Friday, May 15, 2009

Weekly Market Update


The sprouting “green shoots” may turn out to be closer in color to yellow—at least for now. Investor hope for an economic stabilization faded slightly as the retail sales and employment data disappointed this week. more...

US Treasury yields headed lower this week after a reprieve from new supply brought buyers back into the market. more...

Large-Cap Equities
The equity market fell sharply due to weak economic data and a plethora of secondary offerings by public companies. more...

Corporate Bonds
Investment-grade primary activity shot out of the gates this week with over $11.5 billion pricing on Monday alone. more...

Mortgage-Backed Securities
Mortgages enjoyed another week of easing credit conditions, robust demand, and declining volatility. more...

Municipal Bonds
The municipal bond market enjoyed another solid week as risk aversion continued to abate across credit markets. more...

The high yield market momentum of the prior eight weeks appears to be fading a bit. The Merrill Lynch High Yield Constrained Index is down 1.0% over the past week, after a stunning 20% rally from mid-March 2009 to early May. more...

Western European Equities
Stocks in Western Europe lost ground over the past week. The stocks with the worst performance were basic resources (-9.7%) and real estate (-8.4%). more...

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) lost -6.2% this week, while the Russian stock index RTS went down -0.2%. more...

Global Bonds and Currencies
Disappointment with the week’s global economic data triggered a return to risk aversion which benefited all major government bond markets in the past week. more...

Emerging-Market Bonds
Emerging markets sold off this week following weaker equity markets in the US. Dollar-pay debt spreads widened by 30 bps, taking a breather after several weeks of rally. more...

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“Anything in any way beautiful derives its beauty from itself and asks nothing beyond itself. Praise is no part of it, for nothing is made worse or better by praise.”
Marcus Aurelius

Market Reflections 5/14/2009

A rise in jobless claims didn't scare accounts away from the stock market where bargain hunting, following three days of selling, pushed the S&P 500 up 1% to 893. Auto sector layoffs, likely centered at Chrysler, drove initial jobless claims up 32,000 to 637,000 while continuing claims continue to mount, now at 6.56 million. Remember, the S&P move to 930 last week was based on expectations that job contraction was easing. Producer prices showed wide gains, easing questions over deflation but raising new ones on inflation.

Given gains in stocks, demand softened for the safety of the dollar which fell about 3/4 of a cent to $1.3640 against the euro. Oil rose about 50 cents to $58.50 while gold held firm at $925. Treasury yields were little changed with the 2-year ending at 0.84 percent

Thursday, May 14, 2009

The State of Housing Markets Around The World: Not Bottoming Yet?

Only two countries (Germany and Switzerland) out of 32 main property markets saw positive momentum in 2008 (a slower downward house price movement or faster upward movement), while 28 countries saw momentum deteriorating. Around 8 out of 32 countries saw house prices rise, adjusting for inflation, while 20 countries experienced house price falls with the sharpest in Latvia (37%), Lithuania (27%), U.S. (20%), UK (18%), Iceland (16%), Ireland (12%), and Ukraine (Kiev) (12%). Downward price momentum accelerated in Q4 2008 (Global Property Guide)

While stock market recoveries often precede an economic recovery, a key driver of property occupancy - employment - is often one of the last economic indicators to turn. This suggests that 2009 will remain a difficult year for commercial and residential property globally (Jones Lasalle)

Market Reflections 5/13/2009

In a setback for the economic outlook, retail sales proved weak for a second month. Accounts moved to safety, exiting the stock market where the S&P 500 fell 2.7 percent to end at just under 884. The dollar gained 1/2 cent against the euro to $1.3584 while Treasury yields fell 1 to 7 basis points in steepening trade. Oil fell back on demand concerns, ending down $1 to just under $58 despite big draws in weekly inventory data. Gold, benefiting from steady concern over financial-system risk, held firm ending at $926.

The Correction Finally Arrives

Don Worden:

"The markets have finally made up their minds what they want to do. In so doing it gave me a feeling of relief.It seemed to me that the market was acting too resistant to decline in view of the grim trading stats.In situations like that, I realize people are bombarded with bullish opinions (from experts). This leads to widespread confusion and ans a futile search for justification for a new wave of opinion.

Wednesday, May 13, 2009

Retail Sales

Released on 5/13/2009 8:30:00 AM For April, 2009
Previous Consensus Consensus Range Actual
Retail Sales - M/M change -1.1 % 0.1 % -0.6 % to 0.6 % -0.4 %
Retail Sales less autos - M/M change -0.9 % 0.3 % -0.2 % to 0.8 % -0.5 %

Retail sales in April were surprisingly negative, dashing market expectations significantly for two months in a row. Overall retail sales fell another 0.4 percent in April after dropping 1.3 percent the month before. The April decrease was sharply below the market forecast for a 0.1 percent increase. Excluding motor vehicles, retail sales posted a 0.5 percent decline, after a 1.2 percent plunge in March. The fall in ex-auto sales was far worse than the consensus expectation for a 0.3 percent increase.

Declines in sales were broad based but led by electronics & appliance stores, down 2.8 percent; gasoline stations, down 2.3 percent; and food & beverage stores, down 1.0 percent. The downward tug by gasoline sales hardly explains the overall weakness. Excluding motor vehicles and gasoline, retail sales fell 0.3 percent after declining 1.0 percent in March.

Overall retail sales on a year-on-year basis in April were down 10.1 percent, down from minus 9.6 percent in March. Excluding motor vehicles, the year-on-year rate worsened to down 7.7 percent from down 6.3 percent in March.

Equities will not like today's retail sales numbers. The green shoots view of the economy holds true only if the consumer sector stabilizes. Look for possible flight to safety in the bond market.

Market Consensus Before Announcement
Retail sales dropped 1.1 percent in March after a 0.3 percent gain in February. Sales were weak across the board. But the strongest declines were seen in electronics & appliance stores, motor vehicles, and miscellaneous store retailers. Excluding motor vehicles, retail sales decreased 0.9 percent, after a 1.0 percent boost the month before. Our first glimpse at consumer spending for April was not good, hinting retail sales could decline further for the month. Unit new motor vehicle sales fell back to a 9.32 million unit annualized pace for the month after a 9.86 million unit rate in March - a 5.5 percent monthly decline.

Retail sales measure the total receipts at stores that sell durable and nondurable goods. Consumer spending accounts for two-thirds of GDP and is therefore a key element in economic growth. Why Investors Care

Data Source: Haver Analytics

MBA Purchase Applications

Not really good news.
Released on 5/13/2009 7:00:00 AM For wk5/8, 2009
Previous Actual
Purchase Index - Level 264.3 265.7

MBA's purchase index is improving but not much at 265.7 in the May 8 week vs. 264.3 in the prior week. These results, along with levels in April, are not pointing to a major pickup in home sales, suggesting that low interest rates and falling home prices are, as yet, giving only a limited boost to home sales. Low interest rates have had a big impact on refinancing, though demand has been slowing in recent weeks with the index down 11.2 percent to 4,588.6. Mortgage rates are at rock bottom with 30-year fixed loans averaging 4.76 percent for a 3 basis point decline.

The Mortgage Bankers' Association compiles various mortgage loan indexes. The purchase applications index measures applications at mortgage lenders. This is a leading indicator for single-family home sales and housing construction.

Why we care about this:
Why Investor's Care
This provides a gauge of not only the demand for housing, but economic momentum. People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as the Mortgage Bankers Association purchase applications, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.

Each time the construction of a new home begins, it translates to more construction jobs, and income which will be pumped back into the economy. Once a home is sold, it generates revenues for the home builder and the realtor. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items new home buyers might purchase. The economic "ripple effect" can be substantial especially when you think a hundred thousand new households around the country are doing this every month.

Since the economic backdrop is the most pervasive influence on financial markets, housing construction has a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the MBA purchase applications index carries valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.


Weekly, data for previous week are revised to reflect more complete information.

The Mortgage Bankers' Association compiles various mortgage loan indexes. The purchase applications index measures applications at mortgage lenders. This is a leading indicator for single-family home sales and housing construction.

Market Reflections 5/12/2009

Tuesday was a quiet session for the stock market on caution ahead of tomorrow's retail sales report. Trade data showed deepening weakness for exports reflecting recessionary effects in other nations. In a separate report, the Treasury posted its first deficit in the tax month of April since 1983. The S&P 500 slipped 0.1 percent to 908.

The biggest news came from oil which hit $60 before edging back below $59. Traders stress that gains in oil do not reflect current supply/demand fundamentals, reflecting instead strength in the stock market and weakness in the dollar which slipped 1/2 cent to $1.3637 against the euro. Weakness in the dollar is tied to increasing appetite for risk, the result of optimism in the U.S. and tangible signs of strength in China.

Tuesday, May 12, 2009

Will the Fed buy more bonds?

U.S. Treasury bonds have fallen over half a percentage point in the past seven weeks, the biggest fall since 1994. Mortgages rates on 30-year fixed loans are back to more than 5%... This sets the stage for a showdown between the government's lenders (bond buyers) and the Federal Reserve, which wants interest rates to remain low. The Street (BlackRock, American Century, Federated, and Pioneer Investment) thinks the Fed will buy Treasury bonds again (like it did last month) in order to force rates lower. No matter what the Fed does, long-term interest rates are going much higher and the bond market is going to get crushed.

What will more and more creditworthy borrowers do when they see the Fed engineering a huge new inflation? Borrow as much money as they can, at fixed rates. Take Microsoft, for example. Bill Gates' company has never borrowed a penny before – ever. It has no need for debt financing whatsoever – it's sitting on more than $20 billion in cash reserves. Nevertheless, Microsoft will borrow billions in five, 10, and 30-year debt. It will use the money from this sale to help fund a $40 billion share repurchase program – nearly 25% of the company's outstanding shares. Follow Bill Gates' lead: Buy high-quality equity. Sell government debt.

Another member of the ultra-wealthy, Bond King Bill Gross, is also betting on inflation. Gross reduced U.S. government-related debt holdings (which include Treasuries, agency debt, and government-backed bank debt) in his PIMCO Total Return Fund for the first time since January. His holdings are now 26% of the fund down from 28% in March - the most he's owned since April 2007. If his May 8 interview with CNBC is any clue, Gross may shift some assets into senior bank debt now that the government's stress tests are done... "The banking system is enduring," Gross said. "These types of spreads on the senior debt level are historic and quite attractive."
From Bloomberg:

BlackRock Inc., American Century Investments, Federated Investors and Pioneer Investment Management say it's time to buy Treasuries because the Fed will need to expand its purchases to keep consumer borrowing costs from rising further."

While government buying of Treasuries will temporarily keep yields down, and could make for a good short-term trade, it won't stop the eventual massive inflation hangover.


“I have not failed. I’ve just found 10,000 ways that don’t work.” Thomas Edison

Was It a Sucker's Rally?

You can have a jobless recovery but you can't have a profitless one.
The Dow Jones Industrial Average has bounced an astounding 30% from its March 9 low of 6547. Is this the dawn of a new era? Are we off to the races again?

I'm not so sure. Only a fool predicts the stock market, so here I go. This sure smells to me like a sucker's rally. That's because there aren't sustainable, fundamental reasons for the market's continued rise. Here are three explanations for the short-term upswing:

- Armageddon is off the table. It has been clear for some time that the funds available from the federal government's Troubled Asset Relief Program (TARP) were not going to be enough to shore up bank balance sheets laced with toxic assets.

On Feb. 10, Treasury Secretary Timothy Geithner rolled out another, much hyped bank rescue plan. It was judged incomplete -- and the market sold off 382 points in disgust.

Citigroup stock flirted with $1 on March 9. Nationalizations seemed inevitable as bears had their day.

Still, the Treasury bought time by announcing on the same day as Mr. Geithner's underwhelming rescue plan that it would conduct "stress tests" of 19 large U.S. banks. It also implied, over time, that no bank would fail the test (which was more a negotiation than an audit). And when White House Chief of Staff Rahm Emanuel clearly stated on April 19 that nationalization was "not the goal" of the administration, it became safe to own financial stocks again.

It doesn't matter if financial institution losses are $2 trillion or the pessimists' $3.6 trillion. "No more failures" is policy. While the U.S. government may end up owning maybe a third of the equity of Citi and Bank of America and a few others, none will be nationalized. And even though future bank profits will be held back by constant write downs of "legacy" assets (we don't call them toxic anymore), the bears have backed off and the market rallied -- Citi is now $4.

- Zero yields. The Federal Reserve, by driving short-term rates to almost zero, has messed up asset allocation formulas. Money always seeks its highest risk-adjusted return. Thus in normal markets if bond yields rise they become more attractive than risky stocks, so money shifts. And vice versa. Well, have you looked at your bank statement lately?

Savings accounts pay a whopping 0.2% interest rate -- 20 basis points. Even seven-day commercial paper money-market funds are paying under 50 basis points. So money has shifted to stocks, some of it automatically, as bond returns are puny compared to potential stock returns. Meanwhile, both mutual funds and hedge funds that missed the market pop are playing catch-up -- rushing to buy stocks.

- Bernanke's printing press. On March 18, the Federal Reserve announced it would purchase up to $300 billion of long-term bonds as well as $750 billion of mortgage-backed securities. Of all the Fed's moves, this "quantitative easing" gets money into the economy the fastest -- basically by cranking the handle of the printing press and flooding the market with dollars (in reality, with additional bank credit). Since these dollars are not going into home building, coal-fired electric plants or auto factories, they end up in the stock market.

A rising market means that banks are able to raise much-needed equity from private money funds instead of from the feds. And last Thursday, accompanying this flood of new money, came the reassuring results of the bank stress tests.

The next day Morgan Stanley raised $4 billion by selling stock at $24 in an oversubscribed deal. Wells Fargo also raised $8.6 billion that day by selling stock at $22 a share, up from $8 two months ago. And Bank of America registered 1.25 billion shares to sell this week. Citi is next. It's almost as if someone engineered a stock-market rally to entice private investors to fund the banks rather than taxpayers.

Can you see why I believe this is a sucker's rally?

The stock market still has big hurdles to clear. You can have a jobless recovery, but you can't have a profitless recovery. Consider: Earnings are subpar, Treasury's last auction was a bust because of weak demand, the dollar is suspect, the stimulus is pork, the latest budget projects a $1.84 trillion deficit, the administration is berating investment firms and hedge funds saying "I don't stand with them," California is dead broke, health care may be nationalized, cap and trade will bump electric bills by 30% . . . Shall I go on?

Until these issues are resolved, I don't see the stock market going much higher. I'm not disagreeing with the Fed's policies -- but I won't buy into a rising stock market based on them. I'm bullish when I see productivity driving wealth.

For now, the market appears dependent on a hand cranking out dollars to help fund banks. I'd rather see rising expectations for corporate profits.

Mr. Kessler, a former hedge-fund manager, is the author of "How We Got Here" (Collins, 2005).

Please add your comments to the Opinion Journal forum.

Printed in The Wall Street Journal, page A17

Market Reflections 5/11/2009

Monday prove to be a quiet defensive session. The administration, citing the slow economy, raised its fiscal-year deficit projection by $89 billion to $1.8 trillion, borrowing 46 cents for each dollar the government spends. The 2010 deficit is pegged at $1.3 trillion. Otherwise, the only news in the session was stock and debt issuance. Several banks issued stock following stress-test related issuance on Friday where demand proved very strong. Microsoft also tapped the debt market for the first time, selling $3.75 billion in 5-, 10-, and 30-year notes.

Stocks fell back amid questions whether Friday's big gains were overdone. The S&P 500 fell 2.2% to 909. Oil also fell back a bit, ending at $58.15. Gold was steady at $914. The dollar firmed slightly from Friday's selloff to end at $1.3582 against the euro. Demand for the safety of Treasuries picked up with the 10-year yield down 12 basis points to 3.16 percent.