Dave’s Daily

So many images and thoughts, so little time. But, let’s just go with the image above since it’s short, snappy and makes the point: Black Friday is really dumb. That leads nicely to a Black Monday of sorts.

The immediate chart below is the NASDAQ from Friday. As I mentioned last week today was the end of the fiscal year for many financial institutions including mutual funds. A little window dressing for Main Street occurred all last week and hit an all time high Friday. Yeah, I know, they’re not supposed to do that right? Sure.

Below is the McClellan Oscillator from Friday’s close which shows the markets much overbought.

Compared with most of last week, volume was higher and breadth was as crummy as you’d expect. It looks like a negative 10/90 all the way per our man in Geneva.

Bonds are already in a bubble. Yields are basically zero on the short end of the curve and are posting negative yields after current inflation on the longer end.

Why would anyone buy a 10-year bond or longer yielding 2.6%? It makes no sense at first glance, or if you’re like me, no sense at all.

But, there are those investment structures [large institutions, pension plans, and market makers] that need to own and buy fixed income products. They’re not buying high yield bonds, emerging market debt, investment grade [not certain what that is anymore] corporate bonds, mortgage backed securities and so forth. What’s left for them? Direct Treasurys.

Then, let’s not forget those Lazy Investors out there, a distinct minority, who are cushioning the current blow from stocks by owning a percentage of bonds in their portfolio. But they must be getting restless with current yields and duration risk.

Owning bonds here also confounds conventional wisdom which argues that future inflation is baked-in to what governments are doing fiscally and central bank monetary policy. After all, there will be a lot of bonds to sell down the road. The today investor focus is on limited fixed income choices for buyers and current deflationary prospects.

Today Bernanke fanned the flames for bond bulls indicating the Fed was prepared to use other monetary tools to inject liquidity to the system including buying Treasurys in the open market. Let’s see, so they auction them and then buy them back at higher prices. Seems pretty stupid, eh?

What’s wrong with cash in insured deposits for individuals? Not a thing.

Last week I wasn’t commenting too much believing a lot of the action was window dressing on light volume. Sure, there was a lot of talk of the new Obama financial team that investors seemed to like at least temporarily. Also bulls believe stimulus packages and massive liquidity injections globally will turn the tide eventually.

Unfortunately for them, the deflationary trend remains intact. This is troubling and try as authorities might the trend isn’t reversing. Further, bond markets are sending a highly negative message regarding deflation and negative economic growth.

The behavior of American shoppers [dba, Chucky] is an embarrassment. But it seems more about event hysteria than anything else. More importantly preliminary data indicates strong sales but only on heavily discounted merchandise which means little profits for retailers. I’m still thinking Chucky and the kids will be stringing popcorn to decorate their twig of a Christmas tree. But, they’ll do it watching their plasma TV and eating the old maids.

Have a pleasant evening.