Guest post by Cravens Brothers.
First quarter 2012 was an “Indian Quarter” with the fourth warmest winter in U.S. history coinciding with the best quarter for U.S. equities since the iMac, Palm V and internet IPOs were warming things up back in 1998. That didn’t end well, but I do hear the sock puppet dog is making a comeback. The S&P 500, Dow Jones Industrial Average, and NASDAQ Composite were up 12%, 8%, and 19% for the first quarter of 2012.
European Central Bank long term refinancing operations (LTRO) in December and late February (essentially $1.3 trillion in 1% loans to banks for survival) took a “Lehman event” (i.e., complete financial system freeze up) off the table for banks, lowered Spanish and Italian yields (the rate at which they borrow) significantly, and acted as quasi-QE for U.S. equity markets (providing money supply to fuel risk taking in U.S. equities). The last of these effects is was what caught most market watchers/pundits/investors off guard. Liquidity is liquidity, regardless of where it comes from. The continued “reflation” of markets through U.S. QE and now Euro Zone “quasi-QE” is something to rent, not buy. You need to be in the game, but you can tap the top of your helmet to get out as well (although if you did that when I played growing up in Texas you may never have seen the field again…different game today…but I digress).
Looking at the balance of the year, it will be interesting to see if the Fed tries to get one more stimulus done before mid-year, in the form of QE, a variation of Operation Twist, or some other monetary experiment to keep markets going. The Fed minutes from their most recent meeting say “no”, but minutes are carefully worded posturing. The Fed does what it wants when it wants, except for a brief few months when it gets bitten and has its hands tied by an upcoming presidential election. So, 1H12 would be the time for stimulus if they do it.
In case you missed it while you were busy eating easter eggs.
The NFP was a small disaster with the ES futures dropping hard.
The JPM Trader Bruno Iksil, is “distorting the index”. From Bloomberg.
A JPMorgan Chase & Co. (JPM) trader of derivatives linked to the financial health of corporations has amassed positions so large that he’s driving price moves in the $10 trillion market, traders outside the firm said.
Iksil may have “broken” some credit indexes — Wall Street lingo for creating a disparity between the price of the index and the average price of credit-default swaps on the individual companies, the people said. The persistence of the price differential has frustrated some hedge funds that had bet the gap would close, the people said. Full article here.
More on the topics below.
Guest post by Doug Short.
Treasury yields have been a bit of a roller coaster ride for the past few months. The 10-year note had been hovering around the two percent level for the past few months after hitting its historic low of 1.72 immediately following the September 21st announcement last year of Operation Twist. Despite the Fed’s stated purpose of lowering long-term interest rates, the 10-year steadily rose to an interim high of 2.42 on October 27th, but it soon settled into a pattern of hovering around 2.00 with the one quick dip to 1.82 and an upper range of 2.11. But in mid-March the yield on the 10 surged to a closing high of 2.39 on March 19th and then declined to a hover range around 2.23.
Today’s disappointing jobs report triggered a bond rally with the yield on the ten falling to 2.07 at the close, a decline of 12 basis points from the previous close.
Here is a snapshot of selected yields and the 30-year fixed mortgage since the inception of Operation Twist.