Risk appetite fades-reflation ebbing–Feb.25,2009

The treasury sold $32 Billion in Five Year Notes today to yield 1.985%.On Thursday the FED will sell 7 year notes for the first time since 1993. There is plenty of demand out there for “safe” treasuries so inflation appears to be under control. A slight uptick in Tsy yields is expected after Thursday. The Ten Year Tsy is currently yielding 2.90%.

Despite a brief January respite from the credit in gloom, toxic assets have returned to center stage despite the the new Geithner “Financial Stability Plan”.
From Bloomberg: Before giving more capital to banks, Geithner is sending examiners into the 18-20 biggest firms to perform newly designed “stress tests.” Nouriel Roubini, an economist at New York University, forecast in January that financial firms would write down another $2.5 trillion on top of the $1.1 trillion since 2007.

Precious metals and “Tsy short” trades renewed their upside today. Since December the following trades are still working:
FCX up 32%
GDX up 12%
GLD up 15%
TBT up 11%
PCN rallied then failed

After a huge rally corporate bonds sold off in Feb. as there is more concern about default.S&P recorded 31 defaults totaling $49B in 2009 more than all the defaults in 2006 and 2007.(see pC12 WSJ “Heard on the Street”).PCN is down 5% today.

Real Estate remains the weakest sector with the IYR down 21% due to a continued weak housing sector and expectations that REIT Div will be cut. Stock were weak again today.

Crude recovered by 5% up to $2 due to a weaker that expected build-up in inventory. Energy stocks were strong today with gains of 2-5%. However the XLE is down 11% from our Dec 18 start trending with the S&P.
Look for selected energy stocks to rally from here.

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