Tuesday, February 28, 2012

Consumer Confidence vs. The Bond Market

The market is higher again in early trading. Pullbacks continue to be brief affairs and the stock market mocks those calling for an imminent correction.

The strongest piece of economic data today was the Conference Board's Consumer Confidence index which spiked to 70.8 in February from 61.5 last month. That's a big jump and we also saw a rise in the Univ. of Mich consumer confidence index earlier in the month.

So it's safe to say that consumers are becoming more upbeat about the economy. We know from the relentless rise in the stock market that investors are becoming more upbeat about the market as well. But what doesn't translate is what is eating at bond investors?

The 10-year yield continues to drift lower, now back down to 1.90%. If the bond market were even a tad more upbeat about the economy and global markets, I would expect the 10-year to have already reached 2.5-3.0% levels.

Some would argue that the Fed is skewing this indicator with their operation twist buying. But this is a very deep market, and the Fed can only effect things at the margin. They can't fully absorb a global selloff in Treasuries, if and when we ever get one. In the meantime, the 10-year yield remains an outlier in terms of improving sentiment indicators.

The rebound in the housing market hasn't shown up yet in the Case-Schiller figures. This index fell another -4.0% in December, even though its data lags a bit. We will have to see if the index picks up as it starts showing 2012 figures.

On the earnings front, I see more stocks gapping higher on positive reactions to earnings. The poster child today will be Priceline (PCLN), but also take a look at SINA, DPZ, and AZO to name a few. On the disappointing reaction side are SWN, TECD, and FDP.

Commodities are mixed so far. Oil prices are a bit lower near $108, while gold prices are higher to $1785 and copper and silver prices are up even more (on a percentage basis).

The VIX is flattish around the 18.15 level.

Trading comment: Yesterday we trimmed our longs in SODA, but the stock continues higher today. Google (GOOG) is also moving back above its 50-day average, which is a good sign. Tech stocks are leading the early action while defensive utilities (last year's winners) continue to lag. With the markets up as much as they are since the October lows, I would expect to see some larger increases in bullish sentiment in the advisor surveys, but we haven't seen the extreme readings yet. Maybe this week will begin to show more bullishness.

KAM Advisors was long GOOG, PCLN, SODA


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