Global Interest Rates Heating Up

The Market Friday looked like a microcosm of investor opinions to where the market is headed. Our observations are that there is a pretty even matchup of whether the market should go up or decline, which is unusual to have such an even matchup. Ergo, the indecision in market direction. The Dow was solidly down in the am, back up to a slight decline down again, down 100 again and a close above 10000. The S&P futures showed a different picture being down over 14 points in the Globex overnight into Friday's open, and then rallying back all day.

A few months ago Australia surprisingly raised rates in the face of the global economy slowdown, saying things were pretty good for them. Now, China has tightened showing a need for them to slow things down. Other emerging countries are showing inflationary tendencies as well, namely India and Brazil. The US 30 yr Treasury bond Auction was weak with rates moving up, and the US dollar has been strengthening too.

Greece got a nod that they will be bailed out, but we won't call it that since Germany disdains this terminology. Looking forward at the other PIIGS (Portugal, Italy, Ireland, Greece & Spain) horrible acronym, but perhaps self fulfilling prophecy - we think there is a high probability that these other countries will need "assistance with their financial difficulties" too. So, the US has been printing money to create stimulus and now it looks like Europe may be faced to print money to save their neighbors and the Euro dollar. This printing of money has historically had a strong correlation to inflation.

Last week the economy showed mixed signals. Retail sales were moderately healthy and exports continued an uptrend. But consumer sentiment fell back—indicating that the consumer is still on shaky ground and consumer failed to extend the gains from January.

Our concern for the economy is that China has been viewed as one of the main drivers of US growth going forward. But if they slow, what happens to us? I suspect our growth will slow too. Also, the assumption has been that the consumers will drive the recovery, but a more realistic view may be that they consume, but at a slower pace, due to high unemployment rates and credit card companies that continue to reduce spending limits for consumers. Regarding quarterly earnings, cost reduction, read layoffs and weak comparisons to previous quarterly results have led to positive quarterly reports for the earnings season, rather than sales growth. Private mid and small sized businesses have said that business is slow, due to weak sales. No new job creation coming here. So, this economic driver looks questionable too.

Copper prices, which have often led the stock market in direction, have been going down too, although they rebounded somewhat Friday.

Thus, we remain cautious on equities, but optimistic on the US. Some of our countries greatest companies are created during times of economic struggle.