Morning Market Report

Let's start out today by talking about bonds. Those have quietly become a story lately and almost no one has noticed. The ten year is again weaker this morning, though just slightly. That's good news considering what's happened over the last week and a half. The ten year is up to 3.82%. It reached a low of 3.19% in November. It's more recently been in the 3.3% range. To put this into perspective, after the refinance boom ended, bonds averaged about 4.2% from 2003-2007. That was a guage to see where they were at. So, 3.8% is still very low. It's also getting dangerously high. That's because we're carrying nearly $13 trillion worth of debt and much of it will be financed by these ten year bonds. The yield spread between the two and ten year also continues to set all time records. It's currently at 2.83%. The three month t bill has raised itself from the critically negative levels to .041%. Bonds in England and Germany were relative unchanged today so we'll wait and see how domestic bonds respond.

Meanwhile, there was relatively good news on the retail front.

The spending bounce means retailers managed to avoid a repeat of last year's disaster even amid tight credit and double-digit unemployment. Profits should be healthier, too, because stores had a year to plan their inventories to match consumer demand and never needed to resort to fire-sale clearances.

Retail sales rose 3.6 percent from Nov. 1 through Dec. 24, compared with a 2.3 percent drop in the year-ago period, according to figures from MasterCard Advisors' SpendingPulse, which track all forms of payment, including cash.

Now, it's important to keep in mind that 2008 was an awful year for retailer and so I'm not sure how good this news really is. This is sort of like a .200 hitter getting excited because their batting average increased by ten percent.

The most interesting news if you will of the weekend came from Paul Krugman who said it was a "reasonably high chance" that we'd see a double dip recession. That means the economy will recover for a while and then fall back into recession. That happened to Reagan in 1982-83 and to FDR in 1937-38.

Paul Krugman was on ABC's The Week on Sunday declaring a "reasonably high chance" of a double dip coming next year.

Actually, he doesn't sound quite as gloomy as you might guess. Yes, he describes the entire recovery so far as being driven by government spending and inventory rebalancing, but the odds of a double dip he does place at lower than 50/50, so that's good. Obviously he wants much more spending.

I almost never agree with Krugman so I won't be one of those people that suddenly calls him an oracle since we do. It's very important to note that Krugman, from the beginning, has insisted that the stimulus wasn't nearly big enough and this is more of that skepticisim.

In commodities, oil is pushing $80 a barrel again. It's currently at $78.57 a barrel. It reached below $70 a barrel only two weeks ago. Gold is back above $1100 an ounce. It's currently at $1105 an ounce. It reached over $1200 an ounce and shot back down. It's been slowing pulling itself up since it reached a low in the $1080 range.

All three indices are opening just slightly higher this morning. They're all up about .25% forty five minutes in. Retailers are strong following the retail numbers. Markets in both Europe and the Far East were both up nearly across the board. The Hang Seng in China was down .17% but that's the only major indice that was down. The NIKKEI in Japan was up 1.33% and the Straits Time Index in Singapore was up .63%. The broader Chinese index was up 1.51%. In Europe, the FTSE in London is even, the DAX is up .7%, and the Spanish index is up .44%. All indices are up or even in Europe.

The Dollar is mixed. It's down .01% against the Euro, down .13 against the British Pound but up .41% against the Japanese Yen.

Here's a couple things of final note. China says its economy is growing faster than expected. Let's keep in mind that a week and a half ago, it was annouced that the U.S. again revised its most recent GDP data to a growth of 2.2%. It was originally measured at 3.2%, then revised to 2.8% and now 2.2%. So, everyone should keep that in mind when you hear initial data for any number.

Then, there's this news, a prediction from Morgan Stanley Dean Witter.

If Morgan Stanley is right, the best sale of U.S. Treasuries for 2010 may be the short sale. Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said.

In fact, if MSDW is right, we're all in big trouble. That would severely stunt any recovery. It could even lead to inflation. This goes back to what I spoke about in the beginning. That is that U.S. Treasury bonds are weakening and no one is noticing. If the rate on the ten year bond is 5.5%, then mortgage rates will be in the neighborhood of 7%. You can forget any sort of housing recovery with those rates. Such high borrowing costs would almost certainly mean a double dip recession. Every market observer had better start to pay attention to bonds.