Thoughts For Tuesday, 12/14/2010

"There's not the least thing can be said or done, but people will talk and find fault."

--Don Quixote

For the seventh day in a row, Spanish bonds are weaker.

In fact, the yield on the Spanish 10-year note on this week's $3.3 billion offering is now within 13 basis points of its all-time high yield -- which was last recorded in 2001. Those bonds are now yielding 5.53%, which compares with Irish 10-year yields at 8.28% and Greek yields of 11.85%.

An auction of 18-month Spanish bills yielded 3.72% yesterday, vs. 2.66% at a similar sale last month.

From my perch, we are now at the point where the recent acceleration in the rate rise could jeopardize the U.S. stock market or, at the least, present a challenge to further gains.

If the ascent in yields doesn't moderate shortly, I find it difficult to see stocks making much more progress, and the risk of a correction will be heightened.

There was virtually no difference between today's FOMC statement and that of a month ago.

I suspect some observers will emphasize that in order to sell its QE2 strategy, the Fed might have understated its description of the trajectory of domestic economic growth in the first part of its statement.

The drop in fixed-income prices is accelerating.

Over the last week, our leadership has taken the easy route and has demonstrated still further that there will be no meaningful movement on our burgeoning deficit. The bond vigilantes smell blood, recognize this inertia and are demanding a price to be paid in much higher interest rates.

Meanwhile the talking heads' chorus of smooth and self-sustaining economic growth has grown ever louder, ignoring the warning signs of worsening payrolls growth, the temporary nature of the stimulus, a continued buildup in household savings, a banking system that is still in a healing mode and a worsening housing market (among other issues).

I'm not sure at all that the Fed's QE2 policy is working. Rather, it is extending our addiction to artificially low interest rates.