CTS Spotlight for the week of February 04, 2011

Hello and welcome back to CRI's CTS Spotlight,

02/04/11: As the US economy flounders amid tepid growth data at best, bond markets around the world are breaking lower in earnest. QE2 has worked and inflation is alive and kicking. So much so that US treasuries are now also pointing substantially lower (Please refer to this week's CTS Blog for more on that). This all has 1987 written all over it. In that year, the bond market broke in March while equities rallied into October only to ultimately break too. The January Barometer lends support to that thesis as well. Be warned, prices are moving higher and ought to continue to do so for now - but that won't remain forever.

The charts above are the Weekly and Monthly 10 year US treasury note futures contract traded on the CBOT. There is no doubt about it, this market is heading lower and quickly. As the chart to the left shows (Weekly) we have taken the past three months to carve out a very bearish flag pole formation based primarily on the fundamental notion that the US Fed is pumping $600 billion dollars into the US economy through the purchase of two to five year paper. This of course left a proverbial vacuum for longer dated maturities and indeed prices have fallen. This past week's price action has confirmed a bearish flag pole formation and the specific numbers suggest we are going to test the 111 to 112 level in earnest. If we look at the chart to the right (Monthly) we can see why a move into that area makes sense. Since the recession peak in '09, US treasuries have traded in a range where the bottom is around 112 and the top is around 128. Considering the strength in equities, a general belief that the worst of the US housing market disaster is behind us, and a US Fed determined to bring inflation back no matter what cost - I think it only makes sense that longer term interest rates ought to be rising. Keep in mind too, the housing disaster was really a financial stock disaster that left the entire sector with massive liabilities and no earnings. TARP & QE2 have not only relieved the financial stocks of much of the debt burden but have also re-established bank earnings streams through an engineered yield curve. Well done Mr. Bernanke, well done...

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