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business newsSigns of Risk Aversion Return
By
Richard Suttmeier
Apr 28, 2010 9:10 am
Lower US Treasury yields are a sign of risk aversion.
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Editor's Note: This article was written by Richard Suttmeier, chief market strategist at ValuEngine.com, which is a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.
Lower US Treasury yields are a sign of risk aversion. On Tuesday the US Treasury sold $44 billion in two-year notes at a yield of 1.024. The bid-to-cover was 3.03 times the auction size. The indirect bid at 31% is at the low end of the 30% to 40% neutral range I've talked about many times.
Today the US Treasury sells $42 billion in five-year notes. If this maturity holds my quarterly and semiannual pivots at 2.464 and 2.529, the downward trend is toward my monthly resistance at 2.239.
On Thursday the US Treasury sells $32 billion in seven-year notes, which are trading around my semiannual pivot at 3.107.
The 10-year yield declined to a test of my semiannual pivot at 3.675 on Tuesday and Wednesday morning. Around this pivot is my weekly support at 3.983 and quarterly resistance at 3.467. A weekly close richer than 3.675 would also be a monthly close richer than that level. This has been my benchmark for risk aversion, which makes sense given the risk of the Greek debt crisis. There is a potential contagion to other PIIGS nations; Portugal, Iceland, Italy, Greece and Spain.
The Fed will keep the federal funds rate at zero to .25% Wednesday afternoon. You know I'm against this policy stance, as I've said many times that the funds rate should never have been pushed below 3% to begin with. The Fed sees moderate economic growth, no inflationary pressures, but sees the housing market and slow job growth as reasons for keeping this low funds rate for an “extended period." I see housing and banking returning as a drag on economic growth, and inflationary pressures building in commodity prices, health-care costs, and food prices. Low rates are providing speculative fuel for Wall Street while leaving Main Street high and dry.
The S&P/Case-Shiller Home Price Indices show that home prices are likely to decline in the wake of the ending of the tax credits this Friday, and the continued supply of short sale and foreclosures.
In Tampa Bay where my son an I bought a new home a year ago prices were down 1.2% in February and down 6% year-over-year. When we bought our home in April 2009 the appraised value was down 16.7% from 2008. Today the appraised value is down another 20% for 2010. Why? Because our model home in our community was sold on a short sale, well below the market.
Comex Gold is becoming a currency of last resort. With the euro trading to a new 52-week low on Tuesday, gold gained a strong bid. The Greek and PIIGS debt issues are real problems for the global economy, which means gold can rebound to my semiannual resistance at $1186.5. A weekly, and hence, monthly close above this level targets a new high in May, as currency of last resort.
Nymex Crude Oil should decline back to my annual pivot at $77.05, as the debt crisis, Goldman Sachs (GS) issues, and Main Street woes reduce demand for energy. This week’s resistance is $86.26.
Thoughts on Goldman CEO, Blankfein
One thing I strongly agree with: There shouldn't be any disclosure obligation for market makers. I was a market-maker in US Treasuries and federal agency securities between 1972 and 1987. When you make a market you have a bid price at which you'll buy from a client and an offer price at which you'll sell. Traders always need to have a market bias on the securities for which they make markets. When bullish you want to be long Treasuries. When you're bearish you want to be short. This opinion can change on a dime. There were times in my career as a trader when the client flow of business made me long when I wanted to be short, and vice-versa.
The issue with Goldman isn't making undisclosed bets on the short side, but creating synthetic financial instruments that should be banned, as investors cannot fully understand the risk/reward. The institutional sales force at Goldman is instructed to sell a structure, and may not know that the market maker is shorting. The sales force is selling the potential positives of the structure not knowing that the trading desk created a monster designed to implode. These types of products need to be banned. We didn’t need them or use them 10 to 20 years ago, and given the fragility of the global debt markets today, we need to de-lever not add leverage. The global pools of notional amounts of derivatives are just too big, and as we're seeing today, countries and states are at risk. Bank exposures to all such structures must be returned to bank balance sheets and marked to market daily. If that’s not possible for a certain type of structure, they should be banned with global exposures unwound. This should be the priority of financial reform!
The Daily Chart for the Dow
There’s an up-trend resistance line that connects highs going back to November 2009, which was tested at Monday’s high of 12,258.01. This level also lines up with the 61.8% Fibonacci retracement of the decline from the October 2007 high to the March 2009 low. The high was just above monthly and annual resistances at 11,228 and 11,235. We didn't get to my semiannual resistance at 11,442 as yet. We have overbought MOJO with the 21-day simple moving average at 11,025. A close today below 11,025 shifts the daily chart to negative and indicates risk to the 50-day and 200-day simple moving averages at 10,750 and 10,104.
My market call remains, “Dow 8,500 before Dow 11,500"!
Lower US Treasury yields are a sign of risk aversion. On Tuesday the US Treasury sold $44 billion in two-year notes at a yield of 1.024. The bid-to-cover was 3.03 times the auction size. The indirect bid at 31% is at the low end of the 30% to 40% neutral range I've talked about many times.
Today the US Treasury sells $42 billion in five-year notes. If this maturity holds my quarterly and semiannual pivots at 2.464 and 2.529, the downward trend is toward my monthly resistance at 2.239.
On Thursday the US Treasury sells $32 billion in seven-year notes, which are trading around my semiannual pivot at 3.107.
The 10-year yield declined to a test of my semiannual pivot at 3.675 on Tuesday and Wednesday morning. Around this pivot is my weekly support at 3.983 and quarterly resistance at 3.467. A weekly close richer than 3.675 would also be a monthly close richer than that level. This has been my benchmark for risk aversion, which makes sense given the risk of the Greek debt crisis. There is a potential contagion to other PIIGS nations; Portugal, Iceland, Italy, Greece and Spain.
The Fed will keep the federal funds rate at zero to .25% Wednesday afternoon. You know I'm against this policy stance, as I've said many times that the funds rate should never have been pushed below 3% to begin with. The Fed sees moderate economic growth, no inflationary pressures, but sees the housing market and slow job growth as reasons for keeping this low funds rate for an “extended period." I see housing and banking returning as a drag on economic growth, and inflationary pressures building in commodity prices, health-care costs, and food prices. Low rates are providing speculative fuel for Wall Street while leaving Main Street high and dry.
The S&P/Case-Shiller Home Price Indices show that home prices are likely to decline in the wake of the ending of the tax credits this Friday, and the continued supply of short sale and foreclosures.
- The bulls touted that the 20-City Composite is up 0.6% year over year, but 11 of the 20 are experiencing year-over-year home price declines.
- More important is that the 20-City Composite declined in February versus January. The index is back to levels of late summer/early autumn of 2003.
- From the peak in June/July 2006 the trough of April 2009 the 20-City Index is down 32.6%, and from this peak through February home prices are down 30.3%.
In Tampa Bay where my son an I bought a new home a year ago prices were down 1.2% in February and down 6% year-over-year. When we bought our home in April 2009 the appraised value was down 16.7% from 2008. Today the appraised value is down another 20% for 2010. Why? Because our model home in our community was sold on a short sale, well below the market.
Comex Gold is becoming a currency of last resort. With the euro trading to a new 52-week low on Tuesday, gold gained a strong bid. The Greek and PIIGS debt issues are real problems for the global economy, which means gold can rebound to my semiannual resistance at $1186.5. A weekly, and hence, monthly close above this level targets a new high in May, as currency of last resort.
Nymex Crude Oil should decline back to my annual pivot at $77.05, as the debt crisis, Goldman Sachs (GS) issues, and Main Street woes reduce demand for energy. This week’s resistance is $86.26.
Thoughts on Goldman CEO, Blankfein
One thing I strongly agree with: There shouldn't be any disclosure obligation for market makers. I was a market-maker in US Treasuries and federal agency securities between 1972 and 1987. When you make a market you have a bid price at which you'll buy from a client and an offer price at which you'll sell. Traders always need to have a market bias on the securities for which they make markets. When bullish you want to be long Treasuries. When you're bearish you want to be short. This opinion can change on a dime. There were times in my career as a trader when the client flow of business made me long when I wanted to be short, and vice-versa.
The issue with Goldman isn't making undisclosed bets on the short side, but creating synthetic financial instruments that should be banned, as investors cannot fully understand the risk/reward. The institutional sales force at Goldman is instructed to sell a structure, and may not know that the market maker is shorting. The sales force is selling the potential positives of the structure not knowing that the trading desk created a monster designed to implode. These types of products need to be banned. We didn’t need them or use them 10 to 20 years ago, and given the fragility of the global debt markets today, we need to de-lever not add leverage. The global pools of notional amounts of derivatives are just too big, and as we're seeing today, countries and states are at risk. Bank exposures to all such structures must be returned to bank balance sheets and marked to market daily. If that’s not possible for a certain type of structure, they should be banned with global exposures unwound. This should be the priority of financial reform!
The Daily Chart for the Dow
There’s an up-trend resistance line that connects highs going back to November 2009, which was tested at Monday’s high of 12,258.01. This level also lines up with the 61.8% Fibonacci retracement of the decline from the October 2007 high to the March 2009 low. The high was just above monthly and annual resistances at 11,228 and 11,235. We didn't get to my semiannual resistance at 11,442 as yet. We have overbought MOJO with the 21-day simple moving average at 11,025. A close today below 11,025 shifts the daily chart to negative and indicates risk to the 50-day and 200-day simple moving averages at 10,750 and 10,104.
My market call remains, “Dow 8,500 before Dow 11,500"!
No positions in stocks mentioned.
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