Friday, June 5, 2009

Markets Await Unemployment News

Interest rates continued to rise overnight in anticipation of improved unemployment numbers. The most positive estimates project that under 500,000 jobs were lost in the previous month. Normal numbers have been coming in minus 600,000. Today's estimates peg a loss of 520,000 jobs. The 10-year rate hovers around 3.75% now, the same rate that existed back in November, before the real fall in rates occurred. Rates last year, on this day, were 4.05%. In contrast, the Dow was 12,600 and the S&P 1,404. Gold was around the 865 level.

Which Market is Right?

I began looking that the relationship between rates and stocks in 2005 and saw a big disconnect at that time. In normal times, we can see rates and stocks highly correlated. When we had the big correction in stocks several months ago, stocks and rates were at the same point. Now, we see stocks getting ahead of rates again. Which market is right? How will this be corrected? And when? The unfortunate solution however is that both stocks and bonds (move inversely to interest rates) must both fall.

With such a prediction, it is obvious that your traditional money manager will not be able to help you through this correction. With both stocks and bonds falling, investors are at risk at again, taking big hits in their portfolio. If your portfolio hasn't been reviewed by a financial planning expert that has experience not only in stocks and bonds but also deriviatives to help you hedge your positions, you should find such a person soon.

Remember, DIVERSIFICATION means nothing if all of your assets are positively correlated.

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