Montreal, Canada

A milder replay of mid-2008 is underway across financial markets. Sovereign bond spreads in the weaker European peripherals are widening again and Treasury bonds are about to breach the important 3% yield level amid growing fears of a double-dip in U.S. housing.

The easy money has already been made. That’s the case now as it pertains to the 2009 global rally that saw just about everything and anything with a risk bias take-off.

In retrospect, was March 2009 a bear market low or just a massive “dead-cat” bounce?

I would argue it’s the latter. Bull markets typically don’t start with interest rates at zero percent, big tax hikes on the horizon and the ongoing destruction of credit now attacking sovereign governments in Europe. Deflation is now making a comeback as housing data point to another big drop in activity across the board following the expiration of tax credits in April. Despite low mortgage rates and growing affordability, the market isn’t convinced this economic recovery is sustainable.

In addition to rallying Treasury bond prices since April, other economically sensitive indicators are rolling over. None of this bodes well for a global economy desperate to cling onto government fiscal support at a time of growing spending cuts.
Copper, the Baltic Dry Index, lumber, steel and even crude oil appear weak on a technical basis, violating important support levels recently. The case for the bulls looks weak, tired and exhausted in late June 2010.

From its highs earlier this spring, the MSCI World Index is now down more than 12% and still losing technical support. Foreign stocks, as measured by the MSCI EAFE Index, excluding the United States, are down almost 15%. The S&P 500 Index is off 10% from its 2010 high.

From now until earnings Q3 season approaches later this fall, the markets are likely to bounce around like a ping-pong ball. Stocks will probably offer much better value by October or November. The summer is usually a bad time to make bold speculations – littered with surprise policy announcements, devaluations, crashes, defaults – since 1997.

I suspect this summer won’t be any different as a sovereign nation possibly defaults, a military conflict erupts somewhere or a shocking economic announcement drives risk assets much lower. The market smells bad and internals like the advance-decline line, new highs versus new lows and tepid stock market volume all point to great danger this summer.

Treasury bonds are rallying hard and will probably continue to gain traction as an uncertain world heads into the safest government paper – U.S. and German government bonds. The bond bull market is still alive – for now.