Cu is a leading economic indicator….it’s breaking out ahead of other commodities…notice how the $ is sagging. Here’s a link to my Copper Comparison Chart . Ace
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We’re getting into a real fine point here in terms of economic theory with the Yield Curve as the curve is very steep right now…and has been for many months. Traditional economic theory suggests that a steep curve is bullish for stocks over time. Yet, the markets have stumbled the past few months….there is a quandary here, it seems.
In a recent chart I created (not shown here) , I placed a comment there on July 4th that perhaps in a deflationary economy, a high yield curve may actually be bearish? I haven’t figured that out yet, but it was my speculation and my vague recall of something I learned many moons ago in college econ courses that I took. For those who know me well, I’m the would-be economist who never was…I loved economics in high school and college. I took several courses including advanced level and aced them all and amazed my teachers…. but I never majored in it because a counselor told me my math skills needed to be very strong to get a degree (as it turns out, my math skills have been better than average over the years, but I was too naive to know then I was smarter than many people at numbers.)
Anyway, my point is that if the ten year yield is SIGNIFICANTLY higher than is the inflation rate, it creates what I would call a “real deflation premium.” In other words, if deflation exists in our economy, and let’s just say that deflation is -1% and the 10 year yield is at +2.94% which is where I saw it this morning, the actual real deflation premium is 3.94% in this example…because that’s the spread between -1 and +2.94. (Note: According to the FED’s website, the TIPs “official” inflation rate is about 1.8% on the 10-year yield or what they call the “real yield.”)
In such a scenario, higher long term interest rates act as a drag on the economy, because of slack demand, borrowers are unwilling to pay interest rates that are significantly higher than the deflationary effects that exist in the economy. To put it another way, if one borrows at 2.94% but is paying off the loan on a depreciating asset, they may not want to borrow at all. Thus, slack demand reinforces a slowing economy and more deflation.
To this end, there is something known as “the Bernanke Doctrine” which says that in a deflationary environment, the FED may actually buy longer term treasuries to keep the interest rates down and thus stimulate demand for loans such as with mortgages. (For those who don’t know, it is not normal policy for the FED to meddle in buying 10-yr and 30-yr notes and bonds…market forces normally control the long end of the yield curve.) We have already seen this with QE I when the Fed bought mortgage backed securities and some 10 year notes in 2009’s recover period…and we may see another form of it again soon as the FED appears to be nervous once again about deflation in the economy.
So, there is this quandary with the high yield curve…on the surface, it seems bullish by historic and traditional measures …but if it turns out that deflation is now the enemy, then a high yield curve is actually bearish as I posted on my chart on July 4th.
…so, let’s keep an eye on the CPI and PPI numbers, which I believe will be coming out later this week for further clues?
This is a link to a dynamic yield curve chart by StockCharts.com which contrasts a curve against the S&P index over time. Be sure to press the animate button and watch how the two graphs move in time.
the original source 2 Yr Note at all-time low….
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I was in communication with a respected trader recently on his views of Wynn Resorts and Casinos (symbol: WYNN)…I disagree that it is about to fall 30 points as he believes…I told friend recently that I think WYNN could be a long term winner…by long term, I think 2 to 4 months from now based on that double-bottom TRIX reading and triple bottom MACD reading. Sure, it’s a short in the very near term…I said that the other day, but I think you’rethis other fella is wrong about the next 2 to 4 months out.
BTW, how can he say that a death cross is imminent when the two lines (50 and 200) are more than $10 apart??? The 50 line has just barely started to dip…I think there is time, if the numbers improve, to avoid a death cross.
Also,I just read in Kopin Tan’s weekly blog (in Barron’s and Barrons.com) that WYNN is sitting on a horde of cash and has many insiders…that could potentially declare a special dividend in the 2nd half of this year before the Bush tax cuts expire…
The idea here is that WYNN’s insider shareholders may float a proposal to pay out a special one time dividend while the dividend tax remains capped at 15%. Next year, the tax will likely jump at high as 39.6% for top bracket folks.
If they pay out a special divvy this year, the price could rally in the days before the payout…once the payout occurs, the price could collapse…so, get this: if the price collapses after a payout, the insiders will have a capital gains loss which can be used to offset winnings from eleswhere (assuming a more recent higher cost basis…but even a longer term lower basis might suffer less once price drops after divvy payout), and up to $3,000 will be taxed at the current 15% LT cap gains rate…next year, that goes to 20%.
…and they also pay only 15% on the dividend tax this year…vs. up to 39.6% for next year. Barron’s suggested a few others that could possibly do the same…another one was AMZN…can’t recall the rest right now…
Now that I think about it, that is the only way one might get a 30 point selloff on WYNN! On a technical correction, as the price might correct after such a large dividend payout! (laugh!)
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The Wall Street Journal said recently that the full European bank stress test report would be released on July 23…that would be July 22nd overnight for us.
I read that up to 1/3 of the European banks may fail the stress test, according to one analyst familiar with the banks and the test criteria.
Also, here is something I didn’t consider before, but one of the interviewees this morning on CNBC (a Fifth Third Bank pro) said that the reason our treasury yields have dropped has to do with the European banks buying up US treasuries to “window dress” their bank depositis….and once the stress testing is done, we should expect treasury yields to fly higher when the banks sell that paper back into the markets!
Furthermore, there was news today that China’s central bank bought fewer US treasuries the past month…about 4% less, which is a substantial change for them. So, Europe made up the difference, but what happens when the European banks begin selling? Can the Fed step in and continue to buy treasuries when the rest of the world won’t? Does this put the US currency at great risk?
For now, you would not know it…gold was selling off steeply again today, but it may be manipulation by gold traders in New York…and such manipulation may soon be over-run with panic buying? I don’t know, but be prepared for such a scenario…I’m sure the Fed will do its best to prevent such a “run on the currency.”
I may do a new round of TBT call buying next week since it proved quite profitable for my followers and I last week… but probably not until mid-week, when I think the yields may bottom around 2.85% on the 10 year.
I realize what I am about to say goes against the conventional wisdom that the stock markets are in a secular bear market. Generally, I was buying into that concept myself until I took a look at the perennial Dow Jones Industrial Average over many decades.
The lower line (in gold) shows what the Dow looks like if all inflation is removed since year 1900. The value of the Dow is presently under 1000 in “year 1900 constant dollars.”
site de rencontre ado mobile The top trend line (red) from the 1929 top to the 1966 top (“Nifty Fifty” era) shows that a new Secular Bull Market began in 1997 and was re-tested with the March 2009 low. It has since bounced higher off that line, which means that as of July 14, 2010, we are still in a Secular Bull Market, contrary to popular opinion.
The reason it is important to remove inflation from a long term chart is that over 110 years, inflation has dramatically distorted the values of the Dow compared to where it once was. By removing inflation from the chart of the Dow, we can now see that the line is no longer “a mountain,” but rather a line that appears to be under-valued in terms of all the technological/ scientific/ productivity increases the US/ and global economy has witnessed the past 81 years since the 1929 top. So long as the Dow does not drop below the 2009 bottom (Dow 6500 in current terms), we will remain in a secular bull market, meaning that investors with a very long time horizon should be able to make profits in the stock market.