction with the sharp rise in the 10-yr yield (also the 30-yr yield), it reflects the development of financial market problems that are not superficially apparent.
The media narrative attributed Friday’s jump in Treasury yields to the “strong” jobs report. But this is nonsense. The number reported missed expectations. Moreover, the number of working age people “not in the labor force” rose to an all-time high,which is indicative of substantial slack in the labor market.
More likely, yields are soaring on the long end of the curve (10yrs to 30yrs) because it was quietly reported that the amount of outstanding Treasuries jumped by $1.25 trillion in the Government’s 2018 Fiscal Year (October thru September). This means that the Government’s spending deficit soared by that same amount during FY 2018. To make matters worse, the Trump tax cut will likely cause the spending deficit – and therefore the amount of Treasury issuance required to cover that deficit – to well to north of $1.5 trillion in FY 2019.
Who is going to buy all that new Treasury issuance? Based on the Treasury’s TIC report, which shows major foreign holders of Treasury securities, over the last 12 months through July (the report lags by 2 months), foreign holdings of Treasuries increased by only $2.1 billion. The point here is that, in all likelihood, the biggest factor causing Treasuries to spike up in yield is the market’s anticipation of a massive amount of new issuance. Secondarily, the rising yields likely reflect the market’s expectation of accelerating inflation attributable to the deleterious consequences of the trade war and the lascivious monetary policies of the Fed. The market is assuming control of interest rate policy.
On Tuesday last week (October 3rd), the Dow closed at a record high (26,828). Yet, on that day three times as many stocks in NYSE closed at 52-week lows as those that closed at 52-week highs. Since 1965, this happened on just one other day: December 28, 1999. The Dow peaked shortly thereafter (11,722 on January 10, 2000) and began a 21 month sell-off that took the Dow down 32%.
I don’t necessarily expect to see the stock market tank in the next few weeks though, based on watching the intra-day trading action the past couple of weeks leads me to believe that the market is vulnerable at any time to a huge sell-off. The abrupt spike in Treasury yields plus market technicals – like the statistic cited above – lead me to believe that the cracks in the stock market’s “floor” are widening.
The above commentary is an excerpt from the latest Short Seller’s Journal. In that issue I presented LULU as short at $153. It’s already dropped $8 and several subscribers and I have more than doubled our money on put ideas. You can learn more about this newsletter here: Short Seller’s Journal information.
have you taken a close look at pcln ? looks like a candidate for some puts. I got burned badly on my short etf’s the day citibank reported a profit, and the fed started buying all the crap with funny money. haven’t been in the market since, but thinking about getting my feet wet again.
Tough short even though it’s insanely overvalued.
is it a money laundering operation?
Dave, will a real estate and new vehicle collapse in sales bring the stock market into a collapse down.
I think so. Plus a whole viper’s nest of other issues
Nahhh Dave, all will be well becasue I just read a comment from a prophet on another blog [LOL]:
“But the big picture? No change, and there never will be. They will continue to suppress metals, they will continue to support stocks, bonds, and real estate. They’ll just give you people a “scare” and then they’ll lower interest rates, loosen the money a bit, and things will rebound in another 6 months, year. Mark my words, there will be no change in our system for at least another 20 years.
It’s good idea to not despair and to look into history of Markets , they using same tricks over , over again.
There is crash , they wait patiently for the bottom , start slowly buying , interest is low , economy is improving , they still buying and pushing prices and sentiment higher and higher. At the top they change tune and start pushing interest higher and same time they selling stock till they crash market.
They can’t push Markets forever and Markets will go down sooner than later , all this game is about making money and fool as many people they can.