Keep Your Eyes on the Yield Curve

Thursday, December 24th, 2009

Stocks are trading at or close to 2009 highs, being helped along by a record steepening of the yield curve. Put simply, on Tuesday the gap between 10- and 2-year US government bond yields hit its widest spread ever – 286 basis points, beating last week’s 276 basis points and the previous record set in August 2003 of 274 basis points.

From across the pond, David Fuller (Fullermoney) said: “Veteran subscribers will recall a remark often used on this site [Fullermoney]: Bull markets do not die of old age - to which I will add warnings by Roubiniesque economists. Instead, they are assassinated - usually by central banks. So how many rate bullets does it take to fell a bull? You may not be surprised to hear that there is no precise answer, because it depends mainly on sentiment and liquidity. We know when central banks start to reduce liquidity, or at least increase its price, but we do not know precisely when that will affect sentiment adversely.

“Note the still widening spread between US 10-year yields over 2-year yields, otherwise known as the yield curve, on this historical. It is still rising, indicating to me that quantitative easing continues. The time to start thinking about closing long portfolios in anticipation of the next bear market, I suggest, will be when the yield curve next inverts by moving below zero. However, the lead was so early last time (early 2006) that some of us became complacent about it.”

Source: Fullermoney

Tags: Anticipation, Basis Points, Bear Market, Bond Yields, Bull Markets, Bullets, Central Banks, David Fuller, Economists, Fullermoney, Gap, Government Bond, Inverts, Last Time, liquidity, Portfolios, Precise Answer, Quantitative Easing, Sentiment, Yield Curve
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David Rosenberg: Yesterday’s action was telling

Thursday, September 3rd, 2009

David Rosenberg’s Breakfast with Dave newsletter just came in - here is the synopsis that accompanied the report:

YESTERDAY’S ACTION WAS TELLING

The damage was done yesterday. The U.S. 10-year Treasury note yield broke below the interim lows (as did the long bond) and this is very likely going to set up a retest of the 3.00% level. Government bond yields are at a seven-week low. Corporate bond risk, as measured by CDS, has risen to a six-week high. The Canadian dollar has slipped to a two-week low - even gold/silver prices ripped (best session in five months) and generated a further huge outperformance between Canada and the U.S.A. Meanwhile, gold is rallying on the safe-haven bid because other commodities like oil (down to a two-week low) and copper dropped on cyclical concerns. (China’s decision to diversify into IMF notes to the tune of $50 billion also likely helped bolster the gold price). Welcome to the real post-bubble credit collapse world where the initial earthquake is followed by intermittent aftershocks - as market chatter now turns towards the next possible financial problem.

BUYING POWER, WHERE ART THOU? According to TrimTabs, corporate insiders were net sellers of their stock to the tune of $6.3 billion in August - the selling/buying ratio was a huge 30.7x (insiders bought only $210 million). Not only that, but share buybacks slowed to a trickle in August too - $3.6 billion, which was the third lowest tally in the past two years.

EMPLOYMENT BACKDROP … STILL THE MISSING LINK

The government has managed to pull rabbits out of the hat when it comes time to stimulate housing and autos - though not indefinitely - but obviously has no such magical show for the labour market. As the ADP data showed, there were 298k private sector jobs lost in August (but isn’t that a green shoot next to -360k in July and, -433 in June, -461 in May and -518k in April?).

Not only that, but the slack in labour markets across the U.S.A. have hit truly extreme levels. Fully 19 metro areas now have unemployment rates above 15%, and there are locales in California where the numbers are north of 30%.

To get the report, you have to register with Gluskin Sheff to receive them. They’re well-worth reading.

Tags: 7x, Aftershocks, Bond Yields, Canada, Commodities, Corporate Bond, Corporate Insiders, David Rosenberg, Gold, Gold Price, Gold Silver, Government Bond, Labour Market, Labour Markets, Level Government, Market Chatter, Missing Link, oil, Outperformance, Retest, Safe Haven, Share Buybacks, Silver Prices, Year Treasury Note
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Words from the (Investment) Wise (August 16, 2009)

Sunday, August 16th, 2009

During the week marking the second anniversary of the start of the credit crunch, stocks, copper, nickel, zinc and sugar recorded fresh 2009 highs. But the celebrations came to an abrupt end as caution crept back into investors’ vocabulary on Friday when it dawned upon pundits that markets were running away from economic reality. On top of that, Chinese equities - a leading stock market on the way up - saw a reversal of fortune and declined to a five-week low.

This is where the Ecclesiastes-based lyrics of the Byrds’s classic, Turn, Turn, Turn, started resounding in my head: “To everything (turn, turn, turn), There is a season (turn, turn, turn), And a time for every purpose, under heaven, A time to gain, a time to lose …” (Click here for audio.)

Source: Mike Keefe (hat tip: The Big Picture)

Paul Kasriel, chief economist of Northern Trust, reports that the meeting statement of the Federal Open Market Committee (FOMC), released on Wednesday, was a bit more optimistic about the near-term economic environment, changing its language from “the pace of economic contraction is slowing” at the June 24 meeting to “economic activity is leveling out”. However, the communiqué also said that household spending would be constrained by “sluggish income growth”, in addition to the other constraining factors mentioned in the June 24 statement - “ongoing job losses, lower household wealth, and tight credit”.

“Given our current view that the recovery is going to be subdued and uneven over the next several quarters, we do not expect any federal funds rate increases from the FOMC until June 2010, at the earliest,” said Kasriel.

Shorter-dated US, UK and other government bond yields - securities that are sensitive to interest rate movements - declined on indications that benchmark interest rates would remain at low levels for an extended period of time. Longer-dated US yields also fell after the Fed announced that its Treasury purchase program would be extended until October. “The point is the Fed said it would keep the punch bowl open an extra month but it would not increase the punch that is already in the bowl. It will just dole it out in smaller increments over an extra month,” remarked Bill King (The King Report).

To James Grant (Grant’s Interest Rate Observer) the level of Treasury yields spells danger. He said: “Vacation-time thought experiment: With the knowledge that the US government will be borrowing as much as $3.5 trillion from the public in fiscal years 2009, 2010 and 2011, approximately matching the Treasury’s cumulative borrowing between 1789 and 1994, would you have guessed that the yield on the 10-year Note would today be hovering in the neighborhood of only 3.7%? If ‘yes’ is your answer, you must not go away on vacation this month. You have too hot a hand to stay away from the office.”

The past week’s performance of the major asset classes is summarized by the chart below, showing risky assets starting to take a breather.

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.

The MSCI World Index (+0.1%) and MSCI Emerging Markets Index (unchanged) marked time last week, but are still showing solid year-to-date gains of +15.6% and +50.4% respectively. As weakness crept in towards the close of the week, the US and a number of other markets snapped a winning streak of four straight weeks. Emerging markets underperformed developed markets for the second week running since the beginning of May, indicating signs of risk appetite abating somewhat.

Click here or on the table below for a larger image.

Top performers in the stock markets this week were Bulgaria (+9.4%), Lithuania (+6.7%), Estonia (+6.5%), Vietnam (+5.5%) and Venezuela (+4.5%). The top three positions were again occupied by countries from Eastern Europe that are still playing catch-up as the scare of a banking collapse in the region dissipates. At the bottom end of the performance rankings, countries included China (‑6.6%, last week -4.4%), Nigeria (-4.5%), Luxembourg (-3.6%), Cyprus (-3.2%) and Israel (-2.8%).

After surging by 90.7% since the beginning of the year and notching up seven straight weeks of gains, the Chinese Shanghai Composite Index has now declined by 12.2% since its peak of August 4, taking the Index back to its early-July level. On Friday, the Index (3,047) dropped to below its 50-day moving average (3,103), but it is still comfortably trading above its 200-day line (2,420). The Rate-of-Change Indicator (black line in the bottom section of the chart) has broken below the zero line, thereby flashing a sell signal.

Source: StockCharts.com

Of the 94 stock markets I keep on my radar screen, a majority of 63% (last week 74%) recorded gains, 33% (21%) showed losses and 4% (5%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included Vanguard Extended Duration Treasury (EDV) (+5.2%), iShares MSCI Austria (EWO) (+4.4%) and WisdomTree Japan SmallCap Dividend (DFJ) (+3.8%).

At the bottom end of the performance rankings, ETFs included Market Vectors Solar Energy (KWT) (-5.8%), SPDR KBW Regional Banking (KRE) (‑5.1%) and iShares Cohen & Steers Realty Majors (ICF) (-4.9%).

On the credit front, an indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds (albeit not to the extent to restore the ratio to pre-crisis levels). As to be expected, there is also a close relationship between the Index and the movement of the benchmark US stock market indices.

Source: I-Net Bridge

Economists of the ilk of John Mauldin (Thoughts from the Frontline) and Nouriel Roubini (RGE Monitor) warn that the coming “recovery” may be anemic and not much more than a “statistical recovery”. In this regard, the quote du jour this week comes from Lawrence Mishel, president of the Economic Policy Institute, who described the situation as follows in The Washington Post: “Economists are using one concept of recession that is at total variance with how a normal human being thinks of it. A normal human being thinks of a recession as: You fell into a hole, and as long as you’re in a hole, you’re in a recession. Economists think of [a recession's end] as … when the economy stops shrinking.”

Other news is that the Federal Deposit Insurance Corp (FDIC) seized Colonial Bank on Friday - the sixth largest bank failure in US history. Additionally, regulators closed four more banks, bringing the tally of US bank failures in 2009 to 77, including 32 since July 1.

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “market”, “economy”, “bank”, “prices” and “China” featured prominently. Interestingly, “recovery” also moved up the ranks as the global economy seems to have turned the corner.

The key moving-average levels for the major US indices, the BRIC countries and South Africa (where home is) are given in the table below. With the exception of the Chinese Shanghai Composite Index, which fell below its 50-day moving average on Friday, all the indices are trading above their respective 50- and 200-day moving averages. The 50-day lines are also in all instances above the 200-day lines and therefore not threatening the bullish “golden crosses” established when the 50-day averages broke upwards through the 200-day averages.

The steepening uptrend of a number of indices has become frothy and some degree of reversion to mean is probably overdue. I believe this process - which could take the form of either a pullback or a consolidation (i.e. ranging) pattern - might have commenced with the declines in China and elsewhere. The July lows are also given in the table, as these levels may offer support for a number of the indices.

Click here or on the table below for a larger image.

Long-timer Richard Russell (Dow Theory Letters) said: “Some of the smartest and most successful men and women in the world disagree as to whether we are dealing with a correction in an ongoing bear market - or whether we are dealing with a new bull market. Nobody on the planet possesses the final, ultimate answer. I happen to believe we’re dealing with an upward correction in an ongoing bear market, and that opinion is what keeps me on the edge of my seat. I’m worried about the economy, I’m worried about the future, and I’m worried about the market itself.

“Because this correction, so far, has been impressive, many analysts are calling it a ‘cyclical bull market’ instead of a bear market rally. I don’t care what you call it, if I’m correct, if, indeed, we are in a rally in a bear market, I want to be on my guard. I went through a number of these ‘cyclical bull markets’ during the 1966 to 1980 bear market, and I saw a lot of investors lose their shirts when those various bear market rallies unexpectedly topped out.”

Doug Kass (TheStreet.com), who accurately called the March bottom, is now outright bearish, saying: “The market optimism we are now experiencing in the expectation of a clean hand-over of the baton of stimulation from the consumer (2000-2006) to the government (2008-??) might be more short-lived than many believe, as the price of stimulation, regardless of whether its source is the private or public sector, holds the promise of being more of a growth retardant. With the debt supercycle continuing apace (but in a public sector context), the fragility and inherently unstable ‘balance of financial terror’ argue for a not-so-benign and extremely volatile stock market future.

“… the margin of safety is becoming ever more thin as the enemy of the rational buyer, namely optimism, reaches new heights. … since a self-sustaining economic recovery appears doubtful, I do not believe we have started a new bull market. Rather, it is more than likely that economic growth will disappoint in late 2009/early 2010 as the domestic economy confronts many of the emerging secular challenges.”

On Friday, I published a short post on Chinese equities and said: “… it looks if more downside is in store for the Shanghai Composite Index and it would not come as a surprise if lower Chinese equities serve as the catalyst for a well-deserved pullback in global stock markets.” With world markets coming off the boil by the close of the week, China may already have started leading world markets lower. A much-needed pullback/consolidation of frothy markets looks likely - be cautious out there!

For more discussion on the direction of financial markets, see my recent posts “Stock markets disconnected from economy“, “All eyes on Chinese equities“, “Bob Prechter - ‘Step aside’ from long positions“, “When will the rally end?“, “Revisiting Bob Farrell’s rule #9” and “More on Bob Farrell’s rule #8. (And do make a point of listening to Donald Coxe’s webcast of August 13, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
The Recession Status Map below, courtesy of Dismal Scientist Economy.com, aggregates growth statistics from around the world and allows one to see at a glance which economies are in recession, at risk or beginning to recover. Click on the map to link to the interactive version.

Source: Dismal Scientist

Although the recessionary conditions still dominate, global business confidence turned positive last week for the first time since early last October. (The chart below uses a four-week moving average and is therefore not yet reflecting the break above the zero line.) “The gains in sentiment are evident across the entire global economy and all industries,” said the latest Survey of Business Confidence of the World by Moody’s Economy.com. Businesses’ broad assessment of the current economic environment and the outlook into early 2010 are particularly upbeat. However, despite the steady improvement in confidence, the Survey results remain consistent with a global economy that is still in recession.

Source: Moody’s Economy.com

The German and French economies unexpectedly bounced back in the second quarter - both grew at 0.3% in the three months to the end of June after having suffered four straight quarters of negative growth. This resulted in GDP in the Eurozone falling by only 0.1% in the last quarter. Meanwhile, the UK’s GDP lags the OECD economies with a second-quarter decline of 0.8%.”

A snapshot of the week’s US economic reports is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

Friday, August 14
• The factory sector has turned the corner
• Inflation remains contained
• Consumer Sentiment Index dips again

Thursday, August 13
• Gasoline prices bring down total retail sales in July
• Jobless claims report - sum of continuing claims and special programs advances for second consecutive week

Wednesday, August 12
• FOMC meeting statement - the Fed defines “autumn”
• Trade gap widens while exports also advance

Tuesday, August 11
• Q2 productivity surge is temporary
• Small business optimism dips slightly in July

Also, Zillow.com reported (via Bloomberg) that almost one-quarter of US mortgage holders owed more than their homes were worth in the second quarter, expecting the figure to rise to as much as 30% by mid-2010 as job losses and foreclosures climb.

George Soros said in an interview with Reuters that the US economy had hit bottom and the current quarter would see positive growth due to the government’s stimulus spending. He said he did not believe the economy needed further stimulus money, notwithstanding calls for a second round of spending [from the likes of Nobel laureate Paul Krugman].

Meanwhile, a survey by The Wall Street Journal among 52 economists (with 47 respondents) reported that 27 participants said the recession had ended and 11 expected a trough this month or next. “Only six economists expect the Fed to raise the federal funds rate, now between 0% and 0.25%, this year. Most expect an increase at some point in 2010, but more than a quarter of respondents don’t see the rate moving until 2011 or later.”

Source: The Wall Street Journal, August 11, 2009.

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Source: Yahoo Finance, August 14, 2009.

Click here for a summary of Wells Fargo Securities’ weekly economic and financial commentary.

The US economic data reports for the week include the following:

Monday, August 17
Empire manufacturing
Net long-term TIC flows

Tuesday, August 18
Building permits
Housing starts
PPI

Wednesday, August 19
None

Thursday, August 20
Initial jobless claims
Leading economic indicators
Philadelphia Fed

Friday, August 21
Existing home sales

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global financial markets performed during the past week.

Source: Wall Street Journal Online, August 14, 2009.

“Listening to the market, maximizing the bets that turn out and minimizing those that don’t, are the essence of how portfolio management works. Because nobody is right all the time, that discipline is the oft-overlooked secret of how real fortunes are made,” said Jonathan Hoenig (hat tip: Charles Kirk). Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist Investment Postcards readers in making those fortunes.

For short comments - maximum 140 characters - on topical economic and market issues, web links and graphs, you can also follow me on Twitter by clicking here.

That’s the way it looks from Cape Town. (Our entire household is down with flu, but fortunately a less harmful strain than H1N1, which is rife in the neighborhood. I guess this too will “turn, turn, turn”, as the Byrds sang.)

Hat tip: Leo Kolivakis, Pension Pulse

Charlie Rose: A conversation with Kurt Andersen about his book “Reset: How This Crisis Can Restore Our Values and Renew America”

Source: Charlie Rose, August 10, 2009.

Financial Times: Eurozone data raise hopes for recovery
“The German and French economies unexpectedly bounced back in the second quarter, raising hopes that the worst of the economic crisis is coming to an end in the eurozone.

“The region’s two biggest economies, which had each suffered four consecutive quarters of negative growth, both grew 0.3% in the three months to the end of June, figures showed on Thursday.

“The figures confounded economists who had predicted contractions in each country again after German gross domestic product plummeted 3.5% and French GDP shrank by 1.3% in the first quarter.

“As a result, GDP in the 16-nation currency bloc fell only 0.1% in the last quarter, the European statistics office said, cheering economists who had expected a decline of 0.5% after a drop of 2.5% in the previous quarter.

“The better than expected performance echoed that of the US economy, which shrank only 0.3% in the second quarter on a quarterly basis. But the UK saw its GDP shrink 0.8%, prompting criticism of the government’s handling of the economy.

“Erik Nielsen, chief economist for Europe at Goldman Sachs in London, said: ‘If you look at the US and Europe, pretty much everyone had a better second quarter than expected a few months ago - with the exception of the UK.’”

Source: Gerrit Wiesmann and Ben Hall, Financial Times, August 13, 2009.

Ifo: Improvement in economic climate for euro area
“The Ifo World Economic Climate for the euro area improved in the third quarter of 2009 for the second time in succession. The increase in the Ifo indicator was solely the result of more favourable expectations for the coming six months; the assessments of the current economic situation, in contrast, still remain at an historical low.

“The current economic situation is still assessed as definitely unfavourable in almost all countries of the euro area. The expectations for the coming six months, however, have brightened in the euro area. Especially in Germany, Austria, France and the Netherlands, the World Economic Survey (WES) experts anticipate a clear improvement, and in Italy, Portugal, Slovenia, Slovakia, Belgium, Spain and Finland they foresee at least a stabilisation of the economic situation in the coming six months. A continued pessimistic view, albeit somewhat weaker than in the previous quarter, prevails among WES experts in Ireland and Greece.”

Source: IFO, August 12, 2009.

Alexander Redman (Credit Suisse): Food price inflation
“A fresh spike in food prices due to supply and demand imbalances could have serious implications for central bank policy, says Alexander Redman, strategist at Credit Suisse.

“He notes the sugar price is at its highest for more than two decades, rice trades at a large premium to its two-decade real average and wheat is close to the 20-year (constant 2009 dollar) average price.

“Mr Redman says a major factor behind the elevated sugar price is the poor Indian monsoon rainfall - which led to the country’s driest June for 50 years.

“‘This has clear implications for global food production volume and hence food price inflation, he says. ‘India accounts for 22% of global rice production, 13% of sugar and 12% of wheat. This is important as global food supply is already very tight.’

“He says Emerging Europe, the Middle East and Africa are the regions most vulnerable to rising food prices, with food and agriculture net imports accounting for 0.6% of GDP. Asia collectively is able to feed itself while Latin America is a net exporter of food.

“‘Russia, Turkey, Egypt and South Africa, among the EMEA region’s principal economies, have inflation basket weightings of food in excess of 25%. Ultimately, central banks may be faced with the spectre of having to tighten monetary policy much earlier than would have been preferable in the current global economic environment.’”

Source: Alexander Redman, Financial Times, August 13, 2009.

MoneyNews: Faber - central banks blowing huge new bubble
“Investing guru and publisher of the Gloom, Boom and Doom Report Marc Faber remains a bear, predicting a stronger dollar, tightening in global liquidity and another correction in asset prices.

“When the S&P bottomed in March, the dollar was weak, notes Faber, who expects the next few months will be a period of dollar recovery and ‘a correction time in asset markets’ as the dollar strengthens.

“‘The strong dollar means global liquidity tightening,’ Faber told CNBC.

“‘In a scenario where growth will be disappointing, I think emerging markets will be kind of vulnerable.’

“The worse the global economy, the more stocks could go up, Faber says, because the world’s central bankers have become nothing more than money printers.

“‘They’re dangerous to the health of the global economy,’ Faber says.

“‘They created the Nasdaq bubble, the housing bubble, and now they want to create another bubble to bail them out.’

“Financial crises, Faber points out, usually lead to some fundamental change that purges the excesses that went before.

“But, he says, the Obama administration chose instead to bail out financial firms at the taxpayers’ expense, leaving the country vulnerable to a bigger crisis in the next few years.”

Source: Julie Crawshaw, MoneyNews, August 13, 2009.

Paul Kasriel (Northern Trust): FOMC statement - the Fed defines “autumn”
“We suppose the biggest news from today’s FOMC meeting statement is that it put a time (sort of) certain on the end of its Treasury coupon buying binge - October. In the June 24 policy statement, the FOMC said that the Treasury coupon purchase program would wrap-up in the ‘autumn’. In effect, the Fed is stretching out the ‘weaning’ period before it makes the market fend completely for itself in finding buyers for Treasury coupons in as much as the current pace of Fed purchases would have exhausted its allotment prior to October.

“One might argue that the longer the Fed keeps the buying program in place, the more latitude it might have in increasing the size of the program. Along with the consensus view (did you expect anything different from the Fed?), the FOMC is a bit more optimistic about the near-term economic environment, changing its language to ‘economic activity is leveling out’ from the June 24 meeting’s ‘the pace of economic contraction is slowing’. But not to get too exuberant about the outlook, the FOMC commented that household spending would be constrained by ’sluggish income growth’, in addition to the other constraining factors mentioned in the June 24 statement - ‘ongoing job losses, lower household wealth, and tight credit’.

“With the FOMC expecting ‘that inflation will remain subdued for some time’ and anticipating that ‘economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period’, it is obvious that it has no intention of hiking the federal funds rate target between now and September 22-23, the next scheduled Committee meeting. Given our current view that the recovery is going to be subdued and uneven over the next several quarters, we do not expect any funds rate increases from the FOMC until June 2010, at the earliest.”

Source: Paul Kasriel, Northern Trust - Daily Global Commentary, August 12, 2009.

The Wall Street Journal: Economists call for Bernanke to stay, say recession is over
“Economists are nearly unanimous that Ben Bernanke should be reappointed to another term as Federal Reserve chairman, and they said there is a 71% chance that President Barack Obama will ask him to stay on, according to a survey.

“Meanwhile, the majority of the economists The Wall Street Journal surveyed during the past few days said the recession that began in December 2007 is now over. Battling the downturn defined most of Mr. Bernanke’s term, which began in early 2006 and expires in January, and economists say his handling of the crisis has earned him four more years as Fed chief.

“‘He deserves a lot of credit for stabilizing the financial markets,’ said Joseph Carson of Alliance Bernstein. ‘Confidence in recovery would be damaged if he was not reappointed.’

“The Journal surveyed 52 economists; 47 responded.

“After months of uncertainty, economists are finally seeing a break in the clouds. Forecasts were revised upward for every period, with 27 economists saying the recession had ended and 11 seeing a trough this month or next. Gross domestic product in the third quarter is now expected to show 2.4% growth at a seasonally adjusted annual rate amid signs of life in the manufacturing sector, partly spurred by inventory adjustments and strong demand for the ‘cash for clunkers’ car-rebate program.

“Many of the economists said there is little to be gained by changing the Fed chairman, especially considering the massive task at hand for the central bank as the economy emerges from the recession.

“‘Continuity is critical as we emerge from this crisis. Otherwise we could slip back in again,’ said Diane Swonk of Mesirow Financial. ‘Bernanke is the best suited to undo what has been done when the time comes.’”

Source: Phil Izzo, The Wall Street Journal, August 11, 2009.

Chief Executive: CEO confidence shows marked decline
“Chief Executive magazine’s CEO Index, the nation’s only monthly CEO Index, dropped to 63 in July, after showing gradual improvement. All components of the index are down, with Employment Confidence taking the largest hit.

“February saw the lowest ebb of the overall CEO Confidence Index at 39.2 increasing to a peak in May of 75.7. Almost nine in ten leaders (88.8%) rated the Current Conditions Index as bad, an increase from June (86.3%) and May (81.6%).

“What’s worse is that pessimism over employment is reaching new heights. The Employment Confidence Index declined 25% with 57% of CEOs expecting continued decrease in employment next quarter. Over 95% rate the current employment environment as bad - the highest level for 2009. Less than 5% think employment conditions are normal and virtually no one (0.4%) thinks they are good.

“The Capital Spending Index shows a majority of business leaders think capital spending will hold over the next quarter while a sizeable minority (39%) expect capital spending to drop. ‘We’re currently treading water’, commented one respondent. ‘Once the federal stimulus dollars stop (our life preserver), we’ll sink to the bottom from exhaustion. It would happen anyway. The government is only delaying the inevitable. We need to go through the pain before we can get on the road to recovery.’

“CEOs sentiment is mixed on where we are in the slowdown. 33% believe the worst is yet to come, 35% believe the worst is happening now, and 29% believe the worst is behind us.

“The cause of renewed CEO pessimism has many sources. One respondent remarked, “Healthcare Reform, especially should President Obama’s plan be approved will have devastating effects on the economy. Also, the Climate Bill [Waxman-Markey], if approved will have a significant negative impact on the economy.’ Another commented, ‘The foolish and politically motivated decisions of the Obama administration is having a permanent and profound effect on all business decisions people are making. There will be no ‘rally’.’ ‘The current direction of the administration will deepen the downturn and strangle the private sector with increased taxation, unemployment and socialization of business in the US’, observed a third CEO.”

Source: Chief Executive, May/June 2009.

Reuters: George Soros - US economy has bottomed
“The US economy has hit bottom and the current quarter will see positive growth due to the government’s stimulus spending, billionaire financier George Soros said on Tuesday.

“‘I think it (the stimulus) has made a difference, the economy has actually bottomed and I think we are facing a positive quarter, and I think that is largely due to the stimulus,’ he said in an interview with Reuters Television in New York.

“Soros said he did not believe the economy needed more stimulus money, despite calls for a second round of spending.”

Source: Edward Krudy, Reuters, August 11, 2009.

The Washington Post: “A recovery only a statistician can love”
“The pile of economic data indicating that the worst of the recession is over just keeps growing. In the past few weeks, the government has reported that businesses last month shed the smallest number of jobs in nearly a year. The savings rate, after rising rapidly, held steady at levels not seen in at least five years. And from April to June, productivity surged to a six-year high.

“But the same data also explain why any recovery isn’t going to feel like one anytime soon for millions of Americans. Its existence will be confirmed by statistics, but, over at least the next year, the benefits are unlikely to materialize in the form of higher wages or tax receipts or more jobs.

“‘It’s going to be a recovery only a statistician can love,’ Wells Fargo senior economist Mark Vitner said.

“‘Economists are using one concept of recession that is at total variance of how a normal human being thinks of it. A normal human being thinks of a recession as: You fell into a hole, and as long as you’re in a hole, you’re in a recession,’ said Lawrence Mishel, president of the Economic Policy Institute. ‘Economists think of [a recession's end] as … when the economy stops shrinking.’”

Source: Annys Shin, The Washington Post, August 12, 2009.

Nouriel Roubini (Forbes): A “jobless” and “wageless” recovery?
“After severe job losses in early 2009, the pace of job losses slowed starting in April, and the July numbers have brought more respite. Non-farm payroll job losses were 247,000 in July. However, the private sector lost 254,000 jobs. This is considerably better than analysts expected (around 325,000) but not good enough to claim that we are in the middle of a strong and sustainable recovery.

“Looking at the recessions of the post-war period, average monthly job losses ranged between 150,000 and 260,000. Average monthly losses in this recession are still at 350,000. For the first four months of the year, the average was at 648,000. The improvement with respect to the first part of the year is clear. The improvement with respect to what we are used to seeing in recessionary periods is much less clear cut. The latest numbers are not exactly what you’d call good news, at least not in absolute terms. In relative terms, however - after skirting a near-depression - markets seem to consider 247,000 payroll losses a breath of fresh air.

“The increase in average weekly labor hours in July is certainly a positive sign. But it also shows that, when economic conditions begin improving, companies will increase labor hours and temporary workers and move workers from part time to full time. Only after that do they begin hiring new workers. So hiring is still a long way ahead. The decline in the unemployment rate from 9.5% in June to 9.4% in July was not due to an improvement in the employment situation but is explained by the large decline in the labor force (-422,000). Workers facing hiring freezes, fewer full-time jobs and jobs at lower wages are leaving the labor force.

“The economy has lost over 6.6 million jobs since the recession began, which is way above the job losses that we are used to seeing in recessionary periods when job losses have ranged between 1.5 million and 2.5 million. The large job losses of the past months and longer unemployment duration will continue to weigh on the economy in the coming months. The unemployment duration improved slightly in July from the record high witnessed in June, which is positive news.

“Unemployed workers are falling behind their debt payments, raising defaults on loans and making government mortgage modification programs ineffective. Default rates on various loans have already surpassed the unemployment rate. According to the Moody’s credit card index report, published in May 2009, the credit card charge-off rate crossed 10% in May 2009 and is expected to reach a peak of 12% by the second quarter of 2010.

“For the labor market to stabilize, job losses need to slow to 100,000 to 150,000 per month, and jobless claims need to fall to around 400,000. Payrolls alone don’t reflect the strength of the household sector. Labor compensation and work hours also function as indicators, and both of these have slowed sharply in recent months. Even as borrowing conditions remain tight and home prices continue to fall, the dip in labor compensation will continue to constrain consumer spending, notwithstanding any fiscal stimulus.

“In a severe, consumer-led recession like this one, the labor market is a leading (rather than lagging) indicator of economic recovery, and the consumer still drives the US economy (private consumption still makes up over 70% of GDP). A slowdown in the pace of job losses from 650,000 to 250,000 is welcome, but in no way offers comfort about a prompt comeback of the US consumer. This raises concerns about the strength and sustainability of any economic recovery that most people are expecting in the second half of 2009, and beyond.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, August 13, 2009.

MoneyNews: Rogoff - US may face second recession
“The United States faces a prolonged period of sluggish growth and perhaps another recession in the next five years, Harvard University economist Kenneth Rogoff said on Tuesday.

“The US recession that began in December 2007 is close to an end, and economic growth will hover near a sluggish 2% for the next five to seven years, he said.

“‘We’re going to be Japan-light,’ he said in an interview, referring to Japan’s years of sub-par growth after its financial crisis of the 1990s. ‘We won’t have a lost decade, but we will face some of the same challenges.’

“Rogoff, a former International Monetary Fund chief economist and an expert on banking crises, said the United States faces a 50-50 chance of a second recession in the next five years.

“Moreover, the commercial real estate market crisis remains a potential drag on growth.

“‘Commercial real estate is a tsunami coming that’s going to wipe out a lot of the small banks,’ he said. ‘It’s unclear if any big players will be stressed out by it, which will depend on how the economy is doing.’

“Rogoff also said the United States will need to raise taxes soon as debt levels swell and interest rates rise. He expects to see a national sales tax in three years.

“‘People just don’t understand how much taxes are going to have to go up on the current trajectory we’re on,’ he said. ‘People are still on the high that the government can back everything and not seeing what the costs are.’”

Source: MoneyNews, August 11, 2009.

CNBC: The Black Swan squawks
“Nassim Taleb, principal of Universa Investments and author of ‘The Black Swan’, discusses, the markets, the economy and whether Fed Chairman Ben Bernanke should be reappointed.”

Source: CNBC, August 12, 2009.

CNBC: Krugman - more stimulus and investment drivers needed
“More stimulus measures and drivers for investment are needed to jolt the recovery process for the economy, says Paul Krugman, nobel laureate and professor of economics at Princeton University. He assesses the likelihood of an economic recovery with CNBC’s Martin Soong.”

Source: CNBC, August 10, 2009.

Asha Bangalore (Northern Trust): Gasoline prices bring down total retail sales
“Retail sales fell 0.1% in July after an upwardly revised 0.8% in June. In July, a significant decline in gasoline prices accounted for the decline of the headline number. Excluding gasoline, retail sales rose 0.1%, marking the third consecutive monthly increase of this component.

“The cash-for-clunkers program led to a 2.4% increase in auto sales reflecting the increase in unit auto sales (11.2 million units in July from 9.7 million units in June). The cash-for-clunkers program has borrowed auto sales from the future and has come at the expense of non-auto retail sales in July.

“Among the other major components of retail sales, sales of clothing (+0.6%) and health and personal care (+0.7%) increased, eating and drinking establishments recorded gains (+0.4%), while purchases of furniture (-0.9%), general merchandise (-0.8%) and building materials (-2.1%) fell in July.

“Arithmetically, the fact that the July level of retail sales exceeds the second quarter average is a plus for the third quarter performance. Consumer spending is most likely to add to real GDP in the third quarter after a 1.2% annualized decline in the second quarter.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 13, 2009.

Barry Ritholtz (The Big Picture): Temporary help is less bad
“Students of economic and employment data know that many of the components of the employment situation are leading economic indicators.

“I like to look specifically at Temp Help for some insight as to the demand for labor and employer confidence. My go to guy for all things Temp Help is Bruce Steinberg. His monthly analysis on Temp Hiring makes for a sober and clear eyed assessment following the NFP release.

“You can see both year-over-year and monthly data charted below. As you might imagine, Y-Y is down substantially - about 26%. The monthly data, while volatile, seems to be moderating, falling about half a percent (0.56%).”

Source: Barry Ritoltz, The Big Picture, August 10, 2009.

Bloomberg: US foreclosure filings set third record high in five months
“Foreclosure filings in the US climbed to a record for the third time in five months in July as falling home prices and the recession left more homeowners unable to keep up payments or refinance.

“A total of 360,149 properties received a default or auction notice or were seized last month, according to data seller RealtyTrac. One in 355 households got a filing, the highest monthly rate in RealtyTrac records dating to January 2005, the Irvine, California-based company said in a statement.

“‘We’re in a deep hole,’ Diane Swonk, chief economist at Chicago-based Mesirow Financial Inc., said in an interview. ‘There is a whole new wave of foreclosures tied to the cyclical dynamics of the economy.’

“Foreclosures increased as the US recorded another 247,000 job losses in July and home prices fell, leaving an increasing number of mortgage holders owing more than their properties were worth. The median price of an existing single-family house dropped 15.6% to $174,100 in the second quarter, the most in records dating to 1979, the National Association of Realtors said yesterday. Almost one-quarter of US mortgage holders are underwater, property data firm Zillow.com said August 11.

“‘There are a slew of factors showing fundamental weakness on the demand side: tighter underwriting, job loss, investors who’ve been badly burned,’ said Stuart Gabriel, director of the UCLA Ziman Center for Real Estate in Los Angeles. ‘We have not seen the bottom of the housing market.’”

Clusterstock: Foreclosures still concentrated in the bubble states
“There are some signs that the foreclosure crisis is spreading across the country. Kansas foreclosures doubled, for example. But in the meantime, they still reside in four huge, bubble states - California, Arizona, Nevada and Florida, though they are only now starting to show signs of flattening.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - Business Insider, August 13, 2009.

Bloomberg: US underwater mortgages may reach 30%, Zillow says
“Almost one-quarter of US mortgage holders owed more than their homes were worth in the second quarter and that figure may rise to as much as 30% by mid-2010 as job losses and foreclosures climb, Zillow.com said.

“‘The negative-equity rate will rise and spin off more foreclosures,’ Stan Humphries, Zillow’s chief economist, said in an interview. ‘I see a substantial downside risk to prices and don’t think we’ll see a bottom until the middle of next year.’

“The percentage of people owing more than their properties are worth may increase to almost half of US mortgage holders before the housing recession ends, Deutsche Bank AG said August 5.

“About 25 million homes, or 48% of mortgaged properties, will be underwater as prices drop through the first quarter of 2011, Karen Weaver and Ying Shen, analysts in New York at Deutsche Bank, wrote in the report.”

Source: Dan Levy, Bloomberg, August 11, 2009.

Clusterstock: Home prices collapsing even faster
“The Case-Shiller Index has been signalling an improvement in the second derivative of housing prices for a few months, and in the latest report it even showed a sequential increase. But check out the NAR’s numbers for all of Q2. The year-over-year drop in the median sales price of single family homes showed its worst decline ever. They didn’t even have a second derivative gain improvement.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - Business Insider, August 12, 2009.

Asha Bangalore (Northern Trust): The factory sector has turned the corner
“Industrial production increased 0.5% in July after a 0.4% drop in June. Factory production advanced 1.0% in July, following a 0.6% decline in the prior month. Production at the nation’s factories has fallen every month between January 2008 and June 2009, with the exception of an increase in October 2008. In addition to the 20.1% rebound in auto production, which helped to raise the headline, factory production excluding autos rose 0.2%.

“Factory production has recorded the bottom for this recession. The most important conclusion from history is that factory production turns the corner at the end of a recession.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 14, 2009.

Asha Bangalore (Northern Trust): Trade gap widens, while exports also advance
“The trade deficit of the US economy widened to $27 billion in June from nearly $26 billion in the prior month. A 7.0% increase in inflation-adjusted imports accounted for a widening of the trade gap; imports of non-petroleum items fell 1.2% in June. Overall imports of goods, after adjusting for inflation, rose 0.1%. Nominal imports of goods and services rose 2.3%, the first increase since July 2008.

“Exports of goods and services increased 2.0% in June; exports have risen in three out of the last six months. Inflation-adjusted exports of goods increased 0.6% - also in three out of the six months ended June. The trade deficit of goods in real terms narrowed slightly to $35.9 billion from $36.3 billion in the prior month. The overall real trade deficit is likely to be smaller in the second quarter vs. the first quarter. The net impact of the drop in inventories and trade deficit will be confirmed after the inventories data are published on August 13.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 12, 2009.

Asha Bangalore (Northern Trust): Small Business Optimism Index dips slightly in July
“The Small Business Optimism Index fell 1.3 points to 86.5 in July. The index is largely a coincident indicator. Therefore, a significant improvement of the index is necessary to conclude that the recession has ended.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 11, 2009.

Asha Bangalore (Northern Trust): Inflation remains contained
“The Consumer Price Index (CPI) held steady in July after a 0.7% surge in June. On a year-to-year basis, the CPI has fallen 2.1%. In July, the energy price index fell 0.4% and the food price index dropped 0.3%. Energy prices have retraced a part of the July decline in the early weeks of August.

“The core CPI, which excludes food and energy, moved up 0.1% in July vs. a 0.2% gain in the prior month. The July core CPI has risen 1.56% from a year ago. The peak for the core CPI is 2.93% in September 2006.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 14, 2009.

Asha Bangalore (Northern Trust): Q2 productivity surge is temporary
“Productivity of the US economy rose 6.4% in the second quarter after a 0.3% increase in the prior quarter. Although output declined, hours worked fell more sharply and led to an increase in productivity. Productivity gains toward the end of a recession and the beginning of recovery are typical and they reflect cost cutting strategies of firms. The surge in productivity registered in the second quarter is not representative of the long-term trend; the long-term productivity of the US economy is roughly 2.5%.

“The sharp increase in productivity and a mild gain in compensation (+0.2%) translated to a 5.8% drop in unit labor costs. The decline in unit labor costs is a big positive because it implies the absence of inflationary pressures.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 11, 2009.

Clusterstock: Companies don’t need to borrow because they don’t want to spend
“The financing gap is the difference between capital expenditures and cash flow. Another way of putting it is that it measures the dependence of business on financing for growth.

“The financing gap turned sharply negative at the end of last year. This negative financing gap indicates that the business sector as a whole is generating enough cash to purchase capital expenditures without borrowing. This supports the claims of banks that demand for business loans has declined. But that isn’t necessarily good news for the economy.

“We’ve overlaid this with the unemployment rate to indicate that the negativity of the financing gap doesn’t tell us much about underlying economic conditions. The gap turned sharply negative in late 2005 as unemployment was falling, indicating a booming economy that generated a large cushion of liquid assets for companies to spend on capital expenditures. This time around the negative financing gap, is very different - most likely generated by a decline in expenditures rather than excess cash flow. In short, this is a recessionary negative finance gap.

“We’ve actually never seen anything like this in recent memory: a growing negative financing gap coupled with growing unemployment.

Source: John Carney and Kamelia Angelova, Clusterstock - Business Insider, August 10, 2009.

Clusterstock: Fiscal meltdown!
“Hopefully deficits don’t matter, because if they do, then boy are we screwed. Today’s chart was put together by Diapason Securities analyst Sean Corrigan (via Alphaville), and it shows the stunning rise of outlays and similar collapse in receipts. The blue line is the real killer, though, as it shows just how meager our tax revenue is compared to outlays.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - Business Insider, August 11, 2009.

Bloomberg: Toxic loans topping 5% may push 150 banks to point of no return
“More than 150 publicly traded US lenders own nonperforming loans that equal 5% or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.

“The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3% or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.

“The biggest banks with nonperforming loans of at least 5% include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10%, the biggest in the 50 US states was Michigan’s Flagstar Bancorp. All said in second-quarter filings they’re ‘well-capitalized’ by regulatory standards, which means they’re considered financially sound.

“‘At a 3% level, I’d be concerned that there’s some underlying issue, and if they’re at 5%, chances are regulators have them classified as being in unsafe and unsound condition,” said Walter Mix, former commissioner of the California Department of Financial Institutions, and now a managing director of consulting firm LECG in Los Angeles. He wasn’t commenting on any specific banks.

“Missed payments by consumers, builders and small businesses pushed 72 lenders into failure this year, the most since 1992. More collapses may lie ahead as the recession causes increased defaults and swells the confidential US list of ‘problem banks’, which stood at 305 in the first quarter.”

Source: Ari Levy, Bloomberg, August 14, 2009.

CNBC: TARP takes on toxic assets
“The underlying problem of troubled assets on the balance sheets of banks still remains unresolved, according to a new report by the Congressional Oversight Panel. Elizabeth Warren, the panel’s chair, discusses the report.”

Source: CNBC, August 11, 2009.

American Banker: Revenge of the accounting authorities?
“The Financial Accounting Standards Board took plenty of heat in April for loosening mark-to-market guidelines, a move that critics assailed as a gift to the financial industry and a nod to political pressures.

“The FASB’s latest idea, however, if seen to completion, would go a long way toward silencing accusations that the rulemakers have gone soft on banks.

“Under consideration: an unprecedented proposal to vastly widen the use of mark-to-market accounting, so that it becomes the default method for valuing financial instruments, including loans that banks plan to hold to maturity. If adopted, the rule could set off a new wave of writedowns at a time when investor confidence in banks is fragile at best.

“Proponents say that stricter use of mark-to-market would simplify accounting rules and give investors a clearer picture of companies’ financial health. The opposition, led by the bank lobby, says it is unfair to make companies absorb the blow of falling market values for loans they have no intention of selling. And they say that new questions would be raised as to how to value specialty loans and other assets for which there are no ready markets.

“The American Bankers Association is trying a nip-it-in-the-bud approach, publishing a position paper earlier this month and sending a letter to accounting standards-setters in advance of an official public comment period.”

Source: Heather Landy, American Banker, August 11, 2009.

Barron’s: Next real estate shoe is not dropping
“As recently as last month, stories were being written about how the next shoe to drop on the economy would be in the commercial real estate sector. It did not take much of a Web search to find warnings going as far back as early 2008.

“The talk was that hundreds of billions of dollars of commercial mortgages would default.

“Yet, prices of commercial real estate investment trusts (REITs) have been soaring over the past few weeks and the technicals have not looked this good in a long time.

“Mr. Market does not quite agree with the talking heads.

“While the sector is quite overbought in the short-term based on traditional measures, long-term investors can finally feel better about adding them to the universe of potential purchases.

“To be sure, a rising market tide does indeed raise most boats. The ones that do not rise, to continue the analogy, are leaky boats heading for further trouble. Commercial REITs not only rose but also outperformed the market the during the current summer rally.

“In round numbers, the iShares Trust Dow Jones US Real Estate Index Fund (ticker: IYR), which measures a cross section of REIT types, beat the Standard & Poor’s 500 20% to 15% since early July.

“The real estate sector will not be immune to any major market pullback. However, many technicals have lined up to make me think something deep down has changed for the better.

“That would suggest that a price dip in the commercial real-estate patch is something to cheer, not fear.”

Source: Michael Kahn, Barron’s, August 10, 2009.

Bloomberg: Pimco’s Gross reduces mortgage holdings, adds to cash
“Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., reduced holdings of mortgage debt to the lowest level in more than two years and added to cash and equivalent securities.

“Gross cut the $169 billion Total Return Fund’s investment in mortgage bonds to 47% of assets in July, the least since April 2007, from 54% in June, according to Pimco’s website. Cash comprised negative 1%, the most in 2009, rising from negative 6%.

“In an August investment outlook, Gross said investors in riskier assets will get ‘haircuts’ because US economic growth will be closer to 3% than the range of 5% to 7% for the past 15 years. The US economy will begin to recover in the second half of 2009, he wrote in the outlook posted on Pimco’s website. The Newport Beach, California-based firm doesn’t comment on changes in holdings.

“‘There is no investment potion for this new environment other than steady income-producing bond and equity investments in companies with strong balance sheets and high dividend yields,’ Gross wrote. ‘A journey to 3% nominal GDP means default/haircuts for assets on the upper end of the risk spectrum, as well as extremely low-yielding returns for government and government-guaranteed assets at the bottom end.’

“The Total Return Fund returned 12.3% in the past year, beating 96% of its peers, according to data compiled by Bloomberg. The one-month return is 1.15%, outpacing 34 percent of its competitors.”

Source: Susanne Walker, Bloomberg, August 12, 2009.

MoneyNews: Schiff - Rising stocks not a sign of recovery
“Rising US stock prices - particularly following a 50% decline - say nothing about the health of the US economy or the prospects for a recovery, says Euro Pacific CEO Peter Schiff.

“‘In fact, relative to the meteoric rise of foreign stock markets over the past six months, US stocks are standing still.’

“‘If anything, it is the strength in overseas markets that is dragging US stocks along for the ride.’

“There is an inexplicable but widely held belief that stock market movements are predictive of economic conditions, Schiff writes at GoldSeek.com.

“The current rally in US stock prices has caused many, including President Obama, to conclude that the recession is nearing an end, Schiff notes.

“‘Reality is clearly at odds with these optimistic assumptions,’ he says.

“‘In the current cycle, neither the market nor its cheerleaders saw this recession coming, so why should anyone believe that these fonts of wisdom have suddenly become clairvoyant?’

“Schiff points out that through most of 2008, even as the economy was contracting academic economists and stock market strategists were still confident that a recession would be avoided.

“‘If they could not even forecast a recession that had already started, how can they possibly predict when it will end?’ he asks.”

Source: Julie Crawshaw, MoneyNews, August 10, 2009.

Nicholas Colas (BNY Convergex): Mixed messages from Q2 results
“The US second-quarter reporting season has left investors with a mixed outlook for the rest of 2009, says Nicholas Colas, chief market strategist at BNY Convergex.

“He points out that while earnings generally met or exceeded forecasts - following decisive cost-cutting measures in the first half - many companies chronically missed their revenue expectations in the second quarter.

“‘The market overall looked through these misses, much to the chagrin of the bears,’ Mr Colas says.

“But he says that having had a chance to reflect on the quarter’s results, analysts generally remain cautious with regard to revenue growth for the second half.

“‘Analysts are raising revenue estimates a tad more than they are lowering them. But the idea that the fourth quarter would be the inflection point of the current recession, where revenues turn positive year over year, now looks to be at risk.

“‘When we contrast this caution with the positive stock price returns of recent weeks, it is easy to dismiss the market’s enthusiasm as misplaced optimism.

“‘But we would offer a different slant. The market expects revenue expectations to rise in coming weeks, due to the recent spate of better than expected economic data. The greater number of positive revisions is a good start in that direction.’”

Source: Nicholas Colas, BNY Convergex (via Financial Times), August 11, 2009.

Bespoke: S&P 500 P/E ratio nearly doubles
“A P/E ratio rising from 10 to 18.35 is what happens when the S&P 500 rallies 50% (the P) while earnings (E) continue to decline. Below we provide a chart of the S&P 500 price to earnings ratio since the start of the 2002 bull market using trailing 12-month diluted earnings per share from continuing operations.

“The S&P’s P/E ratio reached its highest level since the end of 2004 earlier this week. While P/E expansion is not unusual during bull markets, investors will remember that the S&P 500’s P/E actually declined from the start to the finish of the ‘02-’07 bull. This is because earnings grew even faster than stock prices.

“When looking at the chart below, you can see that the P/E did expand in the early days of the ‘02-’07 bull before earnings finally started to grow again in late 2003 and early 2004. Obviously if the current bull is going to have any sustainability at all, earnings will have to start growing again. But for now, as evidenced by the skyrocketing P/E ratio, investors are paying up on the hopes of future earnings growth.”

Source: Bespoke, August 14, 2009.

Bill King (The King Report): Stock market driven by funny money
“The dilemma for bulls & solons: Can the US economy & financial system survive without the govie umbilical cord and if not, how long will it be before bonds collapse and take everything with them?

“AIG posted its first quarterly profit since 2007. Will the SEC investigate to see who profited from the obvious inside information about its earnings last week? Don’t bet anything you can’t afford to lose.

“As for the stock market - as we asserted a week or two ago, it again has become greatly disconnected from the economy. But that’s what funny money does.

“We completely understand how funny money can induce the masses to get jiggy on stocks no matter the economic condition. Heck, Easy Al and Bernanke’s reigns are testament to stocks divorcing from economic reality on funny money.

“But one must consider that just five months ago, the US was in probably its greatest financial crisis since the Revolution. (No Wall Street firm failed during the 1929 Crash; no insurance company or the largest manufacturer was nationalized; there were no FNM/FRE takeovers, etc. etc. etc.). And the US economy collapsed at the greatest rate since The Great Depression.

“Now we are asked to believe that only five months after possibly the worst two-quarter collapse in US financial and economic history the recovery is here. This would be a first if true.

“Last week we noted that while many pundits are correlating the recent 50%-ish rally to 1975 and 1982 May 1930.

“The FT’s John Authers echoes our warning that stocks did not get to historically cheap levels in 2009 like they did in 1974 and 1982, which is precisely what transpired in 1929- 1930.”

Source: Bill King, The King Report, August 10, 2009.

Bloomberg: Tudor calls stock gain a bear market rally
“Tudor Investment Corp., the $10.8 billion hedge-fund firm run by Paul Tudor Jones, said equity markets could decline later this year, creating buying opportunities.

“Slowing growth in China and the return of front-page stories on swine flu may be ‘further catalysts for global equity markets to pause in September’, the Greenwich, Connecticut-based firm said in an August 3 client letter.

“Tudor said the 47% gain in the Standard & Poor’s 500 Index of the largest US companies since March 9, when it fell to a 12-year low, is a ‘bear-market rally’. The index topped 1,000 for the first time in nine months this week after companies reported better-than-expected profits.

“‘Impressive counter-trend rallies are a feature, not an oddity, of secular bear markets,’ Tudor said. ‘We are not inclined to aggressively chase the market here. Many doubts remain about the sustainability of this recovery, most prominently the weakness of household income growth.’

“Tudor’s biggest hedge fund, the $8.9 billion Tudor BVI, gained 10% this year through July after losing 4.5% in 2008. Hedge funds on average lost a record 19% last year, according to Chicago-based Hedge Fund Research Inc.

“The firm said that a year-end gain in stocks may be another bear market rally with equities falling in 2010.”

“Tudor said it expects the US dollar to fall by the end of the year as money managers diversify their currency reserves. ‘Reserve accumulation and diversification trends will be persistent and mutually reinforcing the direction of the US dollar,’ Tudor said.”

Source: Saijel Kishan, Bloomberg, August 6, 2009.

David Fuller (Fullermoney): Markets temporarily overextended
“Most of the world’s stock markets are temporarily overextended once again so they too are likely to experience another pause and consolidation of recent gains before long. If this process coincides with anniversary jitters as investors recall last year’s meltdown, we can expect a further delay. Nevertheless, with monetary policies remaining favourable and economic prospects improving, we would not be surprised to see new recovery highs for most stock markets prior to yearend 2009.

“Active investors may wish to reduce some equity positions on current strength, or to hedge, with a view to repurchasing on setbacks. I would not be tempted to chase stock markets higher at this time. I will retain all long-term positions in my personal long-term investment portfolio because I think they have further and potentially significant potential over the duration of this bull market. Meanwhile, sentiment will turn more negative in the event of a general stock market pullback and I would regard that as an additional buying opportunity in favoured themes.”

Source: David Fuller, Fullermoney, August 11, 2009.

TheStreet.com: Kass - a summary of my bearishness
“As I see it, the bull market argument is that the US is exiting the recession just like the many that preceded the current one. Consequently, corporate profits will exceed consensus forecasts in tandem with: the resumption of revenue growth; the record fiscal and monetary stimulation; an export-led Asian recovery; and the operating leverage associated with productivity gains achieved through draconian cost cuts and influenced by the benefits of wage deflation.

“The bulls further argue in favor of Say’s Law of Production (i.e. business drives consumer incomes and spending) and that the high-tax health and energy bills introduced by the President have been recently set back (as the Blue Dog Democrats and the liberal leadership are already battling).

“The bear market argument that I have now embraced is that we are seeing nothing more than a second derivative recovery and that, owing to a temporary replenishment of inventories, the economy is only getting less worse (or getting better from a depressed level). The ingredients for a durable and self-sustaining recovery are missing as an economic double-dip grows more likely in a climate of corporate cost cuts, elevated jobless rates, wage deflation and continued pressure on personal consumption expenditures. Bears, such as myself, reject Say’s Law of Production and view weakening consumer incomes and spending as a poor foundation and as inadequate drivers to improving business activity into 2010.

“The economic downturn of 2007-2009 has already been different this time in scope and duration. For example, unlike the other post-depressions/recessions of the last century, we have already witnessed two consecutive quarterly drops in nominal GDP. As well, the 20-month-old recession has resulted in a near 4% drop in real GDP vs. drops of between 2.5% and 3.0% in the mid 1970s and early 1980s recessions. The US economy came out quickly from those prior downturns, with recoveries to new peaks in economic activity taking only three or four quarters.

“My view is that it will continue to be different this time as the typical self-sustaining economic recovery of the past will not be repeated for 10 important reasons.

1. Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.

2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.

3. The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.

4. The credit aftershock will continue to haunt the economy.

5. The effect of the Fed’s monetarist experiment and its impact on investing and spending still remain uncertain.

6. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.

7. Commercial real estate has only begun to enter a cyclical downturn.

8. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

9. Municipalities have historically provided economic stability - no more.

10. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.”

Click here for the full article.

Source: Doug Kass, TheStreet.com, August 10, 2009.

Bespoke: Sector relative strength
“The charts below show the relative strength of the ten S&P 500 sectors versus the overall index. Given the interest in the Transports by Dow theorists, we have also included the relative strength of that group. In each chart, a rising line indicates that the sector is outperforming the S&P 500 while a declining line indicates underperformance. We have also included dots showing each time the Fed cut rates (red) and left rates unchanged (black dots).

“In the consumer sectors, Discretionary stocks are near their highest levels of outperformance in the last year, while the Staples sector has been steadily trending lower. In the last week, Financial relative strength has spiked higher as stocks like AIG and C have surged, but with the sharp rise in recent weeks, we wouldn’t be surprised to see the sector take a break in the coming days.

“Finally, the Technology sector has been the market’s leader since the March lows, but it has been lagging since the start of August. As shown in its chart, the current downleg in underperformance looks similar to the leg lower it took in early May right before the overall market began its sideways correction.”

Source: Bespoke, August 11, 2009.

Bespoke: Shorts getting a little lonelier
“Following July’s leg higher, it seems that traders on the short side have cut and run. As shown in the chart below, the average stock in the S&P 500 had 4.97% of its float sold short as of the end of July. This is the lowest level since January 30th, and marks a decline of 17% from the peak levels in July 2008. Bears will cite this number as proof that investors are crowded on the long side. While bulls would probably prefer to see higher levels of short interest, they are likely to note that short interest still remains high from a longer-term perspective.”

Source: Bespoke, August 11, 2009.

CNBC: Hedge fund heavyweights on the industry
“Leon Cooperman, of Omega Advisors; Michael Steinhardt, of Wisdom Tree Investments; and David Gerstenhaber, of Argonaut Capital Management, discuss the state of the hedge fund industry.”

Source: CNBC, August 10, 2009.

Financial Times: Speculation grows over dollar’s turning point
“Just a week after the dollar hit its lowest level for 10 months, the main talking point in FX markets is whether the US currency is about to strengthen.

“The change of sentiment has been sparked by last week’s US payrolls report, which saw far fewer job losses in July than expected. This strengthened the view that the US is past the worst of its recession and that its economic recovery could precede that of Europe and Japan.

“‘Markets are in a flurry of debate about whether Friday’s US payrolls data marks an inflection point for FX, whereby good US economic news starts to benefit rather than hurt the dollar,’ says Ray Farris at Credit Suisse.

“Hans Redeker at BNP Paribas says there are signs that the US economy has responded positively to the massive US fiscal and monetary stimulus, thus reducing the risk premium for holding US assets.

“‘The introduction of quantitative easing in March has let the performance of the dollar diverge from the guidance of real interest rate differentials,’ he says.

“‘Now, as the economic outlook has stabilised, the relative yield and interest rate differentials should regain their impact on currency markets.’

“Others are hesitant to call an end to the trend of dollar weakness, given that the currency’s rebound has been based on its reaction to a single piece of economic data.

“‘If there is a shift, it’s at a very embryonic stage,’ says Neil Mellor at Bank of New York Mellon.

“But if the dollar does continue to rise, it would mark a very significant development given the pattern of trading that has tended to characterise the currency markets since the onset of the financial crisis.

“This has seen the dollar benefit from haven demand when equities, and hence risk appetite, have fallen.

“In contrast, the dollar has lost ground when stocks and investor confidence have risen as investors abandon the relative safety of the US currency in search of higher returns elsewhere.

“Thus as equities hit their highest level of the year last week, the dollar index, which tracks its progress against a basket of six major currencies, fell to its lowest level since October.

“This correlation has led to the perverse situation where the dollar has fallen on better US economic data and rallied when news from the US has disappointed.

“This pattern seemed to break down last Friday after the US employment report. The positive surprise generated a predictable rise in equity markets and a surge in US Treasury yields. The dollar also strengthened.”

Source: Peter Garnham, Financial Times, August 11, 2009.

Reuters: Pickens - I’m long oil
“Oil man turned wind power fan T. Boone Pickens sees the price of a barrel of oil rising slightly to $75 by the end of this year and $85 next year.

“‘I’m long oil,’ said Pickens in an interview on the sidelines of US Senate Majority Leader and Nevada Democrat Harry Reid’s National Clean Energy Summit, a meeting of industry leaders and policy makers.

“Pickens has written a blueprint for US energy policy, called the Pickens Plan, that focuses on converting heavy vehicles like big long-distance trucks, to natural gas.

“Pickens, traditional environmentalists and those fearing US dependence on foreign oil sources have argued that the nation should focus its efforts on alternative energy, like wind. As the economy has soured, potential jobs for building new energy infrastructure has taken a leading role in debates for changing the economy away from oil.

“Nevertheless, ‘when the global economy gets going again, demand will be above supply,’ said Pickens, explaining his forecast for oil prices, which has been constant for most of the year.

“The billionaire recently delayed plans to build the nation’s largest wind farm in the Texas panhandle, blaming financing problems and transmission limitations.

“‘You’ve got wind corridors all the way from Sweetwater, Texas to the Canadian border, so we’re looking at projects all up and down that corridor,’ he said, adding that he was talking to groups with transmission capacity to decide where to site more than 600 windmills.”

Source: Peter Henderson, Reuters, August 12, 2009.

Bloomberg: IMF gold sales may begin in 2010
“The International Monetary Fund will probably sell 200 metric tons of gold annually starting next year, ‘potentially weighing on prices’, Citigroup Inc. said in a report e-mailed today.

“Gold will fall to $850 an ounce in the second half of 2010, Citigroup Sydney-based analyst Alan Heap wrote in the report. The IMF board will approve a gold sale before its annual meeting in October, Reza Moghadam, director of strategy, policy and review, said on July 29. A planned sale of 13 million ounces (403 tons) was accepted by the US last month.

“‘We believe the sell down will likely begin in 2010 and see around 200 tons sold per year, potentially weighing on prices,’ Heap wrote in the report.

“The IMF owns 3,217 tons of gold, the third-largest holder of gold after the US and Germany, according to data compiled by London-based research company GFMS Ltd. A sale of 200 tons would compare with 246 tons disposed last year by central banks, according to GFMS.

“European central banks have an agreement to limit their gold sales to 500 tons a year, and that arrangement expires in September. A new accord has not been announced.

“‘The central bank agreement is expected to be renewed after it expires in September, although, in our view, it could now perhaps afford to be more relaxed in terms of annual limits and allocating quotas,’ Barclays Capital analyst Suki Cooper wrote in a report.”

Source: Claudia Carpenter, Bloomberg, July 31, 2009.

TheStreet.com: Nadler - gold could go lower
“Jon Nadler, senior analyst at Kitco.com, argues that gold could go lower and outlines a potential trading strategy.”

Source: TheStreet.com, August 12, 2009.

Financial Times: China’s economy cools as lending slows
“China’s surging economy slowed slightly in July as state-controlled banks heeded Beijing’s instructions to rein in excessive lending, with the volume of new lending dropping 77% from a month earlier.

“Most economic indicators however suggested a continuing strong recovery, largely as a result of government investment and state-directed lending that saw new loans nearly triple in the first seven months from the same period last year.

“Industrial output expanded by 10.8% in July from a year before, less than most economists had predicted. Fixed asset investment growth rose 32.9% from a year earlier for the first seven months of year, indicating some slowing in July as half-year growth had been 0.7 percentage points higher.

“Senior Chinese leaders have repeatedly emphasised their commitment in recent weeks to a ‘moderately loose’ monetary policy but fears of bubbles forming in the property and stock markets prompted the central bank and banking regulators to order banks to slow lending last month.

“‘This policy of ‘backdoor tightening’ will be replaced with effective tightening measures authorised by top policy makers when the growth recovery is further confirmed, most likely in the fourth quarter of 2009,’ according to Goldman Sachs economists Helen Qiao and Yu Song. ‘We also expect more meaningful tightening measures to be adopted in 2010, after more signs of overheating and inflationary pressures emerge.’”

Source: Jamil Anderlini, Financial Times, August 11, 2009.

Financial Times: The Bank of England versus deflation
“The UK appears to be the main exception to the disinflation affecting the global economy - yet the Bank of England is the most concerned of all the main central banks about the risks of deflation, says Stephen Lewis, chief economist at Monument Securities.

“‘There is no mystery about the divergence of inflation in the UK from the experience in other economies,’ he says.

“‘Currency factors have probably contributed significantly to the pattern, with sterling’s overall depreciation tending to boost UK import costs.’

“Mr Lewis says that in the light of history, the Bank of Japan might have been expected to be the most worried of the world’s central banks about declining prices.

“Yet the BoJ and the European Central Bank have stood pat on policy for the past two months, while the Federal Reserve has gone a long way in winding down the special measures it undertook to cope with the financial crisis, he says. ‘The Bank appears to be alone in believing that fresh action was needed to support demand in the economy, when it increased the scope of its asset purchase facility by £50 billion last week.

“‘The conclusion seems inescapable, bearing in mind recent inflation data, that there is a stronger bias towards growth and a greater tolerance of inflation at the Bank of England than at the other central banks.’”

Source: Stephen Lewis, Financial Times, August 12, 2009.

Financial Times: UK tax deal with Liechtenstein
“About 5,000 investors with an estimated €2 billion to €3 billion in secret Liechtenstein bank accounts will be asked to come clean under an agreement signed on Tuesday. Tax correspondent Vanessa Houlder explains the background to the ground-breaking deal.”

Click here for the article.

Source: Financial Times, August 11, 2009.

Financial Times: UBS and US strike tax evasion deal
“UBS and the US government have agreed an out-of-court settlement to end one of the most bitter assaults on Switzerland’s hallowed bank secrecy.

“The case has significant implications for the future of client confidentiality, amid fears among many Swiss bankers that a dilution of traditional secrecy rules could prompt a defection by worried foreign customers.

“No details of the deal were revealed on Wednesday, pending formal signing, probably early next week. However, lawyers said the settlement would involve UBS supplying the names of least 5,000 US offshore clients and possibly paying a big fine.

“Bankers were reluctant to comment before knowing the terms. But the Swiss bankers’ association said it expected the settlement ‘would be consistent with Swiss law’.

“The difficulty of finding a formula allowing Bern to authorise a breach of secrecy rules, while maintaining the facade of confidentiality, probably explains why the deal took so long, after lawyers indicated agreement in principle last month.

“‘We are pleased to have initialled an agreement with the Swiss government which protects the US government’s interests,’ said Doug Shulman, the Internal Revenue Services commissioner.

“‘I am pleased to say that it has been possible to resolve the matter in the form of a compromise between two sovereign states - that is in the interests of both states,’ said Eveline Widmer-Schlumpf, the Swiss justice minister.”

Source: Haig Simonian, Financial Times, August 12, 2009.

Tags: Bond Yields, BRIC, Canada, Chief Economist, Copper Nickel, Credit Crunch, Current View, Economic Contraction, Emerging Markets, ETF, Federal Funds Rate, Federal Open Market Committee, Government Bond, Household Spending, Household Wealth, India, Interest Rate Movements, Mike Keefe, Nickel Zinc, Northern Trust, oil, Open Market Committee, Paul Kasriel, Reversal Of Fortune, Tight Credit, Turn Turn Turn
Posted in Emerging Markets, Gold, India, Markets | No Comments »

Picture du Jour: Coppock shows bottom in Treasuries

Wednesday, July 22nd, 2009

Further to my post of yesterday, arguing that government bond yields have in all likelihood bottomed (see “Is the yield curve pointing to better tidings“), I have also analyzed the Coppock indicator for a longer-term perspective.

The Coppock curve is a long-term price momentum indicator used to recognize major bottoms in financial markets. For those who are mathematically minded, the indicator uses a monthly time scale and is the sum of a 14-month rate of change and 11-month rate of change, smoothed by a 10-period weighted moving average (see skyjuice for formula).

The market will typically reverse its trend whenever the Coppock curve reverses from an extreme low or extreme high. The graph below shows the historical relationship between the Coppock indicator and the US 10-year Treasury Note yield going back 20 years. A picture paints a thousand words …

Source: Plexus Asset Management (based on data from I-Net Bridge)

“You pays your money and takes your chance”, but it would seem as if the odds are stacked in favor of rising long-term interest rates for a while to come.

Tags: Bond Yields, Bottoms, Cape Town, Coppock Curve, Coppock Indicator, Financial Markets, Government Bond, Likelihood, Momentum Indicator, Moving Average, Plexus Asset Management, Price Momentum, Target, Term Interest, Term Perspective, Tidings, Time Scale, Treasuries, Year Treasury Note, Yield Curve
Posted in Markets | No Comments »

Is the Yield Curve Indicating Better Tidings?

Tuesday, July 21st, 2009

While the deflation/inflation debate rages on, the jump in US government bond yield (and stronger commodities and weaker US dollar) seems to indicate that deflationary pressures are moderating.

The chart of the US 10-year Treasury Note yield shows a clear uptrend since the end of last year, with the yield also now trading above both the 50- and 200-day moving averages.

Source: StockCharts.com

The graph below shows the relatively flat yield curve (red line) immediately prior to the first rate cut in September 2007. As indicated by the black line, the yield curve has steepened dramatically since as monetary policy kept shorter maturities at low levels while longer maturities have been in a rising trend.

Source: StockCharts.com

A steeper yield curve typically heralds better tidings for economic growth, although concerns about massive issuance also come into play. The graph below shows the close relationship between the US GDP-weighted Purchasing Managers Index (PMI) and the US 10-year Treasury Note yield.

Source: Plexus Asset Management (based on data from I-Net Bridge)

This raises the question as to what the impact of the yield curve typically is on the stock market. The blue line in the chart below shows the US 10-year Treasury Note yield relative to the US 2-year Treasury Note yield. A rising blue line indicates a steepening yield curve, whereas a downward trend shows the opposite. A comparison with the S&P 500 Index highlights a broadly inverse relationship, i.e. stocks fall when the yield curve steepens and rise when the curve flattens.

Source: StockCharts.com

A key observation, however, is that the stock market usually bottoms prior to a peak in the yield curve, i.e. as confidence regarding an economic recovery gains ground and earnings prospects improve.

Importantly, the steepening of the yield curve comprises two phases: firstly, when both short- and long-term rates fall but short rates fall more than long rates as a result of poor economic conditions and, secondly, when long rates start discounting better economic prospects but short rates are still kept at low levels. The subsequent decline in the yield curve is when both short and long rates increase, but short rates rise faster than long rates. Share prices typically rise during the second phase of the steepening of the yield curve and the ensuing decline.

The above analysis is merely one cog of the wheel, but seems to support the argument that US stocks are in all likelihood in a broad bottoming-out phase. As said before, investors will now focus on the second-quarter earnings reports as a test of whether stock prices bear resemblance to fundamental reality. In the meantime, a cautious approach is warranted but that should not preclude one from finding stocks that look cheap.

Tags: Bond Yield, Commodities, Debate Rages, Deflationary Pressures, Downward Trend, Economic Recovery, Gains Ground, Government Bond, Inverse Relationship, Maturities, Monetary Policy, Moving Averages, Pmi, Purchasing Managers Index, Red Line, Stock Market, Tidings, Uptrend, Us Gdp, Year Treasury Note, Yield Curve
Posted in Markets | No Comments »

Is Rosie Right on Bonds?

Wednesday, July 15th, 2009

The paragraphs below are excerpts from a recent report by David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates.

“The consensus says that the era of the secular decline in government bond yields has come to an end because of the very low yields and the massive reflation efforts from governments everywhere. The consensus is that inflation is going to have to show up somewhere at some point. That may well be true, but despite huge policy initiatives, long-term bond yields did not hit their bottom in the US until late 1941 at below 2% and this was a good 12 years after the initial shock.

“Nobody built more bridges or paved more river beds than the LDP did in the 1990s in Japan, and despite a doubling in the government debt-to-GDP ratio and multiple credit downgrades, the yield on the 10-year JGB did not hit their lows at less than 1% until 2003 - again, this was 13 years after the initial shock. To be sure, there were selloffs and spasms along the way, but it took years for fiscal and monetary policy to finally break the downtrend in bond yields.

“To be sure, this has been a brutal year for US Treasuries, with the yield on the 10-year note nearly doubling this year at the June 10 peak of 3.98% (though the Treasury market has generated a +2% return so far in July - the first positive showing since March). From our lens, it cannot be said that the secular bull market in bonds is over until the 10-year breaks above 5.26% because then and only then will we be able to say that for the first time in this 28-year secular bull phase, the prior interim high was ‘taken out’. Look at the time series below and you will see that ever since bond yields peaked during the inflation bubble of 1981 they kept on hitting lower and lower ‘highs’ during the eight cyclical selloffs, and they continuously made lower ‘lows’ during the intermittent eight cyclical rallies. That is how a secular bull market is ultimately defined:

October 26, 1981 (High): 15.60%
October 13, 1982 (Low): 10.39%
June 25, 1982 (H): 14.76%
May 4, 1983 (L): 10.12%
August 8, 1983(H): 12.20%
April 6, 1986 (L): 6.98%
March 20. 1989 (H): 9.53%
October 15, 1993 (L): 5.19%
November 7, 1994 (H): 8.05%
October 5, 1998 (L): 4.16%
January 20, 2000 (H): 6.79%
June 13, 2003 (L): 3.13%
June 12, 2007 (H): 5.26%
December 8, 2008 (L) 2.08%
June 10, 2009 (H): 3.98%
Today: 3.26%.

“Keep in mind that over half the time, bond yields hit their fundamental lows in the June-December period; and we also know that Treasuries have rallied in 15 of the last 20 third quarters. So the seasonals, if nothing else, are quite positive for the fixed-income market during this time of year.”

Will Rosie be on the money? I am not so sure. The graph below shows the historical relationship between the US GDP-weighted Purchasing Managers Index (PMI) and the yield on 10-year Treasuries. Should the PMI show further improvement and break above 50 (indicating expansion), long bond yields may not have much downside potential. In any event, I am not sure who wants to sink money into a 10-year T-Note with a 4% coupon that is losing 6-8% a year as a result of dollar depreciation.

Source: Plexus Asset Management (based on data from I-Net Bridge).

Tags: Bond Yields, Bull Phase, Chief Economist, David Rosenberg, Downgrades, Fiscal And Monetary Policy, Gdp Ratio, Gluskin Sheff, Government Bond, Government Debt, Initial Shock, Jgb, Look At The Time, Policy Initiatives, River Beds, Secular Bull Market, Secular Decline, Selloffs, Term Bond, Treasury Market
Posted in Markets | No Comments »

Tim Bond on China and the Fed’s “punch bowl”

Wednesday, June 24th, 2009

Tim Bond, head of asset allocation at Barclays Capital, discusses in the video clips below the outlook for Chinese growth, as well as government bond yields and when the Federal Reserve Board will start raising rates. FT’s investment editor John Authers conducts the two-part interview that also covers a number of other topical issues.

Part 1:
Will Chinese domestic growth be the saviour of the global economy?

Click here or on the image below to view the interview.

Part 2:
Are bond yields normalising? When will the Fed start raising rates?

Click here or on the image below to view the interview.

Source: John Authers, Financial Times, June 22 and June 23, 2009.

Tags: Asset Allocation, Barclays, Barclays Capital, Bond Yields, China, Chinese Growth, Federal Reserve, Federal Reserve Board, Financial Times, Global Economy, Government Bond, Image, Interview Source, John Authers, June 23, Punch Bowl, Saviour, Tim Bond, Topical Issues, Video Clips
Posted in Markets | No Comments »

Higher bond yields raise caution

Friday, May 29th, 2009

While investors’ attention was focused on global government bond yields marching higher, the holiday-shortened week produced a surprisingly small number of video clips.

Some quality footage was nevertheless produced, featuring the likes of David Rosenberg, now in his new role as chief economist and strategist of Gluskin Sheff, Mohamed El-Erian, Barry Ritholtz, Puru Saxena and Mario Gabelli.

And then there is “out of the box” analyst Marc Faber arguing that the US economy will enter “hyperinflation” approaching the levels in Zimbabwe. “I am 100% sure that the US will go into hyperinflation,” Faber said in an interview with Bloomberg. “The problem with government debt growing so much is that when the time comes and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”

The selection kicks off with a humorous take by Emmy Award winner Hoofy and Boo on “How not to save Detroit”, and concludes with a clip featuring Twitter co-founders Biz Stone and Evan Williams explaining how they plan to attain their goal of generating revenue by the end of the year. (By the way, you can follow me on Twitter by clicking here.)

Hoofy & Boo (Minyanville): How not to save Detroit
“Chrysler is in dire straits and hoping that Fiat will save the company. Join Hoofy and Boo as they watch two turkeys combine in an ill-conceived effort to make an eagle.”

Source: Hoofy & Boo, Minyanville, May 2009.

Financial Times: GM’s future
“Spencer Jakab says once General Motors emerges from almost certain bankruptcy, it may be in surprisingly good shape.”

Source: Spencer Jakab, Financial Times, May 26, 2009.

Fox Business: End of recession? Not so fast
“David Rosenberg, chief economist at Gluskin Sheff & Associates, gives his take on the end of the market downturn.”

Source:Fox Business, May 26, 2009.

CNBC: Outlook from the Bond King - Mohamed El-Erian
“Current perspectives on the future of the economy, with Mohamed El-Erian, Pimco CEO/co-CIO.”

Source: CNBC, May 27, 2009.

Bloomberg: Wachovia’s Vitner says consumers seeing better economy
“Mark Vitner, managing director at Wachovia Corp., talks with Bloomberg’s Erik Schatzker about data showing that confidence among US consumers jumped this month to the highest level since September. The Conference Board’s sentiment index surged to 54.9, higher than forecast and the biggest gain since April 2003, the New York-based research group said today.”

Source: Bloomberg, May 26, 2009.

CNBC: Blitzer on S&P/Case-Shiller home price declines
“The data shows home prices fell at the fastest rate ever in the first quarter. Insight with David Blitzer, Standard & Poor’s managing director/chairman.”

Source: CNBC, May 26, 2009.

CNBC: Ritholtz - how far from the housing bottom?
“Searching for the housing bottom, with Barry Ritholtz, FusionIQ CEO and the Fast Money traders.”

Source: CNBC, May 26, 2009.

John Authers (Financial Times): House prices key to consumer confidence
“John Authers, FT’s investment editor, says that until US house prices recover we will not see consumer confidence return in earnest.”

Click here for the article.

Source: John Authers, Financial Times, May 26, 2009.

The Wall Street Journal: The rise of a financial stability regulator
“Just as the Great Depression led to the creation of new institutions and financial practices, the Obama administration is on track to impact financial regulations. One of the new concepts involves a financial stability regulator, David Wessel explains.”

Source: The Wall Street Journal, May 27, 2009.

The Washington Post: Geithner dismisses GOP socialism charge as “ridiculous”
“Treasury Secretary Timothy Geithner admits private investors are worried about investing in new government-backed commercial mortgage securities and dismisses as ‘ridiculous’ a recent Republican National Committee resolution stating that Democratic policies bordered on socialism.”

Source: The Washington Post, May 24, 2009.

The Wall Street Journal: Mythology of bulls and bears
‘As the bulls gain force, investors must avoid getting trampled in a stampede. Barron’s Steven Sears comments.”

Source: David Ranson, The Wall Street Journal, May 21, 2009.

CNBC: Puru Saxena - expect a mild correction
“As markets have run ahead of themselves, expect a mild correction or consolidation soon, predicts Puru Saxena, money manager and CEO, Puru Saxena Wealth Management. He tells CNBC’s Chloe Cho why this will be positive for the US dollar.”

Source: CNBC, May 27, 2009.

Bloomberg: Gabelli says stock market finding “place of equilibrium”
“Mario Gabelli, chairman and chief executive officer of Gamco Investors Inc., talks with Bloomberg’s Betty Liu about the outlook for the US economy and stocks.”

Source: Bloomberg, May 28, 2009.

CNBC: Faber - market correction will unfold
“Marc Faber, editor and publisher of The Gloom, Boom & Doom Report, says the overbought market will correct but he is uncertain about the magnitude of the correction. He speaks to Sean Callow of Westpac Bank, CNBC’s Martin Soong & Sri Jegarajah.”

Source: CNBC, May 25, 2009.

CNBC: Dr Gloom - paper money will become worthless
“Hold onto gold as paper money will become worthless in the future, warns Marc Faber, editor & publisher of The Gloom, Boom and Doom Report. CNBC’s Martin Soong & Sri Jegarajah asked Faber how he was gaining exposure to the precious metal.”

Source: CNBC, May 25, 2009.

The Street: Gold can hit $1 000
“Is a perfect storm of a weak dollar, weak markets, options expirations and physical demand going to push gold higher? Carlos Sanchez, Associate Director of Research for CPM Group offers his take at TheStreet.com.”

Source: The Street, May 28, 2009.

CNBC: OPEC secretary general - oil should be above $70
“OPEC is looking for a ‘reasonable’ oil price, which is not below $70 a barrel, OPEC secretary general Abdalla Salem El-Badri told CNBC after the organization left output unchanged Thursday.”

Source: CNBC, May 28, 2009.

MarketWatch: Twitter founders aim for revenue by year end
“Twitter co-founders Biz Stone and Evan Williams tell MarketWatch columnist Therese Poletti how they plan to attain their goal of generating revenue by the end of the year.”

Source: MarketWatch, May 27, 2009.

Tags: Barry Ritholtz, Biz Stone, Bond Yields, Chief Economist, Cnbc, David Rosenberg, Financial Times, Global Government, Gluskin Sheff, Good Shape, Government Bond, Hyperinflation, King Mohamed, Marc Faber, Mario Gabelli, Market Downturn, Mohamed El Erian, Puru Saxena, Quality Footage, Shape Source
Posted in Canadian Stocks, Emerging Markets, Gold, Markets, Oil and Gas, Outlook | No Comments »

Jeremy Siegel: Outlook for Government Bonds

Friday, May 15th, 2009

Jeremy Siegel, on his outlook for government bonds:

40 years ago [US] treasury bonds were yielding over 6.3 percent, about twice their yield today. It is mathematically impossible for government bonds to come close to matching those 12 percent returns in future decades. Stocks, on the contrary, can easily repeat their returns over the past four decades, since those returns were near their
historical average…

For the 55-year period from December 1925, when the well-known Ibbotson stock and bond series begins, through January 1982, total real government bond returns were negative. This means that, by rolling over in long-term government bonds, reinvesting all the coupons, and thereby taking no income, investors’ bond portfolios were sinking in value.

Most strikingly, for the 40-year period from 1941 through 1981, government bond investors lost a whopping 62 percent of their value after inflation. A loss in purchasing power over this long a period has never happened in stocks. There has never even been a 20-year period when real returns in stocks have been negative. In fact, the worst 30-year real return for stocks is plus 2.6 percent per year, just slightly below the average real return investors earn with government bonds.

Looking at today’s markets, the forward-looking prospects for government bonds are very poor. Yields on 30-year inflation-protected bonds are 2.3 percent, and yields are only 4 percent on 30-year Treasuries. In contrast, after stocks have fallen 50 percent from their previous high, as they did in March of this year, their subsequent 30-year real returns have always been in excess of 10 percent per year.

The 40-year outperformance of government bonds over large stocks has ended.

As a addendum, Robert Arnott, of Research Affiliates opined about bonds vs. stocks in Bonds: Reversion Cuts Both Ways?

Tags: 1941, 30 Year Treasuries, Addendum, Bond Investors, Bond Portfolios, Bond Returns, Bond Series, Bonds Vs Stocks, Contrary, Government Bond, Government Bonds, Ibbotson, Inflation Protected Bonds, Jeremy Siegel, Outperformance, Poor Yields, Prospects, Purchasing Power, Research Affiliates, Robert Arnott, Stocks Bonds, Us Treasury Bonds
Posted in Bonds | No Comments »

Hendry: Markets Assuming Optimism

Wednesday, April 29th, 2009

Hugh Hendry, the outspoken hedge fund manager and founder of Eclectica Asset Management, known for his remarkably accurate call on deflation, and long-duration government bond bets, appeared on CNBC last night to share his controversial outlook on markets. In his usual and cutting way, Hendry dismissed critics of his stance on long bonds, by pointing out that we are in the midst of “a rally of risk”.

The recent rise in stocks and talk about green shoots in the markets are optimistic assumptions, as the world downturn “still has a way to run,” said Hugh Hendry, CIO at Eclectica.

Here are the accompanying notes from CNBC.

The recent rise in stocks and talk about green shoots in the markets are optimistic assumptions, as the world downturn “still has a way to run,” Hugh Hendry, Chief Investment Officer at Eclectica, told CNBC Tuesday.

World gross domestic product looks overestimated, because global consumption has been based on debt, and this cannot continue, Hendry told “Squawk Box Europe.”

“In the last five weeks we had a rally in risk. Big deal,” he said.

“I am fearful of the surplus countries, like China and Germany. I think GDP has been overstated,” Hendry added.

“My notion was, you had Bernie Madoff doing US GDP accounting.” China “built capacity to serve a world that doesn’t exist. We’re drowning in capacity. The idea to propose we build more… that ain’t a remedy,” he explained.

Although companies’ results beat forecasts, this is mainly because they marked their expectations too low, but their outlook is grim, according to Hendry.

“I believe the downturn in the global economy still has a way to run. We’ve only been given evidence of further deterioration,” he said.

The rise in bond yields shows that the yield curve is flattening, pointing to more economic weakness ahead.

“What it reveals is that it’s terrifying. This rise in bond yields shows… the private sector is countering the Fed and is tightening policy,” Hendry said.

During the Great Depression, there had been rallies in the stock market, but stocks generally fell, Hendry reminded, explaining his bearish stance on stocks. He added that nobody can predict where the bottom was for the stock market.

“Monkeys spend all their time picking bottoms. I refuse to pick bottoms as I don’t live in trees,” he said.

Hendry also shared his thoughts on Tobacco stocks, commodities, bonds, and gold.

Tobacco stocks, especially in the US, are among the few assets that Hugh Hendry, chief investment officer at hedge fund Eclectica, said he likes Tuesday, but he added investors should be prudent as world economies are still in the middle of a deleveraging trend.

Altria and Philip Morris are interesting choices as they are “priced in dollars,” Hendry said, adding “I like dollars.”

“One of the things we know with certainty is that people smoke, they’re addicted to it,” Hendry added.

He said he was getting a 9 percent yield on the stock, but, because of the fragile economic situation, was thinking of buying senior debt, which would give the same yield but offers more security in case of bankruptcy.

“As a society, we have taken debt… to almost four times greater than the economy. That’s unprecedented. And it’s a turning point,” Hendry said. “Governments around the world want some inflation, and they are targeting inflation. It’s one thing to target it and another to achieve it. Who wants to take on debt today?”

Because of this, the economy will continue to contract and commodities such as oil are not a good bet either, according to Hendry.

Bonds are not a good buy for the summer, as they are usually an investment for the second half of the year, and investors should be “patient and scared” and, at the end of debt deflation, may get “fantastic values”.

Gold has behaved as a risk-free asset, but Hendry said he hopes for a correction in the price of gold to around $600 to $700 per ounce, from the current level of $898, to start buying.

“I’m not saying it will happen, but stranger things have happened,” he said. “Gold investors have had it easy. I expect gold to get a bit more uncomfortable for the people who hold it in the short term.”

“The intellectual case for gold is very strong. Governments are printing money, but only God prints gold and that takes billions of years.”

Tags: Accompanying Notes, Assumptions, Bernie Madoff, Bond Yields, Chief Investment Officer, Cnbc, Deflation, Depressio, Deterioration, Duration Government, Economic Weakness, ETF, Global Consumption, Global Economy, Government Bond, Great Depression, Gross Domestic Product, Hedge Fund Manager, Hugh Hendry, Optimism, Rallies, Squawk Box, Stock Market, World Downturn, Yield Curve
Posted in Bonds, Commodities, Economy, Gold, Markets, Oil and Gas, Outlook | No Comments »

Corporate Bonds or Equities? Deflation or Inflation?

Monday, March 30th, 2009

The debate rages on, and it is between whether to invest in corporate bonds or equities, or if economic conditions are deflationary or inflationary? FT Alphaville, Fortune.com and Capital Spectator have covered this quite well. Here are all the pieces:

Of Bonds and Stocks and the Weimar Republic
(FT.com/Alphaville, March 30, 2009)
by Tracy Alloway

You’d have to be living under a bailout-sized rock not to be aware of the current debate surrounding equities vs corporate bonds.

HSBC has now thrown its hat in the ring, in a 24-page research note entitled “The triumph of the pessimists”, which looks at the behaviour of corporate bonds and equities over the past 140 years or so. Here’s the summary.

Lots of studies have looked at government bond and equity valuations, few at the relationship between corporate debt and equities. We’ve filled the gap, going back to the middle of the 19th century.

The results don’t look pretty for equities, which are likely to suffer a multi-year downgrading compared with corporate debt… Historically, there have been three multi-decade periods. Relative prices in the first two were very different to those in the third. Before the beginning of the last century, yields on corporate equity were sometimes lower than those on corporate debt and sometimes higher.

Over the following 50 years — from about 1907 until 1951 — they were almost always higher, sometimes a great deal higher. But for the 50 years starting in the early 1950s, dividend yields on equities fell sharply relative to yields on corporate bonds. By 2000, the peak of the cult of the equity, the relative yield of equities compared with government and corporate bonds had reached its lowest level ever.

In fact, the only significant period in which dividend yields weren’t higher than corporate bond yields was in the early 1930s (chart, using railway bond yields as a proxy for corporates, below), when dividend yields collapsed and corporate bond yields surged because of the cascade of Depression-related defaults, according to HSBC. Investors’ enthusiasm for equities was dulled, and, in a parallel with our current financial crisis, their appetite for corporate debt sharpened. Even as the economy improved and profits rose, investors attached an increasingly low valuation to dividend payments, resulting in increased dividend yields.

Fearing another depression, then, investors demanded more of their returns upfront. That’s why dividend yields went up and corporate spreads went down. Although stocks went up and down, the shift continued until 1950, by which time the trailing PE for the S&P had fallen to 6x, its dividend yield had reached 7.5%, yields on Baa bonds had fallen to 3.2% and spreads to less than 80bps. In the early 1930s, Baa yields reached 11% and spreads touched 725bps.

That was the cheapest that equities have ever been against corporate bonds. Over the next 50 years, not all at once and with big, sometimes huge setbacks, valuations of stocks compared with corporate bonds moved from their cheapest ever to their most expensive. Which … is the situation in which we find ourselves now.

Which leads us to today, when, according to HSBC, we’re facing two scenarios for corporate bonds and equities.

Over the past 18 months, the implosion of the global financial system has led to huge risk aversion and acute deflationary concerns, both of which have driven government bond yields lower still. Now, it could be that quantitative easing by central banks will lead to a pick up in inflationary concerns and worries about how governments will repay the huge numbers of bonds that they have issued and will continue to issue. That’s certainly not an argument that one should dismiss out of hand. That wouldn’t augur well for government bonds in the long term.

Alternatively, the situation we’re in now might echo the 1930s, when risk appetite was shot to pieces and, regardless of whether inflation fell through the floor or picked up somewhat, government-bond yields fell and then fell further. For their part, having spiked up hugely, corporate spreads declined for the rest of the decade. But as we saw earlier, if investors lapped up bonds, particularly corporate bonds, they shunned equities; earnings yields and dividend yields rose dramatically. In that environment, investors, in other words, were expressing a strong preference for safety and income over risk and capital gains.

Although we strongly suspect that the present world looks more like the second of these scenarios than the first, we really don’t know for sure. Perhaps it doesn’t much matter, as long as governments don’t unleash another huge inflation. For what is certainly true is that central bankers have now told us explicitly that they will not allow government bond yields to rise for the foreseeable future. Their aim is simple: to make risk-free assets so unattractive that investors wade into riskier markets, thus restoring confidence to the financial system and the economy as a whole. For now, it’s clear, equity markets have taken the hint, but corporate credit markets haven’t. That situation will, we think, be reversed.

This is a sentiment echoed in The Aleph Blog and Crossing Wall Street. The spread between corporate bonds and equities is getting big - corporates were sitting out of the recent rally. They are, as per HSBC’s research title, the pessimists.

However, as HSBC also notes, this is essentially a deflationary vs inflationary debate. In a deflationary environment, as in the Great Depression, corporate bonds, with their stable returns, make sense. In an inflationary environment those fixed returns are eroded. Equities, with their ability to raise prices in tandem with inflation (or as close as they can get) could be more attractive.

A slightly random example here - but the German stock market of the 1920s increased by a staggering amount as inflation shot through the roof. We’re far from hyper-inflation, but throwbacks to that era, like the below 1921 clipping from the New York Times, should give us pause for thought.

Related links:
Sunday links: Stocks vs bonds - Abnormal Returns
Is it back to the Fifties? - FT
Equity lives! - FT Alphaville
The death of equity - FT Alphaville

This entry was posted by Tracy Alloway on Monday, March 30th, 2009 at 16:32.

WHAT ARE MONEY MANAGERS THINKING? (Capital Spectator)

What are professional money managers thinking these days? A new poll by Russell Investments offers an answer. Among the highlights:

• 67% of managers are now bullish on corporate bonds
• 61% are bullish on high-yield bonds

In both cases, the percentages are a bit higher compared with the previous poll from last December. “In this environment of caution and realism, managers are finding opportunity in spreads between high-quality corporate bonds and Treasuries that are at historic levels,” Erik Ristuben, Russell’s chief investment officer, says in the accompanying press release. Expectations for junk bonds are also higher from late last year.

U.S. equities, on the other hand, have fallen in the eyes of managers. Value and small-cap equities suffer the most in terms of the current outlook, according to the Russell survey. Here’s an overview of how the changes in expectations for the various asset classes stack up:

Source: Capital Spectator

High-yield bonds: Appetite for risk

If you’ve got the stomach for it, industry watchers say now is the time to hit the bargain buffet.

By Beth Kowitt, reporter

Last Updated: March 30, 2009: 12:02 PM ET

NEW YORK (Fortune) — Like most investments with higher credit risk, the high-yield bond market took a huge hit in 2008 as investors fled to quality. But with the sector recently seeing its deepest discount ever - and even rallying a bit - some say it’s time to test the waters again.

“The values are just extraordinary,” says Martin Fridson, CEO of Fridson Investment Advisors and a high-yield bond specialist. “I think it’s an opportunity you’re not going to see very often in your lifetime.”

Fridson says the spread between high-yield bonds and treasuries over the last few months has been far beyond anything seen before. The option adjusted spread, which measures the difference, is about 17.6 points, according to Merrill Lynch data. A year ago, the spread was 8.2 points.

Lower valuations mean more upside, Fridson says, but they’re also the reason for investors’ hesitations. Default rates will likely run higher than during past recessions, he notes, partly because the quality of the sector has deteriorated since the last low cycle.

Lawrence Jones, associate director of fund analysis at Morningstar, said some experts he’s spoken with expect default rates, which have run between 2% and 3% the last few years, to reach between 10% and 15%.

“I see the opportunity,” Jones says, “but almost everyone who’s being straight with you will say there’s a lot of risk.”

You may know them as “junk”

High-yield bonds, or “junk” bonds, are defined by the industry as a bond with below a Standard and Poor’s BBB- rating. They have a higher risk of default (failure to make a scheduled interest or principal payment), and are subject to greater price swings than more highly rated bonds. But on the upside they also have a higher rate of interest.

Jones suggests making high-yield bonds a small part of your portfolio through bond funds run by experienced managers and research teams investing in better-quality high-yield securities. A fund provides the advantage of a manager’s expertise and also the diversification that’s needed to limit the risk of default in any single investment. And high-yield bonds can be highly illiquid, i.e., hard to unload if they’re thinly traded, but a fund gives you the security of getting in and out when you want.

Read the entire piece here.

Source: Fortune.com

Tags: 1930s, 1950s, Alphaville, Bailout, Capital Spectator, Cascade, Corporate Bond Yields, Corporate Bonds, Corporate Debt, Corporate Equity, Corporates, Debate Rages, Deflation, Dividend Yields, Economic Conditions, ETF, Ft Alphaville, Gap, Government Bond, Government Bonds, Pessimists, Relative Prices, Valuations, Weimar Republic
Posted in Bonds, Canadian Stocks, Credit Markets, ETFs, Markets, Outlook, US Stocks | No Comments »

Inflation is Tomorrow’s End-game

Friday, March 20th, 2009

There seems to be a fair amount of knee-jerk enthusiasm about inflation and inflationary assets, though according to some analysts, its too early in the offing to be taking a big stance in that direction. We’ve covered this off in many stories during the course of the year.

Everybody is reading from the same story book, but many of us are skipping to the end of the story, instead of fully appreciating the economic forces which have led to Fed’s decision to adopt quantitative easing, by adding a trillion dollars to its balance sheet. Bill Gross, PIMCO Managing Director, echoes that we will only see inflation as of 2010-2011. Here are some additional comments:

From Reuters:

Not all analysts agree the plan is a good idea or that it will cure what ails the heavily indebted economy, but many expect it to bring the benchmark 10-year note yield back down to the 50 year lows seen around 2.0 per cent seen last December.

“They can hold them down as low and as long as they want because they can print as much money as they want,” said Marty Mitchell head of government bond trading at Stifel Nicolaus in Baltimore.

“Yields can stay low and probably are headed lower.”

Inflation will ultimately become an issue, Mitchell said, but the more immediate concern was the prospect of a downward deflationary spiral in prices, wages and economic activity.

This means inflation is not on the agenda and will not be for at least a matter of months and possibly a couple of years.

“Inflation is tomorrow’s end game,” Mitchell added. “Right now they’re fighting off a deflationary environment.”

Mary-Ann Hurley, VP, Fixed Income Trading, D. A. Davidson says:

“While we’re not concerned about inflation right now, boy we potentially have a huge problem down the road. I don’t think it’s this year or next year’s problem but maybe 2011.”

“We’ve got a huge amount of stimulus and how is the Fed going to unwind all this? I can see a scenario where interest rates go up dramatically, which will hurt the economy. So, it’s a mess.”

Howard Simons, Bianco Research:

“We’ve crossed the Rubicon,” said Howard Simons, strategist at Bianco Research in Chicago. “We have absolutely severed any connection between our dollar and reality. It’s as fast as you can print it right now.”

The Feds decision is more likely at this stage to be bullish for bonds than for equities, as the rest of the developed world is forced to swallow the QE pill. There is also the age-old adage, “Don’t Fight the Fed.” If the Fed is buying bonds…for the time being in any case.

After all, how many of us really understand deflation?

Source: Reuters, Fed Plan May Lower Rates, But at What Cost?, March 19, 2009

Tags: Ails, Balance Sheet, Bill Gross, Bill Gross Pimco, Bond Trading, Deflationary Spiral, Downward Spiral, Echoes, Economic Activity, Economic Forces, End Game, Fixed Income Trading, Government Bond, Hurley, inflation, Lows, Managing Director, Marty Mitchell, Quantitative Easing, Reuters, Stimulus, Trillion, Vp, Wages
Posted in Bonds, Economy, Markets | No Comments »