TRADE DEAL CAUTION

The major stock market averages opened lower this morning, but quickly pared losses. At the moment, the Dow is down 92 pts and the SPX is down .17%. Banks and biotechs are up .6% to 1.4% in early trading. In addition, energy exploration stocks are up after EOG Resources (EOG) reported quarterly results. Oil prices are up at 3-month highs following a lower than expected crude inventory report. WTI crude oil is back up over $57/barrel. Most other commodities are up as well; the Bloomberg Commodity Index is up 6.5% so far this year. Is it possible that this index is predicting a rebound in global economic growth later this year? Bonds are falling in price, rising in yield. The 10-year Treasury yield ticked up to 2.68% this morning. Nothing to see here.

CNBC Contributor Kevin O’Leary pointed out that the corporate bond market can shed some light on the outlook for equities. “If you want to feel that you can stay long in equities,” you should closely monitor corporate bond spreads (that is, the difference between yields on corporate bonds and Treasury bonds). “Spreads are saying clear sailing ahead” for stocks. He also said bond traders “have to be smarter than equity guys because they have a lot to lose if things blow up.” What he means is that even in good times, bond returns are relatively low, and in bad times one can lose a lot of money in an asset class that is supposed to be pretty safe.

US pending home sales (i.e. contracts signed) fell 3.2% in January from year-ago levels. That doesn’t sound encouraging, but it was significantly better than economists were expecting. Pending sales volumes are beginning to improve after falling almost 10% last December.

Famed investor Leon Cooperman was interviewed on CNBC yesterday. He noted that with respect to financial conditions, we live in a “very abnormal world.” As evidence, he cited $9 to $11 trillion worth of global sovereign bonds carrying negative yields. That is, investors in these bonds are guaranteed to lose money. Interest rates certainly aren’t normal in the US either. What does normal look like? He says the US economy grows about 2% per year, and adding 2% inflation gives you 4% nominal growth. So as a rule of thumb, the 10-year Treasury yield should also be about 4%. As I mentioned above, it is currently trading at 2.68%. Now, as for the stock market, Mr. Cooperman believes it is trading at fair value. He believes the SPX deserves to trade at a P/E ratio of 16-17, exactly where it is now. But that’s OK because he is quick to point out that an economic recession is not in the cards. Conditions that typically lead to a big market decline just don’t seem to be present. The economy is fairly healthy. The Fed is no longer aggressively tightening monetary policy. Stocks are not over-valued and he doesn’t see any “speculative” behavior among investors.

By the way, Mr. Cooperman was asked about the rise of socialism within the Democratic party. He responded thus: The main vice of capitalism is the unequal distribution of wealth. The main vice of socialism is the equal distribution of misery.


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