Earlier today we outlined the catalysts for the case of a DJIA 14,000, even though we will be the first to admit that the market is getting overbought.  What is happening is that no one really believes that the FOMC can maintain that exceptionally low interest rate bias out until the end of 2014.  Even if the recovery keeps chugging along at a snail’s pace, the ‘against’ argument is starting to win.

The ProShares UltraShort Lehman 20+ (NYSE: TBT) has risen almost 10% this week from trough to peak and that is no easy task.  Unless something interrupts the markets or unless some new shoe drops, our take is that Mr. Bernanke is going to have to start referring back to “his caveats that would allow the Fed to remove the end of 2014 outlook.”

Fed governor Lacker is the current dissenting vote on the ‘to 2014′ outlook.  That may be different at the next FOMC meeting.

JON C. OGG

To show just how much rates have risen, the 3.38% compared to a 3.27% just in the last couple of days.  The yield was about 3.12% just a week ago.

Of the bids, 29% were listed as indirect and the auction had a 2.7 bid-to-cover ratio.  That bid-to-cover is deemed a good bid-to-cover in a long bond auction.

ProShares UltraShort Lehman 20+ (NYSE: TBT) is the double-short (inverse) 20+ year spectrum of Treasury bonds and its price is up 3.7% at $20.68 today.  This was under $19.00 just a week ago.

JON C. OGG

The Institute for Supply Management has issued its reading for January non-manufacturing and the data is strong.  Very strong.  At 56.8, this is the best reading in almost a year.  Dow Jones was only calling for a reading of 53.1.

The business index was 59.5 versus 55.9 in December.  Employment showed the biggest gain to 57.4 from a prior December reading of 49.8 and prices rose only to 63.5 from 62.0 in December.  Even new order picked up to 59.4 from 54.6 in December.

The news this morning, particularly after the stellar jobs numbers, is really hurting longer-dated Treasury prices and driving yields higher.  The Fed Funds Futures are signaling a much quicker rate hike scenario than just a week ago.

The iShares Barclays 20 Year Treasury (NYSE: TLT) tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index and its price is down 2.3% at $116.39. The ProShares UltraShort Lehman 20+ (NYSE: TBT), which is double inverse the price action (intraday) is up a whopping 4.6% at $19.32 on the day.

JON C. OGG

• DJIA: 11,764.03 (-102.59; -0.86%)
• NASDAQ: 2,647.57 (-21.67; -0.81%)
• S&P500:    1,243.30 (-10.75; -0.86%)
• 30YR-T: 3.8050% (-0.114)
• 10YR-T: 2.5630% (-0.061)

Washington D.C. is responsible for this last wave of what probably locked the markets back into recession.  The debt and budget process actions were way too slow, were maddening to the public, and frankly gave businesses the last excuse needed to pull their hands off the buying buttons and hiring buttons.

The ProShares UltraShort 20+ Year Treasury (NYSE: TBT) hit a new 52-week low today, an extreme measure, as the Treasury yields challenged 3.80% on the 30-year and 2.50% on the 10-year.

ProShares UltraPro S&P500 (NYSE: UPRO), a 300% S&P 500 mover, has bounced a bit, but is still down over 2% at $65.55 after having traded under $64.00 briefly.  Direxion Daily Financial Bull 3X Shares (NYSE: FAS) has even briefly traded under $20.00 today before a recovery.

SPDR Gold Shares (NYSE: GLD) tracks the gold market and both hit a new high yet again. The SPDR Gold trust hit $162.86 today as gold was challenging $1,675.00 per ounce.  Even the iShares Silver Trust (NYSE: SLV) has risen back above the $40.00 death-trap line that has killed investors before.  Those shares are up 1.7% at $40.50 today.  These are feeling leveraged enough that we didn’t even dare use the leveraged metals ETFs.

Will an oversold bounce come?  It may be happening as this publishes.  The stock markets have now gone negative in 2011 and the losing streak will be nine consecutive days if today ends up in the red.  That would mark the longest losing streak in years and years for stocks.

The austerity measures will take out that much more from the economy.  The layoff waves have started all over again, GDP is anemic, Europe is trying to keep the PIIGS out of the slaughterhouse, Triple-A ratings are becoming mere token items, China and India keep slowing, austerity measures will drag, and on and on.

Now the big hope is that value buyers will step in or that a grossly oversold reading will bring on more buyers.  If you overlay the 2010 chart with the 2011 chart so far, this could end up being Financial Groundhog Day.

JON C. OGG

Stocks are higher but not with the fervor many might have hoped for with the DJIA only up 40 points and with the S&P 500 up about 3 points.  The move so far is having the following impact:

• Crude Oil is down $1.57 or 1.4% at $112.36 per barrel;
• Natural Gas is down $0.04 or almost down 0.9% at $4.72;
• Gold was down about $1.00 around $1,555.00 per ounce;
• Silver was where the biggest drop was with a $3.14 drop (-6.5%) at $45.46/oz.
• 10 Year T-Note 3.297% (up 0.03)
• 30-Year T-Bond 4.403% (effectively flat)

We are tracking the key exchange traded funds and exchange traded products on the news immediately after the open of the markets:

iShares Silver Trust (NYSE: SLV) down 6.6% at $43.82 and ETFS Physical Silver Shares (NYSE: SIVR) is down 9.2% at $43.50; SPDR Gold Shares (NYSE: GLD) is down 0.55% at $151.53. Silver had already been indicated down considerably before the Bin Laden news broke.

United States Oil (NYSE: USO) is down less than 0.4% at $44.99 and the nearly uncorrelated ETP for gas of the United States Natural Gas (NYSE: UNG) is down 0.1% at $12.05.

Whatever the currency impact was is slowing, at least as far as the PowerShares DB US Dollar Index Bullish (NYSE: UUP) is concerned, as it is now down 0.1% at $20.93.  The impact has also been muted in the anti-bond ETF of the ProShares UltraShort 20+ Year Treasury (NYSE: TBT).

Unfortunately there is only so much that one man’s death, even Osama Bin Laden, is worth.  The new fear is that this news will embolden many of the splint terror groups to increase their activities in the days, weeks, and months ahead.  This begs a question… Is the Bin Laden death what the Fed would call “transitory”?

JON C. OGG

It was just back in August when we sounded the alerts that 20 of 30 DJIA stocks had higher payouts than the 10-Year Treasury, and 8 of the 30 DJIA components had a higher yield than the 30-Year long bond. While there are still some out-yielding the 10-year Treasury and the Long Bond, the list has shrunk considerably.

We now have only 5 of the 30 DJIA components with a higher dividend yield than the 10-Year Treasury and we have only two yielding more than the long bond:

Kraft Foods Inc. (NYSE: KFT) at $31.41 yields roughly 3.70% with its $1.16 annualized payout. Merck & Co. Inc. (NYSE: MRK) at $36.66 yields roughly 4.20% with its $1.52 annualized payout.  Pfizer Inc. (NYSE: PFE) at $17.08 yields roughly 4.20% with its $0.72 annualized dividend but that is about to be higher at $0.80 per year and that new yield comes to almost 4.7%.

The only two which already yield more than the long bond are AT&T, Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ).  AT&T at $29.17 and the annualized $1.68 dividend comes to 5.7% for a dividend yield.  Verizon is at $34.58 and the $1.95 annualized payout comes to 5.6% for a dividend yield.

If longer-dated Treasury yields rise too much, they will become real competition for income-oriented investors.

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JON C. OGG

This morning is showing a 4.44% yield in the Treasury’s 30-Year long-bond.  While that yield hit 4.46% Friday and briefly appears to have challenged 4.50% earlier last week, we have to go back to the end of May to see the same yields on the CMT.

The Fed is said to be buying Treasuries out six to seven years on the curve, and this action is expected to start ahead of tomorrow’s FOMC meeting.  A headline late Friday noted about $110 billion was the indicated amount of Treasury purchase for the month ahead.  Whether that is the case or not is another matter.

ProShares UltraShort 20+ Year Treasury (NYSE: TBT) ETF is up 0.2% pre-market at $38.28 and its 52-week range is $29.77 to $51.21.  That one will see its price rise if Treasuries fall and their yields rise.  iShares Barclays 20+ Year Treasury Bond (NYSE: TLT) is there for those who believe bond prices will rise.

JON C. OGG

Nothing illustrates the rise in yields and the drop in prices of long-dated Treasury maturities better than the highly volatile ProShares UltraShort 20+ Year Treasury (NYSE: TBT).  Keep in mind that this one has double-leverage and that it is inverse leverage.  At 10:50 its price is up another 1.2% at $37.94 but that was trading as low as under $35.00 back on November 30.  The high hit yesterday was $38.26 and that was the highest price seen since mid-November when shares hit $38.29 and $38.27.  You have to go back to the end of June to see other $38+ prices.

The ‘regular way trade’ on the 20+ year maturities that is a bet on rates falling and Treasury prices rising is the iShares Barclays 20+ Year Treasury Bond (NYSE: TLT).  It does not have the leverage and it is not inverse.  As rates rise and bond prices fall, the TLT loses value and that can be seen with a 0.8% drop today to $93.43.

A headline from the DJ broad-tape noted that the 10-Year Treasury yield of 3.267% was the highest yield in nearly six months.  We now show a 10-Year yield of 3.25%.  This may still be extremely low on historic terms, but this rate was down all the way at 2.48% back on November 4 and was at 2.76% as recently as November 23.  Just on Monday that had come back down to 2.94% after briefly going back above that whole number of the 3.00% hurdle.

The 30-Year Long Bond yield is now 4.40%.  This also may still be extremely low on historic terms, but this rate was down all the way at 4.04% back on November 4 and under 4.00%  on November 2.  The 30-Year yield was at 4.17% as recently as November 23.  Just on Monday that had come back down to 4.25%.

The big question is a post-QE2 question.  The Fed has signaled that it wants you to own risk-based assets because it won’t pay you much interest and that real rate of return may be far less if inflation kicks in.  When you see a 75-basis point rise in the rate of the 10-Year Treasury yields, the question is whether investors will decide to lock in their equity and commodity gains and settle for the safety of the Treasuries at a new benchmark.

So far this is the second day where we have seen a rapid drop in equity index values.  The DJIA peaked above 11,440 yesterday but it closed marginally in the red at 11,359.16. The DJIA is now in the red again down almost 15 points at 11,343.99 after having been up about 20 points earlier this morning.

Another bit of food for thought… If you have not refinanced your house to capture those lowest rates ever, you better see if you can qualify for that refinance.

JON C. OGG

There is one standout.  In the interview, CNBC’s Becky Quick and Joe Kernen asked many questions but the one that stood out the most was whether or not the U.S. was in a bond bubble after QE2 has started.  You know Buffett will leave himself wiggle room, but this was about as close to an overwhelming “YES” answer as the Oracle of Omaha will give:

• “I think short-term and long-term bonds are a very poor investment at the present time.”

He might not use the word “BUBBLE” but that is close enough.  The 10-Year Treasury yield is roughly 2.83% and the 30-Year Treasury’s Long Bond yields approximately 4.27% this morning.  So far we are seeing a slight gain in the ProShares UltraShort 20+ Year Treasury (NYSE: TBT) as it is ‘double short’ the 20+ year Treasury Index.  It closed at $36.59 yesterday and is around $36.80 in early bird pre-market trading.  The iShares Barclays 20+ Year Treas Bond (NYSE: TLT) is indicated lower as well.  After a $96.14 close, it is indicated around $95.95, but it lacks the leverage and therefore lacks the volatility.

Buffett did note that he would rather be in stocks over bonds at the present time.  He also noted that the tax code should hit those making more harder.  He did note something a tad less damning on the bond bubble, and that is that the dilutive effect of QE2 won’t be huge.

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JON C. OGG

Much of the reactions seen in the last 10 days or so is in reaction and re-reactions to the endless efforts of QE2.  The new form of quantitative easing is not going well.  the intent with printing money was to “buy down intermediate and longer-dated Treasury yields.”  That has not been seen as the focus is on more short-term instruments.

The yield on the Treasury 30-Year long bond was under 3.70% at the end of September and it rose to 4.00% at the end of October.  Now it sits at 4.31%.  As far as the 10-Year Treasury Note, right before the end of September those yields were just under 2.50%.  Yields were higher above 2.60% at the end of October and now they sit above 2.80%.

Ben Bernanke and friends at the Federal Reserve wanted to reflate by getting closer to a target inflation rate of 2.0% rather than almost no price inflation at all.  Printing money and temporarily buying down intermediate and longer-term bond yields is something that will have many unintended consequences.  We’d say this about manufactured inflation… “Be careful what you wish for.  You will get it, and then some…”

As far as gold or influencing other commodities and influencing currencies and equities, this is sometimes true and sometimes false.  During the peak oilboom in 2008, gold was flirting with $1000 and was generally in a $800 to $100 range before and after the oil bubble burst.  At the time, oil was peaking around the $140 mark depending upon which markets were being eyed at the time.

JON C.  OGG