The yield on the benchmark 10 year Treasury bond hit 3.94% on Friday. Yields
are rising. This is bad for stocks, as equities compete with debt as an
investment, and debt is growing ever more attractive.

The sky isn’t falling yet. We’ve visited these yield levels several times
since the recovery began, once every few months it seems.

The fanciful scenarios of the title are two concerns. What if the bond market
saturates, and there is no more capacity for more debt to be issued? What if
there is a crisis of confidence in US Treasuries?

What evidence do we have for these fanciful scenarios? The recent auctions
have been poorly subscribed. Yields have risen sharply. There is a fear that the
demand/supply relation may not be elastic, and at some point, buyers simply
won’t exist for the debt the government is trying to push, regardless of the
price. A frozen debt market isn’t so unthinkable, as we witnessed it in 2008 and
part of 2009. The market for certain municipal bonds froze, and the market for
corporate debt became severely impaired.

It isn’t hard for me to imagine there being a finite pool of capital
available to buy debt, and for the huge issuances of Treasuries to begin to
“drain the pool”, like an oil well. At some point, the gusher becomes a trickle,
and eventually the oil is all used up.

Another related problem is the possibility of a crisis of confidence in
Treasury bonds. Any sort of irregularity in the Treasury bond market could
trigger, in effect, a run on the bank. Even the rumor of an irregularity. Yields
would shoot up, or the market for Treasuries would freeze, and the government
couldn’t fund its operations.

Some weight must be attached to these fanciful scenarios but how much or
little is the question. It isn’t unthinkable for there to be a run on government
debt. It isn’t unthinkable for the government bond market to reach full
capacity, preventing further sales. I don’t think they’re likely, but unlikelier
things have happened. Until Lehman collapsed and the debt markets seized, no one
thought that was possible or likely either.

The likelier possibility is not the black/white, crisis/no crisis but rather
a shade of grey/partial crisis. A spike in yields is likely as some point,
because yields are likely to go up at some point. What would this mean for
stocks?

A yield spike would not be good for stocks. It essentially puts bonds on
sale, and makes stocks look expensive. A stock market correction, if not a bear
market, is the likely outcome.

What about a minor crisis of confidence in Treasuries? This crisis, as I
imagine it, would raise yields even more, but not freeze the market. The frozen
Treasury market scenario is Armageddon, plain and simple, as 20% of our economy
would stop. A yield spike would hurt equities, by making them look more
expensive, and putting bonds on sale, and hurt businesses that depend on
borrowing. A yield spike in a fragile economy could cause a double-dip
recession, or even a depression, depending how high the rates went. Equities
fall an average of 40% in recessions.

The point of this post is that although the economy is recovering and the
stock market is thriving on improving economic fundamentals, none of it may
matter depending how the interest rate situation plays out in the next few
years. The equity market is the bond market’s b****h. Stocks have been thriving
in a flat interest-rate environment. That environment is about to change;
interest rates have nowhere to go but up. Even long-term rates have remained
relatively constant over the last year. IEF, the 7-10 year Treasury bond ETF,
fell -4.11% in the rolling 1 year period to 4/2/10. What if it falls 30% in the
next year? Will stocks just shrug off that headwind? Do you want to hold stocks
during the rise? Bonds? Gold?

There are some good things about higher interest rates of course. It
encourages savings. However, low interest rates are widely viewed as strong
economic stimulus, which we need to have a healthy post-recession recovery. Home
buyers, businesses looking to expand, and businesses with debts to service all
face higher costs when interest rates are high. Higher costs are inflicted on
consumers, who consume less.

So to wind all this up, we’re likely to see higher interest rates, possibly
under severe duress, or more likely under mild duress, natural market forces, or
Fed decree. This will reduce consumption by placing higher costs on businesses,
which will pass this on to consumers. Consumption is 2/3 of the economy, so the
economy will slow. I just can’t see any way this will be good for stocks. Maybe
necessary medicine to keep the economy strong, but this will catalyze a “real”
10-20% pullback in stocks, at least, at some point this year or next. And I
can’t see it being good for gold or bonds either. The dollar is likely to
continue to strengthen though, making currency perhaps the best investment for a
rising-rates environment. Shorting the Euro, long the dollar, seem like good
bets for the rest of the year. Published By Bloominonion Sunday, April 04, 2010

The yield on the benchmark 10 year Treasury bond hit 3.94% on Friday. Yields
are rising. This is bad for stocks, as equities compete with debt as an
investment, and debt is growing ever more attractive.

The sky isn’t falling yet. We’ve visited these yield levels several times
since the recovery began, once every few months it seems.

The fanciful scenarios of the title are two concerns. What if the bond market
saturates, and there is no more capacity for more debt to be issued? What if
there is a crisis of confidence in US Treasuries?

What evidence do we have for these fanciful scenarios? The recent auctions
have been poorly subscribed. Yields have risen sharply. There is a fear that the
demand/supply relation may not be elastic, and at some point, buyers simply
won’t exist for the debt the government is trying to push, regardless of the
price. A frozen debt market isn’t so unthinkable, as we witnessed it in 2008 and
part of 2009. The market for certain municipal bonds froze, and the market for
corporate debt became severely impaired.

It isn’t hard for me to imagine there being a finite pool of capital
available to buy debt, and for the huge issuances of Treasuries to begin to
“drain the pool”, like an oil well. At some point, the gusher becomes a trickle,
and eventually the oil is all used up.

Another related problem is the possibility of a crisis of confidence in
Treasury bonds. Any sort of irregularity in the Treasury bond market could
trigger, in effect, a run on the bank. Even the rumor of an irregularity. Yields
would shoot up, or the market for Treasuries would freeze, and the government
couldn’t fund its operations.

Some weight must be attached to these fanciful scenarios but how much or
little is the question. It isn’t unthinkable for there to be a run on government
debt. It isn’t unthinkable for the government bond market to reach full
capacity, preventing further sales. I don’t think they’re likely, but unlikelier
things have happened. Until Lehman collapsed and the debt markets seized, no one
thought that was possible or likely either.

The likelier possibility is not the black/white, crisis/no crisis but rather
a shade of grey/partial crisis. A spike in yields is likely as some point,
because yields are likely to go up at some point. What would this mean for
stocks?

A yield spike would not be good for stocks. It essentially puts bonds on
sale, and makes stocks look expensive. A stock market correction, if not a bear
market, is the likely outcome.

What about a minor crisis of confidence in Treasuries? This crisis, as I
imagine it, would raise yields even more, but not freeze the market. The frozen
Treasury market scenario is Armageddon, plain and simple, as 20% of our economy
would stop. A yield spike would hurt equities, by making them look more
expensive, and putting bonds on sale, and hurt businesses that depend on
borrowing. A yield spike in a fragile economy could cause a double-dip
recession, or even a depression, depending how high the rates went. Equities
fall an average of 40% in recessions.

The point of this post is that although the economy is recovering and the
stock market is thriving on improving economic fundamentals, none of it may
matter depending how the interest rate situation plays out in the next few
years. The equity market is the bond market’s b****h. Stocks have been thriving
in a flat interest-rate environment. That environment is about to change;
interest rates have nowhere to go but up. Even long-term rates have remained
relatively constant over the last year. IEF, the 7-10 year Treasury bond ETF,
fell -4.11% in the rolling 1 year period to 4/2/10. What if it falls 30% in the
next year? Will stocks just shrug off that headwind? Do you want to hold stocks
during the rise? Bonds? Gold?

There are some good things about higher interest rates of course. It
encourages savings. However, low interest rates are widely viewed as strong
economic stimulus, which we need to have a healthy post-recession recovery. Home
buyers, businesses looking to expand, and businesses with debts to service all
face higher costs when interest rates are high. Higher costs are inflicted on
consumers, who consume less.

So to wind all this up, we’re likely to see higher interest rates, possibly
under severe duress, or more likely under mild duress, natural market forces, or
Fed decree. This will reduce consumption by placing higher costs on businesses,
which will pass this on to consumers. Consumption is 2/3 of the economy, so the
economy will slow. I just can’t see any way this will be good for stocks. Maybe
necessary medicine to keep the economy strong, but this will catalyze a “real”
10-20% pullback in stocks, at least, at some point this year or next. And I
can’t see it being good for gold or bonds either. The dollar is likely to
continue to strengthen though, making currency perhaps the best investment for a
rising-rates environment. Shorting the Euro, long the dollar, seem like good
bets for the rest of the year. Published By Bloominonion Sunday, April 04, 2010 Read More

I know it has happened to me several times… Read More

The VIX touching its lower Bollinger band (VIX
chart) and the market coming within a few tenths of 1170 (SPX
chart) triggered my sell criteria today. 
SPXA50R
has jumped above 88, which were cycle highs several times in the recent past.

I sold VWO, FXI, and EWZ, my emerging markets laggards,
and kept VWO and VB.  I bought, with some
remaining cash, a small position in SDS, the 2x inverse S&P 500
ETF.  I'm moving into a hedged position with SDS
and JNK, 80% JNK and 20% SDS, but since this is an IRA, it takes a few
days for
the cash to become available, so I didn't sell all my long positions.  I
do not want to be net short, even for a few
days, but at this point I want a hedge.

I estimate the market has between 0 and 30 more points of
juice left, so keeping some longs is a good idea.  VB and VNQ are strong
performers.  Let your winners run, is the idea here.

I am not really making a bet on the short side, although,
I suspect, the short side is the higher probability trade, given the
market
extension and extreme overbought state. 
Shorts are guilty until proven innocent at this point, in my
opinion.  You need to get below the 200
day moving average (1045) before the short sale becomes the default
trade.  That is a possibility, but not a high
probability, at this point.

I'm moving out of risky assets though, and I need to sell
either all or part of VB and VNQ to fund a big JNK position, with SDS
hedge.  The market has shown great
resilience and strength, but those characteristics have limits.  Trees
don't grow to the sky.  This tree may hit 1200 though, so striking
the right balance between long and short is the challenge at the moment.

I exited VWO at a small profit, 0 to +4% on all blocks.  I exited FXI
and EWZ at a small loss, a 0 to
-3% loss on all blocks.  With VB and VNQ I
have more appreciation, 9-12%, currently.

I lost a great deal of money trading last year.  By this time last
year I had completed 29 transactions
and lost -$595.  The market's steep
decline in early 2009 had something to do with that of course.  I have
made +$498 so far this year, with
another couple thousand in unrealized appreciation in VB and VNQ.  I
have completed 14 transactions so far this
year.

What do you call a trader who trades half as much and earns
twice as much?  A maturing trader.  Since the bear market started I've
become
much more proficient using indicators, something I will be eternally
grateful
to Horse Trader for setting me on the right path with, and would like to
work
toward a simple trading system, using SPY or perhaps QLD, buying the
dips and
selling the peaks.  There are several
systems I've examined (black box systems) on Collective2.com and
glinser.com, using
QLD, but I think, ultimately, what I need to do is do the trading myself
rather
than rely on a black box.

On Fast Money tonight Kominsky (sp? He's the new guy)
pointed out managers need to get allocated for end of quarter, so this
market
of ridiculous extension may just go on extending through March 31.  That
makes sense, but the market was really
oversold a month ago, so the length and strength of this rally, to me,
is really
proportionate to that.  I believe any
market rise the results from a deeply oversold condition is strong in
proportion to the depth of the prior oversold condition, and by the same
token,
any market retracement that results from a prior overbought condition
(like we
currently have) is bearish in proportion to the strength of the prior
overbought condition.

Published By Bloominonion Thursday, March 18, 2010

The VIX touching its lower Bollinger band (VIX
chart) and the market coming within a few tenths of 1170 (SPX
chart) triggered my sell criteria today. 
SPXA50R
has jumped above 88, which were cycle highs several times in the recent past.

I sold VWO, FXI, and EWZ, my emerging markets laggards,
and kept VWO and VB.  I bought, with some
remaining cash, a small position in SDS, the 2x inverse S&P 500
ETF.  I'm moving into a hedged position with SDS
and JNK, 80% JNK and 20% SDS, but since this is an IRA, it takes a few
days for
the cash to become available, so I didn't sell all my long positions.  I
do not want to be net short, even for a few
days, but at this point I want a hedge.

I estimate the market has between 0 and 30 more points of
juice left, so keeping some longs is a good idea.  VB and VNQ are strong
performers.  Let your winners run, is the idea here.

I am not really making a bet on the short side, although,
I suspect, the short side is the higher probability trade, given the
market
extension and extreme overbought state. 
Shorts are guilty until proven innocent at this point, in my
opinion.  You need to get below the 200
day moving average (1045) before the short sale becomes the default
trade.  That is a possibility, but not a high
probability, at this point.

I'm moving out of risky assets though, and I need to sell
either all or part of VB and VNQ to fund a big JNK position, with SDS
hedge.  The market has shown great
resilience and strength, but those characteristics have limits.  Trees
don't grow to the sky.  This tree may hit 1200 though, so striking
the right balance between long and short is the challenge at the moment.

I exited VWO at a small profit, 0 to +4% on all blocks.  I exited FXI
and EWZ at a small loss, a 0 to
-3% loss on all blocks.  With VB and VNQ I
have more appreciation, 9-12%, currently.

I lost a great deal of money trading last year.  By this time last
year I had completed 29 transactions
and lost -$595.  The market's steep
decline in early 2009 had something to do with that of course.  I have
made +$498 so far this year, with
another couple thousand in unrealized appreciation in VB and VNQ.  I
have completed 14 transactions so far this
year.

What do you call a trader who trades half as much and earns
twice as much?  A maturing trader.  Since the bear market started I've
become
much more proficient using indicators, something I will be eternally
grateful
to Horse Trader for setting me on the right path with, and would like to
work
toward a simple trading system, using SPY or perhaps QLD, buying the
dips and
selling the peaks.  There are several
systems I've examined (black box systems) on Collective2.com and
glinser.com, using
QLD, but I think, ultimately, what I need to do is do the trading myself
rather
than rely on a black box.

On Fast Money tonight Kominsky (sp? He's the new guy)
pointed out managers need to get allocated for end of quarter, so this
market
of ridiculous extension may just go on extending through March 31.  That
makes sense, but the market was really
oversold a month ago, so the length and strength of this rally, to me,
is really
proportionate to that.  I believe any
market rise the results from a deeply oversold condition is strong in
proportion to the depth of the prior oversold condition, and by the same
token,
any market retracement that results from a prior overbought condition
(like we
currently have) is bearish in proportion to the strength of the prior
overbought condition.

Published By Bloominonion Thursday, March 18, 2010 Read More