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That Makes Perfect Sense
The hype continues, especially on Bloomberg TV. Boy does the media love this story. They are running extended segments on the "U.S. Debt Crisis". And the talking head host is bubbling with excitement as she questions various guests over the dire consequences.
Here's an interesting approximate quote from earlier: "Standard and Poors has indicated that there is a 50% likelihood that they could lower the debt rating for the U.S. in the next 3 months".
So they may, or may not, do something some time in the next 1/4 of a year. Unless they don't.
And the action in the currency markets and in the U.S. bond market is interesting.
If one takes the media reports as gospel, then because of the debt situation, the United States may be notched down to a lesser quality credit risk, which means that there is an increased risk the holders of U.S. bonds will not be paid. And because of that risk, traders are fleeing the Euro, Pound and Yen and moving into the Dollar. Oh, and the yield on the U.S. 10-year bond has skyrocketed to 2.95%, a dramatic increase from its level of 3 weeks ago (July 6th) when it was at 3.097%.
No! Wait! That can't be right! The current yield should be higher! And why would the dollar be moving up?
So, to sum up, because the U.S. may be official labeled a lower quality credit risk traders a flocking to the U.S. currency and debt.
Well that makes all the sense in the world.
Looking beyond Washington, the question is this: Could there be real trouble on the horizon?
Could the myopic focus on the U.S. debt ceiling issue be causing many of us to miss the potential trouble that seems to be brewing in other areas?
I say yes.
One area not to lose focus of is Europe and the ongoing European Sovereign Debt Crisis. In this regard I would call your attention to the recent climb higher in rates on Italian and Spanish debt. Investors Business Daily reports that Spanish and Italian debt yields rose following the latest debt auctions. The yield on Spain's short-term debt rose to a 3-year high. Italian 6-month bills saw their interest rate climb to the highest level since November 2008.
If the European Sovereign Debt Crisis bubbles up again it could be a serious problem for equity markets. In my opinion to have yields rise again, so soon after the latest major effort, which was advertised as "solving the problem", would be a sign of potentially extremely serious difficulties. What could the E.U. leaders do next to calm the markets?
The second area of concern which we all must remain aware of is the gradual, one might say relentless, deterioration of the economic data being reported regarding the U.S. economy. In an example of growing weakness in the industrial sector, yesterday 3M, Illinois Tool Works and Paccar put forth reduced outlooks for the 2nd half of 2011. Also the report on New Home Sales showed a further drop in activity. Other recent economic reports have shown a struggling U.S. economy at best. I have seen some research reports that conclude that the U.S. is actually rolling over into another soft patch, or worse, an actually contraction.
Since analyst's estimates of S&P500 earnings and general economic growth remain high, any shortfall would seem to qualify as a negative surprise. And unlike the "Debt Ceiling Crisis", a weakening economy and reduced company revenues & earnings are events which have not been discounted by the markets.
I will continue to play for a bounce in the short term. But as I have said before, I will do so with smaller than normal positions and with at least one eye on the exit.
Have a good one...
Curt B.
Options Manager: Daily Decision-PRO
S&P 500 - Last 12 Months
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