The Econ­omy and Bond Mar­ket Radar  (Decem­ber 28, 2011)

Long-term Trea­sury yields ended the week sharply higher revers­ing last week’s rally and leav­ing us almost exactly where we were two weeks ago.

The sell-off in Trea­suries this week could be attrib­uted to a three-year lend­ing pro­gram from the Euro­pean Cen­tral Bank (ECB) which helps Euro­pean banks secure long-term fund­ing and is also poten­tially a form of quan­ti­ta­tive eas­ing. This induced a “risk off” trade this week as stocks ral­lied and bonds sold off. Eco­nomic news was also gen­er­ally sup­port­ive as the Lead­ing Indi­ca­tors (LEI) chart shows below. Lead­ing indi­ca­tors have remained rel­a­tively sta­ble and the absolute level implies eco­nomic growth in the next six months.

Strengths

• The ECB’s three-year loan pro­gram that kicked off this week reduces some of the tail risk of a sig­nif­i­cantly bad out­come for Euro­pean financials.
• For the sec­ond week in a row, ini­tial job­less claims fell to the low­est level since May 2008.
• Hous­ing starts rose 9.3 per­cent in Novem­ber which was much bet­ter than expected as multi-family home starts hit a three-year high.

Weak­nesses

• After revi­sions, third quar­ter GDP rose a mod­est 1.8 per­cent and was revised down from the ini­tial 2.5 per­cent that was orig­i­nally reported in late October.
• Per­sonal income and spend­ing expe­ri­enced dis­ap­point­ing growth, both ris­ing just 0.1 per­cent in November.
• Eco­nomic weak­ness has been show­ing up around the world with var­i­ous dis­ap­point­ments in Japan, India and Brazil.

Oppor­tu­ni­ties

• Eco­nomic news is expected to be rel­a­tively light next week. With the recent week-to-week volatil­ity, the mar­ket could rally on a mod­est sen­ti­ment change.

Threats

• The sit­u­a­tion in Europe remains extremely fluid and neg­a­tive news is almost expected at this point. Unfor­tu­nately, the sit­u­a­tion is polit­i­cally dri­ven, mak­ing it dif­fi­cult to pre­dict out­comes and ramifications.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

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