Strong Like Bull

The Markets are strong.... Austin Powers Strong.

The simple reason for the strength is the following:

Massive asset reallocation from US Treasuries to Equities. Many Institutions were vastly under invested in equities, they are all playing catchup. It is a complete reversal of what was happening in Sept-Oct 2008, and Jan-Feb-Early March 2009. Many investors were moving monies to safe risk averse assets, shunning equities and risk. These brought yields to stunning lows, even negative real yields in short term treasuries. It was a perfect storm like event that snowballed into total global equity liquidation. That trade now needs to be reversed, and the unwinding of the safe risk trade is what is leading stock equity averages globally. Like I have stated previously, this market is still being dominated by the arbitrage trades based off quant models. You have to go with the flow for the time being. The SP Futures as well as cash market has risen above its 200 day moving averages, which always bodes well and brings in more cash from the sidelines. The SPX is trying to rally above its Jan high of 943, where it is currently. The technicals in this market look great, totally oblivious to the rotten fundamentals.

The sell off in the U.S. Treasury Market can best be explained by the following:

The ballooning budget deficit combined with recurring record US Government debt issuance's, the weakening dollar, rising oil prices, and the perception of hyperinflation, as well as what I explained above has rocked the Treasury Market. The market's perception that the worst is behind us (because of some better than expected economic reports...Consumer Credit? Unemployment? GDP?...even a low in housing?) which has lead to investors moving money from risk inverse safe fixed income assets to higher risk/higher return investments like equities. Also...rumors that the USA would lose its AAA credit rating all had a Tsunami like effect that made investors flee from long bond dated Treasuries. It was a recurring theme of fundamentally bad fixed income news culminating with MBS/TSY yield spreads reaching their "too rich" zone, that made people re think. The lack of bad news in equity land perverted this thinking, as money plowed into stocks.

But then again...all of the reasons for bonds to sell off is not necessarily great news for equities....but money has to go somewhere.

Just imagine what would happen to the global marketplace if the US credit rating was cut...currency collapse and global liquidation once again.

Quite Simply:

The Fed's recent balance sheet expansion has served its purpose...to stabilize the economy in the short run. The calming efforts of the Fed appears to have led the market to believe that the economy is on the road to a V-shaped recovery. If the market perception is distorted and investors are overestimating the timing of such a recovery... the recent steepening of the yield curve will be corrected (oversold) as the herd flows funds back into risk averse assets. I do not believe the market is behaving rationally at the moment. There will be a correction. The timing of such a correction depends on the economic data to come, 2nd QTR Bank results, and the psychological reactions of market participants.

The Fed's interaction in financial markets and whirlwind of contradictory economic data has altered the market's perception of economic reality. I believe the market's perception of recovery is overaggressive. What we are witnessing is economic stabilization...the economy has avoided the worst case scenario it looks like. Reality must be restored if we are to avoid the market "biting the hand that feeds them" (going against the Fed's policies that are intended to save the banking system), inadvertently pushing the global economy into depression. Now that short term stability has been restored the focus must now be placed on the building blocks of recovery...the biggest of which are restoring jobs (aggregate demand) and rebuilding credit within the banking system. Without this strong economic foundation the housing market will not recover and the United States will lead the world into a global depression.

What I am seeing:

Energy has caught up with the market. For example:

Crude Oil = $67.85 up $1.56 or 2.35%
Nat Gas = $4.050 up $.22 or 5.92%

Spurring a rally in:

Oil Services Index = Up 4.63%
AMEX Oil & Gas = Up 3.50%
Amex Nat Gas Index = Up 4.78%

Anything economically sensitive:

Retail Index = Up 5.89%
Cyclical Index = Up 5.87%

What is lagging though and worries me are the banks...did they not lead this rally previously?

PHLX Banking Index up less then 2/3 of 1%.

Many banks actually are in the red today.