Color By Numbers

During today's trading session the U.S. equity markets rallied after some encouraging data. The first was better-than-expected earnings by Barclays. The second was a better-than-expected Empire Manufacturing report. The third was data which indicated that foreign demand for U.S. treasuries waned in December. At first glance this looks very bullish for stocks and very bearish for bonds, but the truth is not skin deep. This was evidenced by the differing reactions by the treasury market (which counterintuitively rallied) and the equity market.


Let's begin with Barclays. Barclays reported very good numbers. The bank did report strong profits from investment banking, but most of its profit was due to the sale of Barclays Global Investors to Black Rock for $9.9 Billion. Barclays improved core earnings are not to be dismissed, but the numbers are not quite as rosy as the financial press would have us believe.

The same can be said for Empire Manufacturing. The report came in at better-than-expected 24.9, but a closer look at the data reveals that almost every component was worse than the previous month. What carried the day? Inventories. It was the inventory component which drove the number higher. New orders fell to 8.8 from 20.5. Shipments fell to 15.1 from 21.1. Prices paid fell slightly to 31.9 from 32. A gauge within the report which measure the outlook for the next six months fell to 52.8 from 56. However, the employment component rose to 5.6 from 4.0. I would consider this a mixed report.

The Net Foreign Securities Purchases data indicated that China was a net seller of U.S. treasuries, but Japan was a net buyer. All told foreign central banks were net sellers of U.S. debt. If that was the case, why did the long end of the treasury curve rally? It turns out that much of the selling came fro China liquidated treasury bill holdings. This would affect the short end and nor the long end. Yields on the long end are hanging in there as the bond market is not convinced that robust, sustainable growth is yet upon us.

I feel like I am raining on everyone's parade, but that is not my intent. I am just trying to make sense out of the data and policy. One reader suggested that I publish some trade ideas. With few exceptions I have been reluctant to do so. I don't want to be accused of hawking products or talking books, but if readers want some specific opportunities I will come up with a few. I will not be easy and in this mature, if not rich, fixed income market beauty is truly in the eye of the beholder.