Friday, October 2, 2009

Treasuries Nearing End of Price Gains for Now?

Calculated Risk quotes from some of the MSM regarding gloom about the economic cycle, in "After the Storm": No Immaculate Recovery. Here is a representative sample from it:

The Ylan Mui at the WaPo reviews the recent economic data: New Economic Reports Show We're Still Hurting (ht Ann)

The fragile economic recovery has relied heavily on government stimulus spending, but new data show that as the money runs out, a sustained rebound may be elusive.

A similar theme from The Economist: After the storm

Despite a welcome return to growth, the world economy is far from returning to “normal” activity. Unemployment is still rising and much manufacturing capacity remains idle. Many of the sources of today’s growth are temporary and precarious.

Similarly, the bears at Comstock have a "Special Report" called FUMBLE--ITIS that says similar things:

This time there is a major employment problem that leads not only to job loss but also wage contraction. We also have a continuing problem of restriction of credit to business for expansion and consumers for consumption. This, in conjunction with about 35% excess capacity, is not conducive to corporations expanding their facilities or hiring new employees. These conditions, along with a housing market almost entirely supported by government mortgage guarantees, make the last leg of the relay race much more of a problem than in past expansions. Also, the losses of net worth experienced in the earlier implosion of stocks and real estate have not come close to being restored by the latest stock market rally or a lessening real estate contraction.

The facts discussed above make the last leg of the relay race much more of a problem than it was in the past.

In Comstock's analysis, the expansion is ready to roll, but business and consumers are too weak to have a strong finish despite the Fed etc. performing the first 3/4 of the race well.

There may be a bit too much gloom around for this part of the business cycle.

Meantime, the 10 year and 30 year Treasury yields have plummeted in a short time. The 10-year is at 3.15% in Asia now, down from 3.85% Aug. 10 and 3.48% less than 4 weeks ago. The 30-year is at 3.93%, down from 4.33% Sept. 9 and 4.60% Aug. 7. Both yields are nearly 10% below their 50 day moving averages.

Bank deposits are now yielding 1% or less, and even IBM probably will return 2% after it raises the dividend one of these days, while generating a gigantic free cash flow yield of more like 7%. It trades at about 11X 2010 expected earnings. On the upside, IBM could in one year trade at 15X earnings of $11/share, or $165/share.

To phrase it differently, if IBM (surprisingly) stopped buying back its stock and returned all its free cash flow to its stockholders as dividends, it might have a dividend yield of 7%. One might guess that that action alone would cause a gigantic pop in the stock.

In the meantime, Japan's stock market is selling off on good news:

Japan’s jobless rate unexpectedly retreated in August from a record and household spending rose as the nation emerged from its worst postwar recession.

Given the political decision of governments to trash their own finances to support those of large corporations plus the current downdraft in stock prices, the common stocks and bonds of very large self-financing corporations NOT in the financial field are looking better and better vs. increasingly inflated and possibly momentum-driven prices of government debt.

Meanwhile, gold prices are just hanging around $1000 frustrating bull and bear alike, but gold was down half as much as the Dow Thursday and is more or less unchanged overnight while Asian stocks are down over 2%.

The dog that is not barking is gold. It goes up as the reflation (without much deflation) goes on, and it doesn't go down much when stocks go down. Thus the market keeps on implicitly suggesting that it is undervalued.

Copyright (C) Long Lake LLC 2009

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