Not So Green

by Michael Panzner, Financial Armageddon. June 4, 2009

In a March interview with 60 Minutes, Fed Chairman Ben Bernanke told interviewer Scott Pelley that he saw “green shoots” of recovery in our crumbling economy. Since then, a growing number of observers have also claimed to see signs of life sprouting up in various places, presumably aided by one of the biggest government spending sprees of all time. However, given today’s news of a sharp reversal in the trend of year-on-year same-store retail sales, I’m wondering if we’ll soon discover that all this greenery is suddenly changing color?

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Based on four measures of risk -- the Volatility Index (VIX), the price of gold relative to silver, 3-month Eurodollar less 3-month Treasury bill rates (TED spread), and Bloomberg’s U.S. Financial Conditions Index, which “combines yield spreads and indices from the money markets, equity markets, and bond markets into a normalized index” -- conditions are supposedly back to where they were before Lehman Brothers failed. Yet even a cursory look around reveals that many markets remain broken or are shadows of their former selves, while the real economy is anything but sound. Maybe the optimists have been smoking a few too many of those green shoots?

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It doesn’t take much to get equity investors excited, of course. Even though the good news is hard to find and other developments -- like the fact that bond yields are surging and the difference between short and long-term rates has widened to a record extreme -- threaten to stop any hint of a recovery dead in its tracks, bullishness keeps rising along with share prices. Based on recent history, however, the optimism of individual investors has just reached a bearishly contrarian extreme.

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Not surprisingly, the combination of short-covering and greater-fool buying, along with the trillions of dollars Washington has been handing over to banks and other financial institutions, has been a short-term boon for the share prices of the firms that helped get us to where we are today. That difference can be tracked using a benchmark measure known as the NASDAQ OMX Government Relief Index, which is designed to mirror the performance of US listed firms that are participating in the TARP or other direct government investment programs or government loans, according to Bloomberg.

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(Hat tip to Clusterstock)

Finally, for those who are technically inclined, it’s worth noting that while the MSCI Emerging Markets Index remains 40% below its absolute peak, the global benchmark is now at the November 2007 - May 2008 resistance levels relative to the World Index that marked the end of the global equity bull market.

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Stocks ended higher, despite the ongoing meltdown in bond prices. Gains were paced by strength in technology and oil shares as well as a rebound in the banking sector.

At the close, the Dow Jones Industrial Average was up 74.96, or 0.9%, to 8,750.24. The S&P 500 Index gained 10.7, or 1.2%, to 942.46. The Nasdaq Composite Index rose 24.10, or 1.3%, to 1,850.02.

August gold futures climbed 16.70 to $982.30, while the U.S. Dollar index shed 0.2%. Ten-year Treasury yields surged 17 basis points to 3.71% and June WTI crude oil futures jumped $2.69 to $68.81/bbl.

Michael Panzner

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