This morning, I find myself wondering how long investors can continue to support cash raising activities. That’s probably not the best way to pose the question. Perhaps after I set the stage, the question will make more sense.   

 

Yesterday, Greece started selling 7-year bonds to raise cash to cover its debt issues. The yield was to be 6%. But then, Greece got greedy and tried to drop some 12-year notes on the market.    

 

Now, Greece was warned not to try and add supply to its offering because the market wasn’t ready for it. So I don’t know what Greece was thinking when it decided to ignore this advice and float the 12-year notes. But Greece will pay the price. Nobody wanted the 12-year notes. Investors only bought about half of what was offered. That drove the yield on the 7-year notes to 6.3%.   

 

That may not sound like a big deal. But Greece has to pay that extra 0.3%. And with $6.7 billion in of new 7-year notes, that 0.3% works out to $210 million. That’s not pocket change. And Greece has to raise around $2.4 billion per month to cover its deficit. And of course, it has to pay that money back.   

 

Who can afford to lend $2.4 billion to Greece every month? And who’s going to lend money to Spain and Portugal and Ireland when they start aggressively tapping the bond market?   

 

And then there’s U.S. bond sales. The Treasury is reportedly planning to raise $1.6 trillion through bond sales to cover the U.S. budget deficit this year. And the U.S. isn’t the only country selling bonds.  

 

Plus, the Treasury is about to start selling 7 billion shares of Citigroup NYSE:C). And if that’s not enough, the Fed’s about to stop supplying liquidity in the form of mortgage-backed asset purchases. 

 

It should be pretty clear why the Fed is adamant that rates must remain at essentially zero. Otherwise, where will all the cash come from?   

 

About a week ago, I gave you a target for the S&P 500 of 1,200. I still think we’ll see that level in the near future. But I won’t be surprised if we get a correction after that.   

 

The stock market has come a long way. In fact, investors seem to have priced an absolutely perfect recovery for housing, employment and corporate profits. It seems to me that we are probably due for a bit of a let down.   

 

Now, I will treat a correction as a buying opportunity. Because of the three (housing, employment and corporate profits), I think corporate profits are the most reliable.

Published by Wyatt Investment Research at