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Tuesday March 15 Morning Commentary

03/14/2011

Global markets are declining in sympathy with the Nikkei 225, as that equity market has tumbled over 10% from Monday's close. U.S. markets are poised to open near this year's opening S&P 500 Index price of 1257.64.

Plenty of questions are being asked of me - if I am ready to suggest further downsizing, from market weight to underweight?  Given the conditions that currently exist, I am not.

Let's think about the following conditions:

  • I disagree with the belief Japan has no impact on today's FOMC meeting. In fact, I expect private conversations regarding the Fed stepping up to replace the BOJ as a buyer of U.S. Treasuries.
  • So much for the sharp spike in yields.  Let's eliminate that concern. On February 9, the U.S. 10 year Treasury traded 3.7660.  This morning, it is back below 3.25. Private sector borrowing costs for consumers and corporations will remain favorable. Demand for corporate bonds will remain strong.
  • In 1995, the Kobe earthquake on January 17 initiated a two week global selloff in equity indices.  Shortly thereafter, Japan diverged from other global indices. The U.S. quickly returned to its upward trajectory, while Japan continued to decline over the next 6  months. I place a high probability on a similar occurrence this year.
  • The BOJ needs to defend the appreciation in the yen by reducing its current account surplus. Purchasing its own government debt would expedite that process and stabilize the Nikkei 225. I am closely watching the BOJ measures as they have significant impact on global capital markets.

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