CTS Spotlight for the week of April 8th, 2011

Hello and welcome back to CRI's CTS Spotlight,

04/08/11: As the US dollar continues its slow grind down to the well established target zone (74.441 to 73.516) there is a general feeling in the market that the US economy itself is far from healthy. Of note this week, Eurodollars (our short term interest rate proxy) have established a bottom and reversed what looked like a well defined top. The implications suggest short term interest rates in North America are not going up any time soon. Indeed, the US Fed has suggested that its QE2 program will be extended into June '11. Looking elsewhere, many commodity prices have reversed their recent tops suggesting that the latest market correction was little more than an attempt to shake out the 'weak-hands'. CRI's S&P 500 blog has been attesting to this notion over the past weeks as very little 'technical damage' has been done even though the news headlines would lead one to believe otherwise.

 

The Eurodollar market is the corporate equivalent to the T-bill market. Where T-bills are guaranteed by a government body, Eurodollars are guaranteed by corporations. To understand how this market works think of a Eurodollar contract's price as the inverse of its interest rate. So if Eurodollars are trading at 99.60, then the interest rates paid is .40% (100 minus the price). The fact that the Eurodollars have bottomed in price suggests that short term interest rates paid by corporations to the holders of their paper are now NOT going up but indeed, may fall even further. This is very interesting because if one believes the North American economy is improving then Eurodollar rates should be rising. The fact that this very well established bottom has come in, suggests that the North American economy isn't as good as the media would lead us to believe and that indeed, one should expect the malaise of the past couple of years to continue. The question then becomes, when does this 'malaise-ness' get reflected in the rest of the market. CRI's feeling is that the stock market (and many of the commodity markets) have a natural tendency to rally into the seasonal peak in and around May. So CRI's words of caution this week are: 

Don't get sucked into the seasonal euphoria, this may be a very big trap...

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