Flattening Of The 30 10 US Sovereign Debt Yield Curve Puts Downward Pressure On Stocks

Financial market report for January 31, 2011

1) … The 30 10 US Sovereign Debt Yield Curve Flattens Manifesting A Death Cross which will put downward pressure on stocks.
The 30 10 US Sovereign Debt Yield Curve, $TYX:$TNX, flattened, manifesting a death cross. Such flattening increases debt deflation delveraging pressure on US stocks, VTI, as well as World Stock, VT.

The death cross is seen in the 50 day moving average crossing over the 200 day moving average; it was accompanied by a dark cloud covering candle stick on January 28, followed by a bearish harami on January 31, 2011.

Today’s strong sell of the 30 Year US Treasury, EDV, -1.06%, relative to a milder sell of the 10 Year US Government Note, TLT, -0.76, represents de-risking and de-leveraging of US Government debt.

The flattening of the yield curve, seen in the chart above beginning in November came with the announcement of QE 2, and caused a strong disinvestment out of gold stocks — the announcement of a new type and easing with the US Federal Reserve purchasing of debt, terminated the swing trade in the gold mining stocks, GDX, as is seen in the chart below. The swing trade in the HUI Precious Metal Stocks, ^HUI, was the an awesome one,having one leg up beginning in 2001 and another leg up in 2008.    

Today’s death cross in risk, or perhaps better said in US Central Bank seigniorage, put a damper on the rise of stocks which rose weakly. Part of the rise came with a speculative purchase of base metals, DBB, 2.6%, with Aluminum, JJU,2.3%, Copper, JJC, 2.1%, Lead, LD, 3.3%, Tin, JJT, 2.0%. and Nickel, JJN, 3.2%, which gave strong boost to basic materials, IYM, Metal Manufacturing, XME, 2.0, BHP Billiton, BHP, 2.1%, Coal, KOL, 2.3%, Alcoa Aluminum, AA, 2.8%, Cliffs Natural Resources, CLF, 2.9%, Arch Coal, ACI, 3.1%, US Steel, X, 3.6%. Uranium Stocks, 4.4%, Tech Resources,TCK,4.6%. At market tops, speculative purchasing in  commodities often runs strong, just like in today’s trading.

Another part of the rise came from a rise in oil, USO, on Revolution Crisis in the Middle East which drew up the Energy Shares, XLE, the energy service shares, OIH, Small Cap Energy Shares, XLES, and Dow Jones Energy Services, IEZ.

The Revolution Crisis was Euro, FXE, boosting, which gave a boost to Italy, EWI, the European shares, VGK, and Spain, EWP, which closed at a rally high of 41.87, as well as boosting to European oil company Repsol, REP, which closed at a rally high as well.   

Like the gold stocks did in December 2010 and in most of January, 2011, now all stocks, that is world stocks, VT, US Stocks, VTI, The New York Composite, NYC, the World Small Cap Stocks Excluding the US, VSS, and the Emerging Market Small Cap Stocks, EWX, are likely to fall lower with Bonds, BND, US Treasuries, EDV, and with World Government Bonds. BWX, as the bond vigilantes call interest rates higher on all sovereign debt. The chart of EDV, and the flattening of the yield curve, give clear, cogent and convincing evidence QE 2 both monetizes and destroys US debt.  Of note, Bonds, BND, fell lower today to close at 80.35, in a Bear Flag Pattern, and in an Elliott Wave 3 Down, having hit strong resistance at 80.50. And of note World Government Bonds, BWX, continued higher today to close at 58.94, just below strong resistance at 59.00. And Junk Bonds, JNK, finding moneyness, continued higher to close at 40.49, just below resistance at 40.50. Charts are presented below for ones consideration   

VTI

NYC

World Small Cap Stocks Excluding The US Weekly, VSS Weekly

Networking stock sector leader, NetApp, NTAP, has a PE of 36; its earnings are unlikely to keep its price swinging higher, as the former king of swing, the HUI Precious Metals, GDX, has a lower PE of 22. Having said that, when gold, GLD, does break out again, then the gold mining stocks such as  Agnico Eagle Mines, AEM, ASA Limited, ASA, Goldfields, GFI, and Newmont Mining, NEM, will swing higher for a period of time.

Utilities, XLU, rose 0.22%, but debt laden NextEra Energy, NEE, fell parabolically lower on today’s higher 30 Year US Government Bond Interest Rate, $TYX, and higher 10 US Government Note, $TNX, Interest Rate. Of note, the former rate began to rise when Ben Bernanke gave initial notice of QE2 at Jackson Hole; and the latter began to rise with his formal announcement in November.

The chart of NextEra Energy has something in common with all the others, that being Quantitative Easing, once stimulative to stocks has now become destructive. Loss of debt sovereignty, that is loss of debt seigniorage to the bond vigilantes is deflationary to stocks. Anticipation of Quantative Easing and actual announcement of it, has driven Food Commodities, FUD, soaring, causing Revolution Crisis. And the US Central Bank policies have brought on Inflation Destruction in China, YAO, as well as in the Emerging Markets, EEM. Furthermore, mankind is now held hostage to the bond vigilantes. Some perceive themselves to be libertarians, and proclaim themselves to be sovereign individuals, free from even the bond traders; but the charts here in this article suggest that the bond traders are their sovereigns, unless of course they own gold which seems to be stabilizing in relation to a number of currencies, such as the Australian Dollar, as is seen in the chart of Gold relative to the Australian Dollar, GLD:FXA, making gold the sovereign currency and storehouse of investment wealth.   

The 200% of the Russell 2000, URTY, is in an Elliott Wave 3 of 3 Down sell off; today’s 1.4% rise is likely the last best short selling opportunity the down wave affords, as in a bull market one buys on dips and in a bear market one sells into rises.  

2) … In Today’s News:

A … A back-door debt restructuring is in the cards for Greece; it  will require some sacrifice of national sovereignty and more sacrifice, that is austerity, from the people of Greece.
Open Europe reports: It is widely reported that a deal on restructuring Greek debt could be imminent with EU officials in Athens to discuss the issue. The scheme being discussed is three-pronged: firstly it would see Greece borrow another €50bn from the European Financial Stability Facility. Secondly it would see Greece use the EFSF to buy back bonds at between 65% – 75% of their nominal value from the ECB and private bondholders. Thirdly the plan would see the maturity of the bail-out loans extended by 30 years. In return, Greece would need to impose further austerity measures, specifically introducing a cap on its budget deficit into its constitution. If adopted the scheme is expected to re-profile two-thirds of Greece’s €330bn debt by the end of the year. It has been compared to the Brady plan which rescued Latin America from bankruptcy in the 1980s.

Speaking at the World Economic Forum in Davos, Switzerland, on Friday, Greek Finance Minister George Papaconstantinou confirmed that informal talks are underway to find ways to reduce Greece’s debt burden. The FT reports that some IMF and EU officials support Portugal being pushed into seeking a bail-out. Die Welt notes that the Italian government is holding up discussions on the new Stability Pact, as they do not agree on setting public debt limits at 60% of GDP.

Over the weekend Der Spiegel reported on the ‘pact for competitiveness’ which German Chancellor Angela Merkel is set to propose to eurozone leaders at the Summit on Friday, including increase of retirement ages across Europe, harmonisation of corporate tax rates and the introduction of a debt brake into all eurozone members’ national constitutions. Bloomberg suggests that Merkel will ask for this in return for an increase in the eurozone bail-out fund.

Handelsblatt quotes government sources saying that the plan still needs to be agreed upon with the coalition partner FDP. On his Coulisses de Bruxelles blog, Jean Quatremer argues “the French have already showed opposition to a pension age of 62 years; they will detest retiring at 67”. FT Deutschland and Handelsblatt report that the ECB is keeping interest rates low for fear of harming the weaker eurozone members or destabilising their weak banking sectors, with inflation fear in Germany as a result.

A recent poll conducted by the Economist Intelligence Unit and commissioned by RBC Capital Markets shows that more than four out of five senior executives, or 85%, believe that there is a chance of one or more countries leaving the eurozone in the next three years, while two in three, or 60%, said there was a chance the eurozone would break-up over the next three years.
WSJ EUobserver Spiegel Coulisses de Bruxelles Guardian FT FT 2 FT 3 FTfm FT 4 Jornal de Negocios Les Echos Reuters Expansion Handelsblatt Coulisses de Bruxelles 2 FT Deutschland Welt Les Echos 2 Euractiv France 2 To Vima Times 2 EurActiv EurActiv 2 FT Deutschland FT Brussels Blog European Voice AFP Euractiv France

B … French, British Banks Have Most Exposure to Egyptian Loans, BIS Data Show.
Boris Groendahl and Fabior Benedetti-Valentini of Bloomberg report: International banks have lent $49.3 billion to Egyptian borrowers, with French and U.K. banks having the most exposure to the country torn by anti-government protests, data from the Bank for International Settlements show. French banks’ claims on Egyptian borrowers stood at $17.6 billion at the end of September, BIS statistics released Jan. 27 show. U.K. banks’ exposure was $10.7 billion and Italian banks had $6.3 billion in claims, the data show. European banks’ total claims amounted to $40.3 billion (Hat Tip to Gary of Between The Hedges)

C … Authors report Inflation Destruction
Inflation destruction reaches the critical mass eruption level causing India to mull import duty cuts to curb inflation, The Economic Times reports.

Inflation stalks the emerging markets, the Wall Street Journal reports.

Geithner: global inflation no great concern, the Wall Street Journal reports.

Commodity currencies vulnerable, Financial Post reports.

Has the under-recording of US inflation led to Egyptian and Tunisian food riots via loose monetary policy?
Shaun Richards questions.

Keywords: monetization of debt, debt monetization, inflation destruction, yield curve, revolution crisis, European Sovereign Debt Crisis

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