March comes to an end and the “celebration” of the year-long market rally remains in full swing. Complacency among investors seems to reach new heights with each passing week as financial news outlets continue to serve up government grog as if it were Cristal.
True, we at RCM have participated in this rally. We remain committed to our precious metals positions but have also branched out into a number of technology companies. In some cases these are companies that have been on our radar for a number of years. Collectively, their technology dominance is about to go from niche market to mainstream likely setting up the best opportunity for equity price performance.
However, we are also at this time increasing our vigilance, hence the title of this post. An increasing number of disturbing trends have emerged in the last 4-5 weeks that demand a watchful eye and a nimbleness of mind if principal is to be protected when the music stops.
I will begin our search for the Grizzly by posting the following three charts courtesy of Morgan Stanley (MS). All three focus our attention on the credit markets. I have explained in previous posts that credit markets for the last few years have been the best “canary in the coal mine” for equity investors and I believe that relationship will remain intact.
Chart 1 illustrates the recent inversion of the 10 year Swap spreads. As MS explains this is a clear “harbinger for higher U.S. treasury yields”. Bottom line: higher yields are negative for equities and a disaster for the fragile real estate market; a market in which prices in many states, are lower today than in Dec. ‘08
Chart 2 helps us understand why rates are rising. Simple answer: larger deficits equal tighter Swap spreads. As Morgan explains “supply pressure tightens spreads” and evidence points to ever increasing supply.
I will allow Morgan Stanley to summarize this discussion and will be back to you with further posts as we continue to stalk the bear….