Live from Germany...it's a pullback!

 

Just because you want it to happen…doesn’t mean it will…

 

The other day I was driving with my family toward our weekend getaway destination.  Despite my objections we were on our way to Branson, MO for three days with the kids.  When the wife told me where we were going I immediately but politely objected, stating that Branson is for old people…which is true.  She responded rather quickly by saying that Branson has changed over the years…it’s not just for old people anymore.  Now she had me laughing as I imagined the Branson, MO tourism board printing up new advertisements that say “Branson…it’s not just for old people anymore.”  Ultimately I acquiesced to the will of the family to avoid a mutiny, and now I had my truck pointed toward Branson.

 

So now we were about 5 hours into the trip and we began getting hungry.  Being the gentleman that I am, I inquired where she would like to eat.  She stated that she had no preference and deferred the decision to me, as usual.  What you need to know about me on a road trip is that if I am within sight of a Taco Bell and you give the decision to me…that’s where we are going.  Taco Bell is the perfect fast food restaurant.  There are only about six ingredients inside the store so it’s almost impossible to get your order wrong…no matter what you order it’s just the same stuff just in different shapes.  This means that I can get good food and minimize the odds of getting the order messed up at the drive through at the same time.  It’s perfect. 

 

Decision made… “Taco Bell” I announced.  Her response surprised me…”I’d rather not do Taco Bell” she said. 

 

Hmmm…OK…”There’s a burger joint” I offered in reply

 

”I don’t know if I want a burger”

 

This exchange went on one or two more times until I finally had to point out that for a person who just said she had no preferences…she sure had a lot of preferences.

 

What does this have to do with the market?

 

The market is pulling back this morning on the most recent news out of Europe.  Eurozone leaders have just completed a meeting where they came up with their plans (read that as preferences) for how to deal with their issues.  The market is getting as excited as me heading toward a Taco Bell on a road trip…but as we’ll see...they could meet significant obstacles to their preferences as we move forward.

 

The market is a fickle friend.  Just a few short weeks ago the 10-year Treasury traded down to a 1.69% on scary news out of Europe, a global slowdown, and poor domestic data.  Yesterday the German government openly foreshadowed an outbreak of war if the Euro failed…that is language that would make me very nervous if I were a country that’s turning to Germany looking for aid.  Today there is hope in the markets as European leaders announce that they’ve made progress in solving their regional issues.   The early reports that I’m reading are that the agreement they reached involves:

 

1 – forcing bigger haircuts (nicer word for losses) on holders of Greek debt

 

2 – shoring up European banks that are about to be hit with big losses from the haircuts mentioned in “Step 1” …this sounds a lot like our QE1 but it should be good news for investors that hold bonds issued by those banks

 

3 – reinforcing a bigger bailout fund that would serve as a firewall to keep other countries from dragging the rest of the region down (this is the “I hope Spain and Italy aren’t next” fund)

 

In some respects I find it amazing that the market is pulling back on this news.  Nothing has been done yet…at this point we just have plans from politicians.  I’m no political analyst but history has taught me that plans from politicians are frequently ill planned and difficult to implement.  I understand that investors need to move fast to be the first one into an asset so they can make money…but what I’m seeing right now feels like an over-reaction. 

 

The 10-year Treasury was at a 1.69% a few short weeks ago…this morning it stands at a 2.30%.  I love the fact that we’ve pulled back to this level…and if things do indeed get better in Europe we will see yields move higher still as investors reverse the prior flight to quality that drove us to these lows.

 

But I’m left with the question…what makes the market think that Europe’s issues will all be solved after this meeting?  All of the problems are still there.  Making matters worse is that many of their problems are structural in nature…these have no easy short term solutions.  Structural problems can take a very long time to be solved.

 

The way this looks from my seat is that the initial euphoric, knee-jerk reaction to the new plan in Europe is creating a huge buying opportunity for investors who have been holding back cash and waiting for yields to pick up a bit. 

 

You have an opportunity today to buy bonds when the 10 year Treasury is sitting at a two-month high.   The 10-year Treasury is 60 basis points higher today than it was just a few short weeks ago.  This is a classic buying opportunity. 

 

If you have any questions or if there is anything I can be doing for you just let me know.

 

Thanks,

 

Steve Scaramastro, SVP

800-311-0707