CTS Spotlight for the week of November 05th, 2010

Hello and welcome back to CRI's CTS Spotlight

11/05/10: In a week that saw both US mid-term Congressional elections and the US FOMC meeting (among other important trading events) the markets has taken a decidedly bullish stance heading out of the events. The market got what it wanted; both a market friendly Republican controlled US House of Representatives (which ought to put a break on out-of-control Democrat spending) and an additional guarantee of $600 billion in bond purchases by the Fed....let the party resume! We shall examine the Fed's plan and how the charts look in this weeks' CTS blog spotlight so be sure the check that out. Interestingly, Japan's equity index has finally started to move a bit higher. Should this market start to rally in earnest we will know indeed the end of the run is close at hand.

US Bond market - Fed action

In its recently released minutes to the Early November FOMC meeting, the Fed said they are prepaired to inject another $600 billion dollars into the US economy through bond purchases. Specifically, they said they will be targeting the 2 to 5 year US government bonds in an attempt to both steepen the yield curve and 'jump start' the US economy. This week then I thought as a follow up to last weeks' European Bond charts, we would look at the US bond market, which durations are moving and what the yield curve looks like now.

(Please refer to charts above)

Interestingly, the US 30 year bond is NOT participating in the latest bond market rally. Is this what the Fed wants? Notice too that the 10 year bond is starting to roll over. Since we now know there will be another 600 billion in Fed purchased, it is not surpriseing to see both the 5 year and 2 year markets moving to new highs. So then what does this action do to the yield curve?

Here is a current graphical representation of the US government yield curve. Notice how steep it is? This is a healthy growing economy and it is no surprise that the stock market is happy and moving higher. The US government is giving the public a $600 billion check and the market is putting it to work. The problem (if  and when comes) will be when the curve inverts (this is where short term rates are higher than long term rates and is a very good tool at timing recessions). This simply is not the case currently.

Conclusion: The Fed is getting what it wants, the economy is slowly turning....lets hope they know what they are doing.
(oh and by the way.....I have total confidence they DO NOT but enjoy the flood of liquidity while it lasts)


That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com