Stock Market Review - 11/10/09

Ring, ring, ring - It's Asia Calling!

I have introduced my readers to the new chart formation (that I invented) called 'The Chinese Phone Call'. I would like to change the name to the 'Asian Phone Call'. Do I hear a 'Yea'?

Here's the deal. The stock market in the US is now a slave to the 10-year US Treasury yield. When it gets to 3.5%, the Asians, primarily the Chinese and Japanese, pick up the phone and call our Federal Reserve or Treasury Department for help. Japan and China own trillions of this garbage spit forth by the Treasury's perpetual printing machine to satisfy an economy that used to hinge on manufacturing but now just debt. It should also be apparent to everyone that the US economy cannot tolerate higher interest rates imposed by higher bond yields at this point in the 'recovery' (I'm using that term a loosely as does our government). If US bonds have to be bought, they have to be bought with US dollars. Take a look at the chart below and see if you can spot a massive volume spike in the UUP. The UUP is of course, an ETF that correlates to a rising US dollar versus other currencies. It is the blue line and the 10-year Treasury yield is the red line. The gold line is US Bancorp and I included it so we can see how some bank stocks can be helped by a lowering of the Treasury yields.

What can we learn from this relationship? First, the US dollar is not in 'free fall' but it is slowly declining relative to other currencies. Perversely, the demand for dollars to buy bonds to dampen rising interest rates spiked by constant debt issuance has muted what could be a worse decline. Two, the massive US debt will likely continue the dollar demand for the foreseeable future. Three, while it looks like the Dow has been rising in dollar terms, the past few months would show a different picture in other currency denomination. It would be far less impressive. Fourth, the dollar has lost some 15% or so against other currencies this year. Why would anyone by the US bond for a 3.5% yield and risk a 15% principal loss? Does that sound wise? Lastly, this is the foundation of the current market. Wise investors have been warned that this is unsustainable. Sooner or later, somebody is going to run out of money or tolerance for debt.





5dy ending 11/09/09 - TNX in red, UUP in blue, and USB in gold
Chart courtesy StockCharts.com