In today's Break­fast with Dave, Gluskin Sheff's Rosie says:

Gov­ern­ment bonds are on fire. Yes­ter­day we saw a 10bps slide in the Ger­man Bund and U.K. Gilt yields — they are con­sol­i­dat­ing today — and U.S. 10-year yields are now down about half that amount, to 3.22% — 2bps from tak­ing out the Octo­ber lows, so keep an eye here for a pos­si­ble tech­ni­cal break­down in yields. The Cana­dian bond mar­ket already did that yes­ter­day with the yield on the 10-year GoC slip­ping below the Octo­ber lows — we have news for you: this was a major tech­ni­cal move. We can under­stand that gov­ern­ment bonds are the "enemy" to the bulls (not once were Trea­suries even men­tioned as an asset class dur­ing my two-hour stint on CNBC the other day). But there is no deny­ing that some­body is buy­ing these bonds because the 7-year Trea­sury note auc­tion ahead of Thanks­giv­ing had $88 bil­lion of bids for the $22 bil­lion offer­ing. Go fig­ure, some folks clearly still have defla­tion on their mind (as they should).

We went into this lat­est round of tur­bu­lence with tremen­dous com­pla­cency in the mar­ket­place (I really sensed it dur­ing the two-hour stint on CNBC's squawk box on Tues­day) — ral­lies were still light-volume in nature (only two ses­sions in the past three weeks with NYSE vol­ume north of a bil­lion shares), the VIX index had just receded to its low for the year, at 20.5 (down 60% since March!), the bull share and bear share of the sen­ti­ment sur­veys hit late-2007 lev­els, and with the trail­ing P/E ratio at 27x and the for­ward P/E on $65 of earn­ings of 17x. There is no mar­gin for error in an over­val­ued equity mar­ket — one that is priced for nearly 5% GDP growth. Remem­ber, it was in the fourth quar­ter of 1987, a quar­ter that saw 7% GDP growth and a 55% earn­ings trend, that the S&P 500 cratered 30%. So, it's not just about the eco­nomic back­drop, it's what is being priced in — that is the les­son. For a highly over­val­ued mar­ket, it does not take much — like an off-the-cuff remark from the Trea­sury Sec­re­tary on the Meet the Press — to entice a mas­sive round of profit-taking.

Don't look now but the Baltic Dry Index has just slipped for the fifth ses­sion in a row, and down 12% from the Novem­ber 19 interim high. Not a con­struc­tive near-term sign­post for the com­mod­ity com­plex. How­ever, as we said above, we look for­ward to a cor­rec­tion that allows us another oppor­tu­nity to build long-term posi­tions in this seg­ment of the mar­ket where there are sec­u­lar pos­i­tive dynam­ics at play. But as we high­lighted last week, any­thing con­nected to the U.S. dollar-carry-trade — a very over­crowded trade — is due for a correction.

To reit­er­ate, the Swiss, the Rus­sians, the Brazil­ians and the Viet­namese have all taken actions to weaken their cur­ren­cies in recent weeks (see Rus­sia Launches Cam­paign to Weaken Ruble on page C2 of the WSJ).

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