Financial Professionals


Capital Markets Update


Here we are happily one week removed from the "Flash Crash" of Thursday May 6 and several days past the European Union's "shock and awe" defense of the euro. Multiple conflicting, frustrating signals remain for investors. Let's try and explore how they might impact investments in the near and long term.

First up, the Euro Zone (EU). The $1 trillion of support alleviates liquidity concerns. Does it stop the contagion threat? I don't believe so. It also does not eliminate the solvency threat for Greece and potentially other weaker hands in the EU. The impact for the market has been the continued rise of precious metal prices and the U.S. dollar. The euro continues to decline. I view these as near term trends that should continue. Longer term, the most relevant theme for investors is the EU fight versus deflation freezes the hawks here in the U.S. Federal Reserve. The Dovish case for continued flush liquidity, a favorable steep yield curve, and low private sector borrowing costs gains momentum and should continue to support "certain" risky asset prices.

Spot Euro Currency

Source: Bloomberg

Quietly under the radar this week, Blackstone Group, Thomas H. Lee Partners, and TPG Capital are in talks to acquire Fidelity National Information Services for $15 billion, including debt. If completed, this would be three times as large as any leveraged buyout since July 2007. Investors should be rather encouraged that private equity firms are putting capital to work again. Also, the 3 potential suitors for Fidelity National are, in essence, confirming their belief that a trough for housing has occurred with the timing of the potential acquisition.

On Wednesday, May 12, the U.S. Treasury auctioned $24 billion of Ten Year Notes at a yield of 3.548%. The participation of indirect bidders, which included foreign central banks, was 41.9% versus 43.1% in the prior auction. The auctions continue to run smoothly as the Fed's gift to financials. The steep yield curve trade encourages purchases of Treasuries and Agencies. Overall, the 10 year remains range bound as the chart below depicts.

Source: Bloomberg

Spot Oil prices continue to weaken as inventories rise once again. The situation in the Gulf has not improved to where a stoppage of the leak is on the horizon. I continue to suggest that investors not expect a near term rise for oil prices based on the crisis in the Gulf. If anything, the Obama Administration could release oil from The Strategic Petroleum Reserve into an already over supplied market. In addition, the European April 15 to 22 air travel shutdown eliminated demand for jet fuel of 1.2 million barrels per day. That is 20% of the global jet fuel demand. That dynamic also is weighing on oil prices. However, very quietly, natural gas prices, which I believe will rise over the longer term, have experienced a pause in this year's decline.

2010 Spot Natural Gas

Source: Bloomberg

Finally, China, the engine of global growth, continues to speed along, slightly too fast, I believe. Expectations are that a revaluation of the yuan must occur in order to stem inflation and export the excessive growth out of Asia into the Euro zone. The global economy needs balanced growth to continue the recovery; it cannot be isolated in Asia alone. Asian currencies need to appreciate. The net effect would be long term positive for U.S. equities, pause the current cyclical advance in the U.S. dollar, and restart the upward momentum in the natural resources and commodities space. Use Dr. Copper as the guide for that indicator.


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