Saturday, February 7, 2009

Market performance figures

Market Levels

Friday* Last Week Dec. 31 2008 1 Yr Ago
Dow Jones Ind. Avg. 8,255 8,001 8,776 12,247
S&P 500 864 826 903 1,337
Nasdaq 100 1,580 1,476 1,577 2,293
The Russell 2000 464 444 499 703
DJ STOXX Europe 199 191 198 314
Nikkei Index 8,077 7,994 8,860 13,207
Fed Funds Target 0-0.25% 0-0.25% 0-0.25% 4.50%
2-Year U.S. Treasury Yield 0.97% 0.95% 0.77% 2.05%
10-Year U.S. Treasury Yield 2.95% 2.84% 2.21% 3.76%
U.S.$ / Euro 1.29 1.28 1.40 1.45
U.S.$ / British Pound 1.48 1.45 1.46 1.94
Yen / U.S.$ 91.88 89.92 90.64 107.49
Gold ($/oz) $913.30 $927.85 $882.05 $910.51
Oil $39.20 $41.68 $44.60 $88.11
*Levels as of 10:45 a.m. PST


Year to Date (1/1/09 - 2/6/09)

Dow Jones Industrial Avg -5.49%

S&P 500 -4.38%

NASDAQ 0.18%

Russell 2000 -7.06%

MSCI World Index -7.31%

DJ STOXX Europe 600 (euro) 0.15%

Year to Date (1/1/00 - 2/5/09)

90 Day T-Bill -0.01%

2-Year Treasury -0.18%

10-Year Treasury -4.97%

ML High Yield Index 5.97%

JP Morgan EMBI Global Diversified 0.62%

JP Morgan Global Hedged -1.59%

Market Reflections 2/6/2009

Yet another catastrophic employment report heightened the pitch of concern over the economic outlook and is forcing the immediate response of policy makers. Hopes that the government will rescue the banking system and quickly stimulate the economy shifted the focus away from the troubles of the present and toward the future, pushing the Dow industrials 2.7 percent higher and back near 8,300. The S&P 500 also gained 2.7 percent to end at 868.60.

The movement away from safety pulled money out of Treasuries and the dollar. Treasury yields are at 0.27 percent for the 3-month bill and 3.69 percent for the 30-year bond. The dollar fell back a cent against the euro to $1.2934.

Oil isn't reacting to the stock market as it used to. The March contract held within its tight range ending just over $40 once again. Money stayed in gold which was little changed at $913.80.

Friday, February 6, 2009

Auto bankruptcy is imminent?

Reuters reports the US government has retained two law cos with extensivebankruptcy experience and the investment bank Rothschild to advise officialson the taxpayer-backed restructuring of General Motors and Chrysler, a person with direct knowledge of the work said. New York law company Cadwalader, Wickersham& Taft was hired by the US Treasury last month and will consider a range ofpossibilities for the struggling automakers including the prospect of abankruptcy funded by the US government, the person said. Cadwalader is joinedby law co Sonnenschein, Nath & Rosenthal and Rothschild in working with USofficials as they prepare to review turnaround plans being readied by the twostruggling automakers, the person said. A spokeswoman for Sonnenschein in LosAngeles confirmed that the co had been engaged to advise Treasury on "ongoingmatters related to the 2008-2009 developments within the US automobile industry."

Face it, the auto industry in the USA is BANKRUPT, INSOLVENT and unrescuable. It is criminal for our government (read Congress) to billios of my and your money into this debacle.

$25 BILLION given to auto companies with great fanfare.... and behind the petticoat curtain the government hires a bankruptcy advisor!!!!

Stop this theft of our future well being now!

When the "Stimulus/Spending" fails: what then?

Could it be that we have now moved from a recession to a depression? Bill Bonner, thinks so...

He was also the first to put in writing the thoughts about the U.S. following Japan's decade of funk, with his book Financial Reckoning Day, that was published about 6 years ago! So... I stop to listen to what he has to say... I don't always agree, but I sure do listen, for his track record is good... Recall, he also coined the "Trade of the Decade" at the turn of the millennium... "sell the DOW, and buy Gold on the dips"... That's worked out quite nicely, eh?

Courtesy of Bill Bonner: a scenario to think about: full story here: (

"In a recession, the basic plan or formula for the economy is still valid.The economy just needs a little time...and maybe a little monetary boost...before it continues growing. Typically, inventories are sold a new burst of production can begin.

But in a depression, the problems are structural.

One way of understanding this is just to look at balance sheets. Whether you are a business or a family, you can only afford so much debt. When you get too much, you have stop and pay it down. And when it becomes so great you can't pay if off - because you don't have enough income - you have to declare bankruptcy. A depression is when a whole economy declares bankruptcy...or should. Because it can't pay its debts. Businesses, for example, have been built for a level of demand that no longer exists. It is not a question of waiting a few months. By the time consumers are ready to buy again, the whole economy will have moved on. Imagine, for example, a guy who built a nationwide chain of stores just to sell ipods to teenagers. The business may have been a great success - for a while. And he took out huge loans so he could expand...and take advantage of the demand. But then comes a depression. He says to himself: 'I'll just get some more financing...and wait it out.' But who's going to lend to him? By the time the kids begin buying again, ipods will be like vinyl LPs. His business is history. His lenders have lost money. The loans should be written off and the business should be destroyed, not mummified and preserved.

A depression is when the whole economy changes its business plan, in other words. And that takes time...and creative destruction.

How much time? Well, in the United States alone there is about $6 trillion too much private debt...$1 trillion too much output capacity...and millions of "excess" workers. How long will it take to retrain, retool, and re-absorb these excesses?

We don't know. The last depression took about 20 years...and a major war (talk about creative destruction!) Then, the United States was making the structural shift from a Japan-like capital investment-led a post-WWII consumer-led economy."


Jobs 7.6% unemployment

The US economy lost more than half a million jobs in January for the third month running, figures showed on Friday.

The number of jobs lost last month reached 598,000, while the unemployment rate - 4.4 per cent before the credit crisis - jumped to 7.6 per cent in January, its highest level since 1992.

Economists had expected non-farm payrolls to drop by 525,000 and the unemployment rate to rise to 7.5 per cent, up from 7.2 per cent the month before. Employment has declined by 3.6m since the recession began in December 2007, and half of this decline occurred during the last three months, according to the Bureau of Labor Statistics

If you think that aTrillion dollar pork spending bill that a congress with an 8% approval rating (can it get any lower!) is trying to force down the throats of all of us and our unborn grandchildren, will change these are breathing from the same bong that Phelps did.

Our president is being at least disingenuous if not startlingly naieve if he continues to push nonsense of the kind that seems to promise 4million jobs to be created from this unbelievable theft of this nations future.

Last night he pulled the petticoat off the pig and stopped calling this current spending boondoggle a stimulus and revealed it for what it is: a "pork spending" bill.

Whatever happened to "timely, targeted and temporary" that Pelosi et al crammed into the national psyche this time last year?

The political lies are well noted by the electorate.

There may be a majority of Democratic votes in Congress, but that is all it is. A majority. It is NOT a mandate from every citizen of this still great country to continue politics as usual and spend money this nation does not have. This path will lead to the ruin of the lifestyle we know, for us and for generations to come.

All this spending has to be funded. We will have to borrow unbelievably large amounts of money from anyone who will lend! At ever higher rates of interest.

The laws of economics cannot be repealed by our congress. King Canute tried that too.

If you remember inflation at 21% and Treasury interest rates at 12% or higher (remember the ruin Jimmy Carter brought to us?) hold your britches: what is to come will make us look like a banana republic or worse, like Argentina!

Revisit 21% inflation rates or higher? Very likely and as soon as 2010/2011.
Unemployment above 10%? as soon as this very year!!

Challenge Pelosi, Reid, Obama et al to stand by their responsible dogma: Targeted, timely and temporary and Mr Obama, get rid of earmarks, all of them, now . This is the moment to prove your greatness or tarnish you image forever.

Market Reflections 2/5/2009

Economic slowing, at least at first, has usually been associated with slowing productivity as the labor force produces less. But not this time. Despite a drop in output, fourth-quarter productivity proved strong and is raising talk that firms have slashed their workforces with unusual speed. The day's jobless claims data show acute contraction in the labor market and point, as do a host of other indications, to another month of severe losses in tomorrow's jobs report.

Talk in Washington is building that the new administration will roll back mark-to-market accounting rules that have forced banks to value assets at their current value. The talk gave a boost to bank shares and reversed early losses in the stock market. The Dow industrials rose 1.3 percent to end back over 8,000 at 8,063.

Other economic data included another run of very weak chain store reports, reports that point to another very weak retail sales report. The weak economic data pulled money into the Treasury market despite the gain in stocks. Yields were down 1 to 2 basis points across the curve with the 2-year ending at 0.97 percent and the 30-year at 3.64 percent. The dollar firmed slightly to end at $1.2814 against the euro. Oil remains steady, holding just over $40 while gold moved further over $900, ending at $917.80.

Thursday, February 5, 2009

Bank of America bankruptcy?

US Senator Dodd doesn't see nationalization of Bank of America-DJ

then again he didn't see the economic train wreck coming either.

The U.S. economy is screwed

The Old Guys Say “Sell!”

What if I told you that the oldest technical indicator in the book – a system of signals established by the best-known name in the financial business – was telling you to sell blue-chip stocks immediately?
First, a little back-story. Okay, a good bit of back story, but bear with me and I promise to get to that sell signal (and what you can do about it) in the end.

Back in the days when beards, tails and top hats were de rigueur for gentleman in the financial biz, Charles Dow wrote a series of 255 editorials for his quaint new paper, The Wall Street Journal.
After his death, William P. Hamilton, Robert Rhea and E. George Schaefer took his various cogitations, stray comments and bits of sentiment, and hammered them into a cohesive “Theory of Everything.”

The Six Commandments

This eponymous trading system had six primary tenets:

1: The market has three movementsMajor trends last one or more years, secondary reactions retrace the major trend over some 10 to 90 days, and short swings oscillate within reactions over either hours or days, depending on whom you ask.

2: Market trends have three phasesAccumulation (when insiders are buying a into a good deal), public participation (when every Tom, Dick and Harry gets involved), and distribution (when the wise guys sell off their shares for profit).

3: The stock market discounts all news Also known as “the efficient market theory,” there are three flaws to this idea of a level playing field. The first presumes that all companies are completely transparent and all information is universally available. The second presumes that this information is universally understandable. The third is that investors will always act in their own best interest.
(Now things get interesting: While the first tenet is technical in nature, relating to the time it takes for the market to uptake ideas, and the oscillating reactions to that uptake, the second two are really philosophical, relating to our presumed intelligence and sanity. But with item 4, Dow et al. resume contemplating empirical data.)

4: Stock market averages must confirm each other Back in Chuck Dow’s time, our buying population had spread from coast to coast. Industrial centers were cropping up all over the darn place, and raw materials were even further astray.
It was all well and good to set up a saddler in St. Louis. If you want to make money, you have to be able to get cowhide at a decent price from Montana and then profitably ship your saddles to riders in Philadelphia.

So the gist of this rule is that an increase in manufacturing isn’t a trend until it is confirmed by an increase in shipping. The same holds true in inverse: It ain’t a genuine bite-you-where-it-hurts bear market until the steam ships stay in port and the railroads stop rolling.

5: Trends are confirmed by volumeThis one’s easy: Trends aren’t hiccoughs, twitches or momentary indigestion. They require the full force and faith of millions of investors putting their money where it matters.

6: Trends exist until definitive signals prove that they have ended Finally, Dow lived in an era where science was remaking the world. Because he trusted the tangible over the ephemeral, he tried to link the concept of physical momentum to the psychology of crowd behavior. To wit: “A market in motion tends to remain in motion.”

So What Happens Now?

Let’s set rules 2 and 3 aside for a moment.

They are, as I said, more philosophy than science, and depend on a certain level of rationality and honesty that is in short supply these days.

I think that we can all agree that the requirements of rules 1 and 5 for a genuine bear trend have been satisfied beyond a shadow of doubt.
The question at hand is: “What happens now?”
Will Washington suddenly uncover some unfound well of competence, and drag our collective behinds back from the brink? Or are we about to tip into another yearlong round of bloody sell offs?

Bad News and Worse

I could point out the worst GDP reading in a quarter century (except I think I already have several times over the past few weeks). I could read you chapter and verse on current unemployment (7.2% according to the government, already cresting 12% according to some more “inclusive” calculations).

I could quote no less a luminary than British Prime Minister Gordon Brown, who confessed in the House of Commons that we are truly mired in a great depression akin to the 1930s. (The apparatchiks at #10 Downing Street are desperately trying to retract the statement, but I’m afraid that this particular cat is out of the bag, through the door, and out of sight down the street already.)

Or I could simply go back to Charles Dow’s tenet 4: “The Transports must confirm the Industrials.”

The Facts of the Matter

If you look at the Dow Jones Industrial Average for the past few days, you can’t help but see the fact that last Monday’s low of 7867.37 beat the previous low of 7909.03 set on Jan. 23.

If you look to the Dow Transports’ chart you can see consecutive lower lows of 2926.66 on Jan. 27 and 2865.58 on Feb. 2.

The Only Sane Solution

The trend is already in place.

The counter-reaction is ending.

The next leg down has been signaled and confirmed.

The only protective tactic that makes any sense is to buy puts against both the Industrials and Transports

Summers warns of deflation threat

Warning that the U.S. does "not have time to wait," Lawrence Summers, director of the National Economic Council, said the country faces "a real risk" of slipping into deflation. He said it is urgent that Congress quickly adopt the economic stimulus proposed by President Barack Obama. Bloomberg.
I agree with the deflation threat, but again as I have highlighted this stimulus bill is an abomination!

Economic advisory panel: Volcker

Our old Fed Chairman, who is highly regarded for his inflation fighting in the early 80's, Paul Volcker, spoke last night and he's none too happy with the delay in starting the economic advisory group that the new President, Obama, set up. Obama picked Volcker, but Volcker isn't seeing any moving forward with this advisory panel. Volcker wants to help, and I believe we need his voice, but no one wants to "include" him... Hmmmm... I wonder what's going on there... Does the new administration believe they don't need Volcker's voice? I sure hope that's not true!

Chinese Manufacturing Contracting, Industrial Production Slowing As Global Demand Weakens

Based on PMI surveys, manufacturing, which accounts for 40% of China's GDP, has been in contraction for at least six months as external demand for Chinese goods falls and domestic demand is depressed by the decline in housing prices and construction sector

Industrial production growth is the slowest in a decade (5.7%) and electricity demand, a key proxy for output, contracted in Q4 2008. Chinese manufacturing continues to contract, albeit at a slightly less sharp pace since November 2008 and is now shedding record jobs

Fitch Downgrades Russia to ‘BBB’ with Negative Outlook

Fitch lowered Russia's debt ratings to ‘BBB’ and maintained its negative outlook as the impact of negative shocks from commodity prices and global capital markets, and the challenge to the Russian authorities in trying to manage the necessary macroeconomic policy adjustment weaken the economy

Market Reflections AM Thursday


09:00 ET Market is Closed : [BRIEFING.COM] S&P futures vs fair value: -7.40. Nasdaq futures vs fair value: -20.50. The major U.S. indices are heading toward a lower open. Europe's major indices are also under pressure as France's CAC is down 2.2%, Britain's FTSE is down 1.6%, and Germany's DAX is off 1.7% as European financials continue to trade with marked weakness. To help stimulate economic conditions England's central bank cut its key lending rate target to 1.00% from 1.50%. The European Central Bank stood pat on its target rate of 2.00%, as expected. Asian markets concluded Thursday with mixed results. The MSCI Asia-Pacific Index closed 0.6% lower amid weakness in tech stocks. Japan's Nikkei lost 1.1% Technology stocks were under pressure in the wake of a disappointing forecast from U.S.-based Cisco (CSCO), but shippers spiked after the key Baltic Dry Index climbed. Hong Kong's Hang Seng closed 0.9% higher. Top Lender ICBC and Bank of Communications were strong performers, while insurers also rallied. China Cosco, mainland's biggest shipping conglomerate, had a strong showing, as well. Personal computer maker Lenovo was was unable to join the advance after posting its first net loss in nearly three years. In mainland China, the Shanghai Composite closed 0.5% lower amid ongoing weakness in bank shares.

Wednesday, February 4, 2009

Market Reflections 2/3/2009

Vehicle sales were extremely weak in January in news that pushes concern over auto makers to a new level of urgency. The results will raise talk of major bankruptcies.

The news on vehicles sales surprisingly did not affect the market, at least in Tuesday's session. Shares of GM and Ford were little changed. The Dow industrials posted a strong 1.8 percent gain. Many companies warning of trouble ahead, including Dow Chemical, Cummins Engine and homebuilder DR Horton, posted gains on the session.

What did give a boost to the market was a bounce in pending home sales which, together with last week's report on existing home sales, are raising talk that low mortgage rates and falling home prices are finally giving a boost to the housing sector. The pending home sales data along with the stock market's gain pulled money out of the Treasury market where yields jumped sharply, including an 18 basis point jump to 3.66 percent for the 30-year bond.

News of a labor agreement between refiners and refinery workers hit the wires at the market close. But the news was expected and isn't likely to move oil prices which have been little changed in recent sessions at just over $40. Gold ended little changed at just over $900. The dollar fell 1-1/2 cents against the euro to $1.3036.

Tuesday, February 3, 2009

Dont believe the housing industry economists

Thanks to plummeting prices, pending home sales jumped 6.3% in December, the National Association of Realtors reports.
The NAR’s median home price plummeted 15% in December, year over year, to $175,400… the steepest drop on record.
Almost hilariously, the NAR projects the 2009 median home price to be $198,100. That’s a 12% hike from today’s median. And in 2010, your home’s value will pop another 5%, to an average of $207,700. Seriously? Some people never learn:
“The broad trend over the coming year,” forecast Lawence Yun, the NAR chief economist, back in December 2007, “will be a gradual rise in existing home sales, but because sales are exceptionally low in the final months of 2007, total sales for 2008 will be only modestly higher than 2007.” He predicted the median home price would rise to $218,300 last year… just a tiny bit off. Yun still leads the NAR economics unit.

Inflation? bond traders bet on it

Bond traders are making bets the inflation is coming to the U.S.

The yield on a 30-year bond has risen to 3.6% today, about 100bps higher than all-time lows set in late 2008. Might not seem like much, but it’s pretty breakneck for the bond world… economists polled by Bloomberg didn’t predict yields that high until 2010.

The Truth about investing: the Core Method it works very well

Consider what Charles Ellis, who helps oversee the $15-billion endowment fund at Yale University, said:

"Watch a pro football game, and it's obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, 'I don't want to play against those guys!'

Well, 90% of stock market volume is done by institutions, and half of that is done by the world's 50 largest investment firms, deeply committed, vastly well prepared -- the smartest sons of bitches in the world working their tails off all day long. You know what? I don't want to play against those guys either."

That's a brutal and very honest observation. The institutions Ellis refers to are mutual funds, hedge funds, and program traders -- and all of their professional staff, mathematicians, and researchers. The pros are deploying every possible tool to give them whatever edge they can get. And even they can have a hard time, as most of them will testify to the difficulty of trading in 2008.

The Core Method relies on ferreting out the information on what the best of these institutions are buying from the morass of data on their holdings.

Most of this data is gleaned from public filings. Using that data is a terrible way to invest for the future. Thats what they were doing as much as a year ago in some cases.

The Core Method identifies the most successful institutional investors currently, and then searches news, websites and other media for information on the most current holdings.

Where there is a consensus amongst the best, we can identify the security and Invest like the Best sm

When will we know if Government Stimulation is working?

How will we know that the government stimulus is working to stabilize the markets?

Very simply, It ALL comes back to commodities; we will know that the financial markets will stabilize when…oil prices rise again.

The economic data that the media tend to focus on are often lagging indicators. Unemployment, GDP, corporate earnings and retail sales tell us what has already happened…not what is going to happen.

Another argument for higher interest rates

This is a little technical, courtesy Niels Jensen , Managing Partner of Absolute Return Partners based in London, courtesy of John Mauldin. Thanks John, your work is much appreciated:

"So when we are told that the bailout cost, although large, is still manageable, it is only half the story.
The loss of tax revenue is another nail in the coffin and could lead to a dramatic – and unpredicted - rise in public debt. Have you heard any mention of that from your government?

At this point I need to introduce something as alien as the "flow-of-funds accounting identity"3:

Δ(G-T) = Δ(S – I) + ΔNFCI4

I rarely throw formulas at you for the simple reason that it scares many readers away. I urge you to stay with me for a bit longer, though, because this formula is critical in order to understand how the government response to the current crisis is likely to impact interest rates longer term. The equation states that any change in fiscal stimulus (Δ(G-T)) must equal the change in private sector net savings (Δ(S-I)) plus the change in net foreign capital inflows.

Translation: If our government stimulates the economy through public spending, as it is currently doing in spades, we must either save more or we have to rely on foreigners being prepared to invest in our country. There are no exceptions to this rule.

The key question, as our economic adviser Woody Brock points out, is what will cause this equation to hold true? It is quite simple. We will save more if we get paid more to do so (through higher interest rates) or if we are so scared of the future that we stop spending and start investing instead.

Foreign investors are no different. Now, with the trillions of dollars being spent around the world to shore up our financial system, the fear factor alone is not going to be enough. Higher – possibly much higher - interest rates will be required to ensure sufficient savings.

Obviously, there is another option at the government's disposal. The central bank can monetize some or all of the deficit by buying the bonds issued by the government. This line of action will keep Δ(G-T) down; hence the need for increased private savings (and/or capital inflows) drops accordingly. The problem with this approach, as an old Danish saying states, is that it is like wetting your pants to stay warm. Monetization executed on a big scale is highly inflationary in the long run, inevitably driving bond yields higher.

The good news is that we are very unlikely to loose control of inflation in the short run. The economy is simply too weak for that to happen.

Dishonesty in labelling: The house "stimulus" package

Thought this rant pretty much sums up why the Congress has the lowest approval rating in history! Hope it wont drag down the approval rating of our President:

Courtesy Chuck Butler, President, Everbank World Markets.

OK, speaking of stimulus... I'm very upset with the "new and Improved" stimulus package. I'm sure you've figured this out already from previous rants. However, now... I'm even more ticked off! Oh, and the TV / Cable media are swallowing the propaganda from the White House, hook, line and sinker! Here's what I'm talking about folks...

The package has a "buy American" portion in the package... This is protectionism folks... And here's what gets my goat the most about protectionism at this stage of the recession... Fed Chairman, Big Ben Bernanke, is supposedly a "U.S. depression guru"... Well, Big Ben, wasn't the protectionism of the 1930's one of the reasons for the Great Depression? And is just so happens that now we've had "the cheater's" confirmation, calling China "currency manipulators", and that was followed up with the "buy American" portion of the package...

Look... There's nothing wrong with the slogan, Buy American... In fact, I think it would be a great thing to go around saying and doing, based on our manufacturing prowess... But, that's not what I'm talking about here... I'm talking about protectionism, at a time when the global economies are hurting and need to export to us... I'm really surprised that the currency traders haven't seen this and taken the dollar to the woodshed... But then, maybe they're getting the wool pulled over their eyes...

The other thing that ticks me off on the "new and improved" stimulus package is the fact that a very small piece of the $816 Billion (before the Senate adds their pork!), stimulus is for the infrastructure projects that have been billed as a "major piece" of this plan! HOGWASH! Now, I'm not going to sit here and pass judgment on all the "items" that are being allocated Billions of dollars, like $1 Billion to deal with the census problems, and $88 Billion to help move the Public Health Service into a new building next year, and $650 million for TV Converter boxes. The list of items like this goes on and on... And all worthy items, I'm sure... But none of these types of spending allocations, and I repeat this so you get the full force of this statement... None of these types of spending allocations are doing anything to create jobs. Oh... And just for those of you keeping score at home... $50 Billion is allocated to bricks and mortar... Infrastructure... Which has had "top billing" on this package... Well, the truth is out... I sure hope someone takes their lawmakers to the woodshed for this!

China: money fleeing,economy declines

Beware what you wish for Schumer et al. What happens when this situation changes?

China's money in full flight to foreign refuges: The flow of capital into China has reversed. Money is going out as the nation's growth rate plummets, with experts estimating that as much as $240 billion left during last year's fourth quarter. Chinese investors are sending their money out of the country; the foreign affiliates of Chinese companies are parking their money elsewhere; and foreign investors are increasingly pulling their money out.

A senior Chinese government official said 20 million migrant workers have lost their jobs because of the economic crisis, a figure that is two to three times higher than what the government forecast. Chinese Premier Wen Jiabao assured an audience in London that the government will "take forceful steps" to prevent the nation's growth rate from falling significantly below 8%.

Higher interst rates are inevitable!

As things currently stand, the government and the Fed may take any steps they want to stabilize the economy, no matter how much these steps cost.

Now, the government is like a fat schoolboy taking candies from a well-dressed stranger. It has spent $8.5 trillion of future taxpayers' and foreign creditors' money guaranteeing debt and bailing out failed companies. But the government doesn't have its own money to pay for these remedies. So it borrows and inflates.

Analyst Jim Bianco's research shows the government's remedies have now cost America more than World War II. The Fed is expanding the money supply at a current rate of 151% a year... and in the last three months, the Treasury borrowed $485 billion. It has never borrowed this much in 12 months.

In 2009, the government will run the world's first trillion-dollar deficit.In 2010 or 2011 – when the Chinese arrangement ends – the Bond Market Vigilantes will return. Watch gold for the signal.
Gold is a much smaller market than the bond market, so it's more nimble. When gold makes a new high above 1,050, you should immediately start looking for shelter. It means the Chinese arrangement is winding down and the Vigilantes are coming.

The Vigilantes will run interest rates up by at least 10%.

They will force the U.S. economy to deal with its debt problem, the root of all our troubles today. No more bailouts, no more government guarantees, no more expensive spending programs, and no more printing money. This is what the situation was like in the early 1980s. It was chaos, but those who prepared ahead of time made a fortune.

This time around, while the vigilantes restore balance, you should own only gold, cash, and short-term money-market instruments. In the meantime, you should use the stability to earn as much income as you can by selling options against blue-chip stocks and holding high-yield bonds and other income investments.

These investments prosper when there are no Bond Market Vigilantes around.

Banking system still on life support

As expected The Federal Reserve on Tuesday announced the extension through October 30, 2009, of its existing liquidity programs that were scheduled to expire on April 30, 2009. The Board of Governors approved the extension through October 30 of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Money Market Investor Funding Facility (MMIFF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). The FOMC also took action to extend the TSLF, which is established under the joint authority of the Board and the FOMC.

In addition, to address continued pressures in global U.S. dollar funding markets, the temporary reciprocal currency arrangements (swap lines) between the Federal Reserve and other central banks have been extended to October 30. This extension currently applies to the swap lines between the Federal Reserve and each of the following central banks: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, the Norges Bank, the Monetary Authority of Singapore, the Sveriges Riksbank, and the Swiss National Bank. The Bank of Japan will consider the extension at its next Monetary Policy Meeting. The Federal Reserve action to extend the swap lines was taken by the Federal Open Market Committee.

The current expiration date for the Term Asset-Backed Securities Loan Facility (TALF) remains December 31, 2009. Other Federal Reserve liquidity facilities, such as the Term Auction Facility (TAF), do not have a fixed expiration date.

Market Reflections 2/2/2009

Economic data included another rise in the savings rate, a rise that reflects concern over jobs and one that is chocking off consumer spending. Construction spending on housing continues to fall while spending on commercial and government projects is now on the decline. ISM data on the manufacturing sector showed slowing rates of contraction but nevertheless point to six months of remaining contraction and a full year of contraction for factory jobs. Company news included another run of layoffs, this one led by retailer Macy's.

approach of Friday's jobs report, one that is expected to show another month of giant losses, kept markets quiet. The Dow industrials fell 0.8 percent while the dollar gave back 1/2 cent of its recent gains against the euro to end at $1.2840. There was a moderate safe-haven bid for long term Treasuries with the 30-year yield down 14 basis points to 3.47 percent.

The risk of a refinery strike seems remote, judging at least by oil prices which slipped 3 percent to $40.37. Gold gave back 3% of its recent gains to end at $903.80.

Monday, February 2, 2009

High yield bonds

High yield taxable bonds started off the year with a bang, generating a total return of 5.99% (752 bps of excess return).
We are starting to see investors reaching for yield again which is somewhat troublesome to us and we advise caution in high yield.

In the municipal space, total returns were solid and when you factor in the tax benefits clearly outpaced most of their fixed income brethren. Our theme of quality underperformed as a bevy of recent press articles about how “cheap” municipal bonds are drew in the lemmings. Here too we advise caution. It is my belief that the strains in the municipal market are much more severe than anything in the recent past and a period of above average defaults can not be ruled out.