Thursday, November 26, 2009

Equities - You are Back of the Bus

Time and again, it has been proven over the years that the bond markets are usually smarter than the stock market.

To Wit:

Fear pushes US rates into negative

By Michael Mackenzie in New York
Published: November 24 2009 19:19 | Last updated: November 24 2009 19:19
Negative interest rates are back. Yields on short-term US government debt have fallen into negative territory as banks and investors park their cash in havens before the end of the year.
 Equity investors have been ignoring the robust demand for treasuries, negative short rates.

One need only be reminded of Sep 2008 and Dec 2008.

Ignore the bond market signals at your peril.  Robust demand for bonds at historically low yields, negative short rates are not a healthy sign. 

Secondly, we have Dubai and we also have an imploding Greece.  These could be one off events.  But they could also be the first dominoes.  In the larger scheme $60 billion or thereabouts in Dubai is not that big a number given where we have come from.

But what is far worse is the structural damage that is being inflicted in the region.  China is a bubble.  India is a market share gain story and FDI flows, not much more.  Brazil is a commodity play.

And we have seen the bogus recovery stats with the bulk of GDP growth this past quarter driven by cash for clunkers and housing programs. 

Take it all away and what do you have left?
A strapped, over debted, suffering consumer and governments entering the scenario consumers were in 5 years ago, teaser rate debt.  Leverage is a bitch.  It usually comes back and bites you.

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