• ponderInterest rates look like they could be forming a new higher trading range around 2.6% (2.25%-3.25%) on the 10-year bond (1.4% was the low last year). There is still risk they move substantially higher than that but it all depends on the Fed and that’s a guessing game I’d rather not play.
  • I’m starting to worry about real estate just a bit. The homebuilder ETF is possibly forming a head and shoulders top. Lumber prices warned of a slowdown months ago and the recent interest rate surge can’t be helping, either. In addition, disappointing numbers from companies like Fastenal and Tempur-Pedic are worrisome. Considering the “recovery” is largely built on the housing rebound this could also be a bad sign for GDP.
  • “Developed” stock markets have recently formed a major divergence. While the S&P 500 made new highs this month, European and Japanese stocks have not been able to rally beyond their 61.8% Fibonacci retracements. In fact, the Nikkei plunged over 400 points last night and looks like it needs to at least test its recent lows. The impetus for the selloff was higher than expected inflation numbers. Investors are worried that this may force the Bank of Japan to temper its inflationary policies – you can bet Bernanke & Co. are watching this very closely.
  • Koan: If the mere talk of reducing “quantitative easing” causes a record increase in interest rates, what happens when the Fed actually ends the program?
  • Earnings growth this quarter has come completely from the banking sector. Without the banks earnings are now backtracking. What’s more, because they don’t have to report the $31 billion they lost over the past couple months as interest rates surged, the numbers are complete fantasy.
  • Here’s a great quote today from a great investor: “Weak fundamentals accompanied by expensive and rising financial markets is almost always a dangerous combination for investors.” -Seth Klarman
  • Investors battered by the financial crisis and punished by the Fed’s zero-interest-rate policy may be piling into another asset class bubble: “safe,” dividend-paying stocks. There’s no doubt the companies I’m referring to are great companies (though I won’t name names) but when investors are willing to pay 25 times earnings for a company that can merely grow at the rate of inflation I think they’re probably taking on more risk than they comprehend. At best, there is no “margin of safety” and at worst they stand to lose ~35% when they revert to their mean valuations.
  • Sold to you: Institutions (smart money) have never dumped more stock on retail investors (dumb money) than they have over the past four weeks.