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Wednesday, May 4, 2011

Market Thought... curious

I find the 10yr treasury yield chart curious.

It is an obvious indication of slower GDP growth, but it is approaching an interesting level.  Last summer, when it breached the 3% mark, I indicated it would put the fear-of-god in the big boys causing them to sell the market, due to the deflationary implications. And that is what happened.

Hopefully the lesson that the market learned last summer was that earnings were not affected. The big boys were reminded that the stock market is a function of earnings, not 'indications of' GDP.

The EU PIGS solvency issue caused the systemic threat that facilitated the market sell off, and fear of deflation last summer. But what is the threat going to be this go around?  Will it be EU debt restructuring? There have been chatter of a 'soft' restructuring first, then a 'hard' restructuring.

The only time restructuring would matter is if we have heavy leverage within the system.  After Goldman (and other banks) reported, banks are not excessively leveraged. They are at about 12-1. The only time I heard about excessive margin use or leverage, was today with Cramer mentioning it. (I have no corroberation of the magnitude, outside of the contradiction from the banks. So I can not make a decision based on Cramer's qualitative statement. But I will keep my eyes and ears open, and try to look into it further.)

We will see how the market decides to take it. IMO, the above does not merit an SP500 move that breaks 1300, as highlighted in the 'charting' post.

Although the current movement in the 10yr note appears to be frustrating PIMCO's Bill Gross. Probably because, at the time being, he is on the wrong side of the trade.

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