Moody’s late/Bulls run wild

At 1am ish, Asian markets fell across the board after Moody’s put Spain on review for a possible downgrade and that weakness spilled over into Europe and to the Euro. To put into full perspective though, Moody’s has Spain at one notch above S&P and therefore would just be playing catch up to S&P’s last downgrade back in April. Portugal sold 90 day paper at yield of 3.4%, well above the last one sold on Nov 3rd yielding 1.82%. Following the continued rise in US yields, last night said the avg 30 yr mortgage rate was 5% for the 1st time since May 12th. For the week ended Friday, the MBA said purchases fell 5% to a 4 week low and refi’s fell for a 5th week by .7%. ABC confidence rose 2 pts to -43, a 3 month high and 3 pts above the 1 yr average and confirms the general sense of economic improvement.

The historical knee jerk reaction to an improving economy is that stock investors get more bullish as common sense would imply as the coincident rise in interest rates take a back seat in the analysis. II said Bulls rose to 56.8 from 56.2 to the highest since Dec ’07 while Bears fell to 20.5 from 21.3 to just shy of the lowest since May ’10. As I wrote last week though, “the 64k question for stocks is what level of interest rates matter both in terms of impacting valuations due to the rising risk free rate and in affecting US economy activity. Yes, rates are still very low but because of our economy’s drug like dependency on cheap money, a sharp move of any kind will likely matter.” There is plenty of historical precedent that a better economy doesn’t equal a better stock market if higher interest rates are a corollary result.

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