Making sense of March Market Madness
Sluggish demand for a recent Treasury auction and the big rally in stocks could mean investors love risk again. Or it could just be end of the quarter noise.
By Paul R. La Monica (
[email protected]), CNNMoney.com editor at large
Last Updated: March 26, 2009: 2:36 PM ET
NEW YORK (CNNMoney.com) -- The Treasury Department is busy holding auctions of U.S. debt to raise much-needed funds for the government's numerous financial rescue packages.
The bad news is that Wednesday's sale of 5-year notes was not met with as much healthy demand as previous Treasury auctions. And even though demand was stronger for an auction of 7-year notes Thursday, interest from foreign buyers was a bit low.
That could be a sign of a supply problem, a glut of Treasurys on the market.
It also may be an indication that foreign investors that are big holders of Treasurys could be growing more nervous about the health of the U.S. economy, particularly its rising debt load and increasing budget deficit.
To that end, China's premier said earlier this month that he had "some worries" about the security of U.S. bonds and the head of China's central bank proposed earlier this week that a new global currency be created to replace the dollar as the international reserve currency. China is the biggest holder of U.S. Treasurys.
In addition, European Union president and Czech prime minister Mirek Topolanek said Wednesday that the stimulus package passed by Congress last month was "a way to hell."
But the somewhat sluggish demand might also be a good sign. It could mean that investors have stopped worrying so much about the U.S. economy, and instead of flocking to the safety of Treasurys are now looking at stocks as a better buying opportunity.
In other words, shares of U.S. companies may finally look more attractive. And if that's the case, the need to bailout more firms in the financial and auto sectors could diminish over time.
Stocks have surged in the past few weeks, including a nearly 500 point gain in the Dow on Monday following the release of the Treasury Department's plan to help banks get rid of toxic assets. Since stocks hit their lowest point of the year on March 6, the S&P 500 is up nearly 23%, leading some investors to hope that stocks have finally hit bottom in this bear market.
And bank stocks have been leading the charge. The KBW Bank Index, which includes beaten-down financials such as Citigroup (C (http://money.cnn.com/quote/quote.html?symb=C&source=story_quote_link), Fortune 500 (http://money.cnn.com/magazines/fortune/fortune500/2008/snapshots/2927.html?source=story_f500_link)) and Bank of America (BAC (http://money.cnn.com/quote/quote.html?symb=BAC&source=story_quote_link), Fortune 500 (http://money.cnn.com/magazines/fortune/fortune500/2008/snapshots/2580.html?source=story_f500_link)), is up more than 65% from its March 6 low.
So what gives? Several investing experts said investors may be once again trying to call the bottom, even though it's too soon to do so.
"Investors are looking at the March bottom as potentially being THE bottom. So they seem willing to step up and buy stocks because once the train leaves the station, you've got to be on it. But that may be premature," said Paul Nolte, director of investments for Hinsdale Associates, a money-management firm based in Hinsdale, Ill.
One bond investor added that the latest moves in the bond and stock markets have been driven by a lot of "noise."
Robert Smith, chairman of Smith Affiliated Capital, a fixed-income money management firm based in New York with $2.2 billion in assets, said some of the recent economic data, such as better-than-expected housing sales numbers and a surprise jump in durable goods orders, have muddled the picture for bond investors. Typically, bond prices fall and yields rise when the economy is on the upswing. (Prices and yields move in opposite directions.)
Another fixed-income analyst agreed that the latest data could be helping stocks in the short-term. But he said it's too soon to say that investors are now more eager to flock back into stocks for the long haul and shun safer bonds.
"By no means is the economy out of the woods. It's not a sign of a sudden strong turn in the economy. It just offers potential hopes that the economy may, in some areas, be forming a bottom. And that's not necessarily a bad environment for Treasurys," said John Canavan, an analyst with Stone & McCarthy, a Princeton-based fixed income and economic research firm.
Canavan added that the Federal Reserve's announcement last week that it would start buying $300 billion in long-term Treasurys over the next six months also adds to the confusion in the market since prospective buyers in Treasury auctions already know that the Fed is going to be a participant in debt sales.
"The Fed's announcement will keep something of a floor over Treasury market prices and a ceiling on yields. So I think we still see strong demand for Treasurys," he said.
And neither Canavan nor Smith said they were overly concerned by comments made by Chinese leaders about the U.S. economy. Smith described the remarks as a "rattling of the cages" that helped spur the Fed into deciding to start buying Treasurys sooner rather than later.
With that in mind, Smith said he wasn't sure how much longer the rally in stocks could last. He said part of it could be due to short-covering, the phenomenon that takes place when short sellers buy back stock that they borrowed and immediately sold.
He also said the calendar could be playing a role in what's going on: the first quarter ends on Tuesday and as such, big institutional investors may be rushing to position their portfolios accordingly.
"I don't sense that there is a tremendous interest in stocks yet. We're getting to the end of the quarter and you're seeing the typical noise making," Smith said. "There isn't a race for more risk."