Lunacy on Interest Rates

 | May 20, 2014 | 7:14 AM EDT
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Just a total repudiation of pretty much everything that's been the case: That's how I feel about yesterday's trading right from the get-go.

Here's the setting. On Sunday night the market looked pretty benign. I didn't see anything that would indicate things should be awry. When I got up, though, the S&P 500 was down 6 and a bunch of bourses in European countries were getting hammered, particularly in Italy.

Sure, the AstraZeneca (AZN) deal seemed to blow up, and China's Shanghai Composite was down 1%. We knew that Credit Suisse (CS) was in legal trouble. Deutsche Bank (DB) had sold $11 billion in equity. We had U.S. Treasuries up a few ticks.

But, on the plus side, we had Johnson Controls (JCI) with an exciting spinoff and the big DirecTV (DTV)-AT&T (T) deal.

It seemed like a push.

Sure enough, stocks opened where the futures had dictated. But then interest rates on bonds moved up and stocks reversed upward. Then rates ticked down, taking stocks with them.

Finally, rates went back up -- you can chart all of this by looking at the iShares Barclays 20+ Year Treasury Bond (TLT) -- and that left the market with room to run.

So now we see something that can even trump the downward force of the all-powerful stock futures, and it turns out to be exactly what used to send them lower -- climbing rates.

Now, all of this is algorithmic lunacy. Most stocks do not benefit from higher rates. Right now only the banks do. Yet we're seeing high-growth stocks going higher when rates go higher, and that's nuts. I can imagine that someone with a straight face could say, "Yeah, but when rates go up that signifies that companies will have the ability to raise price." But that's too stupid for words.

When rates go higher, it most likely means inflation pressure, which means you are supposed to sell precisely the stocks that rallied today. Or higher rates might mean more business, which means you have to own stocks that are more leveraged to the economy than the high-multiple stocks are.

Whatever -- this market just has it wrong. But you have to play the hand you have been given, and we are in a new weird phase in which all that matters for the most bullish people out there -- meaning the ones that like the riskiest of the risky -- is a rate increase.

I think this stupidity will come to an end soon, and we will revert to common sense. Right now, though, the rate-related lunacy that's gripping the market has infected all sectors.

I am sure there are people who say this is cause for a correction. I say it's just one more example of some irrelevant tangential level of thinking that's gripped the machines and overrides all common sense. We've seen a lot of these since the ETFs and the machines took over. This just might be one of the nuttiest yet -- and really nothing more than that.



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