6.8.07

  6.8.07

      The yield on the 10-year note finally eclipsing the psychological 5.00% level overnight for the first time since last August was the main catalyst setting the stage for profit taking this week.

Rising interest rates are disconcerting for stocks since higher yields increase the safe-haven appeal of Treasuries and increase the costs of borrowing. That latter issue poses an added concern for the likes of private equity firms whose record pace of leveraged buyout activity has essentially not ruled out any company as a takeover candidate and has helped keep an underlying bid in equities.

Separately, Morgan Stanley issued a "triple sell" rating on European equities for the first time since the dotcom bust due to rising rates among other things.  The investment bank said it expects a 14% correction in European equities over the next six months. That news sent Europe's three major bourses, which recently hit multi-year highs, plunging 1.8% on average and left investors in U.S. equities also questioning valuations. As a reminder, the Dow and S&P 500 were in record territory just days ago, yet rising interest rates have served as an effective profit taking catalyst for the overextended market. Today's only scheduled economic report also failed to give investors any incentive to use intraday market dips as buying opportunities.

The good news is that wholesale gasoline has dropped 33 cents over the last two weeks and is now starting to show up at the pump. We are expecting gas to continue to head down and be lower for the July 4^th holiday travel.

The week ahead holds the answers to the question “What now?” Friday’s rebound needs some follow through to prove that last week’s action was a quick little correction and that the trend is still up. In spite of our signal still showing a Buy within a PPP, we are still playing the conservative bent and staying in cash, at least for the first day or two of next week.

Till next week

The MTA  staff