Weekend Commentary

Let me first touch on Treasurys.  Everyone “knows” Treasury prices are going lower because the Treasury is issuing massive amounts of debt to pay for all of its bailouts and to keep the economy afloat.  It is simple Econ 101 supply & demand – the supply of available Treasurys is increasing (and demand is weakening as people fear a downgrade of America’s credit rating and because of heightened inflation worries); therefore, prices will be lower.  But are they already “lower?”  Has the market already taken all of this information into account?  I think it has. 

Benjamin Graham said it best: “While it may seem easy to foresee which industry will grow the fastest, that foresight has no real value if most other investors are already expecting the same thing.  By the time everyone decides that a given industry is ‘obviously’ the best one to invest in, the prices of its stocks have been bid up so high (or low in our case) that its future returns have nowhere to go but down.”  (p. 16-17 of The Intelligent Investor)

You must remember that markets are forward looking and anticipate the future.  See crude oil – prices have risen sharply but demand has yet to pick up.  Given this, I am not surprised at the rebound in Treasury prices Thursday and Friday.  Yields peaked at 3.75% Thursday afternoon and finished the week at 3.47% (bond prices and yields move inversely).  Everyone “knows” the Treasury is going to issue record amounts of debt this year (and probably for the next few years too) but the easy money has already been made.

 

Now I’ll touch on a piece of information that was completely overlooked Friday.  The Chicago PMI (purchasing managers’ index) was extremely weak.  The May reading was 34.9 compared to 40.1 in April.  The estimate was 42.0.  Any reading below 50 signifies overall business contraction.  I did not hear one person mention this very bearish data and pretty much every asset class rallied Friday in the face of this news.  The economy is still very weak and people are getting ahead of themselves with their second half recovery talk.