April 22, 2014

Closing Comment

Mergers in the pharmaceutical world stirred the pot today. Allergan is in play, Novartis is buying the GlaxoSmithKline Cancer Unit. And you just thought that stocks were poison. As the day came to a close our averages were near their highs, but did retreat from some of the better levels. The Dow closed up +65 points, a gain of +0.4%, with the NASDAQ trumping that with a gain of almost +1.0%. European equities had led the charge overnight and they closed with gains of 1.0% to 2.0%. (Vladimir who?)

Bond prices were generally flat along the curve with the exception of the 30-year bond which continues to march to its own drummer. Today it was to the upside.

The 2-year closed at 0.40%, the 5-year at 1.74%, and the 10-year at 2.72%. The 30-year gained +16/32 on the day.

The 2-year auction received an underwhelming bid, with an awarded yield of 0.447% (about what was expected), a 3.35 times bid/cover ratio, but a larger dealer underwriting share of 57.7%. This is well above the street’s normal load. The direct and indirect bidders showed much less enthusiasm in this month’s bidding, so the dealers made up the difference. The new note is being offered at 0.45% as we head for the barn. Not an auspicious start to the auction process this week. Tomorrow brings the 5-year and potential for more mischief.

The economic news calendar remains on the light side. Today we saw existing home sales come in flat for last month. Tomorrow brings the latest report on new home sales. While the housing market has led the economy’s recovery from the gloom of the Great Recession the leadership role may be passing to the manufacturing sector and then to the consumer. One problem for the housing market now is the absence of supply. Most realtors report they would be closing more business if more houses were for sale. The early bid for housing came from speculators and hedge funds. These folks would walk up to the courthouse steps with pockets of cash, bidding on anything that was in foreclosure. Real homeowners were often shut out of the process. So far at least these portfolios of homes are not coming back onto the market, but are supposedly being rented.

I'm not sure what's going on in the Dollar and commodities. The Dollar is sluggish these days and commodities are pushing higher. The CRB is hitting new highs for 2014, in fact is ahead of levels seen in all of 2013. Yet Crude Oil tumbled today, losing almost $2 per barrel. Gold was weaker as well. Yet food prices are under upward pressure as the drought comes back to haunt the food-growing regions of our country.

Morning Comment

With much of Europe shuttered yesterday in a continuation of their Easter celebration, things were generally slow in both the U.S. bond and equity markets. Bond prices staged a small rally early in the day, but faded back to unchanged late. Equities traded within a narrow range.

Overnight saw weakness in Asian stock markets. Europe is catching up today with gains across the board. One comment suggested that stocks will be okay so long as Ukrainian action remains at the level of skirmishes. I did read an editorial today that reprises comments from Khrushchev’s granddaughter. She says that Putin has already gotten what he wants, control of Crimea. He has also reminded the world that he is a man to be feared. However, she added that she doesn’t think Putin wants to annex all of Ukraine. He can now pull back from the crisis, appear to be a willing deal-maker, and still end up with Crimea in his pocket. Let’s hope she’s right and that this crisis doesn't get out of hand.

U.S. equities are not following Europe higher, at least not yet. Bond prices are opening with small losses along the curve.

The 2-year is starting the day at 0.40%, the 5-year is 1.74%, and the 10-year is 2.74%. The 30-year bond is lower in price by -8/32.

The only real auction today is the 2-year note. Current guesses have the awarded yield at 0.45%. Last month saw the 2-year award at 0.469%, the highest level in three years. This extra juice brought in a very strong bid from large accounts that bid directly with the Treasury and foreign buyers. The street ended up with less than 40% of the sale, well below their normal underwriting load. This energetic bidding continued right through the 5 and 7-year notes later that week. I don’t anticipate that sort of enthusiasm this time around, but with yields having moved higher over the last two weeks there should be at least reasonable interest in the sale.

Reviewing the ground we’ve traveled over the last 30 days, I am amazed that we are, sort of, back where we started. Stocks dropped sharply in early April only to almost fully recover today. Looking back on the year to date, we see stocks more or less about where they were at the beginning of the year.

Bonds traveled the same journey. The 2-year yield hit a high of 0.45% in early April, dropped to 0.35%, and now rests back at the 0.45% level. The 2-year started 2014 with a yield of 0.40%. It sure seems like we’ve walked around the barn a lot, only to arrive at the same spot.

Jeff Smith
Director of Investment Sales

Jeff's comments and insights, based on his professional expertise and the knowledge he has acquired observing the U.S. economy and global markets, are offered as his own personal observations and opinions, and not necessarily reflective of those held by SunCorp, our board or member credit unions. Please do not respond to this message as this e-mail address is un-monitored.


April 2014

Nearly five years after the U.S. economy bottomed out and began its slow recovery, the employment market reached a significant milestone in March: payrolls, excluding government agencies, exceeded their pre-recession peak......Read More

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