U.S. Markets: A Week of Inexplicable Events

You can excuse the average investor if, this week, he found himself and his thoughts drifting, perplexed and panicky. The inexplicable was found lurking everywhere starting with the normally spineless Democrats handing President Obama a historic legislative victory on healthcare reform, Sunday. Opponents feared that the $1 trillion price tag, and the disputable commandeering of 17% of the annual national budget was too ambitious, and that the increase in taxes necessary to cover an additional 32 million Americans health insurance would impede economic growth.

The stock market continued rising into the close; on Tuesday, up 102 points, on below average volume. The respective 17 month highs were 10,752.41 on the Dow Jones Industrial Average; 1,174.17 for the Standard & Poor’s 500 Index, and 2,415.24 on NASDAQ. Some call this a melt-up rally, a term describing a short squeeze in search of a pullback, which never comes, especially during end of the quarter window-dressing buying. If you don’t take any profits now at least buy SPY or QQQQ puts for portfolio protection in April.

But another inexplicable event occurred. Bloomberg reported that the 10-year US treasury swap spread closed negative for the first time ever. Ft.com/Alphaville provides a concise definition:

“A negative swap spread means the Treasury yield is higher than the swap rate, which typically is greater given the floating payments are based on interest rates that contain credit risk, such as the London interbank offered rate, or Libor. The 30-year swap spread turned negative for the first time in August 2008, after the collapse of Lehman Brothers Holdings Inc. triggered a surge of hedging in swaps.”

The negative spread widen on Wednesday accompanied by a below average 5-year treasury auction priced at a 2.605%. The 10’s and 30’s sold off by the close at 3.83% and 4.72%, respectively. The treasury auction calendar is stuffed with offerings as far as they can see. At some point, the market will lose its appetite for governments. It may be happening now, if so, buy puts on TLT.

Another head-scratcher Wednesday was Pimco’s bond maestro Bill Gross comments on CNBC professing his affection for equities: “Let's suggest the economy looks good, that risk assets— whether it's high-yield bonds or whether it's stocks—have a decent return relative to the potential of declining bond prices," he said in an interview. "I'll go with the stock market."

We also learned what we already knew when S & P lowered Portugal’s credit rating, that the western world is broke. Before I forget, this day also included Google (GOOG) and Go Daddy quitting China, the US accusing China of currency manipulation, and financial regulation reform disappearing into a Washington DC black hole.

But enough about inexplicably strange; let us return to good old-fashion butt-ugly economic data. Negative housing data again filled the landscape pointing towards a funky economy in 2010 for the average citizen. The Mortgage Broker’s Association purchasing index, ending March 19, rose 2.75% while its refinancing index fell 7.01%. The average 30-year mortgage increased 10 basis points to 5.01%.

February new home sales fell 2.2%, to an annual rate of 308,000. Two years ago, the annual rate was above 600,000 homes. Supply swelled to 9.2 months while the median price of a home rose 6.1% to $220,500 and the average price up 5.1% to $282,600. The first-time home buyer tax credit ends in five weeks.

Finally, the US Census Bureau, 2009 State Government Tax Collection Data was released. State revenue was down in 2009 versus 2008 some $66.9 Billion dollars. Fourteen states saw their tax revenue fall 10% or greater. The fourth quarter figures are available at the end of March.

This snapshot of the market and the economy shows that things are far from normal, or what we once considered normal. The calculus that propelled investing over the last 30 years has dissolved. The new formula is being being created and tested in real time. The stock market and investing is currently unreal - it’s devolved awhile ago into, or, if you prefer, transformed itself into a momentum investing affair in an unraveling world.

This great casino awash with taxpayers’ cash can only speculate on when the world will end and where shall the end begin; Greece, Portugal, Spain, Italy, the UK? Who shall be savaged first and who shall be saved? Where can I hide and make a profit? It wasn’t in gold Wednesday; the yellow metal lost $15 an oz. due to a rising dollar. However, currently, the dollar is the dog with the least fleas – and it will not rise indefinitely.

If this report reads unfocused and schizophrenic, it’s the market, it isn’t me.