I would have otherwise had a good day, were it not for one position – a large long on TLT (the ETF on Treasury bonds). I had been watching @ZBH1 all night, and earlier it was up nicely, but it started slipping. What puzzled me was that, a little before the open, the futures were down about 1/10th of a percent, whereas TLT was down over half a percent (and that was just the beginning).
I got out of TLT at a loss early on, and a good thing too, because the thing basically collapsed all day long.
But that leads me to the question which is the subject of this post: don't interest rates matter to the market anymore?
Here are the cold, simple facts:
(a) Bernanke has made it abundantly clear there is no limit to how many hundreds of billions he will throw at the market to keep interest rates down. Conclusion: since this pledge is made by the most powerful financial force on the planet, rates should get low and stay low.
(b) Interest rates had done almost nothing but climb for the past three months, as shown in the graph below. Conclusion: the market's concerns about inflation outweigh the most powerful financial force on the planet, and QE2 is and will continue to be a failure.
(c) The housing industry, ostentisibly one of the principal beneficiaries of QE2, is heavily dependent on low interest rates (I'm pleased to report I refinanced my house at 3.25% fixed this autumn – – just about the only positive financial event in my life this year). Conclusion: With rates soaring higher, the housing market is going to continue to get damaged.
(d) The stock market, which for eons has shown its reliance on interest rates (dropping rates=good for equities; rising rates=bad for equities), simply keeps puking to new recovery highs every single day (check out the $INDU today), in spite of the above facts. Conclusion: the entire stock market can be replaced by one financial instrument whose ticker symbol will be WTF.
