Lower Rates Stop Working - What's Next?

Stocks around the world declined this past week, led by European shares.  US shares, despite joining in the sell-off on Friday, declined only slightly.

As mentioned last week, Silver was looking like it was ready to pop and sure enough, it did, rising more than 5% this week.

More European bond buying by the ECB appeared to be the stimulus for the sell-off.  They will begin buying corporate bonds in a continuing effort to stimulate the economy.

In the past, more free money boosted stocks but over time, the effects have been less and less.  This week, a typical European market looked like this:

More Central Bank meetings coming up next week, including one with the US Federal Reserve Bank.  What can be said about that?  Doesn't really matter what Janet Yellen says, computer trading programs react to any comment with buy programs boosting prices back up to the highs.  Usually the volume is so light that it leaves many scratching their heads.

Don't have the precise info in front of me, but reports have shown that Hedge Funds and Major Banks have been net sellers for the past 18 weeks, yet US stocks continue to hover close to the highs.  WHO'S BUYING?  is the big question.  Can't say that I actually know, but as mentioned last week, it had been reported that the group Anonymous hacked into the Federal Reserve trading accounts and found that it is the Fed that is accumulating massive positions in an effort to keep the markets up.  Other reports have speculated that should European markets continue lower, the ECB will be buying stocks aggressively.

It's wonderful when you "have money to burn."

We may never know until it's too late but if the Central Banks are truly buying stocks with money created out of thin air, can equities really have a value?

It is a bit disturbing if one considers the consequences.



CONTINUED LOW INTEREST RATES

There was a time when there was a correlation between interest rates and the stock market.  I first started blogging about it in 2005 when rates started moving lower while the market moved higher.

It got pretty crazy there for awhile but then rates and the markets did come back together and in a hurry!

Isn't it interesting that the SP 500 dropped dramatically to match up with the interest rate?  Notice the very strong correlation between the two until external forces began trying to repeal the market cycle.

"So where are we today?" you might ask.

It certainly looks very "discomforting."  Notice that rates are even lower now than when the market melted down in 2008-2009.

It seems to be understood that there will be "pain" when interest rates rise.  How much pain is hard to say.  Those who do not consider the fall out that will occur when rates do rise may suffer substantially.

While Central Banks fight the good fight to get things moving again, nothing really has seemed to work.  Many who study the world demographics will attest to the fact that many important populations around the globe are aging and are not spending at high enough levels to stimulate the economy.  Business formation continues to decline as increasing levels of regulation add to the cost burden of starting a business.  Yet just sitting on low interest rates much longer will have horrible consequences.  As we've seen recently, pension funds cannot operate in a zero interest rate world.  I read that the Teamster's pension amounts will have to be lowered to just $35 for each year worked, meaning that a worker who had put in 30 years will only be getting $1,000 a month in pension benefits.  Good luck with that!  Insurance companies cannot honor their obligations either.


INTERESTING TIMES AHEAD

As mentioned, the Fed will be meeting this week and then next week, the long awaited Brexit vote.  I can only ask, "what difference does it make?"  Not long ago, Greece held a vote to escape the clutches of the European Union and voted to exit.  What did the government do?  Nothing.

UK can vote to exit, but it won't matter.  The game will play on until one morning we wake up with the news.  GAME OVER!

Markets Await Fed's Rate Decision

As discussed last week, the market has been topping here with a three week test of the high failing two weeks ago.  Then last Friday, we witnessed a THREE DAY test of the high that failed.  The signal was a perfect success as the market opened on Monday down, continuing down throughout the week with a brief bounce on Thursday.  It was a very sellable rally and I added to puts in anticipation of the three month test of the lows, expected this month.

As we can see in the following table, stocks across the globe were decimated.

US markets fared quite well actually as some countries were down up to 7%!

I am expecting further weakness as my monthly count shows the possibility of a three month test of the low at 191.

Even though the prospects appear grim, I still don't see lows below the August/September lows, at least not at this point.

If we view a weekly chart with Bollinger Bands, bands that mark over bought and over sold levels, we can see that oversold levels would occur close to the previous lows.

Looking at the weekly line chart, it appears that volatility might in fact even decline.

With this in mind, I have been selling options at the marked high and low levels to generate income.

While there is lots of room for trading gains within the parameters seen on the previous two charts, my other indicators confirm that volatility, while it may seem extreme based on the current daily moves, is still declining.  This is because the volatility levels caused by the big down move in August/September caused volatility levels to rocket.  Since then, volatility has been muted.

If the next week's moves mirror anything similar to the Aug/Sep moves, then it's possible to see the market drop to the lows in the next couple of days as markets anticipate the Fed's rate hike decision.  Interesting days ahead for sure. 

Holiday Blues . . .

Major markets flatlined this week as Thanksgiving Day in the US apparently even shut down the computers resulting in little change.

As mentioned before, I was anticipating the three week test of the high on Friday so I for one was paying attention.  Throughout the week, SPY approached the 210 level but each time was repelled.  So while I can shrug off the possible test as a non-event due to lack of market participation, I did see the test and until the very end of the trading day on Friday, was watching to see if the machines levitated prices through the 210 level.  It did not happen.

Now, the weekly line chart looks like a setup for a three week test of the low!

Anything could happen in this crazy "data-dependent" market.  Friday's main even will be the Employment Report, the final report prior to the Fed's meeting later in the month of December.  The Fed has strongly hinted that it would raise rates in 2015 and are on track to do so at the December meeting, IF the inflation numbers are job numbers cooperate.

Rates hardly seemed convinced of the pending rate hike.  This chart is the TNX or the ten year rate on a daily basis.  Rates, after quite a rally, have been easing off for the past two or three weeks.

Do rates really matter?  Past market action shows that markets generally continue to rise even after an interest rate hike or two.  The Fed has made clear that even if they do raise rates, it would not be the start of a trend.

The Fed is truly between a rock and a hard place though as their ZIRP (zero interest rate policy) has distorted market prices in nearly every asset class.  In the old days, risk was priced based on the risk free asset, government bonds.  But no longer are government bonds priced through market interaction but based on Federal Reserve policy.  Quantitative Easing (QE) throughout the world has resulted in central banks printing money and buy up assets, resulting in higher bond prices and lower interest rates.  It appears that central banks are also buy up stocks to boost the stock markets.  This has been seen in Japan as well as Switzerland.  I read not too long ago that the Swiss Central Bank had bought more than a billion dollars worth of Apple stock. 

So it's evident that central banks will print more money, if necessary, to defend the market prices of bonds and stocks lest their balance sheets turn to dust. 

I'm sure that I'm not the only one who sees this.  Can the big firms with tons of resources available to research the markets not also see this and be lightening up on risk?  Who is absorbing all of the stocks and bonds that countries and firms are dumping?

Can you imagine why the Federal Reserve would fight to the death not to be audited?  I can.  The game would quickly be revealed.

It's interesting to see that the SPY weekly standard deviation chart has remained in its downward sloping channel.

Whether this past week's market action was an anomaly based on the holiday, is yet to be seen but the three week test of the high on price and standard deviation is a SELL for me.

Just as the weekly chart is a good setup for a three week test of the low, the monthly chart also reflects the same setup with September's closing low marking at 191.

Keep in mind that anything can happen in between December 1 and December 30 and price can still wind up testing the low on December 31 (or do we have again the holiday conundrum?).

For now, this is my tradable setup.  While a breakout to the upside above 210 would bring me in on the call side, I've gone ahead and bought some December 31 puts to play this opportunity.  While some sites I look at are looking at the current market move as a fifth wave of the six year bull market and expect SPY to run from 220 to 250, I have been skeptical from the start.  While I did call the three week test of the low and successfully exploited the signal, I was expecting a move down to 170 or even 150 before we resumed the move to higher highs. 

A move down in December would be great.  If we held up at the 191 level, I would be ringing the bell for a big move up to new highs.  Should we break down below 190, perhaps there would be much further to fall.  I try to be flexible in any case and usually have a protective position going the other way just in case I'm dead wrong in a big way. 

I think that if you are a long term stock holder, then you need to look at your assets just as you would your home, your business or other major assets.  You have some form of insurance on all.  Same thing with stocks.  If you want to stay long, you've got to figure out your "deductible" and then buy protective puts below the market. 

Are We Starting to Get Back to Reality?

Retail Sales Rise, Rates Surge

Are we finally breaking out from a multi-year low?  Rates have been manipulated by government and Federal Reserve actions for more than a decade now.  Have we finally reached a bottom?

It seems that we are in an intermediate term move higher.  Time to be long interest rates - short goverment bonds.

The long term stock market prognosis remains negative however.  Should the stock market turn south, the flight to quality will again push interest rates lower, perhaps down to test the 2% level on the 10 year.  One can never predict with certainty.

Rates have been historically low, even though the credit quality of the US Government is suspect at best.  I have been short bonds now for more than a year, primarily using TBT for most clients, futures for more aggressive clients.  We are certain to again test 4% and I believe, break through with a vengence.

The last time we tested 4%, we broke though but then sold off with a vengence.  It must have been a Fed target rate which caused them to buy Treasuries aggressively.  Rates plummeted to 2.4% from 4.1%.  What incredible volatility we have witnessed in rates (10 year).  But markets are interesting in that they test support and resistance level, then do what is required to bust through.

We did not break new levels on the low end and have established credible support.  10 year rates will now blow though 4%.  It's the Trendsetter Slingshot Effect.  They pull levels down lower and when the rubber band is released, it pushes prices (rates in this case) through tough resistance.

I hope for some backing and filling here.  Building a channel would be nice, But I'd say it's time to be aggressively short on Treasuries.  Sell bonds.

What effect will sharply rising rates have on stocks?  Write me at gary@assetdesigncenter.com to get my next stock report.

Rates Will Never Go Up Again!

Rates are breaking lower, dropping below 2.85% on the ten-year basis. As the chart above shows, the recent levels were holding but a break through now shows that we can expect the 10-year rates to test the 2.0% level.

The stock market continues to remain at relatively high levels even though interest rates, another barometer of the economy, languishes at lows, continually making new lows.

As long as the Fed keeps rates down to zero, the bank arbitrage between the cost of money 0% and guaranteed income Treasuries will continue. It now becomes a no-brainer that rates will continue to fall and we will drift into the dreaded DEFLATION!!!!

I reviewed my notes from 4 years ago and the economy was weak, unemployment was rising and interest rates were falling. We were coming off of 5% on the 10-year. What a bond market rally! It is the mother of all bubbles. I guess you've got to be long the bond market. There is little hope for our economy at this point, not until we have a new administration.

Will we get to the point when the dollar is so devalued that interest rates will have to rise? On no, at that point, the Federal Reserve will step in and buy the Treasuries.

One thing for sure, if the interest rates ever do rise, it will probably cause another economic disaster for the banks as well as countries that continue to pour into Treasuries at miniscule rates. When are we ever going to get our economy together? Is there any hope???

Fed Policy is Killing Us

As the 10-year rates fall below 2.9% and the 2-year rate falls to around 0.5%, it's becoming obvious that the economy is not what is driving the bond market rally, it's the Fed creating still another BUBBLE!!!

When will they stop creating economic bubbles for the benefits of their cronies? While I have been in the Bearish Stock Market camp since 2005 and still expect a test of the lows, I have been encouraged by the corporate earnings that have been coming out in recent weeks. There is an underlying strength in the economy that can come out if we let it. Yet, interest rates continue to plummet. WHY?

It's becoming obvious, although I will check the data, that as the Fed continues to lend money to banks at nearly 0%, the prudent thing to do for them is, of course, buy the treasury market and it's guaranteed return. As long as the Fed continues to provide funds for free, why shouldn't we expect those, who can get free money, to go crazy buying everything in sight?

It's not going to change. While I think that the interest rates HAVE TO GO UP based on the amount of debt we have, the bond market keeps rallying, shaking out the shorts with dramatic moves.

The European crisis is over. I should have staked my dough in the Euro instead of screwing around with a manipulated US system. At first, it appeared that we were derivative trades of Europe. But with Europe doing fine (basis the Euro which is now 130+ versus the dollar), it appears that there is something VERY WRONG with the US stock market and bond market.

After the Flash Crash in May, I got ALL OF MY CLIENTS OUT of the stock market to as much extent as possible. In fact, I don't even want to advise on the stock market anymore as it is now nothing more than a casino with the billion dollar hedge funds, with their computer algorhythms moving the markets. There is no real investment here. It's all a game.

The interest rates, which one would believe was a true reflection of the economy, now also appear to be manipulated or really, out of the market's hand. It doesn't correlate with the economic reality. If it does, then WE ARE TRULY IN A DOUBLE DIP RECESSION and are headed for a depression.

I am really sad. As those who have followed me have noticed, I haven't been writing at all for the last few months. My despair continues and my faith in the US economy wanes. I am not a politician nor do I work for a government. This is where all the money is going.

I suppose that the long-term rates are going to go down very low. This effect WONT STOP UNTIL THE FED RAISES RATES. How sad that the Congress has given the Fed even more rights to screw up our economy. If you are not a banker or a politician, expect that the worst is still to come.

I'm going to start looking at markets away from the US. I just don't think that they are fair anymore. Perhaps no markets are. Unfortunately, the alternative is to start your own business. But you can only do this if you are cash-flushed or have some rich friends.

Good luck America.

Should Stock Averages Be So High?

I often like to compare the 10 year treasury rate to the SPX or other major index to see if things are flowing as they should. I've long believed that rates and stock averages should be correlated as a strengthening economy lifts not only stocks but the demand for money. Thus interest rates. But this is not what we have been seeing.

Rates on the 10-year treasury topped out in April after breaking through the 4% level. The surge was short-lived and for the next three months, rates have dropped hard. First it was the European crisis that caused a "flight to quality" and a run on Treasury securities, pushing rates lower. But since then we have seen the Euro currency trade back up to 130 against the dollar from 119, nearly a 10% jump. Yet interest rates have hardly budged to the upside.

I first started observing this correlation back in 2005 and noted in a different blog how the two were sorely out of line. When stocks crashed though, the SPX came back down to meet the TYX 10 year rate! Again, we see quite a divergence in pathways. Again, is the rate chart reflecting the true reality of the market? Is the world-wide treasury market a more convincing indicator of what is truly going on? Or should we buy into stocks, that rally without much conviction in terms of volume?

I suppose that it's best to be short both the Treasury Market as well as the Stock market. At some point, these two chartlines will again meet up, either by the falling stock market, dropping to meet the low level of rates, or with rates rallying (and Treasuries selling off) to meet the higher stock market average. Or will it be a combination of both?

In either case, such a divergence will probably render the traditional stock/bond diversification methods null and void. With Treasuries already so high, yielding a scant 3% on the 10-year, how much more can they rally should the stock market again collapse? Will we wind up like Japan? with low rates and no growth? This can't last much longer. Which market will give it up the most? I don't know. I remain short, more so the treasuries than the stocks, but none-the-less, I have little confidence in either market.

The S&P 500 and other major indices have been crossing the 200-day moving average. Will this be the catalyst for increased buying? Or are we just completing a head and shoulders topping formation with an ominous descending neckline?

There can be no doubt that corporate earnings have been impressive. Even a perma-bear such as myself has restrained myself from adding shorts so far on this move. In fact, a month or so ago, I even purchased a bunch of C at $3.67. It felt right at the time and wasn't really based on any technical studies. It's just that I've been following the markets since the 70s and markets have rhythms, which after awhile, you just feel.

I'd like to short the stocks now but I want to see if some extra upside might kick in. Lots of news coming this week including GDP and Durable Goods on top of earnings. Perhaps finally we will stop being a derivative play of Europe and start acting on our own.

One thing that troubles me still though is rates. If rates and the SPX were acting as they should be, that is, being correlated, we would also see rates breaking above 3.5% but no, they are languishing at the 3% mark, and threatening to drop to 2.50% on the next wave down.

A strong pop for stocks might start pulling some money out of the treasuries and into stocks. With the little volume in stocks, it's evident that only the institutions are pushing stocks around, as evidenced by the 1,000 point collapse in early May. I certainly wouldn't recommend stocks for anyone after that event. It shows that any wealth in the market could be wiped out in seconds. I was short the market then and was watching it, tick by tick from my home in Mexico. But instead of jumping for joy at making a killing, I was spooked! It was as if the machines had taken over Wall Street. I've seen this Terminator movie many times in the past. It was even proposed in a Tom Clancy book, I believe it was Executive Decision, when a computer code got placed into the market system and when activated, collapsed the US financial system.

Anyway, I heard one proposal that as long as short term rates remain near 0%, all of the other rates will continue to be arbitraged down and that is one reason for the continuing decline in longer term rates. Or perhaps there is just no belief in the US stock market while President Obama is in power. Will we have to wait until November elections to see some pop in interest rates? Or are they really reflecting a new reality? DEFLATION.

Even Inflation Can't Boost Bond Yields

After breaking above 4% at the beginning of the month, the first time in 9 months, the 10-year interest rate has quickly moved to the other extreme. Even this morning's Producer Price Index (PPI) numbers, an indicator of inflation at the wholesale level, came in higher than expected. Food prices rose 2.6% from last month, the largest increase in 26 years! Yet interest rates continued to fall.

It seems clear that interest rates must rise soon, especially if what the stock market is telling us is true. Business is booming! The recession is over! Banks are earning billions of dollars now every three months! One would think that such incredible results would spur interest rates even higher. Imagine the blessing to the banks and other institutions that are able to borrow are virtually 0% interest and participate in the massive market moves! Seems as if it is just another government give-away.

Could it be that the world is still a messy place economically and there is no safe place to put your money? Or is it just the normal gyrations of the markets? Still, as the economy supposedly booms and the Federal Reserve continues to keep interest rates at a minimum, there is sure to be some bubble popping down the line. WHen interest rates finally do rise, all will be running for the door to get out of their safe plays! Will the economy be able to withstand another bursting financial bubble?

Booming Economy But...

Corporate earnings have started to come in and thus far, the verdict is good. Earnings are up and the bank profits are soaring!!! Retail sales are also strong but inflation is non-existant. Thus interest rates, after surging to yearly highs a couple of weeks ago, have fallen back.

On the ten-year rate, the 10-week moving average comes in at 3.77%. The current rate is holding the 3.80% level after busting 4% last Monday.; At that time, our report to subscribers showed how each time we neared 4%, rates fell back dramatically. Prior to the recent test, the last move to 4% occurred more than 9 months ago in June of 2009. Many say that we are in a trading range between 3.75% and 4.00% on the 10-year note. But the actual range in the past year has been between 3.2% and 4%. Certainly a move back down to 3.2% could only be caused by negative economic news.

Few today believe that we could have a "double dip" recession, meaning that the economy could retest the lows of last year. It's full speed ahead - or at least, that is what they want you to believe. The way I see it, it really doesn't matter to the executives. They make their millions whether they do a good job or not. If they fail, Uncle Sugar bails them out and they still walk away with millions. Little has been said these days about the "off-shore" special interest accounts that banks and corporations have off-shore. Here lies the risks. Another recent story in the Wall Street Journal showed how banks are leveraged to the hilt during the month, trading excessively on high margins. However, when it comes time to report, this huge amount of leverage falls to within acceptable parameters. Nothing has changed and the banks are setting us up for another disaster.

I continue to add to my short market positions as I am in it for the long haul. The market excesses thus far have not outlasted me and as we crossed 11,000 on the Dow, I again added to my short market positions. I continue to believe that interest rates will soar. While the deficit has been reduced some $100 billion over last year, gee, $40-50 billion in the hole is still a lot. Yet many rejoice saying hey, the bailout is working!!!

We are only halfway through the week and it has been a hard week for bond bears. Each day, in overnight trading, rates have risen, only to be slammed down once trading opens in the states. It's a no-brainer for 24-hour traders. Play interest rates to rise at the end of trading in the US and play them to fall just prior to the market open in the US. It's worked every day for the past week or so. Yet come next week, we expect that rates will try for the 4% level again. We are establishing longer-term puts now in anticipation. The trends show this to be the best bet.

Full Speed Ahead

Nine out of ten FED OFFICIALS say the economy is still very fragile and chose to maintain interest rates at very low levels. The stock market took this queue as an indication that the markets will continue to rise for, as analysts say, another six months.

We can see that already, small cap stocks are up 10% for the year before even the first quarter ends. As long as the Fed is going to keep rates at zero, it's likely to expect that the stock market will continue to rise with little fear of setback. Thus far, any setback has been mild and immediately challenged by the Fed or other government officials.

As I have often said in this blog, the markets can continue to be irrational for a much longer time than I can remain solvent. It's so sad from my perspective that the Federal Reserve has tried its best to manage the business cycles for far too many years now. Today's news speaks of how the Fed is lobbying to retain its current level of power and it's continued desire to be the master RISK REGULATOR. Yet, they are creating another bubble. We are not so far from the last highs and even then, the markets were over-inflated. Where were we at when Senor Greenspan claimed that there was irrational exuberance? With our economy continuing to crumble, we are in excess of those irrational levels and the Fed wants more!

For those of us who watch things closely, there is little doubt that we are still in a very fragile state but it's because the rules continue to allow banks and other "too big to fail" entities to hide risk in offshore entities. When the FASB pushed to move these assets back on bank balance sheets, the Federal Reserve complained that virtually no bank would be solvent if this rule came to pass.

We are still in a world of hurt. The interest rate market proves that. Rates are not rising despite all the hype that the economy is improving. DONT BELIEVE IT. Watch interest rates and not the stocks. The stocks are merely a respository for those who can't take the low interest rate pain any longer. Many are forced into the market by the Fed's continued policy of low rates. Those on fixed incomes are especially hurt as prices continue to rise yet fixed income sources fall.

We continue to liquidate long positions at each level higher. Our long term picture shows a massive head-and-shoulders formation developing. It could take several years to form the right shoulder. But this being said, we expect a trade range of 10,000 to 12,000 over the next two years. Then look out below. It's going to take a while for today's policies to ripple through and eventually destroy the American life as we know it today. But it will probably happen. Yes, we can go higher on the market and it's inevitable, with the Federal Reserve's intentions, we will push this market higher. It will keep going up until it pulls in every last penny. Then look out below. Welfare state for today's rich and poor alike.

Employment Numbers Improve, Rates Rise

Everything seemed to be in place for rising rates. All we needed was the piece of news to get the ball rolling. The news arrived in the form of a better than expected unemployment number. Despite warnings that the snow storms of late probably caused unemployment to rise more than normal (imagine getting laid off because you couldn't get to work because of a snowstorm!), the unemployment rate steadied at 9.7% and the job losses were minimal.

Ten-year rates rose immediately, jumping from a base of 3.60% to 3.69% at this moment. While we can never totally predict what is to happen, we were confident that rates were headed higher. Just take a look at the daily cycle indicator above. After making a fine base, it is moving up!

Look at the monthly chart. Sure, the stochastic indicator below appears to be breaking down, but this is from a base of the 3.60% rate that was in place when this chart was generated. More importantly, if we go with the basic chart pattern of a three period test, we can see that the interest rate should rise to test the previous high of above 3.8% set three months ago. Should rates stall here, we would want to change our outlook for higher rates. For now though, we believe that the economy is beginning to rebound. We see it in our analysis of Micro and Small Cap stocks, that are rapidly rising. We believe that this is a sure sign of a recovering market.

Look at the weekly chart of 10-year rates. Last Friday, we held the low of three weeks prior. This generally indicates good support. The three-week test of the low is generally a solid buy point for me. To confirm, we need to see some upside, preferrably breaking through the recent highs of 3.8%

Finally, if we look at the daily chart, we see that yesterday's action tested the lows, albeit on a four-day basis instead of three. This however could have been expected as the trading world seemed to have come to a standstill in anticipation of today's unemployment numbers.

It's like the perfect storm for a rate rise. We can see solid indicators from every time frame showing that now is the time for a move higher and possibly a breakout of the 4% level on the 10-year rates.

Good News Hurts Bonds

The markets don't believe it. 10-year rates are testing recent lows at 3.59% despite a great Greek bond auction, lower jobless claims and other news of economic strength. It just shows that the market DOES NOT BELIEVE THE DATA. Is it all a sham? Do markets relate to news?

With the unemployment number expected to be really bad because of the snow storms. "yes dear, it snowed today so I got laid off!", look for opportunities to short the treasuries. When we finally break through the 4% level on the notes, it's going to be an explosive move.

Rates WANT TO GO UP But....

The investment world waits as tomorrow's unemployment report is the pivotal moment in this week's trading action. Each day, rates have spiked up in the morning only to drift lower. Today, we are testing the lows in a four-day testing action. Normally yesterday should have been the test but who knows what is going to happen next?

I must admit, I have been playing the rates to go up since 2005 and still rates have continued to decline. This can't be a good thing as it shows that the U.S. economy has been week for years now. Yes, if you are blessed and a banker or CEO making your millions, you are probably oblivious to such trivial things as interest rates. Lower rates continue to help your business (if you are lucky enough to be credit-worthy).

There is little doubt that for years, rates have been artificially supressed. But there is such a conflict. On one hand, the government wants us to feel confident that we are turning the corner and headed upward. Being an older person, had the government done absolutely nothing, then for sure, we would be on the upswing. Cycles are cycles and they do what cycles do. All the kings horses and all the kings men.... so the rhyme goes. The government merely doled out trillions to their buddies and their efforts have done little to affect the cycles that are going to occur no matter what.

The trip for higher rates has been a long and painful venture. Yet it is inevitable. How can an entity continue to print more money, borrow more money and spend without end and expect it's base rate to be zero? Is the king really wearing clothes? Or is this all a big facade???

Look Out Ben, Rates Likely to Surge

What a surprise. Consumer confidence is down! The recent economic weaknesses are shining through causing havoc on the markets. Such market movement really drives home the total disconnect between Wall Street, Economists, Politicians and the everyday public. Hardly a day goes by where I don't talk to someone who tells me that they've never seen it this bad. So many are discouraged and feel helpless. The fear is pervasive, as it has been for many months now. How can it be that Wall Street has been so confident. I guess when you make millions and millions each year, you lose touch with reality.

But I had expected some weakness in rates this week as I am a strong believer in the three-week testing mechanisms that the market so often displays. It's hard to make a strong surge through the 3.8% mark on the 10-year notes without some kind of testing of recent low levels. I believe that this is what is happening this week. It appears that we are making a strong basing action here, positioning ourselves for a push upward.

It's no surprise that consumer confidence is low. The job market's weakness has been continually understated. It seems that the whole bailout package was intended to bolster the banks and hopefully, give confidence to the public. But the public has no confidence, not only in the financial system but in our political system as well. But none of this matters. The markets are still being driven by trillions of dollars of new money being injected into the system but this cannot last forever. While Ben Bernanke wants to keep rates low and will do all he can to do it, in the end, the markets do what markets do. At some point, even the Federal Reserve and the Government will not be able to keep rates down.

The trillions of dollars have been bolstering a lot of economic numbers. GDP projections are for upwards of 6% growth! How can bonds realistically be rising? How can interest rates be falling? This cannot be reality. How does an economy eke out a 6% growth and interest rates languish? At some point, the investing public and holders of debt are going to rebell, pushing rates sharply higher.

They have kept interest rates low for years now and in the end, holders of the long bonds are going to be punished. It's too bad for those who had sought a safe investment in one of the mightiest countries in the world. But business and market cycles are inevitable. No matter how much the government and Federal Reserve have tried to manage the ebbs and flows of business, like Mother Nature, you can only tinker for so long and then Nature unleashes her force.

The three-week test of the low has been a very reliable indicator over time. While nothing is fool-proof, one only need to look at the trends. There is a persistance for upward rates. The only way that the government is going to be able to stop it is for them to come out and tell us that in reality, all of Obama's efforts have been in vain. But that's not how the administration puts it. They are basking in the glory of supposedly heading off another depression. But as our leaders' past efforts have only led to more and more bubbles, I'd bet that perhaps the final bubble has been forming and when this bubble bursts, we will be happy that we had been positioning ourselves for the upward spikes in rates.

Consumer Confidence Stops Rate Surge

Once again, as the 10-year rates try to break above the current 3.80% resistance, a piece of negative news rattles the markets. Consumer Confidence, as reported by The Conference Board, plunged to 46.0 this month, down 10 points from a revised January reading of 55.9. The 1-year Treasury rate fell to 3.2 after battling to get above 3.8 the past few days.

As the above chart shows, this setback may only be temporary as rates have been showing a strong persistance to the upside. While we don't expect rates to blast through the 4.0% level without some strong news, like China bailing out of Treasuries or something like that (WHOOPS, That is already happening), we do expect that it is only a matter of time that it will happen.

We expect that this upward trend in interest rates will continue despite government and Federal Reserve efforts to hold rates low.

Europe Debt Crisis Fails to Sway US Rates

We have been hawkish on interest rates for a very long time now and have been adding on to our Ultra Short Bond position (TBT) and even going short the interest rate futures. While there has been some volatility in the interest rates as many fear that the sovereign debt issues in Europe will ripple through the system just as the mortgage-backed securities did recently. Yet look at the long term chart of the 30-year interest rate. This monthly chart shows that there is definitely upside momentum. It's almost a sure thing that rates are going to test the 5% level. As the European crisis is hardly making a dent (and isn't even noticeable) in this chart, We will be adding to our short position today.

Will Rising Rates Cause Next Bank Meltdown?

While nothing is ever certain in the markets, it sure does appear that the 10-year treasury rate is going to move higher. It's just a matter of days or weeks, according the my interpretation of the chart. Of course, we could have one last "hurrah" here and then Greece collapses or some other cataclismic event that would cause the world to flock to US Treasuries again. Sometimes I wonder if these events arent coordinated, especially at times when rising rates appear certain.

I was pleased to read that finally, I am not alone in the bond bear camp. A story in Bloomberg this morning notes how Wells Fargo has been unloading the carry trade.
Wells Fargo Betting on Higher Rates The carry trade is the easy, taking money from the government for free and then giving it back to them for treasury securities that pay a higher rate. Believe me, if we had this option in life, none of us would ever have to work again. Banks get to do this with the excuse that there is no loan demand.

But of course, there could be risk, I think, in doing this. Or is there? Seems to me that last year, FASB eliminated the mark-to-market provisions in bank accounting, therefore, even if treasuries owned by banks declined in value, they wouldn't have to note the decline on the balance sheet as the bonds will eventually go back to par. I believe that is how it works and probably why the government pressed the accounting standards board to make these changes.

Anyway, I suppose that the big banks could languish, waiting for the treasuries to mature while those who had been nimble and swift, such as Wells Fargo, take advantage of rising rates and the normally rising demand for money that causes this. This is apparently the Wells philosophy.

Everyone else seems to be playing a game of chicken, including the Federal Reserve. The interest rate game that has been going on in an attempt to save banks that lost big gambles is threatening us all. A bad future move by Bernanke can either lead us into Carter-era inflation or depression. And of course, everyone will defend Bernanke saying that he did the best he could, under unusual circumstances.

I for one will avoid the politics and try my best to profit from whatever situation the world hands me. I believe that playing the interest rates to rise this year will probably be one of the better trades to make.

Dollar, Bonds Surge The World Is Not a Safe Place

The dollar surged today but interest rates, despite a very strong 5.7% increase in the GDP, fell back sharply. This means only one thing. There is FEAR out there in the world. Don't neglect the implications of the SAFETY TRADES. There is something going on. Take some profits while you have the opportunity.

Key Reversal May Mark TOP!!!

Notes and bonds rallied sharply on weaker than expected housing data on Wednesday. By day's end however, long-dated treasury securities like the 10 and 30 year instruments were down, closing the day's trading session at their lows. Probably lots of the move was a result of the Kansas City Fed President's disagreement with the rest of the board that interest rates should remain at low levels.

In evening trading, note futures are down 8 1/2 ticks while bond futures are off 14. This could the beginning of the end for the bond rally. We went short at 117-24 for the notes and were tempted earlier today to add on as the notes topped the 118 handle. But no additional trades were established.