Weekly Market Briefing

From TSG Stock Market Letter
Week Ending April 24, 2009

Market
It has now been seven weeks since this rally began and this week
stocks took a break. Since hitting its low in the first week of
March, the S&P500 is up nearly 28%. Last week we mentioned that
the S&P500 index was 9.6% above its 50-DMA and that is about
where it stayed this week (9.5%) so stocks remain overbought.
But indexes are also still banging up against key resistance
areas that taken together with how overbought stocks are across
the board, increases the chances for a correction. And now this
rally is losing momentum. If prices hold up it will show that
investor demand for stocks is increasing despite the technicals
pointing to a drop. But that must be considered a long shot.

Interest Rates
US Treasuries with a net drop (redemption) of $97 billion in Treasuries by foreigners in February in the latest Treasury international capital flow (TIC) data. This followed a record net redemption of $148.9 billion by foreigners in January.

The government will have to sell $2.4 trillion in new bills, notes and bonds in fiscal 2009, according to an recent estimate by UBS. How does this compare with past Treasury sales? From October through December, the Treasury sold a record $569 billion, up a whopping 693% from the $82 billion it sold during the same period a year earlier, and auctioned another $493 billion in the last quarter up from $156 billion the year before according to Bloomberg, as the government increasingly finds itself squeezed between rocketing expenditures and collapsing tax revenues

Obama plan to raise tax revenues 40% by 2013 and the impact it will have on taxes and the economy. Unless the economy experiences a miraculous recovery, increasing the tax burden amid a declining economy is not only an extremely bad idea, it turns Treasury’s gargantuan task of financing the rapidly rising debt burden as spending soars into Mission Impossible.

What does this mean for traders and investors? First, this is inflationary because if history is any guide, the government will print more money and employ more helicopters from which to throw it into the economy, a methodology euphemistically labeled “quantitative easing.” The next all-too predictable development will be strong upward pressure on interest rates as U.S. Treasury investors demand higher returns to offset their losses due to increasing inflation.

In this increasing hostile investment environment, any investment strategy will need to take rising interest rates and increasing inflation into account.