treasury yields

Apparently it is now fashionable to be bearish since the S&P’s smashing, as in breaking below the 1040 level and 1035 for that matter, performance over the past few days. I hate to break it to everyone, but the time to be bearish was at 1120 and when the VIX was at 15, now, well, be bearish, but be careful. Those looking to jump on the short wagon might find themselves over paying for their positions and they might get squeezed out in the next few days. Don’t get me wrong, my S&P 500 target price is still 900, but I fully expect a retest of the 1040 mark in the very near term.

How bad is the economy?

Anyone even questioning how bad the economy is has their eyes closed and their head stuck in the sand. All the data is rolling over, look at the Chicago PMI today which came in at 59.1, sure, it met expectations, but it is down from where it was and is establishing a declining trend. The leading indicators are down and probably going to look horrible in the near future. I am sure initial claims will still be well over 450K tomorrow, oh, the ADP data stank to high heaven today as well so forget about an upside surprise on Friday. There is some housing data out tomorrow morning and I am sure it will not be good, it is May contract data, but never fear because Congress is attaching an extension of the home buyers tax credit to the unemployment extension, fantastic!

In short, things are much better than, say, September 2008, but things are not good and we are heading for either a double dip or very slow growth in the second half of this year. Treasury yields are telling us we got serious problems ahead and deflation, sound familiar yet, is an immediate threat. However, remember that inflation will come on very fast at some point in the future, you will never see it coming. The good news was that the ECB lending news was not as bad as I was expecting, but let’s face it, the news is still not good in Europe and the risks are very high. Spain may be downgraded, it will be very soon, which I am sure is surprising and people are wondering why such a fiscally sound country be downgraded?

The only thing I am surprised about is the U.S. and the U.K. still have the ‘AAA’ ratings after their drunken stupor of a spending spree, with much more to come before the majority is kicked out in November. After all, once your vote is cast and they lose their jobs what do they care if you dislike them or not? Expect another stimulus which is sure to extend our pain well into 2011. In the end all we will have found is that we have spent a lot of money with very poor results, just like the 1930’s. Let’s just hope this time it does not end like it did in 1941, there seems to be a correlation between poor economic stretches and wars.

What should give bulls some fuel is that everyone is so bearish it is bound to be a contrarian indicator. Am I going to bet on that? No, not yet at least. I spent the majority of this morning dumping everything I absolutely did not love to own building cash and some short positions, the markets were up this AM. While I am sure we will get a bounce in equities I am not so sure we will get it this week, a notable bounce at least. There will be short covering before the 3 day weekend, but at the same time I do not believe any one wants to be long either. What does that mean? We go lower, in my opinion at this very moment, but we could very well get a sharp bounce tomorrow before we go lower. If we break above 1040 we might go higher, but we are certainly not going to make new highs again this year, from what I see right here and now. Things are much worse than they appear unless you are 100% treasuries, suddenly that call I made back in April doesn’t look so crazy anymore either.

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