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May 11, 2007 (iTulip)
After a one day breather, back they come.
Bond Market Holds the Reins Of Stocks' Run
May 11, 2007 (Justin Lahart - WSJ)
Most investors like to rely on quaint stock-market measures like price-to-earnings and price-to-book ratios, or profit growth to make judgments about where stocks are headed. But those fundamentals don't seem to matter much right now. The bond market is in control of your stock portfolio.
Reasonable people can argue, and they do, over whether the stock market is sort of cheap or sort of expensive. Yet stocks have been screaming higher. Even after yesterday's setback, the Dow Jones Industrial Average has gained 5% over the past month.
Why? In these days of debt-fueled buyouts and corporate share buybacks, the stock market's connection to the debt market has become increasingly tight.
AntiSpin: Justin Lahart, who's been ripping the cover off the ball one column after another for months, has the best answer to our question posed yesterday about why the markets are not discounting the way they used to. Much as consumer confidence is no longer a measure of consumers' future employment and wage expectations but is instead a measure of consumers' expectations of future access to credit, the stock market is now an indicator of the market's expectations of future access to credit to finance new deals. May 11, 2007 (Justin Lahart - WSJ)
Most investors like to rely on quaint stock-market measures like price-to-earnings and price-to-book ratios, or profit growth to make judgments about where stocks are headed. But those fundamentals don't seem to matter much right now. The bond market is in control of your stock portfolio.
Reasonable people can argue, and they do, over whether the stock market is sort of cheap or sort of expensive. Yet stocks have been screaming higher. Even after yesterday's setback, the Dow Jones Industrial Average has gained 5% over the past month.
Why? In these days of debt-fueled buyouts and corporate share buybacks, the stock market's connection to the debt market has become increasingly tight.
If the stock market is driven by the bond market, then if you want to know where the stock market is going, it makes sense to keep an eye on the bond market's fuel supply.
Martin Mayer, in an Op-Ed piece he wrote for The New York Times 6/14/2006, The Federal Reserve System: The Mark of the Bust said:
Foreign official holdings of government paper is a miner's canary number. It tells you if there is big trouble ahead. The most common worry is that the number will shrink suddenly, with foreign governments dumping their dollar holdings, driving down the dollar's value and driving up American interest rates, but that's not a real danger. If the price of our government securities dived, the foreign central banks would have to bear the loss. This would be a budget item for their governments, whose leaders would not like it at all.
What we have to watch out for is a sudden and drastic increase in foreign official holdings. Rapid growth in this number in the late 1960's and 1970's forecast the recessions of the early 1970's and 1980's, and it could happen again.
Recent large increases in foreign official holdings indicate that foreign private investors see fewer attractive places to put their money in the American economy. They could presage a significant fall in the price of American assets, stocks (witness the recent drops in American stock markets) and bonds and real estate and all, and a hard landing for a world economy still floating on the crest of cheap credit.
Fair enough. A recent check-up indeed shows foreign private investors continuing to reduce their stake. But foreign central banks continue to cover the difference, which leaves a stock market short seller who sees a recession coming betting against several the world's largest central banks.What we have to watch out for is a sudden and drastic increase in foreign official holdings. Rapid growth in this number in the late 1960's and 1970's forecast the recessions of the early 1970's and 1980's, and it could happen again.
Recent large increases in foreign official holdings indicate that foreign private investors see fewer attractive places to put their money in the American economy. They could presage a significant fall in the price of American assets, stocks (witness the recent drops in American stock markets) and bonds and real estate and all, and a hard landing for a world economy still floating on the crest of cheap credit.
Not a very attractive proposition.
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