Saturday, November 14, 2009

WEEK ENDING 11/13/09

While the unemployment rate climbed to a 26 year high of 10.2% in October, initial claims for unemployment aid, which are generally considered a gauge of the pace of layoffs, fell last week to a seasonally adjusted 502,000. more...

Treasury yields oscillated in a very narrow range this week, with relatively low yields and volatility an ideal scenario for the Federal Reserve as it seeks to navigate the economy. more...

Large-Cap Equities
The stock market rallied for the second straight week on continued corporate mergers and acquisitions activity and the G-20 agreeing to maintain their stimulus efforts, supporting prospects of an economic recovery. more...

Corporate Bonds
Investment grade primary activity got off to a running start this week with over twenty issuers coming to the market. more...

Mortgage-Backed Securities
Complacency is a mortgage investor’s best friend. With Treasuries stuck in a range for another week, mortgages outperformed Treasuries as spreads inched closer to their all-time tights. more...

Municipal Bonds
Yields on municipal bonds are lower this week inside of 20 years of maturity, but higher in longer maturities. more...

The high yield market is facing a flood of new deals, with over 15 deals totaling some $6.5 billion set to price this week and early next. more...

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +6.7% this week, while the Russian stock index RTS went up +6.1%. more...

Global Bonds and Currencies
Major non-US sovereign bond markets were generally slightly firmer overall in the past week despite a surge in risk appetite which pushed equity prices to their highest levels this year. more...

Emerging-Market Bonds
Emerging market dollar-pay debt spreads were tighter this week. Encouraging economic data kept risk appetite strong as equity markets made new highs for the year and credit spreads tightened. more...

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All rights reserved. Legal terms. Payden & Rygel respects your privacy. Privacy policy.

The investment strategy and investment management information presented on this email and related Web site,, should not be construed to be formal financial planning advice or the formation of a financial manager/client relationship. is an informative Web site designed to provide information to the general public based on our recommendations of investment management and investment strategies and is not designed to be representative of your own financial needs. Nor does the information contained herein constitute financial management advice. The firm makes no warranty or representation regarding the accuracy or legality of any information contained in this Web site, and assumes no liability for the use of said information. Be advised that as Internet communications are not always confidential, you provide our Web site your personal information at your own risk. Please do not make any decisions about any investment management or investment strategy matter without consulting with a qualified professional.

Saturday, October 31, 2009

Your Duck is Dead; cost of medical care

A woman brought a very limp duck into a veterinary surgeon.

As she laid her pet on the table, the vet pulled out his stethoscope and listened to the bird’s chest.

After a moment or two, the vet shook his head sadly and said, “I’m sorry, your duck, Cuddles, has passed away.”

The distressed woman wailed, “Are you sure?”

“Yes, I am sure. Your duck is dead,” replied the vet.

“How can you be so sure?” she protested. “I mean you haven’t done any testing on him or anything. He might just be in a coma or something.”

The vet rolled his eyes, turned around, and left the room.

He returned a few minutes later with a black Labrador Retriever.

As the duck’s owner looked on in amazement, the dog stood on his hind legs, put his front paws on the examination table and sniffed the duck from top to bottom. He then looked up at the vet with sad eyes and shook his head.

The vet patted the dog on the head and took it out of the room.

A few minutes later he returned with a cat. The cat jumped on the table and also delicately sniffed the bird from head to foot. The cat sat back on its haunches, shook its head, meowed softly, and strolled out of the room.

The vet looked at the woman and said, “I’m sorry, but as I said, this is most definitely, 100% certifiably, a dead duck.”

The vet turned to his computer terminal, hit a few keys, and produced a bill, which he handed to the woman.

The duck’s owner, still in shock, took the bill. “$150!” she cried, “$150 just to tell me my duck is dead!”

The vet shrugged, “I’m sorry. If you had just taken my word for it, the bill would have been $20, but with the Lab Report and the Cat Scan, it’s now $150.”

Weekly Wrap 10/30/09

Last week we discussed the volatility in U.S. equity markets, and that not only continued this week it became more aggressive. But unlike the prior week's modest moves, the major averages closed sharply lower this week as the dollar rebounded against the other major currencies. The S&P 500 lost 4%.

Once again the declines were broad-based as all ten sectors in the index ended lower, led by Materials (-7.1%) and Financials (-6.9%).

The dollar was the biggest, if not the only, catalyst this week. In fact, the charts of the major indices are almost exact inverses of the U.S. Dollar Index (DXY). A weak dollar benefits the economy as it boosts exports, and investors are trading stocks based on the moves in the currency.

For example, equities attempted to rebound at the open Monday, but the attempt stalled and a spike higher in the DXY late that morning led to a spike lower in the major indices.

The volatility really came through in the last three sessions of the week.

A third day of gains in the DXY on Wednesday led to sharp declines in equities.

Then a reversal in the greenback and modestly better-than-expected GDP figure on Thursday helped equities regain the prior day's declines. The Advance reading for third quarter GDP came in at 3.5%, its first gain in four quarters, slightly better than the 3.2% consensus.

But those gains were short-lived as a resumption in the dollar rally on Friday led to the major indices making fresh week lows.

Third quarter earnings season did continue this week, but there were fewer big names so they took a backseat. For the most part companies continued to beat on the bottom lines, but top line figures and guidance were mixed.

Another rounds of longer-term Treasury auctions also took a back seat -- $123 billion in 5-year TIPS and 2-, 5- and 7-year Notes -- as they no longer seem to have as direct an influence on the equity markets.

Looking ahead to next week, third quarter earnings season will wind down with even fewer big names on the calendar. The dollar will most likely remain in focus until the end of the week, when the always highly-anticipated Nonfarm Payrolls figure is released for October.

Index Started Week Ended Week Change % Change YTD %
DJIA 9972.18 9712.73 -259.45 -2.6 10.7
Nasdaq 2154.47 2045.11 -109.36 -5.1 29.7
S&P 500 1079.60 1036.19 -43.41 -4.0 14.7
Russell 2000 600.86 562.77 -38.09 -6.3 12.7

Friday, October 30, 2009


1 WITCH. Thrice the brinded cat hath mew'd.
2 WITCH. Thrice and once, the hedge-pig whin'd.
3 WITCH. Harpier cries:—'tis time! 'tis time!
1 WITCH. Round about the caldron go; In the poison'd entrails throw.— Toad, that under cold stone, Days and nights has thirty-one; Swelter'd venom sleeping got, Boil thou first i' the charmed pot!
ALL. Double, double toil and trouble; Fire burn, and caldron bubble.
2 WITCH. Fillet of a fenny snake, In the caldron boil and bake; Eye of newt, and toe of frog, Wool of bat, and tongue of dog, Adder's fork, and blind-worm's sting, Lizard's leg, and owlet's wing,— For a charm of powerful trouble, Like a hell-broth boil and bubble.
ALL. Double, double toil and trouble; Fire burn, and caldron bubble.
3 WITCH. Scale of dragon; tooth of wolf; Witches' mummy; maw and gulf Of the ravin'd salt-sea shark; Root of hemlock digg'd i the dark; Liver of blaspheming Jew; Gall of goat, and slips of yew Sliver'd in the moon's eclipse; Nose of Turk, and Tartar's lips; Finger of birth-strangled babe Ditch-deliver'd by a drab,— Make the gruel thick and slab: Add thereto a tiger's chaudron, For the ingrediants of our caldron.
ALL. Double, double toil and trouble; Fire burn, and caldron bubble.
2 WITCH. Cool it with a baboon's blood, Then the charm is firm and good.

William Shakespeare

Wednesday, October 28, 2009

Quotable: For Missing the Unmissable

For Missing the Unmissable
Bernanke, the most passionate cheerleader of Greenspan’s follies, is picked as his replacement, partly, it seems, for his belief that U.S. house prices would never decline and that at their peak in late 2005 they largely just reflected the unusual strength of the U.S. economy. As well as missing on his very own this 3-sigma (100-year) event in housing, he was completely clueless as to the potential disastrous interactions among lower house prices, new opaque financial instruments, heroically increased mortgages, lower lending standards, and internationally networked distribution. For these accumulated benefits to society, he was reappointed! So, yes, after the fashion of his mentor, he was lavish with help as the bubble burst. And how can we so quickly forget the very painful consequences of the previous lavishing after the 2000 bubble? Rewarding Bernanke is like reappointing the Titanic’s captain for facilitating an orderly disembarkation of the sinking ship (let’s pretend that happened) while ignoring the fact that he had charged recklessly through dark and dangerous waters.
The Other Teflon Men
Larry Summers, with a Financial Times bully pulpit, had done little bullying and blown no warning whistles of impending doom back in 2006 and 2007. And, famously, in earlier years as Treasury Secretary he had encouraged (I hope inadvertently) wild and reckless financial behavior by helping to beat back attempts to regulate some of the new and most dangerous instruments. Timothy Geithner, in turn, sat in the very engine room of the USS Disaster and helped steer her onto the rocks. And there are several others (discussed in the 4Q 2008 Letter). You know who you are. All promoted!
Jeremy Grantham

Thursday, October 22, 2009

Market Reflections 10/22/2009

Earnings were mostly positive Thursday, led by 3M and McDonald's and including two from the financial sector: PNC and Travelers. After-the-close earnings were especially strong including big surprises from credit-card issuer Capital One and good results from both American Express and Amazon. Economic news was mixed as a gain for the index of leading economic indicators, a gain skewed by its heavy weighting on the yield curve, was offset by a slight rise in initial jobless claims. The dollar gained back some of yesterday's steep loss, up 0.2 percent on the dollar index to 75.14. Commodities were little changed, holding onto yesterday's big rallies in oil and base metals.

Market Reflections 10/21/2009

Deepening weakness in the dollar is heightening talk that policy makers are pursuing a deliberate, thinly masked devaluation policy to raise inflation in a move to monetize the government's debt. This talk has been going on all year in the commodities markets but is now appearing in broader research including today from Morgan Stanley which says there is "the possibility that central banks might want to engineer controlled inflation to reduce the public debt burden." Until an exit strategy is announced, traders are saying that foreign investors will seek to protect themselves with non-dollar assets and that the markets will taunt the Fed by selling dollars and buying commodities.

The dollar index fell a steep 0.7 percent to 74.99 with the dollar testing the key $1.5000 level against the euro, a break of which may, according to traders, trigger intervention from the ECB. Oil hit new 2009 highs, rising $1-1/2 to end at $81 with copper and zinc also hitting 2009 highs. Gold led commodity gains earlier in the month and, pressured by profit-taking, was unable to make much ground, ending only $5 higher at $1,060. Earnings news was mixed, headed by a huge loss at Boeing which continues to suffer from costs associated with prior production delays. Charles Schwab, citing the drag from the dollar, is recommending that U.S. investors seek companies in sectors with broad international exposure including technology, materials, industrials, and energy. The S&P fell 0.9 percent to 1,081.

Wednesday, October 21, 2009

Market Reflections10/20/2009

A soft housing starts report that included a decline in permits sent the S&P down 0.6 percent to 1,091, offsetting a run of strong earnings reports led Tuesday by heavy equipment maker Caterpillar. The dollar index firmed slightly to 75.52. Commodities were little changed with oil ending at $78.50 and gold at $1,056. Money moved into Treasuries where the 10-year yield fell 5 basis points to 3.34 percent

Tuesday, October 20, 2009

Market Reflections 10/19/2009

Stocks continued to rise, making new 2009 highs boosted by Fed Chairman Ben Bernanke who did not offer any timeline for a change to a less stimulative monetary policy. The S&P gained 1 percent to end just short of 1,100 at just under 1,098. Earnings after the close point to big gains tomorrow with both Apple and Texas Instruments easily beating expectations on both earnings and sales.

Low interest rates interest in the U.S. vs. expectations for rising rates in other economies continue to hurt the dollar. The dollar index fell 0.4 percent to 75.34. The decline in the dollar pushed commodities higher especially base metals where copper gained 10 cents to $2.93. Oil, ending at $79.25, continues to firm on what appears to be an approach to $80. Gold ended at just over $1.060.

Saturday, October 17, 2009

GE heading for bankruptcy

Porter Stansberry writes:

GE says it "brings good things to life," but in fact, over the decade, it has mostly been about bringing good debt to life. For many, many years, GE relied on its triple-A credit rating to borrow money cheaply in the 30-day commercial paper market and then lend it out at a much higher rate, via things like credit-card receivables. These kinds of financial strategies worked well during the debt-financed boom of 1995-2008. They don't work anymore. In fact, without a government guarantee backing its debts, GE would have already gone bankrupt.

Here are the core facts: GE owes its creditors $518 billion. That is not a misprint. It owns tangible net assets of only $17 billion. Thus, on a tangible basis, it is currently leveraged by more than 30-to-1. That's unheard of for a major industrial company. A 3.3% decline in the value of its asset base would wipe out all of its tangible equity. But here's the real problem. Last quarter, the company produced $2 million in operating income. Again, that's not a misprint. On $17 billion in assets, the company earned only $2 million. So... what will happen to GE if (or when) the free market sets its borrowing costs?

GE spent $4.3 billion on interest in the last quarter – thanks to the government's guarantee. So on an annualized basis, GE is now spending roughly $17 billion to service its $500 billion in debt. That's an annualized interest rate of 3.3%. This is not sustainable. Sooner or later, GE is going to have to pay a market interest rate.

Currently, the yield on high-yield corporate debt is around 10%. GE is now rated two slots above "junk" by Egan Jones, the only reliable ratings agency. So let's assume GM could still qualify as an investment-grade credit – which is a generous assumption. GM would pay something like 8% on its debt in a free market. That would cost more than $41 billion a year. Last year, GE earned $45 billion before interest and taxes – in total. It spent $33 billion of these profits on capital expenditures and necessary investments – expenses required to keep the business going. That left it with about $12 billion in what we call "owner earnings." That's not nearly enough money to pay the interest on its debts – whether they're backed by the government or not.

Imagine if the interest on your mortgage consumed 91% of your pre-tax earnings. Could you possibly avoid bankruptcy? No way, right? But... there's a big difference between owing the bank a few hundred grand and owing folks more than $500 billion. Last year, even though GE couldn't actually afford its debts and required a government bailout, it spent $12.4 billion on dividends for common stock holders. That's 20% more than it spent on dividends in 2006! (GE finally cut its dividend by 70% in February. It will be eliminated soon, I promise. Its creditors will finally wake up and demand it.)

Today the stock market values GE at $171 billion. In fact, the common stock – every single share – is not worth one penny. Plan accordingly.
Porter Stansberry

What is a Real Earnings Surprise?

By: Michael Vodicka
Zacks Investment Research

Have you ever wondered why some stocks skyrocket on a positive earnings surprise while others fall off a cliff? In this article we are going to tackle this little-understood issue. Better yet, I will share with you two ways to profit from earnings surprises. More on that later.

3 Reasons Stocks Can Drop After an Earnings Surprise

Estimates vs. Whisper Number: The standard definition of an earnings surprise is when actual earnings come in higher than earnings estimates. But those estimates are the “published” numbers from the brokerage analysts. Quite often investors tend to develop their own unique set of expectations based on sentiment, sometimes referred to as a “whisper number”. If there is too much optimism ahead of the release, then actual earnings will need to be a blowout in order to appease the market’s inflated expectations. This is the most common reason why some stocks fall after a supposed earnings beat.

Quality of Earnings: The highest quality earnings come from having robust revenue growth. This means that the company’s products or services are in high demand and should stay that way. However, far too much of the earnings being reported these days are generated from cost cutting and other "accounting gimmickry". The problem is that the benefits of these moves don’t last. When the market gets a whiff that the earnings are unsustainable, no matter how strong the beat, shares will most likely drop.

Forward Guidance: Plain and simple, when you buy a stock you are taking an ownership position. And what owners of companies care about is the stream of future earnings. So if a company beats earnings for the quarter just reported, but warns that future quarters will see lower earnings, then that stock will go down…and go down fast.

2 Ways to Make Money on Earnings Surprises

So now that we have outlined things that can wrong after an earnings surprise, let's shift gears and talk about something even more important: how to turn a profit from earnings surprises. Here are two ways to go about it.

Good Way: Buy shares in any company that had an earnings surprise and then rose the day following the news. These stocks experience what academics call the "Post Earnings Announcement Drift". Studies clearly show that these stocks usually outperform the market over the next 9 months. Conversely, you should sell any stock in your portfolio that misses its earnings number as it is likely to underperform the market for the next few quarters. The downside of this approach is that there are literally thousands of stocks to choose from every quarter.

Best Way: Look for those rare opportunities where investors simply guessed wrong about a company's earnings prospects. Specifically, find companies with shares that were declining for about a week prior to the earnings report, yet amazingly produced a big earnings surprise. Sure, the price will jump at the open following the news, but our research clearly shows that the stock will continue to rise over the next couple weeks as investors play catch up.

Where to Find These Stocks

Most of the information to find these "Best Way" earnings surprisers is publically available and free. But I don't know of anyone that puts it together in an easy-to-use format that will help you consistently find these winners.
Mike focuses on finding the best momentum stocks for customers. He is also the Editor in charge of the Zacks Surprise Trader service. Learn more here:

Friday, October 16, 2009

Market Reflections 10/15/2009

Oil shot higher Thursday in reaction to a steep draw in gasoline inventories, a draw reflecting improving demand but more reflecting lower output from refineries which have been complaining about weak margins. Oil convincingly broke through resistance at $75 to end at $77.50 with traders talking about $80 based on momentum alone. But a move toward $100 will take strong evidence of demand growth outside of China.

Good news for Friday's stock market hit after Thursday's close with IBM, Advanced Micro and especially Google beating expectations. The S&P ended 0.4 percent higher at 1,096, poised to take out 1,100 in what will inflict even greater agony on the bears. Citigroup and Goldman Sachs both released mixed results before the opening, with big credit losses at Citigroup pushing back prospects for the bank's return to profitability. Gold, which many say is overdo for consolidation, moved lower, losing as much as $20 to $1,045 before bouncing back to $1,050 at the close. The dollar for once wasn't center stage Thursday, edging 1 tenth lower on the dollar index to 75.47.

Thursday, October 15, 2009

Credit in America

From The Economist out of London. The headline reads "Credit in America: Slim pickings, no appetite". In a nutshell, the story notes that the level of credit is dropping, bank lending is contracting, loan losses are climbing, and people are paying down debt and saving more. They conclude the article thusly... "With loan losses unlikely to peak until well into 2010 and banks likely to keep failing until at least 2011, the real credit crunch may still lie ahead." [And that's a very optimistic time line as well. - Ed] I thank P.S. for sending me this story... which is well worth the read... and the link is here.


“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.”

Marcus Tullius Cicero

Wednesday, October 14, 2009

Market Reflections 10/14/2009

Solid gains for retail sales outside of ex-clunker autos fueled a strong rally on Wall Street with the Dow Jones industrial average rising past 10,000 to end at 10,015 for a 1.5 percent gain. The S&P gained even more, up 1.8 percent to 1,092 and is approaching the 1,100 level that bulls had been hoping to reach by year end, let alone October. The S&P is up an amazing 64 percent from its March low. September's gains along with those so far in October are embarrassing the bears who nevertheless continue to warn that the market is moving too far and way too fast. Strong results from Intel late yesterday and promises of more were also behind today's strength.

Wednesday's overnight session saw strong trade data out of China, data that raised expectations further of a widening interest rate differential between the U.S. and other economies. And investors are seeking yield, pushing the dollar index down a very steep 0.7 percent to 75.46. At $75.10, oil firmed a little more than 50 cents but is only flirting, not breaking through, $75, considered to be hard resistance at the outside of an existing range beginning at $65. Gold may be flirting with another breakout, this time to $1,100. Gold ended steady at just under $1,065.

Market Reflections 10/13/2009

Soft earnings at Johnson & Johnson weighed on stocks Tuesday with the S&P ending 0.3 percent lower at 1,073. But strong results after the close from chip makers Intel and Altera, which both raised sales estimates, point to strength for overnight trading. Strong sales and guidance for yet stronger sales are what the bulls are looking for this quarter.

Talk that U.S. interest rates will remain low continues to hurt the dollar with the dollar index down 0.4 percent at 75.82. Oil got a boost from the dollar's trouble, ending $1-1/2 higher at $74.50. Gold, steady at $1,065, is also benefiting from the dollar's weakness.

Tuesday, October 13, 2009

Market Reflections 10/12/2009

Stocks extended their winning streak to six straight sessions with the S&P ending up 0.4 percent to 1,076. Volume was light due to observance of Columbus Day at foreign exchange and bond desks. Oil was a feature Monday, rising nearly $1 to $73 as a cold front sweeps the nation. Shares of oil companies rose more than 1 percent.

Saturday, October 10, 2009

Weekly market Update October 9, 2009


Statements made this week by US presidential advisor Lawrence Summers and Federal Reserve Chairman Ben Bernanke underscore our views that the US economic recovery will likely be sluggish and that the Fed is planning to exit from its credit easing programs. more...

US Treasuries traded significantly lower this week, with the long end of the yield curve, mostly 10-year and 30-year yields, underperforming all other maturities. more...
Large-Cap Equities
The stock market finished the week higher for the first time in three weeks on strong corporate earnings and better-than-expected economic data. more...

Corporate Bonds
Investment grade primary activity kept investors hankering for more, as small infrequent issuers tapped the market. more...

Mortgage-Backed Securities
Mortgages outperformed Treasuries as yields rose sharply on profit taking and hawkish rhetoric by Fed Chairman Ben Bernanke. more...

Municipal Bonds
After enjoying a stellar summer rally, yields on municipal bonds rose sharply this week. This was especially notable in the face of nearly unchanged short and intermediate maturity Treasuries. more...

The capital markets over the next few weeks will be focused on the third quarter earnings season, which has just begun with Alcoa’s earnings. more...

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +2.1% this week, while the Russian stock index RTS went up +12.0%. more...

Global Bonds and Currencies
Bond yields rose from their recent lows in most major non-US sovereign markets over the past week. Several factors were at work pushing yields higher. more...

Emerging-Market Bonds
Emerging market dollar-pay debt spreads tightened this week. Risk appetite once again returned to global financial markets and most equity indices rallied on the back of strong economic data and a better-than-expected start to the earnings season in the US. more...

For more information, please contact 800 5-PAYDEN or visit

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Have a great weekend!

All rights reserved. Legal terms. Payden & Rygel respects your privacy. Privacy policy.

The investment strategy and investment management information presented on this email and related Web site,, should not be construed to be formal financial planning advice or the formation of a financial manager/client relationship. is an informative Web site designed to provide information to the general public based on our recommendations of investment management and investment strategies and is not designed to be representative of your own financial needs. Nor does the information contained herein constitute financial management advice. The firm makes no warranty or representation regarding the accuracy or legality of any information contained in this Web site, and assumes no liability for the use of said information. Be advised that as Internet communications are not always confidential, you provide our Web site your personal information at your own risk. Please do not make any decisions about any investment management or investment strategy matter without consulting with a qualified professional.

Thursday, October 8, 2009

Market Reflections 10/8/2009

A 1 tenth downtick in the Australian unemployment rate to 5.7 percent flashed a signal of global recovery, tripping a rush out of the U.S. dollar and into commodities including gold. Talk is heavy that interest rate differentials will more than ever favor Asian currencies and the euro as economies in the regions strengthen and interest rates begin to rise. The U.S. economy, where the unemployment rate is 9.8 percent and climbing, appears to be lagging though today's economic news was positive, headed by a significant decline in jobless claims and a run of positive chain-store reports that suggest the consumer, despite the weak labor market, may be showing some life.

The dollar index fell a very steep 0.7 percent to 75.97 for a new 12-month low. A weak dollar points to price inflation making gold once again a center of attention. Gold peaked at a new high at $1,061 before edging back in afternoon trade to $1,056. Equities rose on the day, up 0.8 percent on the S&P to 1,065, helped in part by the strong economic news and by yesterday's strong earnings from aluminum producer Alcoa.

Market Reflections 10/7/2009

Stocks drifted Wednesday with the S&P ending slightly higher at 1,057. The biggest news hit after the close as aluminum producer Alcoa posted a better-than-expected bottom line for the third quarter but one helped by cost cuts not rising demand. Shares of Alcoa slipped in after-hours trade. Gold held on to its big gains, ending at $1,042 while oil slipped about $2 to end just under $70 following a big build in gasoline inventories. The dollar firmed slightly which kept a lid on commodities.

Wednesday, October 7, 2009

Market Reflections 10/6/2009

A report from U.K. newspaper "The Independent" pushed gold to record levels and tripped heavy losses in the dollar. The report, denied by all parties, says the Arabs and Chinese are working together with the Russians and the French to reprice oil, replacing the U.S. dollar with a basket of currencies and commodities including -- gold. Gold jumped more than $25 to end near its highs at $1,041. Not only would gold benefit from being included in a repricing mechanism, but it is currently benefiting, in its role as an alternative currency, from questions over the future of the dollar. The dollar index fell 0.4 percent to 76.33.

Commodities rose across the board though the gain in oil was very subdued, up 50 cents to $71.00. Traders noted that supply and demand, which are currently unfavorable for oil, will ultimately determine its value, more so than the items used to price it. Underscoring the glut of petroleum products in the market, U.S. oil company Sunoco is closing a refinery and cutting its dividend in half.

Gold shares soared in extremely heavy volume with SPDR Gold (GLD) up 3% at $102.28 and Barrick (ABX) up 5% at $38.84. The S&P rose on the day, up 1.4 percent to 1,054 despite a run of strategist warnings that the market is due for a correction.

Market Reflections 10/5/2009

Stocks rallied Monday supported by a strong gain for the ISM's non-manufacturing survey, results that show a jump in new orders and in output. Though employment continues to lag, some businesses in the survey are beginning to talk about new hiring. The S&P 500 rose 2% to 1,040. Commodities rallied along with stocks with oil ending at $70.50 and gold once again well above $1,000 at $1,015. The move away from safety made for a 0.3 percent decline in the dollar index to 76.68.

Friday, October 2, 2009

Weekly Market Update (10/2/09)‏


The US economy shed 263,000 jobs in September, which was below the consensus forecast by nearly 100,000. At the same time, the unemployment rate rose to a 26-year high of 9.8% during the month. more...

Treasuries traded higher this week, with the intermediate part of the yield curve, mostly 5 year and 7 year yields outperforming all other maturities. more...

Large-Cap Equities
The stock market fell for the second straight week on concerns of a slower than expected economic recovery. more...

Corporate Bonds
Investment grade primary activity continued its recent run as an eclectic mix of issuers tapped the market. more...

Mortgage-Backed Securities
Is the range bound trade over? A relapse in equities and weaker-than-expected economic reports sent bond yields to their lowest levels since May. more...

Municipal Bonds
The municipal bond market turned in a fantastic monthly performance in September. Total return for the month on the broad Barclays Municipal Bond Index ranked as one of the top 3 months in the last 20 years, at 3.6%. more...

After posting the largest gains in the modern history of the high yield market of over 22% in the second quarter, the asset class did not disappoint in the third quarter. more...

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) lost -3.7% this week, while the Russian stock index RTS went down -0.1%. more...

Global Bonds and Currencies
Major non-US government bond markets had another positive week, supported by equity market declines and concerns over the sustainability of the global recovery in the wake of some disappointing US data, even though domestic data developments were mixed to positive. more...

Emerging-Market Bonds
Emerging market dollar-pay debt spreads were unchanged this week. Although risk appetite receded as reflected through lower global equity indices, emerging market bonds remained supported by strong inflows into the asset class more...

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The investment strategy and investment management information presented on this email and related Web site,, should not be construed to be formal financial planning advice or the formation of a financial manager/client relationship. is an informative Web site designed to provide information to the general public based on our recommendations of investment management and investment strategies and is not designed to be representative of your own financial needs. Nor does the information contained herein constitute financial management advice. The firm makes no warranty or representation regarding the accuracy or legality of any information contained in this Web site, and assumes no liability for the use of said information. Be advised that as Internet communications are not always confidential, you provide our Web site your personal information at your own risk. Please do not make any decisions about any investment management or investment strategy matter without consulting with a qualified professional.

Factory Orders

Released on 10/2/2009 10:00:00 AM For August, 2009
Prior Consensus Consensus Range Actual
Factory Orders - M/M change 1.3 % 1.0 % -0.8 % to 1.6 % -0.8 %

The manufacturing recovery is having a bumpy lift off. Manufacturing activity first moved higher in June then improved further in July but then dipped back in August. Factory orders for August fell 0.8 percent vs. a 1.4 percent rise in July (1.3 percent first reported) and vs. a 0.9 percent rise in June. August's data were pulled lower by durable goods, down 2.6 percent in the month (revised from an initial 2.4 percent). August orders for non-durable goods make their appearance with this report, up 0.8 percent and reflecting higher prices for oil & coal but not nearly enough to offset the drop in durable goods.

Weakness in durable goods is centered in transportation which is skewed not by motor vehicles, which despite cash-for-clunkers have been steady and which rose 2.0 percent in August, but have been skewed by aircraft where a huge jump in July made for a huge drop in August. Most categories outside of transportation also show month-to-month weakness. Capital goods readings fell back from big gains in July and point to trouble for export data in next week's international trade report. Consumer goods readings were mixed showing weakness for durable goods but strength for nondurables.

Among other data in the report, factory shipments fell 0.3 percent vs. a 0.3 percent rise in July. This particular reading raises the question whether the manufacturing sector actually did dip back into negative territory during August. Unfilled orders fell 0.4 percent while inventories fell 0.8 percent as manufacturers continued to keep costs down. But yesterday's ISM manufacturing report showed a pivotal slowing in the rate of inventory draw, pointing to a month-to-month gain for September inventories in what arguably would mark the end of the inventory correction. The outlook for the manufacturing sector is positive but uncertain as the sector's recovery is proving, as was expected, to be gradual not explosive.

Employment Situation

Released on 10/2/2009 8:30:00 AM For September, 2009
Prior Consensus Consensus Range Actual
Nonfarm Payrolls - M/M change -216,000 -170,000 -235,000 to -135,000 -263,000
Unemployment Rate - Level 9.7 % 9.8 % 9.6 % to 9.9 % 9.8 %
Average Hourly Earnings - M/M change 0.3 % 0.2 % 0.1 % to 0.3 % 0.1 %
Average Workweek - Level 33.1 hrs 33.1 hrs 33.1 hrs to 33.2 hrs 33.0 hrs

The September jobs report was disappointing-but the consensus may have grown too optimistic. In reality, job losses are not nearly as severe as earlier in the recession and the unemployment rate is drifting up slowly as expected. Nonfarm payroll employment in September fell 263,000, following a revised decline of 201,000 in August and a revised decrease of 304,000 in July. The September drop in payroll employment was worse than the consensus forecast for a 170,000 contraction. August and July revisions were down a net 13,000 (the net declines were worse).

Job losses were widespread in both goods-producing and service-providing sectors. By major categories, goods-producing jobs decreased 116,000 in September, following a 132,000 drop the month before. In the latest month, construction jobs fell 64,000 while manufacturing declined 51,000 and mining slipped 1,000. Service-providing losses, however, surged back to a 147,000 fall, after contracting only 69,000 in August. The drop in service-providing jobs was led by trade & transportation, down 60,000, and by government, down 53,000. Trade was tugged down mainly by retail jobs which fell 39,000. Government weakness was led by the non-education component of local government, down 24,000, as revenue shortfalls have forced job cuts despite fiscal stimulus monies.

Since the start of the recession in December 2007, payroll employment has fallen by 7.2 million.

On a year-ago basis, payroll jobs were down 4.2 percent in September-slightly better than down 4.3 percent the previous month.

Wage inflation eased sharply as average hourly earnings in September grew 0.1 percent, following a 0.4 percent gain in August. The consensus had projected a 0.2 percent rise for the latest month. The average workweek slipped to 33.0 hours from 33.1 hours in August, coming in below the market forecast for 33.1 hours.

Turning to the household survey, the civilian unemployment rate continued its uptrend, rising to 9.8 percent from 9.7 percent in August and compared to the market forecast for 9.8 percent. The latest rate is the highest since 1983.

Today's employment report will set equities back as futures were down notably on the release. Bond yields fell. However, the numbers are not dramatically negative and on average over the last few months reflect improvement. It is too early to write off the recovery given that nearly everyone expected a sluggish and choppy recovery.

Market Consensus Before Announcement
Nonfarm payroll employment in August fell 216,000, following a decrease of 276,000 in July and a decline of 463,000 in June. By major categories, goods-producing jobs dropped 136,000 in August, following a 122,000 decrease the month before. The slowing in overall payroll job cuts was due to fewer pink slips in the services sector. Service-providing losses were cut in half with an 80,000 decline after falling 154,000 in July. Wage inflation warmed up a bit-likely due to a jump in the minimum wage. Average hourly earnings in August rose 0.3 percent, matching July's gain.

The employment situation is a set of labor market indicators based on two separate surveys in this one report. Based on the Household Survey, the unemployment rate measures the number of unemployed as a percentage of the labor force. Other key series come from the Establishment Survey (of business establishments). Nonfarm payroll employment counts the number of paid employees working part-time or full-time in the nation's business and government establishments. The average workweek reflects the number of hours worked in the nonfarm sector. Average hourly earnings reveal the basic hourly rate for major industries as indicated in nonfarm payrolls.

Market Reflections 10/1/2009

Disappointment for jobless claims, a less-than-robust ISM manufacturing report and a big plunge in vehicle sales tripped a move toward safety and profit-taking in stocks. The S&P ended at its lows in a rush of late session selling, down 2.6 percent to 1,029. Initial jobless claims did rise but after several weeks of substantial improvement, and ISM data showed steady month-to-month expansion with inventories now kicking in to make up for slowing but still sizable rates of month-to-month growth in orders and production. But vehicle sales have no silver lining, pointing to big trouble for the September retail sales report. Demand for safety helped the dollar, with the dollar index up 0.6 percent to 77.19, and also helped Treasuries where the 10-year yield fell 12 basis points to 3.19 percent.

Wednesday, September 30, 2009

Market Reflections 9/30/2009

The book on second-quarter GDP is now closed showing a mild 0.7 percent decline, improvement that may turn to growth in the third quarter. Other data in the session include a weaker-than-expected showing in ADP data that points to mild disappointment for Friday's jobs report, while the Chicago purchaser report points to out and out disappointment for upcoming manufacturing data.

Safety was the trade for Wednesday with the S&P down 0.3% at 1,057. Oil rallied strongly despite a build in weekly inventories, one however offset by a draw in gasoline stocks. Perhaps more importantly, the data show a fourth month of year-on-year demand growth with September proving the strongest yet at 6 percent in what is hinting at consumer strength. Oil rose more than $3 to $70.25. Gold rose more than $10 to back over $1,000 at 1,008.

Tuesday, September 29, 2009

Market Reflections 9/29/2009

Consumer confidence edged back in September as consumers expressed deepening pessimism over the jobs market and their income outlook. But the markets, awaiting Friday's jobs report, held steady in quiet trading. The S&P fell 0.2 percent to end at 1,060. The dollar index firmed 0.2 percent to end at 77.07 while commodities were little changed with oil ending at $66.50 and gold at $990.

Mistakes Traders Make

An interesting survey has just found its way into my inbox, courtesy of Ratio Trading. The survey of more than 500 experienced futures brokers asked what, in their experience, caused most traders to lose money. There are some repetitions in the list, but it is nevertheless a worthwhile exercise to give it a quick read to again remind ourselves of the many investment pitfalls out there.

1. Many futures traders trade without a plan. They do not define specific risk and profit objectives before trading. Even if they establish a plan, they “second guess” it and don’t stick to it, particularly if the trade is a loss. Consequently, they overtrade and use their equity to the limit (are undercapitalized), which puts them in a squeeze and forces them to liquidate positions.

Usually, they liquidate the good trades and keep the bad ones.

2. Many traders don’t realize the news they hear and read has already been discounted by the market.

3. After several profitable trades, many speculators become wild and aggressive. They base their trades on hunches and long shots, rather than sound fundamental and technical reasoning, or put their money into one deal that “can’t fail.”

4. Traders often try to carry too big a position with too little capital, and trade too frequently for the size of the account.

5. Some traders try to “beat the market” by day trading, nervous scalping, and getting greedy.

6. They fail to pre-define risk, add to a losing position, and fail to use stops.

7 .They frequently have a directional bias; for example, always wanting to be long.

8. Lack of experience in the market causes many traders to become emotionally and/or financially committed to one trade, and unwilling or unable to take a loss. They may be unable to admit they have made a mistake, or they look at the market on too short a time frame.

9. They overtrade.

10. Many traders can’t (or don’t) take the small losses. They often stick with a loser until it really hurts, then take the loss. This is an undisciplined approach…a trader needs to develop and stick with a system.

11. Many traders get a fundamental case and hang onto it, even after the market technically turns. Only believe fundamentals as long as the technical signals follow. Both must agree.

12. Many traders break a cardinal rule: “Cut losses short. Let profits run.”

13. Many people trade with their hearts instead of their heads. For some traders, adversity (or success) distorts judgment. That’s why they should have a plan first, and stick to it.

14. Often traders have bad timing, and not enough capital to survive the shake out.

15. Too many traders perceive futures markets as an intuitive arena. The inability to distinguish between price fluctuations which reflect a fundamental change and those which represent an interim change often causes losses.

16. Not following a disciplined trading program leads to accepting large losses and small profits. Many traders do not define offensive and defensive plans when an initial position is taken.

17. Emotion makes many traders hold a loser too long. Many traders don’t discipline themselves to take small losses and big gains.

18. Too many traders are under financed, and get washed out at the extremes.

19. Greed causes some traders to allow profits to dwindle into losses while hoping for larger profits.
This is really a lack of discipline. Also, having too many trades on at one time and overtrading for the amount of capital involved can stem from greed.

20. Trying to trade inactive markets is dangerous.

Source: Ratio Trading, September 4, 2009.^DJI

One view of the future from Marc Faber: (link to video above)

Bullish Today, Marc Faber Is "Highly Confident" the Future Will Be Very Bleak
Posted Sep 22, 2009 07:30am EDT by Aaron Task in Investing, Newsmakers
"The future will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults and the impoverishment of large segments of Western society," Marc Faber writes in the September issue of The Gloom, Boom & Doom Report.
A statement like that pretty much speaks for itself, but it's a bit more complicated than appears on first blush.

Faber has been bullish -- especially on commodities and emerging market stocks -- for some time now and believes the current global recovery trade will last another two-to-three years, as discussed in more detail in a forthcoming clip. But he has major long-term concerns about the dollar's long-term viability given rising U.S. deficits, massive unfunded mandates and the fact "we have a money-printer at the Fed."

This combination will eventually lead to runaway inflation, wholesale debasement of the dollar, and a major lowering of living standards for most Americans and many Europeans as well, says Faber, who is "highly confident" in this grim prediction

Here is a contrasting view from Henry Blodgett (linked here

Everyone Thinks Interest Rates Are Going Higher
Henry Blodget|Sep. 28, 2009, 8:01 AM

The consensus is almost always wrong, which is why today's conventional wisdom that interest rates will drift higher merits examination.

If the consensus is wrong this time, too, it means one of two things:

Interest rates will scream higher, clobbering adjustable-rate debtors and killing the economy.
Interest rates will continue to drift lower, as deflation takes hold.
We continue to believe we'll get hyper-inflation at some point (option 1), because we think the Fed will be more worried about killing the recovery than controlling inflation and will therefore err on the side of the former.

That said, right now, the prevailing trend clearly is deflation. And as Japan has showed, the spate of deflation before the hyper-inflation takes hold can last a while.

Why deflation? Despite the sequential uptick in house prices in the past few months, we still don't think we've seen the bottom. The banks are still facing huge losses in commercial real estate, which means they're likely to keep hoarding their capital and not inject new loans into the economy. This should restrain the growth of the money supply. Consumers are starting to save and retiring debt, which should rein in their spending (and, consequently, trigger price declines to try to entice them). We still have huge slack in our manufacturing industries--capacity utilization is very low.

All of which is to say... We wouldn't be surprised if the obvious trade here--interest rates will drift higher as the economy recovers--is wrong.

Sunday, September 27, 2009

Market Reflections 9/28/2009

Mergers headed Monday's news including multi-billion deals involving Xerox and Abbott Laboratories. The S&P gained 1.8 percent to 1,062 but volume was low given the Yom Kippur holiday. The dollar index firmed 0.5 percent to 76.99 after European Central Bank chief Jean-Claude Trichet stressed the importance of a strong dollar. Another missile test by Iran added some premium to oil which ended $1 higher at $67. Gold was little changed at just above $990.

Friday, September 25, 2009

Market Reflections 9/24/2009

Jobless claims showed solid improvement but were overshadowed by disappointment in existing home sales which ended a streak of gains. The dip in existing home sales played into defensiveness ahead of the G20 meeting. Calls from Italian Prime Minister Berlusconi to limit market speculation made for big declines across commodities including oil which lost $2-1/2 to $66.00 and gold which lost nearly $20 to $995. The move to safety was a big plus for the dollar index which rose 0.6 percent to 76.90. The S&P fell 1 percent to 1,050. Treasury yields edged lower with demand at the 7-year auction especially strong. The 7-year yield ended at 2.99 percent, 1-1/2 basis points lower than the auction's stop-out rate.

Thursday, September 24, 2009

Market Reflections 9/23/2009

The only surprise in the FOMC announcement was the extension of mortgage-backed and agency repurchases to the end of the first quarter, a move aimed at easing the risk of a yield spike when the Fed finally exits the market. The programs are still capped at $1.25 trillion for mortgage-backed securities and $200 billion for agencies. The $300 billion Treasury purchase program will wind down by the end of next month as previously announced. Demand for Treasuries picked up following the statement which included a favorable outlook for inflation. Yields edged back with the 7-year note ending at 3.04 percent. The Treasury will auction $29 billion of 7-year notes tomorrow, ending a record week of supply.

The FOMC statement did not include an exit strategy for quantitative easing. But commodities showed very little reaction in a clear indication that inflation expectations remain stable. Gold did pop up more than $5 in immediate reaction to the statement but hit resistance at $1,020, a level it's hit several times over the past week. The dollar index showed little reaction, rising off session lows to end fractionally higher at 76.21. Stocks edged higher with the S&P once again making a new 2009 high before slipping at the close to end 1 percent lower at 1,060.

Tuesday, September 22, 2009

Market Reflections 9/22/2009

Upbeat company news filled Tuesday's session, helping the S&P to rise 0.7 percent to 1071. Intel, which raised guidance in July and August, said global PC demand is proving stronger than expected and that PC shipments may actually rise this year. Cash-for-clunkers may have come to an end but General Motors is adding shifts and recalling 2,400 factory workers. The nation's largest used-car dealer, CarMax, got a huge lift from cash-for-clunkers even though used cars were not included in the program. But the program did drive traffic into its dealerships. Lowe's was also in the news, predicting sales growth next year on strong do-it-yourself demand. Lowe's is counting on improving home prices to give it a lift. The Federal Housing Finance Agency's home price index rose 0.5 percent in June. Other data included very weak chain-store reports that point to trouble for September retail sales.

The biggest story in the session was the dollar which is hitting new 12-month lows, at 76.07 for the dollar index, down 0.9 percent on the day. Risk appetite is behind the drop which is driving up demand for commodities, especially in China which many say is stockpiling commodities as a hedge against its enormous dollar holdings and holdings of U.S. Treasuries. Oil rose, gold rose, copper rose. Treasuries got a lift from a very strong 2-year auction, raising talk that Chinese demand for Treasuries, at least for now, remains strong. The 2-year yield fell to 0.96 percent, more than 4 basis points below the auction's high yield.

Monday, September 21, 2009

Market Reflections 9/21/2009

Strength in the dollar was the highlight of a quiet Monday session. Talk in the stock market is centering on how rare this year's rally is, showing no correction despite the 60 percent run-up. The S&P 500, where more than 90 percent of the stocks are trading above their 200-day moving average, slipped 0.3 percent to end at 1,064.

Economic data were limited to the index of leading economic indicators which continues to point to strength ahead and where the coincident index is pointing to July as the economic pivot. Risk that the G20 may talk up the dollar later this week tripped short covering, pushing the dollar index up 0.4 percent to 76.78. The rise in the dollar hurt oil which lost more than $2 to end at $69.43. Gold and silver appear to have hit resistance, ending at $1,004 and $16.85.

Friday, September 18, 2009

Weekly Market Update (9/18/09)‏


The steeper-than-expected increase in August retail sales signals that consumer spending may be on the road to recovery. more...

Treasuries traded lower this week, with 5-year yields underperforming all other maturities on the yield curve. more...

Large-Cap Equities
The stock market continued to rally this week on stronger-than-expected retail sales data and analyst earnings upgrades. more...

Corporate Bonds
Investment grade primary activity continued its blazing pace this week as investors bought anything they could get their hands on. more...

Mortgage-Backed Securities
Mortgages modestly outperformed Treasuries in the rally. Thirty-year current coupon spreads were tighter by 4 basis points from the previous week as steady demand trumped originator supply. more...

Municipal Bonds
Yields on municipal bonds moved lower across all maturities this week. Yields on bonds maturing in 10 years dropped 6 basis points, to 2.73%. more...

As the equity markets continue to counter the trend of historically weak Septembers and as the recent economic data has been largely positive, the high yield market is benefitting from these positive trends and has been able to maintain its strong momentum. more...

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +3.4% this week, while the Russian stock index RTS went up +4.1%. more...

Global Bonds and Currencies
Most major non-US sovereign bond markets ceded ground over the past week, broadly in line with losses in US Treasuries. more...

Emerging-Market Bonds
Emerging market bonds continued to outperform US treasuries this week as spreads tightened by 35 basis points. more...

For more information, please contact 800 5-PAYDEN or visit

If you have difficulties viewing this e-mail and would prefer the Weekly Market Update in plain text format, please e-mail us at To unsubscribe from this email, please email us at

Have a great weekend!

All rights reserved. Legal terms. Payden & Rygel respects your privacy. Privacy policy.

The investment strategy and investment management information presented on this email and related Web site,, should not be construed to be formal financial planning advice or the formation of a financial manager/client relationship. is an informative Web site designed to provide information to the general public based on our recommendations of investment management and investment strategies and is not designed to be representative of your own financial needs. Nor does the information contained herein constitute financial management advice. The firm makes no warranty or representation regarding the accuracy or legality of any information contained in this Web site, and assumes no liability for the use of said information. Be advised that as Internet communications are not always confidential, you provide our Web site your personal information at your own risk. Please do not make any decisions about any investment management or investment strategy matter without consulting with a qualified professional.

Canadian Royalty Trusts General Information

Canadian Royalty trusts are a different animal than U.S. Royalty Trusts. First, they renew their holdings and operate more like an oil and gas company than does a U.S. Royalty Trust. Generally the Canadian trusts do not do exploratory drilling. When they do drilling it would generally be to increase production of their existing fields and holdings. Most of the Canadian royalty trusts provide dividend payments which are based on the oil and gas production. Royalty trusts pay monthly or quarterly income that varies over time as the production of their underlying assets varies. Payments to unitholders will also vary with the market price of oil and natural gas. As Canadian Royalty Trusts replenish their reserves (versus U.S royalty trusts that do not replenish their reserves), the distributions of Canadian royalty trusts are generally considered to be eligible for the 15% tax rate. We have not found any official confirmation of the eligibility of Canadian Royalty Trusts for the 15% tax rate and the potential investor should confirm this eligibility from other sources. On February 25, 2005 the Government of Canada passed Bill C-33. Under the terms of Bill C-33, commencing January 1, 2005 a non-refundable withholding tax of 15% will be applied to the entire distribution paid to U.S. residents by "Canadian Royalty Trusts", including both the taxable and return of capital portions of the distributions. Similarly, non-residents of countries with whom there is no reciprocal tax treaty with Canada will be subject to a non-refundable withholding tax of 25% on the entire distribution paid. These withholding taxes will be applied uniformly to units held in both taxable and home jurisdiction tax-exempt accounts. Non-resident unit holders are strongly advised to consult a resident tax advisor to determine the deductibility of these taxes in their resident jurisdiction. This Canadian law means that tax exempt accounts such as IRA's will be subject to the 15% withholding and that the recovery of the Canadian withholding amounts will be probably difficult or impossible to achieve making Canadian Royalty Trusts a questionable choice for tax exempt accounts such as IRAs. Taxable accounts should be able to claim the 15% Canadian withholding as a credit on their U.S. income tax return and therefore easily recover the withholding amount.

Thursday, September 17, 2009

Market Reflections 9/17/2009

Initial jobless claims came in well below expectations, leading to a run of revisions to monthly payroll forecasts which are centering at a decline a bit under 200,000 in what would be another incremental improvement. Housing starts data were mixed but aren't derailing expectations for continued recovery in housing.

The S&P 500 slipped 0.3 percent to 1,065 in narrow trading. Though markets were quiet during the session there's heavy debate whether the historic run from 666 is way too much. Many say yes but not Federated Securities which argues the "real" market low hit in October at 840, when the greatest number of shares hit extreme lows, not just financials as in March. Given the 840 base, Federated says the six-month gain is not outsized for the early stages of economic recovery. Commodities were steady with oil ending at $72.50 and gold at $1,016. The dollar index was little changed at 76.26.

Wednesday, September 16, 2009

Market Reflections 9/16/2009

Industrial production showed a second month of strong gains for manufacturing, pointing to recovery as early as July and echoing Ben Bernanke's comments that the recession is probably over. Manufacturing isn't the only sector on the mend. Housing data continue to show gains, this time it was the homebuilders index which posted a third straight monthly increase. The CPI was skewed higher by energy prices and didn't see much effect from cash-for-clunkers, leading a Bureau of Labor Department official to argue that dealers must have pocketed some of the stimulus.

The S&P rose 1.5 percent to an 11-month high of 1,068, but the central focus of the markets is probably the dollar which continues to decline. The dollar index fell 0.4 percent to end at a new 12-month low of 76.19. The weak dollar is helping commodities including gold which ended near $1,020 with silver continuing to outpace gold's gains, ending at $17.40 for a nearly $1 jump on the day. Oil, up more than $1 to $17.25, got a special lift from a large draw in weekly crude stocks.

Market Reflections 9/15/2009

Retail sales were expected to be strong -- and that's what they proved to be showing wide strength in August outside of cash for clunkers. But whether this strength will continue is uncertain given continuing losses in the jobs market. Producer prices showed a big jump but one related to month-to-month swings in oil. Equities got only a mild lift from the retail sales results with the S&P 500 up 0.3 percent to 1,052. Commodities firmed with oil regaining $2 to $71 and gold digging in above $1,000, ending at $1,008. The dollar index dipped 0.2 percent to 76.50.

Tuesday, September 15, 2009

Economic Results

The August Producer Price Index came in with a 1.7% month-over-month increase, which is better than the 0.8% monthly increase that economists, on average, had come to expect after the index posted a 0.9% month-over-month decline in July. Excluding food and energy, producer prices increased 0.2% month-over-month, which is a bit more than the 0.1% monthly increase that was widely expected. The previous month's data showed that prices had slipped 0.1%. Advance retail sales for August made a strong 2.7% increase. They had been expected to increase 1.9%. The increase marks a sharp upturn from the downwardly revised 0.2% decline that was registered in July. Excluding autos, retail sales were up a more modest 1.1% in August. The consensus called for a 0.4% increase. Still, the sales less autos figure marked a considerable improvement from the 0.5% decline that was made in July. Last on the list is the Empire Manufacturing Survey, which came in at 18.9 for September. That marks its sixth straight month of improvement. It was also better than the reading of 15.0 that was widely expected.

Market Reflections 9/14/2009

President Obama used the anniversary of the Lehman Brothers collapse to say the need for government involvement in the markets is waning. Boosted by building reports of possible mergers, the S&P rallied 0.6 percent to 1,049 and showed no reaction to a brewing trade dispute after the U.S. placed tariffs on Chinese-made tires. The dollar was little changed but at least didn't weaken further with the dollar index up 0.1 percent at 76.70. Most commodities were little changed with gold holding at $1,000 and oil ending at $69.00. Natural gas was an exception, jumping 15% off deep lows on short-covering ahead of winter and on upbeat comments from Goldman Sachs.

Monday, September 14, 2009

The China Tire Trade Dispute..a must read

Courtesy of Jack Crooks at Black Swan Trading
Monday 14 September 2009
Key News
• A U.S. decision to impose special duties on Chinese tires could open the door to a host of trade complaints against Chinese products, creating tensions as Western nations seek Beijing's support at the G20 meeting. (Reuters)
• Euro zone industrial output fell in July and employment dropped again in the second quarter. (Reuters)
• U.K. banks are less than half way through posting 240 billion pounds ($398 billion) of losses on loans and securities, according to Moody’s Investors Service Ltd. (Bloomberg)
“The conventional view is based on the notion that free trade is always a win-win proposition and that our trade with China fits the conditions of the traditional free-trade model. These include the assumptions that the markets are perfectly competitive, that exchange rates are not manipulated, that there are no economies of scale, that there is no cross-border investment or cross-border transfers of technology, and that there are no government subsidies or export requirements. If this were a true picture of our trade in tyres with China, then imposing tariffs would truly be harmfully protectionist and not be justified.
“But this is not even close to the reality of our trade with China, which far from embracing orthodox free trade has openly adopted a neo-mercantilist, export-led economic growth strategy. China keeps its renminbi undervalued against the dollar in order indirectly to subsidise its exports. Foreign direct investment in China is often induced by the use of special, targeted tax and financial incentives. Foreign companies investing in China are often required to export the bulk of their production as a condition of being allowed to enter the Chinese market. This is the case with Cooper Tires, which agreed to export 100 per cent of its production in return for being allowed to invest in a Chinese tyre factory. The tyre industry is characterised by enormous economies of scale and imperfectly competitive markets in which a few oligopolistic producers divide the market among themselves. It is Chinese industrial policies and not market forces that are currently determining the trade flows and the location of production and jobs to the detriment of the US tyre industry.
“Nor is the detriment only to the US industry. Orthodox unilateral free-traders argue that, even if the US tyre workers lose their jobs, the US economy will enjoy a net benefit from lower consumer prices. But this is true only if the shuttered US factories and laid-off workers quickly shift to some other equally productive and well-paid activity. If, as we know, they cannot, the entire economy will suffer a loss of productivity and wages.
Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or
individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be
suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully
read Black Swan’s full disclaimer, which is available at
“This kind of trade is not win-win. Rather it is a classic zero-sum game. It is well-known to game theorists that in such situations a tit-for-tat response is the optimal strategy. Unilateral acquiescence to the aggressive initiatives of another player (the orthodox unilateral free-trade response) is a sure way to lose.”
Clyde Prestowitz, Financial Times editorial 9/10/09
“The American press is Confucianizing itself. A key factor is that increasingly in the last twenty years, media professionals have been subjected to a litmus test on trade. Those who embrace laissez-faire ideology have seen their careers flourish. Those who don’t haven’t.”
“The litmus test is applied by various players with considerable power to influence a journalist’s career. Take, for instance, high-placed news sources in government, in business, in the think tanks, and on Wall Street. For top journalists, easy access to such sources have long been aggressively in Beijing’s camp. In the classic Confucian fashion know throughout East Asia, such sources seek to marginalize and indeed ostracize any reporter who tries to uphold the freedom of the press on China-related issues.”
“Even before reporters get the chance to talk to sources, they are already subjected to a litmus test by media proprietors…Proprietors who apply the litmus test include not only Ruper Murchoch’s News Corporation but General Electric (the ultimate owner of NBC) and Viacom. It is no coincidence that these companies have assiduously cultivated business links with China over the years.”
“…While not all corporate America’s socialization of media people is necessarily so Machiavellian, the fact is that literally trillions of dollar are at stake in the free-trade debate. The debate is of historic concern not only in China, and its corporate friends but also to all the Confucian nations—nations that, by no coincidence, have traditions going back millennia on the sort of politically motivated personnel management we have seen in the American in recent decades.”
Eamonn Fingleton, In the Jaws of the Dragon
FX Trading – Hats off to China—They have made their intentions clear.
It may at times be a cozy symbiotic relationship that has been beneficial for the US; especially as it relates to the US consumer getting increasingly higher quality and very inexpensive goods from China—that does increase domestic purchasing power. But, our relationship with China is not free trade in the “usual” sense. Based on empirical evidence, i.e. read real world not theory, if we continue down this road the US economy will be completely hallowed out of advanced manufacturing—which is important.
Granted the US has the lead in technology, but when US multi-nationals willy-nilly share that technology with key competitors, what’s the competitive advantage?
Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or
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suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully
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The most powerful interests in America will continue to try and convince us it is free trade and will invoke Adam Smith and David Ricardo blah, blah, blah…all in an effort to too keep the game going (there is likely a mix of true believers and those who know better but have the look of the Cat that swallowed the canary).
It won’t take much, except facing up to the most powerful entrenched interests in the world to at least convert the US-Chinese relationship into at least pseudo free trade; that should be the objective.
So, a full-court press of Obama trade policy bashing will likely be filling the airwaves. No Obama fans are we. No Union fans are we. But it is just plain stupid to continue to call our trade relationship with China free.
China has proven again and again to be many steps ahead of its Western counterparts. It is in their interest to do so—so their actions cannot be faulted in the game of great powers. Those going into China to manufacture know the rules (most of them), China has clearly established the ground rules both explicitly; and implicitly by actions. They make no secret of the fact they want to receive technology transfer as quid pro quo, requiring domestic production for access, instead of just shipping in goods, as happens in a trade relationship almost every place else on the planet. Chinese policymakers make no secret of the fact they want foreigners to establish a domestic partner so that said technology can be replicated by a Chinese domestic firm and sold into the Chinese domestic market. Western manufacturers volitionally accept this situation. A situation they don’t seem to accept anywhere else.
So we are not spinning China into the bad guy here. Hat’s off for playing the West like a violin.
That said, any disruption to the China-US trade relationship could rock markets big time. But, given the power behind the status quo, the tire dispute will likely fade from memory as just another Western anti-trade action. And so it goes.
Jack Crooks
Black Swan Capital LLC

This Week's Market Moving Events...

A three-day extravaganza for indicators! On Tuesday, the barrage begins with PPI and retail sales. Mid-week brings us the CPI and industrial production. The indicator show ends with housing starts on Thursday—just before Friday’s quadruple witching.

Tuesday: PPI & retail sales 8.30am
Wednesday: CPI,Industrial Production, Petroleum Report
Thursday: housing starts, jobless claims, nat gas report

Simply Economics Trade, sentiment help recovery

By R. Mark Rogers, Senior U.S. Economist

Markets are continuing to adjust to the likelihood that the economy is in recovery. Equities rebounded further from lows earlier this year and there are signs of strengthening in the consumer sector and in international trade. (click to read entire article)

Thursday, September 10, 2009

Market Reflections 9/10/2009

Talk is building that the economic recovery may prove stronger than expected. Thursday's economic data included strength in both imports and exports, a dip in jobless claims, and improvement in gasoline demand. Economic recovery would move forward the risk of inflation and the need to remove stimulus. These questions continue to weigh on the dollar with the dollar index down 0.3 percent to a new 12-month low at 76.80. Gold firmed $5 to $995 with bulls saying it's ready to make a run at $1,100. Oil ended over $72 with bulls talking about $75.

Company news is definitely upbeat as a run of companies raise guidance. This session's run included Texas Instruments, Procter & Gamble and General Mills. The S&P 500 rose 1 percent to 1,044.14. More and more are targeting 1,200 for the S&P twelve months out. Demand for Treasuries is definitely on the rise, indicating that retail investors are moving out of cash and seeking return, however limited. Today's 30-year bond auction was unusually strong and capped a week of strong auctions. The yield on the 30-year bond fell 14 basis points on the day to 4.19 percent, 4 basis points below the auction's high yield.

Option ARM Disaster Arrival

As I've been saying for several years, the second shoe to drop in the residential housing debacle, would be the Option ARM... and it has just hit the floor. Option ARMS... 70% of which will reset in the next two years... are weapons of financial destruction that have already detonated. The story, which isn't particularly long, is a must read. I thank Craig McCarty for sending it along
Option ARMs, the dubious name for a mortgage product of financial destruction, are back in the limelight showing that they have not gone away. Everyone by now has heard about option ARMs. These toxic mortgages allowed borrowers a buffet of payment options. However, in recent data released this week we are told that things are much worse than we had initially thought. Option ARMs have now become an oxymoron. In fact, they should be called minimum payment mortgages because 94 percent of those who took on these mortgages elected to go with the minimum payment.

These loans are having default rates comparable to subprime loans. In states like California with a decade long housing bubble, option ARMs were a lucrative and inviting mortgage for quick talking mortgage brokers chasing big yields. But one thing is certain and that is these mortgages are here for the next few years and will cause additional problems.

Many have speculated that most of these loans have been modified. Well in the recent report put out by Fitch Ratings, only 3.5% of the approximately 1 million option ARM loans have been modified. That is right, only 3.5% (or if you like, about 35,000 loans). And modifications are no panacea. In fact, of the tiny number of modified option ARMs 24 percent re-default after 90 days while the untouched loans default at a rate of 37 percent after 90 days. These numbers will increase. And why would anyone expect that a loan modification will help? For the most part, all that is done is the term is extended, or interest is cut, but the bank is still able to claim the home is worth the bubble price and therefore allows the bank to keep the “asset” on the books for full face value. What does this mean? More losses coming down the road. And look at how quickly these loans are going bad with new data:

As of today, 46 percent of option ARM loans are 30 days late! Nearly half the entire batch of these loans. And most of these loans were made by the likes of defunct Washington Mutual in states like California, Arizona, Nevada, and Florida. In fact, 75 percent of all outstanding option ARMs are in these states:

Of the currently $189 billion in option ARM loans outstanding, 70 percent will recast in the next two years. Some people wanted to believe that this problem was swept under the rug but it is anything but. In fact, expectations for losses range from 35 to 45 percent assuming home prices do not decline in the areas where these loans are made. Well if you look at California, the state with the most option ARMs it has an unemployment rate of 11.9 percent and just patched up $60 billion in budget deficits. The losses will be bad. Assuming the 45 percent loss ratio, we are looking at $85 billion in losses simply from option ARMs. So much for the optimistic banking scenario.

What makes these loans so insidious is banks are holding onto these mortgages as if they were at face value. Some banks have allocated loss reserves for these loans but nothing in the 45 percent range. They are overly optimistic as usual but these loans are defaulting in mass.

Another reason for the massive amount of defaults is the severity of their negative equity. When these loans were made, loan-to-value ratios were roughly at 79 percent. They are now at 126 percent. One thing about this data point. Many of these loans were made in conjunction with piggy-back products so that 79 percent is deceptive. Many option ARMs were combined as an 80/20 or 80/10/10 loan. So many of these loans are attached to homes with at least two mortgages. The second mortgage disaster is going to hit in full force soon as well and good luck trying to recover anything from the second loan after the foreclosure process happens.

Banks are delaying foreclosure as long as possible. They are stalling and wheeling and dealing with Washington praying that they can somehow artificially juice the market to unload these loans. Tax credits and other incentives are simply cheap methods of creating an artificial market to unload this junk to the average American. Banks simply do not want to come to terms with option ARMs and the public for the most part has assumed many of these loans were modified. 3.5% is nothing especially if we consider that a loan mod constitutes extending the loan term. All that does is makes the loan a longer term option ARM and gives the bank breathing room to devise of ways to offload the mortgage to the taxpayer.

All these loans are negatively amortizing. In fact, as the home values have plummeted the mortgage balance has increased. This is pure financial moonshine. When these loans will recast even with favorable interest rates thanks to the U.S. Treasury and Federal Reserve annihilating the U.S. Dollar, the typical payment will readjust to 63% higher than the original minimum payment. In many cases, it will double.

Referring back to our original chart, we see how many are already 30 days late and only 12 percent of all outstanding option ARMs have recast. As we enter 2010, many of these vintage loans from 2004-2007 will start hitting their 5 year explosion dates. Some have pointed out that Wells Fargo has some 10 year Pay Option ARMs but clearly that is a tiny part of the entire pool. Bottom line is this, 70 percent of these loans will recast in the next 2 years and banks are trying everything they can to offload this toxic mortgage potato to the taxpayer like every other mistake they have done during this decade

Gold Rally Signals Move Away From Currencies, Greenspan Says

I normally don't go out of my way to quote Alan Greenspan... but I'll happily make an exception here. The words that he utters are blasphemous in the hallowed halls of fiat currency. The headline hints, but the quotes from Sir Alan in this 6-paragraph story are astonishing. When he told Representative Ron Paul [R-Texas] many years back that he would never change a word of his Gold and Economic Freedom essay that he wrote for Ayn Rand in her 1966 book Capitalism: The Unknown Ideal... it appears that he wasn't kidding. The story, which is headlined "Gold Rally Signals Move Away From Currencies, Greenspan Says"... is linked

Wednesday, September 9, 2009

Market Reflections 9/9/2009

Stocks rallied Wednesday but the gains are unconvincing to some who say the consumer is too weak to fuel a strong recovery. The Fed's Beige Book reports that retail conditions are "flat" as are wages. All eyes are now on President Obama and his healthcare address to a joint session of Congress.

The S&P 500 rose 0.8 percent to 1,033. Gold backed off $1,000, ending at $990. Oil ended at $71.50. Commodities didn't get a lift from continued weakness in the dollar with the dollar index at a new 2009 low, down 0.3 percent at 77.07.

Market Reflections 9/8/2009

Merger & acquisition activity gave stocks a lift on Tuesday after UK confectionary maker Cadbury rejected a $16.7 billion bid from Kraft Foods. Biogen's $350 million takeover bid for Facet Biotech was also rejected. Consumer credit could only pressure the market briefly despite showing gripping constriction and offering a warning to policy makers that stimulus efforts are not boosting consumer liquidity. The S&P gained 0.9 percent to 1,025.

Gold headlined the session, popping over $1,000 to $1,007 before settling at $995. Inflationary concerns, tied to economic recovery and high government debt, continue to drive up investment demand for gold as well as investment demand for other commodities including oil which jumped $3 to $71.25. Inflationary concerns continue to hurt the dollar with the dollar index hitting a 12-month low at 77.26 for a 1 percent drop.

Friday, September 4, 2009

Weekly Market Update (9/4/09)‏


Employment Report - Nonfarm payrolls declined by 216,000 in August compared to an upwardly revised 276,000 drop in July. The unemployment rate rose to 9.7%, the highest level since June 1983 when the rate was 10.1%. more...

The US Treasury yield curve steepened in the last week of the summer, with 2-year yields dropping 10 basis points (bps) whereas Treasury yields of longer dated maturities remained relatively unchanged. more...

Large-Cap Equities
The stock markets pared back some of its recent gains this week on mixed economic data and a renewed concern of additional bank losses. more...

Corporate Bonds
Investment grade primary activity continued its subdued manner as we made our way through the last several weeks of summer. more...

Mortgage-Backed Securities
Mortgage bonds rallied to their highest level since late spring as the Federal Reserve signaled no end to accommodative monetary policy. more...

Municipal Bonds
The muni market continues its trend of tightening credit spreads and lower long-term yields as investors try to find yield in any avenue available. more...

The high yield market remained relatively quiet this first week of September, with many market participants on the sidelines. more...

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) lost -4.6% this week, while the Russian stock index RTS went down -2.4%. more...

Global Bonds and Currencies
Major non-US sovereign bond markets had a notably quiet week with most closing unchanged. more...

Emerging-Market Bonds
Emerging market dollar-pay debt spreads were marginally tighter this week as trading activity remained light ahead of the holiday weekend in the US. more...

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Thursday, September 3, 2009

Market Reflections 9/3/2009

Economic data on Thursday were mixed between flat and firm. Jobless claims show no improvement and point to still heavy payroll losses in tomorrow's big monthly report. The ISM's non-manufacturing report showed strength in output and an odd jump in prices but no change in new orders. The report's composite index points to continued though slowing contraction for the bulk of the economy. Chain-store sales were mostly but not uniformly positive, yet as a whole they point to long awaited, broad-based gains for the retail sales report at mid month.

Traders are reporting the appearance of fear, the result of equity losses in China. Demand for gold and silver are up in part due to concern that heavy profit taking may hit Chinese and U.S. equities this month and next and that talk may emerge for another wave of stimulus measures in the two nations. Gold flirted with $1,000 before settling over $990 for a more than $10 gain. Silver added 70 cents to $16.10. Base metals, which lack a premium as a monetary alternative, continue to fall back but only slightly with copper down a penny to $2.85. Oil ended slightly lower at $68, but natural gas was a big loser, down 50 cents to $2.50 following another weekly injection for inventories. The S&P 500 was little changed, hovering right around 1,000 and ending at 1,003. The dollar index was also little changed, ending under 78.50.

Jobless Claims Released on 9/3/2009 8:30:00 AM For wk8/29, 2009

There has been very little change in initial jobless claims over the past seven weeks, pointing to little change in payroll losses for tomorrow's monthly employment report. Initial claims fell 4,000 to 570,000 in the Aug. 29 week (prior week revised 4,000 higher to 574,000). The four-week average is right at the current week, at 571,250. Continuing claims have been generally moving lower since early July, unfortunately reflecting the expiration of benefits and not necessarily new hiring.

But in a bad sign, continuing claims rose in data for the Aug. 22 week, up 92,000 to 6.234 million. The unemployment rate for insured workers rose 1 tenth to 4.7 percent. There was no significant reaction to the report.

Market Reflections 9/2/2009

FOMC minutes show that policy makers are as confident as the financial markets that the recession has bottomed. But policy makers do worry that the consumer is weak and so have kept their rate policy and asset-purchase policy on hold. Data included a worse-than-expected jobs forecast from ADP, one that got the stock market off to a slow start. The S&P slipped 0.3 percent on the day to end at 994.75.

Gold was the big mover of the day, up nearly $25 to $980 in a major breakout from two months of narrow trading centered at $950. Middle East accounts were behind the gain, buying ahead of seasonal jewelry demand there and in Asia. Silver rose with gold, ending at $15.40 for a 70 cent gain, but other commodities, including copper and oil, were little changed.

Tuesday, September 1, 2009

Market Reflections 9/1/2009

Buy on the rumor and sell on the fact was Tuesday's theme. A very strong ISM manufacturing report, getting an appreciable boost from cash for clunkers, shot past 50 to 52.9, sounding the beginning of recovery in the sector. But a plus 50 reading was already expected and whether cash for clunkers merely pulled activity from future months is an open question. The session's housing data were also strong with another big gain for pending home sales and a big jump for single-family construction. Unit vehicle sales rounded out the good news, jumping more than 20 percent and pointing, tentatively, to gains for the August retail sales report.

But the market wasn't impressed as the S&P fell 2.2 percent to just below 1,000. But the drop isn't worrying investment strategists who say a 5 to 10 percent correction may be in store and would in fact be healthy, setting the market up for big gains further down the road. The dollar benefited from the move out of equities and toward safety with the dollar index up 0.8 percent to 78.84. Most commodities moved lower in line with equities and in line with the rise in the dollar with oil losing about $1-1/2 to end at $68 and copper losing nearly a nickel to $2.80. But strong dollar or not, gold keeps holding firm, ending at $957.

ISM Mfg Index Released on 9/1/2009 10:00:00 AM For August, 2009

The ISM's manufacturing index burst over the dead-even 50 level for the first time since the beginning of the recession, at 52.9 in August vs. 48.9 in July. New orders led the advance, at 64.9 vs. August's 55.3 and pointing to rising business activity in the months ahead. Production was also very strong in August, at 61.9 for a 4 point gain and pointing to gains in durable goods shipments and total manufacturing sales. Backlogs also increased, at 52.5 vs. 50.0 in July. But manufacturers are not stocking up, instead they continue to draw down inventories where the index is a very weak 34.4 vs. 33.5 in July. Note that future gains in the inventories index, a seeming necessity given rising production needs, will help give the overall index a big boost. Respondents in fact think inventories at their customers' firms are too low, with the customer inventories down 3.5 points to 39.0. Deliveries slowed substantially, up more than 5 points to indicate that current production needs are stressing what has become a pared down supply chain. Production activity and the gain in orders has yet to boost employment where the index only inched forward to a still sub-50 level of 46.4.

All the strength here is flowing through to prices where the prices paid index jumped 10 points to 65.0, an indication that buyers are bidding up prices for raw materials. No doubt boosted by cash-for-clunkers and gains in transportation, the manufacturing recovery is on the way and together with the gain in the pending home sales index indicate that two key sectors are on the acceleration. Stocks jumped in immediate reaction to today's 10 o'clock data.
Construction Spending
Released on 9/1/2009 10:00:00 AM For July, 2009
Prior Consensus Consensus Range Actual
Construction Spending - M/M change 0.3 % 0.0 % -0.5 % to 0.3 % -0.2 %
Construction outlays fell in July but showed significant divergence among components as residential outlays rebounded while public and nonresidential construction declined. Overall construction spending edged down 0.2 percent in July after making a partial comeback of 0.1 percent in June. The dip in July came in below the consensus projection for no change. The decline in spending in July was led by a 1.2 percent decrease in private nonresidential outlays while public spending also fell-by 0.7 percent. The good news in the report was that private residential outlays added to the view that the housing sector is recovering with a 2.3 percent boost in July after declining 0.4 percent in June.

The July construction spending report was not as good as expected but equities liked the better-than-expected ISM manufacturing index and pending home sales index which were released at the same time as construction outlays. Overall, housing appears to have turned the corner and likely is in slow recovery. Meanwhile, the public and nonresidential sectors continue their downtrends.

Pending Home Sales Index
Released on 9/1/2009 10:00:00 AM For July, 2009
Prior Actual
Pending Home Sales Index - Level 94.6 12.0 %
Pending Home Sales Index - M/M 3.6 % 3.2 %
Pending home sales continue to improve pointing to extending gains for existing home sales. The pending home sales index rose 3.2 percent extending a long streak of gains and compared with a 3.6 percent rise in June. The year-on-year is very strong at 12.0 percent. Nearly all indications on the residential side, including today's construction spending report, point to accelerating gains in what is very good news for the economic recovery.

Market Reflections 8/31/2009

A 7 percent plunge in the Shanghai stock market, tripped by new concerns that the government will withdraw liquidity from the business sector, reverberated through global markets and the U.S. market where the S&P 500 fell 0.8 percent to just over 1,020. U.S. economic news was upbeat as Chicago purchasers reported no change in business conditions during August, indicating a bottoming in the region's recession and pointing to similar results in this week's ISM reports. Commodities moved with equities with oil closing below $70 at $69.50 and copper falling more than 10 cents to end at $2.84. But gold held firm at $950, firmly underpinned by solid long-term investment demand. The dollar index edged 0.2 percent lower to $78.13.

Saturday, August 29, 2009

Weekly market Update August 28, 2009

Friday* Last week Dec. 31, 2008 One year ago
Dow Jones Industrial Avg 9,520 9,506 8,776 11,715
S&P 500 1,025 1,026 903 1,301
NASDAQ 2,020 2,021 1,577 2,412
Russell 2000 578 582 499 748
DJ STOXX Europe 600 (€) 238 235 198 287
Nikkei Index (¥) 10,534 10,238 8,860 12,768
Fed Funds Target 0%-0.25% 0%-0.25% 0%-0.25% 2.00%
2-Year Treasury Yield 1.01% 1.09% 0.77% 2.36%
10-Year Treasury Yield 3.45% 3.57% 2.21% 3.78%
U.S. $ / Euro 1.43 1.43 1.40 1.47
U.S. $ / British Pound 1.63 1.65 1.46 1.83
Yen / U.S. $ 93.59 94.38 90.64 109.50
Gold ($/oz) $955.66 $953.85 $882.05 $834.05
Oil $71.93 $73.29 $44.60 $115.59
*Levels reported as of 10:00 am Pacific Standard Time
Year-to-date (1/1/09-8/28/09)* Year-to-date (1/1/09-8/27/09)
Dow Jones Indus Avg. 8.47% 90 Day T-Bill 0.16%
S&P 500 13.51% 2-Year Treasury 0.76%
NASDAQ 28.07% 10-Year Treasury -7.89%
Russell 2000 15.67% ML High Yield Index 39.16%
MSCI World Index 17.99% JPM EMBI Global Diversified 21.81%
DJ STOXX Europe 600 19.74% JP Morgan Global Hedged 0.27%
*Returns reported as of 10:00 am Pacific Standard Time
August 25 Consumer Confidence – The Conference Board’s confidence index rose for the first time in three
months, climbing from 47.4 in June to 54.1 in July. The increase, which beat forecasts, was
largely a result of government programs such as “cash for clunkers” and extended jobless
S&P/Case-Shiller Home Price Index – The 20-city composite index declined 15.4% from year ago
levels, the smallest drop since April 2008. On a month-over-month basis, the measure rose by
the most in four years.
August 26 Durable Orders – Orders for durables jumped by 4.7% in July, the largest increase in two years. The
core rate, which excludes transportation, posted its third consecutive gain, rising 0.8% during the same
New Home Sales – New home sales climbed to a seasonally adjusted annual pace of 433,000 homes in
July, a 9.6% increase over the prior month and the largest increase since February 2005. On a yearover-
year basis, however, sales were down 13.4%.
August 27 Commerce Department Revisions – Gross domestic product (GDP) fell at a seasonally adjusted 1.0%
annual rate in the second quarter, unrevised from the estimate month ago. Business inventories fell
more than previously reported, with the second quarter cut revised from $141.1 billion to $159.2 billion.
The decline in consumer spending over the April to June period was revised from 1.2% to 1.0%.
August 28 Personal Income and Spending – Consumer spending rose 0.2% in July due to increased durable-goods
spending, likely a product of the “cash for clunkers” program. Personal income was unchanged in July
and fell 1.1% in June, a downward revision from the originally reported 1.3% drop.
OVERVIEW ___________________________________________________
The housing market showed further signs of recovery this week. New home sales increased
for the fourth straight month and 18 of the 20 cities comprising the S&P/Case-Shiller Home
Price Index posted modest price gains. Hard-hit metropolitan areas such as Los Angeles,
Miami, and Phoenix registered slight increases in home prices, underscoring the view that the
real estate market has bottomed. The Federal Housing Finance Agency’s house price index
also rose, climbing 0.5% in June on a month-over-month basis. New home inventories fell to
271,000 in July, a 7.5-month supply at the current sales rate that is significantly lower than the
8.8-month supply in June. Continued declines in inventories may boost future housing starts
as construction firms begin building homes again. Improvement in the real estate market will
likely support overall economic recovery, as banks may be able to stabilize their balance
sheets more quickly.
TREASURIES ________________________________________________________________________________
• US Treasuries rallied this week, backed by better-than-expected auctions in 2-year, 5-year,
and 7-year bonds. Five-year on-the-run Treasury yields finished the week 13 basis points
(bps) lower and 30-year yields rallied 17 bps. Trading volumes and liquidity in the Treasury
market was very low this week as most market participants are still on vacation. The market
continues to trade directionless and remains event driven, i.e. dealers position themselves
for Treasury auctions and Treasury buybacks and offer limited liquidity in between.
• US agencies recovered from their temporary sell-off over the last couple of weeks, when
spreads widened 10-15 bps across all maturities. Decreasing supply and the Federal
Reserve increasing their re-purchases helped spreads to recover and tighten back 5-8 bps.
• With Libor continuing to set lower each day, US swap spreads were able to benefit, with
shorter dated spreads tightening 8 bps. Spreads of longer dated swaps tightened up to 4
LARGE-CAP EQUITIES___________________________________________________________
• The stock market was relatively quiet for the week on mixed economic data and lighter
trading volume. The S&P 500 index finished the week unchanged. The Russell 2000 index,
an index used to gauge small-cap stocks, underperformed large-cap stocks. In terms of
style, large-cap value stocks marginally outperformed large-cap growth stocks. The best
performing sector was financials and the worst performing sector was utilities. In the
headlines this week, the US government ended its highly successful “Cash for Clunkers”
stimulus program on Monday as funds allocated to the program were exhausted. Shares of
Ford Motor Company (Ticker F) fell over 4% on the news. On earnings news, Dollar Tree
reported quarterly earnings of 63 cents per share, which beat analysts’ estimates of 53
cents per share. The company attributed the strong quarter on better operating margins and
an increase in sales. Shares of DLTR rallied over 1% on the news after speculators drove
the stock higher over 4% prior to the announcement.
CORPORATE BONDS _____________________________________________________________
• Investment grade primary activity was muted, with a few benchmark deals providing those
not taking a late summer vacation a chance to invest some idle cash. The deals priced this
week were well received by investors, as the entire slate of new issuance finished the week
tighter. Consumer products giant Proctor & Gamble brought a two-tranche deal that sold out
as quickly as ice cream cones on a sultry summer afternoon. With next week being the
unofficial final week of summer, expectations are for a light, if not non-existent, new issue
• Investment grade corporate spreads were flat to slightly tighter in fairly active trading given
the season. Trading desks were thinly staffed, as many participants were away trying to
wring the last bit of value out of their summer share. The underlying tone was positive, with
a bit of a "stealth-rally" feel to the week. The Barclays Credit Index Option-Adjusted Spread
(OAS) finished the week at +212, tighter by 9 basis points.
MORTGAGE-BACKED SECURITIES _______________________________________________
• It was calm in the mortgage market this week as market participants enjoy the last days of
summer. With Treasuries rallying on air, mortgages underperformed in light trading.
Agency pass-through spreads leaked wider by 3 to 5 basis points as steady supply trumped
demand from Asian central banks, money managers, and the Federal Reserve. Most of the
action, if any, was in the commercial mortgage market as spreads narrowed on a healthy
demand for term-asset backed loan facility (TALF) eligible CMBS bonds. The Treasury’s
release of acceptable collateral of CMBS collateral was warmly received by investors. For
the week, the 30-year current pass-through versus the 10-year Treasury closed at 103 basis
MUNICIPAL BONDS _____________________________________________________________
• Lack of new tax-exempt issuance, led by seasonal calendar effects and Build America
Bonds taxable issuance (which account for about 15% of municipal issuance year-to-date
through July) continues to put downward pressure on longer-maturity municipal bond yields
as investors fight for bonds. Two-year AAA-rated GO bond yields are pinned down at 0.71%
and 30-year AAA-rated GO bonds fell to 4.47%-lower by 7 basis points on the week. Thirtyyear
yields have dropped 25 basis points during August.
• This trend is also having spillover effects on lower-rated credits, where investors have
shifted demand due to pick-up in yield over expensive high grade credits. This difference in
yield though continues to “narrow,” represented by strong demand for tobacco securitization
bonds and gas pre-payment bonds this week. Based on secondary market trades on Friday
morning, this trend is set to continue as we head into September. Next week is already set
up to be very quiet in the primary market. New issuance volume is expected to be in the $1
billion range – 20% of a normal week’s new supply hitting the market. This may mean a
pick-up in secondary market activity (as money managers look to reinvest September 1
maturities) and more downward pressure on yields in the municipal space.
• The biggest deal of the week was the seasonal issuance of the Texas Tax and Revenue
Anticipation Notes (TRANs) as part of the state’s annual cash-flow management. Totaling
$5.5 billion, the notes held the highest short-term rating from all three ratings agencies, and
were traded at yields as low as 0.43% following the competitive deal. Other highlights
included the $77 million Oconee County, South Carolina, Pollution Control Facilities - Duke
Energy Carolinas Project bonds. The A1/A revenue bonds offered 3.60% in the bullet 2017
HIGH-YIELD BONDS ____________________________________________________________
• It was another relatively quiet week on the high yield front. Similar to last week, there was no
new issuance in the high yield market and it is likely that we will not see any deals until after
the US Labor Day holiday September 7th. Most market participants are expecting relatively
heavy issuance in September as cash continues to build and there is strong demand for
new well-structured and well-priced deals. After a small outflow last week, high yield mutual
funds this week received inflows of $351 million and this will add to the buying pressure in
September. The Merrill Lynch BB/B high yield index is up just under 1.5% for August, with
much of the price appreciation in the financial sector, in particular the insurance sub-sector.
The insurance high yield sub-sector has rallied as the market outlook on AIG debt and
equity has improved over the past few weeks. In line with the past five months, the riskiest
segment of the high yield market, CCC- and below rated bonds, continued to rally the
strongest, with the CCCs up almost 4% in August and up 70% year-to-date 2009.
EASTERN EUROPEAN EQUITIES __________________________________________________
• The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and
Poland) gained +2.8% this week, while the Russian stock index RTS went up +3.7%.
• Poland, the European Union’s only eastern member to escape a recession since the
credit crisis began, expanded an annual 1.1% in the second quarter of 2009 on the
heels of +0.8% growth in the first quarter of the year. Net exports were the major
driver, as exports declined by only 1% year-over-year, while imports were down -
11.6% versus last year. Investment also surprised on the upside. Since the global
recession started the country’s relatively large internal market, stimulated by cuts in
personal taxes, has helped compensate for a decline in external demand, while a
depreciating zloty early in the year cushioned the fall in exports.
GLOBAL BONDS AND CURRENCIES _______________________________________________
• Major government bond markets ended the week stable to firmer, supported by the good
reception to the week’s heavy US issuance. In the UK, Gilts benefitted from persistent
speculation that the Bank of England will impose negative interest rates on banks’ reserve
holdings to encourage them to lend. However, two-year Bunds outperformed, with yields
closing the week down about 10 basis points as the European Central Bank reiterated its
intention to keep rates low for the foreseeable future. On the data front, news from the UK
was mixed. House prices rose robustly in August and revisions showed that the contraction
in Q2 GDP was less dramatic than initially estimated. However, UK business investment
slumped a staggering 10.4% in Q2. In Europe, the rise in industrial orders exceeded
expectations and the latest round of business and consumer sentiment surveys all
registered further improvement, but Japan’s data was unremittingly disappointing.
Household spending contracted further, unemployment jumped unexpectedly and deflation
worsened. However, Japanese government bonds only managed to finish unchanged ahead
of this weekend’s general election, which is widely predicted to see the ruling Liberal
Democratic Party lose its 60-year grip on power to the opposition Democratic Party of
• In currency markets, the focus was on sterling, which extended its recent losses against the
US dollar in response to talk of negative UK rates. The suggestion by the head of the UK
financial markets regulator that the government should impose a tax on financial
transactions to deter short term speculation also undermined confidence in the pound. The
Canadian dollar closed off its highs after an official suggested that the central bank may
intervene to sell the currency, whose recent appreciation is perceived as a drag on growth
and an obstacle to the central bank’s efforts to meet its inflation target. The Australian dollar
edged higher against the greenback on mounting expectations that rates will rise as soon as
October, but the US dollar ended only marginally weaker against the yen and unchanged
against the euro.
EMERGING-MARKET BONDS______________________________________________________
• Emerging market dollar-pay debt spreads were marginally wider this week as liquidity and
trading volumes declined. Economic data continued to surprise on the upside with Q2 GDP
and industrial production better-than-expected in all emerging market regions.
• Israel surprised the markets by being the first country to hike interest rates globally. Bank of
Israel raised rates by 0.25% to 0.75% on the back of increasing inflation expectations and
an improvement in macroeconomic data. Short-date local yields sold off by 25 basis points
as the curve was pricing in no change in interest rates.
• As expected, the Monetary Policy Council (MPC) in Poland left its benchmark interest rate
unchanged at 3.5% citing signs of economic recovery in Poland as well as the global
economy. The MPC’s inflation forecast is lower than its medium-term target of 2.5% (+/-
1%), meaning it maintained an easing bias.
Sep 1 ISM Manufacturing Index, Construction Spending, Pending Home Sales
Sep 3 ISM Non-Manufacturing Index, Turkey August Inflation
Sep 4 Unemployment Rate