The Smart Money

Stocks continue their march to new all time highs as equities are trading as if there is no taper of QE on the horizon. Bonds, however, have been a bit more tepid in their outlook. Why is it that equities see continued QE but bonds are a bit more skeptical? We always tend to side with bonds when those two markets are conflicted in their outlook. Bonds have reached a critical level between 2.7% and 2.8% on the 10 year as stocks are grabbing the headlines. The 2.7-2.8% level is important because stocks have started to struggle above those bond yields. Watch the 10 year. A soaring 10 year is a huge headwind for the housing market.

Bond yields are THE story. As long as bond yields stay below 2.8% stocks can continue their recent trajectory.  The jobs report this morning was light enough that bonds are acting as if the taper is off and QE is here to stay for a bit. Yields which had been pushing above 2.7% are now back to 2.61% on the 10 year as we write. Be aware that volatility in equities is increasing and September looms on the horizon. September will see a German election pass which could turn up the heat in Europe. Merkel is going to try and keep the status quo until at least until after her election in late September. Merkel will want nothing to rock the boat just yet. The September FOMC meeting is shaping up to be the most important in sometime as they could call for a secular change in monetary policy.

Robert Shiller from Yale was one of the first to call the Internet Bubble in stocks in the Roaring ‘90’s. On CNBC yesterday he called today’s market a bubble. The problem with Shiller’s market call is that when he called the Internet Bubble in 1996 it didn’t pop until March of 2000. Bubbles can go on longer than you think and pop quicker than you can blink.

Private equity firms have been net sellers in recent months.  The Chief Executives of Blackstone, Fortress and Apollo continue to preach that this is a time to take profits and sell assets and that they are finding assets difficult to buy as cash is left to sit in their pockets. Private equity firms are large holders and it takes months if not years to sell out of positions. They are not calling a top but see ripe conditions for selling and poor conditions for buying assets. What the wise man does in the beginning the fool does in the end. Watch the smart money.

We have been saying that the low volatility and low bar for earnings would continue to propel stocks higher in July and August. New money for the month helped stocks yesterday. The market tends to rise on the first 3 days of any new month due to new pension money. Volatility is starting to rise again in the stock market. Watch volatility and bond yields. Quiet is good. Noisy is bad. September could get noisy.

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

Advertisements

The URI to TrackBack this entry is: https://terencereilly.wordpress.com/2013/08/02/the-smart-money/trackback/

RSS feed for comments on this post.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: