Worry About More Than Just The Big 3

The Senate's failure to pass a rescue package for the U.S. automakers has futures pointing to a weak opening for the stock market.

While the automotive news is not good, stock investors should be worried about more than just the fate of General Motors Corporation (GM), Chrysler and Ford Motor Company (F). They should also pay attention to what is occurring in the treasury markets.

On Wednesday, 3-month treasury bills sold with negative yields. According to Bloomberg News, this has never happened in the debt security's 79-year history - which includes the Great Depression.

(Negative yields imply that investors are so concerned about capital preservation that they are willing to pay for the right to loan money to the government. It is akin to sticking one's cash in a safe deposit box - a person has to pay for the box, his money loses value to inflation, but the cash will still be there 3 months later.)

The negative yields followed an auction of 4-week treasury bills at 0% interest. This morning, yields on the 10-year note fell below 2.5%, reflecting rates not seen in over 50 years.

This massive flight to safety has occurred at the same time the S&P 500 (SPX) rose 21% and the Nasdaq (COMP) rose 20% during a rebound that started in late November.

In other words, while stock investors have sought more risk, bond investors have become extremely risk-adverse. It's a situation that does not make any sense and something that I don't expect to last.

Though treasuries are clearly overvalued, the historically low yields are a big warning signal to stock investors. Sustainable rallies in the equity markets don't happen when the credit markets are not functioning right. Unfortunately, I think this morning's weakness could be the start of another downward leg for stocks, with any relief rally from a new rescue package for the Big 3 not lasting very long.

Read the analyst report on F

Read the analyst report on GM

Read the full analyst report on GM

Read the full analyst report on F

Read the full analyst report on SPX

Read the full analyst report on COMP