Signs of Risk Aversion Returns

8/9/2019 Signs of Risk Aversion Returns

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Richard Suttmeier is the Chief Market Strategist at www.ValuEngine.com.ValuEngine is a fundamentally-based quant research firm in Princeton, NJ. ValuEngine

covers over 5,000 stocks every day.

A variety of newsletters and portfolios containing Suttmeier's detailed research, stock picks,and commentary can be found HERE.

Apri l 28, 2010 Signs of Risk Aversion Returns

Lower US Treasury yields are a sign of Risk Aversion. The Fed will keep the Federal Funds rateat zero to .25% Wednesday afternoon. The S&P / Case-Shiller Home Price Indices gets dicey.Comex Gold is becoming a Currency of Last Resort, as Nymex Crude Oil loses MOJO as aneconomic warning. Thoughts on Goldman CEO Blankfein with regard to Market-Making! Thedaily chart for the Dow and re-iterating my market call!

Lower US Treasury yields are a sign of Risk Aversion. On Tuesday the US Treasury sold $44 billionin 2-Year notes at a yield of 1.024. The bid-to-cover was 3.03 times the auction size. The Indirect Bid at31% is at the low end of the 30% to 40% neutral range I have talked about many times in this blog.

Today the US Treasury sells $42 billion in 5-Year notes. If this maturity holds my quarterly andsemiannual pivots at 2.464 and 2.529 the downward trend is towards my monthly resistance at 2.239.

On Thursday the US Treasury sells $32 billion in 7-Year notes, which are trading around mysemiannual pivot at 3.107.

Chart Courtesy of Thomson / Reuters


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The 10-Year yield declined to a test of my semiannual pivot at 3.675 on Tuesday and Wednesdaymorning. Around this pivot is my weekly support at 3.983 and quarterly resistance at 3.467. A weeklyclose richer than 3.675, would also be a monthly close richer than that level. This has been mybenchmark for risk aversion, which makes sense given the risk of the Greek debt crisis. There is apotential contagion to other PIIGS nations; Portugal, Iceland, Italy, Greece and Spain.

The Fed will keep the Federal Funds rate at zero to .25% Wednesday afternoon. You know I amagainst this policy stance, as I have said many times that the funds rate should never have beenpushed below 3% to begin with. The Fed sees moderate economic growth, no inflationary pressures,but sees the housing market and slow job growth as reasons for keeping this low funds rate for anextended period. I see housing and banking returning as a drag on economic growth, and inflationarypressures building in commodity prices, healthcare costs, and food prices. Low rates are providingspeculative fuel for Wall Street while leaving Main Street high and dry.

The S&P / Case-Shiller Home Price Indices show that home prices are likely to decline in the wake ofthe ending of the tax credits this Friday, and the continued supply of short sale and foreclosures. The bulls touted that the 20-City Composite is up 0.6% year over year, but eleven of the twenty

are experiencing year-over-year home price declines. More important is that the 20-City Composite declined in February versus January. The index is

back to levels of late summer / early autumn of 2003. From the peak in June / July 2006 ti the trough of April 2009 the 20-City index is down 32.6%,

and from this peak through February home prices are down 30.3%.


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In Tampa Bay where my son an I bought a new home a year ago prices were down 1.2% in Februaryand down 6% year-over-year. When we bought our home in April 2009 the appraised value was down16.7% from 2008. Today the appraised value is down another 20% for 2010. Why? Because our modelhome in our community was sold on a short sale, well below the market.

Comex Gold is becoming a Currency of Last Resort. With the euro trading to a new 52-week low onTuesday, gold gained a strong bid. The Greek and PIIGS debt issues are a real problem for the globaleconomy, which means gold can rebound to my semiannual resistance at $1186.5. A weekly and hencemonthly close above this level targets a new high in May, as currency of last resort.


Nymex Crude Oil should decline back to my annual pivot at $77.05, as the debt crisis, Goldman Sachsissues, and Main Street woes reduce demand for energy. This weeks resistance is $86.26.


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Thoughts on Goldman CEO Blankfein One thing I strongly agree with. There should not be anydisclosure obligation for Market Makers. I was a market-maker in US Treasuries and Federal Agencysecurities between 1972 and 1987. When you make a market you have a bid price at which you willbuy from a client and an offer price at which you will sell. Traders always need to have a market bias onthe securities for which they make markets. When bullish you want to be long Treasuries. When youare bearish you want to be short. This opinion can change on a dime. There were times in my careeras a trader when the client flow of business made me long when I wanted to be short and vice-versa.

The issue with Goldman is not making undisclosed bets on the short side, but creating syntheticFinancial Instruments that should be banned, as investors cannot fully understand the risk / reward.The institutional sales force at Goldman is instructed to sell a structure, and may not know that themarket maker is shorting. The sales force is selling the potential positives of the structure not knowingthat the trading desk created a monster designed to implode. These types of products need to bebanned. We didnt need them or use them ten to twenty years ago, and given the fragility of the globaldebt markets today, we need to de-lever not add leverage. The global pools of notional amounts ofderivatives are just too big, and as we are seeing today, Countries and States are at risk. Bankexposures to all such structures must be returned to bank balance sheets and marked to market daily.If thats not possible for a certain type of structure, they should be banned with global exposuresunwound. This should be the priority of Financial Reform!


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The Daily Chart for the Dow: Theres an up trend resistance line that connects highs going back toNovember 2009, which was tested at Mondays high of 12,258.01. This level also lines up with the61.8% Fibonacci Retracement of the decline from the October 2007 high to the March 2009 low. Thehigh was just above monthly and annual resistances at 11,228 and 11,235. We did not get to mysemiannual resistance at 11,442 as yet. We have overbought MOJO with the 21-day simple movingaverage at 11,025. A close today below 11,025 shifts the daily chart to negative and indicates riskto the 50-day and 200-day simple moving averages at 10,750 and 10,104.

My market call remains, Dow 8,500 before Dow 11,500!Subscribers to my ValuTrader Report areshort Diamonds (DIA) from $111.77 from last Friday and from $112.39 on Monday.

Thats todays Four in Four. Have a great day.

Richard SuttmeierChief Market Strategistwww.ValuEngine.com(800) 381-5576

As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. Ihave daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters aswell as my most up-to-date analysis of world markets. My newest products include a weekly ETF newsletter as well as theValuTrader Model Portfolio newsletter. I hope that you will go to www.ValuEngine.com and review some of the sampleissues of my research.

I Hold No Positions in the Stocks I Cover.

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Signs of Risk Aversion Returns