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Will QE Tapering Start the Great Rotation From Bonds Into Stocks?


Investors are watching closely to see where the money will go next.

Well, it ain't the volatility we had in previous years, but daily one-percent swings are back in fashion as the Dow (INDEXDJX:.DJI), the S&P (INDEXSP:.INX), and the Nasdaq (INDEXNASDAQ:.IXIC) gave up some ground last week and are bobbing and weaving this week as well. And that's to say nothing of the bond market, which seems to have hit an inflection point after coming back from Memorial Day weekend.

Which leads us to the oft-discussed subject of when money will come out of bonds and into stocks. No one knows when or if this will happen, but something hit the bond market, and the same day stocks were up nicely. Coincidence, perhaps -- but now the guessing, timing, and betting begins in earnest. Bottom line: We should soon know if the 30-year bull market for bonds has ended. And if it has, that money has to go somewhere. Candidates include real estate, art, natural resources, cash, and, oh yeah, stocks. We'll see...

For those of you working this week along with me and the fine folks at Minyanville, there is an OPEC (Organization of the Petroleum Exporting Countries) meeting on Friday, and from where we sit, oil prices still count for something in this world. Will $100 per barrel continue to satisfy them? Let's hope so.

Lloyd's Wall of Worry stands at 19 blocks this week. Scroll down for a text-only version of this week's column and an explanation of how it works.

QE: Tapering -- meaning "to make smaller gradually," according to the Free Dictionary -- will be the word du jour for many jours to come.

US ECONOMY: Some good nums lately. But we all know that it's all about the jobs. Making the June 7 employment report "the" day in marketland.

UNEMPLOYMENT: Job insecurity survey sentiment hits a 20-year high in the UK. This means only one thing: Time to get rid of that bloody survey.

INVESTOR SENTIMENT: "Gray skies are gonna clear up, put on a greedy face…" Here come Mom and Pop!

HOUSING CRISIS: When is the last time the words "prices" and "surging" were used in the same sentence or paragraph or epic novel? It's starting to happen, folks.

EUROPEAN ECONOMY: Stalwart Germany experiencing a "I feel your pain" moment as their unemployment rate flirts with busting through the 7.0% level.

FRANCE: The EU is strongly suggesting economic reforms to spur growth. And for the record, that does not mean reducing work week hours or raising taxes.

US EXECUTIVE BRANCH: Lots of Hyphen-Gate smoke, though no grease fire detected so far.

SPAIN: Calls for them to cut their debt load or else! To which Spain chirps, "But baby, I ain't got no money, honey…"

VOLATILITY: Forget gold and equities; the new king of the volatility hill is Japanese government bonds, aka JGBs (aka "Just Gone Bonkers").

Lloyd: You take a look at the Japanese stock market lately?
HAL: Hai. (Yes)
Lloyd: And?
HAL: Kampai! (Cheers!)
Lloyd: Time for me to learn Japanese?
HAL: Kampai! Kampai!

CHINA: Good news just in: They haven't popped their housing bubble yet. Whew!

GLOBAL ECONOMY: Okay, we can handle a low-to-no growth environment… just as long as it stays in Europe.

JAPAN: The 20-year reign of deflation expected to end this year. To be replaced by twenty years of inflationary rule? We'll see.

DRAGHI: Getting a little pushback from some members of the ECB. Hope they know that bumblebees don't only make honey; they also sting when bothered too much.

SEQUESTRATION: So far, the biggest impact seems to be on slightly weakening real estate values in the Washington, DC, area. Not gonna be a lot of tear-shedding outside the beltway on this one.

BONDS: It was "Bond Tuesday" yesterday as both the US 10-Year Treasury and corporate bonds of all shapes, sizes and quality get historically hammered. More to come? Great rotation out of bonds and into stocks? Stay tuned.

SYRIA: Rumor has it that President Obama asked for a no-fly zone over this civil warring nation.

CENTRAL BANKS: The grand experiment has begun as almost all of the major central banks worldwide (US Fed, European Central Bank, Bank of Japan, and the Bank of England) join together to drop cash from their respective helicopters. Hey China? Buy a whirly bird and join the party.

What Is Lloyd's Wall of Worry?
by Lloyd Khaner

Welcome to my at-a-glance guide to the issues facing investors this week -- a unique tool for traders and money managers.

Typically the term "wall of worry" refers to the entire body of concerns influencing stock market action. When the wall is high, meaning the market is nervous, stocks tend to get cheaper.

This wall of worry is even more specific. Every week I list the exact concerns in the marketplace and use the list to help me make buying and selling decisions. As I like to say, "Buy fear, sell cheer."

In other words, once the the wall rises above 15 blocks, start looking for deals. If the worry count sinks below 10, consider selling; prices have likely peaked.
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Author and author's firm own positions in SPY and DIA.
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