The Bear Market: When It Will Take the Chips Away Again

As you read my regular column section below, “Where the Market Stands; Where

it’s Headed,” you’ll see that long-term interest rates have hit a new eight-month high. In

fact, the yield of the U.S. 10-year Treasury is up 45% since October 2010. Most consumers

are oblivious to the fact that long-term rates are rising so quickly. And this is exactly

how I expected events to unfold.

Thinking the worst of the economic bubble that burst in 2008 is behind us, consumers are

opening their wallets and spending again. The stock market is up to its highest level since

June 2008, the car-makers had a great 2010, and the cost of Super Bowl tickets is up to a

new record high.

The credit-card companies tell the story better:

American Express Company (NYSE/AXP), the world’s biggest credit-card company based on

customer purchases, said that its cardholder spending increased by 15% in the fourth quarter

of 2010, compared to the fourth quarter of 2009.

Visa Inc. (NYSE/V), the world’s biggest bank-card network, saw its quarterly profit rise

16%, which it attributed to surging consumer spending.

But the truth lies in how the stock market is pricing consumer-related stocks. It is pricing

them as if the stock market does not believe consumers will continue to spend.

While the stock market plows higher, American Express stock is actually down six percent

since the spring of 2010. Visa stock is down 36% over the same period. (In the case of Visa,

the stock price also reflects the proposed government capping fees on credit cards, which

would hit Visa and MasterCard the hardest).

By mid-2011, the reality that higher interest rates are headed the way of overleveraged

American consumers will hit home. I see this in the price charts of the high-end luxury

consumer retail stocks right now.

The bear market will have done its job convincing consumers and investors that the worst for

the economy and the stock market is over and that all is well. And that’s exactly when the

bear will take the chips away again from consumers and investors.

Michael’s Personal Notes:

Some comic relief this morning:

The Treasury Borrowing Advisory Committee, which advises the U.S. Treasury, has suggested

issuing bonds with maturities of 40, 50 or 100 years. Why not, I say? We know the government

can never pay back its national debt unless is devalues the greenback or raises taxes

sharply. Why not drag out the debt for 100 years? After all, 40-year bond offerings have

worked in Japan—and we know how well that economy has performed.

Proof that inflation is a problem in the U.S. as the value of our currency has eroded: when

the Super Bowl was first played in 1967, the average ticket price was under $20.00. I was on

the web site FanSnap.com this morning, and a decent single ticket (Upper Level though) is

going for $4,134 for Sunday’s game, without much availability. And I thought we just had the

worst recession since the Great Depression.

Where the Market Stands; Where it’s Headed:

Well, it finally happened yesterday. The bellwether 10-year U.S. Treasury yield broke to a

new eight-month high Wednesday, closing at 3.49%. Looking at the chart of this 10-year

Treasury, there is very little resistance up to a yield of four percent, where I believe the

yield is headed. (Very surprised to see so little media coverage on rapidly rising long-term

interest rates.)

The stock market continues on its merry way, oblivious to rising long-term rates. And that’s

usually how the market works. In my history of studying the markets, I have seen the stock

market rise for up to six months after interest rates peak before stock prices adjust. But,

for now, it is more of the same; stock prices heading higher in the immediate term.

The Dow Jones Industrial Average opens this morning up a remarkable 4.2% for 2011, as the

bear market rally that started on March 9, 2009, continues.

What He Said:

“If I had to pick one stock exchange that would rank as the best performer of 2007, it would

be the TSX (Canada’s equivalent of the NYSE). Interest rates in Canada remain very low and

they are not expected to rise anytime soon. Americans looking to diversify their portfolios,

both as a hedge against the U.S. dollar and a play on gold bullion’s price rise, should

consider the TSX. Most brokers in the U.S. can buy stock on this exchange.” Michael Lombardi

in PROFIT CONFIDENTIAL, February 8, 2007. The TSX was one of the top-performing stock

markets in 2007, up just under 20% for the year.