Friends
The big news this week is the potential extension of the Bush tax cuts, which President Obama and some members of Congress seem to have agreed on. This gave the Santa Claus rally a little extra juice early in the week, but as House Democrats made their opinion known about the President’s deal, the market took a more cautious stance and stocks have lingered the past few sessions. We aren’t complaining though, as just about two weeks ago the S&P 500 closed at the 1180 area. Today, we begin trading with the S&P in the 1230 area, a better than 4% gain in that very short time frame. Santa looks to want to take the market to new yearly highs, but House Democrats threaten to assume the role of the Grinch and stop this advance in its tracks.
Oil has taken a peek at $90 a barrel this week as its climb to $100 seems almost inevitable. As trading begins this morning, oil is slightly above $88. Gold did pull back a bit this week, but still seems to be in a bullish technical pattern, remaining comfortably above its 50 day moving average.
Let’s turn our attention to bonds for a moment. The rise in the 10 year Treasury yield has been breathtaking this week. We have seen a move from 2.50% to over 3.25% in less than 10 trading days. Of course, what that means for prices is quite negative. The 75 basis points move in yield represents about a 6% decline in the current price of the 10 year. This just illustrates what we have been concerned about for a while now (you are probably sick of hearing it from us). Many investors who bailed out of the stock market in 2008 and 2009, and poured money into bonds and bond funds, may not be aware of how fast and how much bond prices can change. A 6% drop in a week is impressive. A move to 4% on the 10 year would represent about a 12% drop in prices from the 2.50% level. If stocks had this kind of move, people would be stunned. We just hope investors are aware of the potential dangers lurking in what they believe is the safe place to hide (remember, we are speaking of interest rate risk, not necessarily credit risk). We will continue to monitor the bond situation and look for opportunity as it arises.
Back to our Santa Claus rally. If Congress and the President get the tax bill settled, Santa seems to have clear sledding for the next few weeks. We are beginning to see economists increase their views on growth for next year, and some strategists are calling for higher stock prices in 2011. We take it one day at a time, and always consider risk parameters when allocating assets, but for now it seems that Santa will continue to make the season bright.
Have a great weekend everyone.
