Today's Market Observation 05.06.2010 Mon Tue Wed Thu Fri Panzner Archive
Speaking of Trouble…
BY MICHAEL PANZNER | may 5, 2010
The markets went on a wild ride today, with stocks falling sharply, bonds rallying strongly, the euro falling, and gold racing to new highs. Although the early catalyst for the moves appeared to be Europe’s burgeoning sovereign debt crisis, a mid-session plunge in the equity market, which was variously blamed on big margin calls, “fat fingers,” and algorithms gone wild, amped up the early action. At their worst, S&P futures were down more than 9%, though prices quickly rebounded after a cliff-like plunge. Regardless of the reasons why, today’s move pushed the benchmark index below a widely-watched uptrend from the March 2009 lows, potentially setting the stage for much more downside to come.
Speaking of sovereign debt woes, the spreads between Irish, Italian, Portuguese and Spanish 10-year government bond yields and their German counterpart continued to widen, with each and every one hitting new 52-week highs. At the very least, that suggests the troubles which have afflicted Greece won’t be stopping there.
In fact, one canary-in-the-coal mine indicator is beginning to signal more widespread difficulties ahead. The spread between the 3-month London Interbank Offered Rate (LIBOR) and the Overnight Indexed Swap (OIS) rate, a barometer of distress in money markets, just hit its highest level since September 2009. While the measure has some way to go before it reaches the kinds of extremes we saw during the Lehman Brothers bankruptcy crisis one year earlier, it is a development that should not be ignored.
The latest moves in the price of gold also bear watching. Not only has the yellow metal rallied to new all-time highs above $1,200(in the face of a rallying greenback, no less), the Swiss franc price has also just hit a record. Perhaps that means the infamous gnomes of Switzerland are returning to their conservative, gold-loving roots of yore?
One asset class that probably won’t be returning to favor for quite some time is the high yield bond market. Aside from the fact that recent exuberant buying has had all the hallmarks of a speculative bubble, with sales of new issues hitting a new record despite no real signs of improvement in the economy, the technical picture is looking rather ominous. While nobody knows for sure, of course, I reckon that it won’t be long before the word “junk” returns to its rightful place as a description for a really bad investment.
And now for a bit of trivia: which sector has been a leading indicator for the overall market? Based on recent history, at least, the answer is the S&P Supercomposite Apparel Retail Index, which is comprised of retailers such as Abercrombie & Fitch, The Gap, Limited Brands, and 27 others. As the following chart illustrates, the last time the price of the index reached current levels it marked the bursting-credit-bubble-inspired peak in the overall market. The time before that, it signaled the end of the dot-com-era boom. A coincidence? Perhaps. But then again, maybe not...?
As noted earlier, stocks ended the session sharply lower. At the close, the Dow Jones Industrial Average fell 347.80, or 3.2%, to 10,520.32. The S&P 500 Index slumped 37.72, or 3.2%, to 1,128.15. The Nasdaq Composite Index dropped 82.65, or 3.4%, to 2,319.64.
June gold futures surged $34.00 to $1,208.10/oz., while the U.S. Dollar index rose 0.9%. Ten-year Treasury yields fell 15 basis points to 3.39% and June WTI crude oil futures fell $3.26 to $76.71/bbl.
Michael Panzner
Author, When Giants Fall and Financial Armageddon
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