The president of Yardeni Research Inc. said a common worry
was that the drop in bond yields may be a harbinger of a U.S. economic
slowdown. This year’s rally in Treasuries is signaling caution even as benchmark
U.S. stock indexes repeatedly set records and the percentage of bulls in
Investors Intelligence’s survey reaches the highest level since January 2005.
The conventional wisdom, at least among fixed-income
traders, is that the bond market is always smarter than the stock market when
it comes to reading the tea leaves that show where the economy is headed. The
smartest of stock traders usually agree with this, and that’s why they always
keep at least one eye, or at least a few lines of algo code, focused on the
bond market.
But here’s the thing about conventional wisdom: you hear
about it the most when it’s wrong. Now settle down bond traders. Before you
fire off a nasty e-mail with an Ivy League-caliber CV attached to it, consider
a few of the tea leaves the stock market is throwing off these days:
Trucks, Trash
•Trucking, railroad and airline stocks are on fire. The DowJones Transportation Average of companies that ship all our stuff and people
around is up 9.2 percent this year through yesterday, more than twice the
S&p;P 500’s gain. Cowen & Co. raised its earnings estimates for railroads
today, citing “robust” traffic growth of 7.5 percent in the first two months of
the quarter.
•Check your trash. A growing economy creates more garbage.
Wunderlich Securities’ “Dumpster Dive” report today includes a chart showing
how solid-waste volume and gross domestic product are usually in such sweet
harmony it rivals Hall & Oates’ “She’s Gone.” Per-week hours among trash
haulers are near records and well above historical averages even as the number
of collection employees is up 1.7 percent, Wunderlich said. It’s hard to
imagine when the 10-year Treasury yield is below 3 percent, the report says,
“but persistent 2 percent plus wage inflation, rising fuel and food prices have
to work its way into rising inflation eventually, no?”
•Maybe it’s not the economy, stupid. The same economic
concerns that drive investors to the safety of U.S. Treasuries have driven them
out of European nations with shaky finances in recent years. Yet, Spanish and
Italian 10-year yields reached record lows in anticipation of today’s rate cuts
by the European Central Bank. Money has flowed into Treasuries because of those
low European yields as well as unusual declines in China’s currency, according
to LPL Financial strategist Jeff Kleintop, who rejects that bond and stock
markets are in disagreement.
Anyway, some people have trouble remembering which one is
Hall and which one is Oates. Daryl Hall is the tall, handsome, blond dude who
does most of the singing. Oates is the shorter, swarthier guy with the
mustache. Conventional wisdom is that the tall blonde is the mastermind, so
bond traders probably think of themselves as the Daryl Hall of the markets. But
the little guy sure can sing too.
