Friday 30 October 2009

The bull is rolling over

SPX falling out of bullish channel, closing below 1,060 suggests weakness to come. SELL!!


Friday 9 October 2009

Beware of gravity!

The equity market is in a gravity defying 'sweet spot' of low interest rates, QE, returning M&A, cash rich, yield hungry investors, and earnings and economic fundamentals are working off ultra low bases. Of these elements, the most likely tap to be closed off first is QE, then interest rates, which will probably be the catalyst for gravity to take over.

Why have bond and equity markets been rallying in tandem?

The answer is simple. Equities have rallied BECAUSE bond yields have fallen, reducing the cost of capital and forcing investors to take more risk to maintain their yield. This amounts to a universal carry trade driving everything including corporate bonds, equities and currencies.

Moreover, the fall in long bond yields is being driven by the short end, on which they are anchored. So, as the 2 year yield is squeezed lower by FSA liquidity requirements and lower for longer base rates, longer dated yield shave also benefited from the carry offered by the steepest yield curve in over 20 years. This interplay is demonstrated by the 2's 10's spread, which has remained stable, as the 2 year has hit a record low...