Market Talk

All aboard (for a stop or two at least.)

So much for the market running out of steam.

The stock market’s stamina looked pretty good today as stocks raced to some early big gains and never relinquished the lead. One should never underestimate the power of new money entering the market on the first of the month.

Dow Jones Industrial Average closes up 118 at 10186; S&P 500 rises 15 at 1089.

But as our WSJ colleague Matt Phillips points out, today’s rally doesn’t exactly exude lots of confidence, as  light trading dominated the session.

Check out Matt’s story at MarketBeat:

As seems to be the trend, Monday’s rally is coming on some pretty skimpy trading activity, which doesn’t exactly exude a whole lot of conviction on the part of traders and investors. It looks like we’ll be lucky to hit 4 billion shares in NYSE composite trading. Snoresville.

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Don't cry, this isn't 2008 all over again.

An interesting, although not necessarily disconcerting, phenomenon is taking place in the Treasury market. Some short-term Treasury bill rates have turned negative today after inching below zero yesterday, meaning investors are effectively paying the government to hold their money.

The last time this occurred was in late 2008 when people were worried about the impending doom of the financial system. Those fears have prompted some to wonder if another devastating event is on the horizon.

“Could there be something more pressing and/or catalytic? We have not heard peep from any of the big banks in a while,” Tyler Durden writes at Zero Hedge.

But the consensus seems to believe that negative short-term T-bill yields are merely “a technical phenomenon” and not reason to start panicking again, John Jansen writes at Across The Curve.

“There is a massive wall of liquidity, a pile of cash which needs a home,” he says, which is helping drive yields lower. “Typically as the year end approaches clients tend to unwind profitable trades and reduce balance sheets. I think that some of that deleveraging process has created new piles of cash and that money needs a place to park.”

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From MarketBeat’s Matt Phillips:

The dollar-funded carry trade is becoming quite the topic of the moment. Nearly every markets story we’re reading seems to have a boilerplate ‘graph explaining how exceptionally low U.S. rates are prompting traders to borrow and sell cheap dollars and buy higher yielding foreign assets, adding grease to the slide the dollar has been on.

When ink-stained — or in our case, pixel-pocked — wretches, and by extension the general public, becomes too familiar with any trade trend, that seems like it should present something of a red flag to professionals. But with the Fed and the global central banking community appearing to be dead set on keeping the liquidity flowing, we’ve heard nary a peep of caution about piling into this trade.

That’s why our contrarian hearts were, well, heartened to see this squib in a note from Christopher Sheldon, BNY Mellon Wealth Management’s director of investment strategy. While stressing that he believes the dollar will continue its decline in the medium term, Sheldon seems to warn investors off making huge bets on the ongoing slide in the buck:

We advise against extreme shifts as the dollar is, once again, close to a multi-year low and most of these defensive positions represent a crowded trade. Many investors’ portfolios already are well positioned for a weaker dollar. A substantial dollar reversal could cause investors to rethink the degree to which they have positioned their portfolios towards dollar weakness and would likely result in reversals in the price of many of their investments.

“What could cause such a reversal in the dollar’s slide?,” you ask.

Well, any sign that the Fed might be thinking of changing its hyper accommodative posture would likely play a part. Yeah, sure the Fed’s on hold for the foreseeable future. But if inflation expectations start rising, for instance if we get a bad auction of Treasury debt — BTW there’s $25 billion of 10-years at 1 p.m. — and yields shoot higher, that could get a lot of people in the markets thinking hard about their position on the buck.

Is CIT Group On Outside Looking In?

CIT Group’s (CIT) financial situation is looking more ominous by the day, unless of course Uncle Sam rides to the rescue.

The cost of insuring CIT’s debt has spiked, its short-dated bonds have plunged and two rating agencies cut the lender’s credit ratings on Monday. CIT shares plunged yesterday but have recovered a bit today on news that regulators are in advanced talks about providing some sort of aid to the lender, according to WSJ.  Shares are up 8% at $1.47 in mid-morning trading.

If the government bails out CIT, it will set an important precedent of what constitutes too big to fail, former IMF chief economist Simon Johnson writes at The Baseline Scenario. CIT only had about $80 billion in total assets at the end of 2008, which he notes was about 1/10th the size of Goldman Sachs (GS) and 1/25th the size of Citigroup (C). It also sits outside the top 20 publicly-traded financial services companies and wasn’t included in the government’s stress tests.

Even though CIT’s reportedly discussing a rescue package with regulators, Johnson says he doesn’t foresee a government rescue, especially considering a lack of strong connections between CIT’s CEO Jeffrey Peek and senior Treasury officials.

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