Friday, June 12, 2009

Weekly Market Update (6/12/09)‏


Retail sales rose for the third time in five months in May and consumer sentiment continued to improve during the month adding to recent evidence that the US economy is poised to recover later this year. more...

In a week dominated by new Treasury supply in 3-year, 10-year and 30-year maturities, Treasuries continued their sharp move higher in yields with 10-year yields trading briefly at 4%. more...
Large-Cap Equities
The stock market ended the week relatively flat as trading volumes reflected light summer activity. more...

Corporate Bonds
Investment grade primary activity slowed down noticeably from its hectic pace even though investors continue to reach for yield. more...

Mortgage-Backed Securities
Mortgages underperformed Treasuries and other spread asset classes as yields traveled with volatility. more...

Municipal Bonds
Municipal bond yields lurched higher this week across the yield curve as the market appeared to catch-up with the recent move in Treasuries. more...

The high yield run continues. For the twelfth week out of the last 13, the broad high yield market posted another positive weekly total return. more...

Western European Equities
Stocks in Western Europe performed well during the week, finishing up +1%. more...

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +4.7% this week, while the Russian stock index RTS went down -2 %. more...

Global Bonds and Currencies
In most major sovereign bond markets, the early part of the past week was characterized by an extension of the previous week’s sell-off as supply and fears of near-term rate hikes continued to drive yields higher. more...

Emerging-Market Bonds
Emerging market dollar-pay debt spreads were roughly unchanged this week. After several weeks of positive price action in risk markets, the tone turned more neutral as investors now focus more on economic data going forward. more...

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The $18,100,000,000 question

The numbers are staggering…really incomprehensible…it’s the kind of stuff that if you made it up no one would believe you…I’m talking about the amount of money both the US• The US government and Fed spent or lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year.
• European governments have approved $5.3 trillion of aid, more than the annual gross domestic product of Germany ($3.3 trillion).
If we break the US spending down to per person living in the US, we get:
$12,800,000,000,000 divided by roughly 304,000,000 = $42,105 per person
Now I know what you’re thinking; if our government, in its infinite wisdom simply doled out that much money directly to every man woman and child, you can bet our crisis would be solved. Heck, in the Crooks family alone, four kids, my wife, and I would have racked up a cool $252,630! Granted, the kids would want their pound of flesh given that all are of age, but still, we could have paid off a whole lot of debt and bought some pretty cool toys with that, deleveraging and stimulating along the way. And I bet you a dollar to a donut that I could more efficiently spend that money than some government agency that’s only trying to “help” me by saving various dinosaur financial institutions and companies throughout our fair land.
Before I went off that tangent, I was going to say that what is really quite amazing is that with a total of….
…committed by the US and Europe, one wonders about a couple of things:
1) How in the heck can banks screw up so catastrophically? Still an open question.
2) Why in the heck don’t we have ragging inflation by now? Still an open question.
When you consider that other governments besides the US and EU (China has been busy along with Japan, Brazil and Russia) are into the money pumping game, and we haven’t seen a whole lot in the way of global traction in demand, and even more surprisingly we haven’t seen any inflation per se from the “growing” countries, it has to make one very nervous.
In fact, as John Ross pointed out yesterday, we keep seeing deflation instead. Just today, as highlighted in the key news above, German wholesale prices fell 9% in May from a year ago! Say what? Yikes!!!!
And did anyone notice US consumer prices went negative year-over-year for the first time since 1954! Yikes!!!!
And Japan is getting bear hugged again by deflation despite being stimulus gurus. Yikes!!!
This is a subject we have been harping on for a while and it goes to the point that there must be still massive amounts bad paper still on the balance sheets of a lot of institutions everywhere, not to mention private balance sheets too. This goes to the point of why this incomprehensible amount of stimulus is not getting the requisite traction, despite signs of hope and glee flowing from some of the emerging markets, which we don’t deny. But for a global recovery, we still think we need places like the US, Europe, and Japan to recover, don’t you?
When you look at the numbers, it’s easily understandable why many expected hyperinflation once there is even a modicum of traction.
Inflation is, and always has been, the preferred route out of trouble by governments past who issued too much debt i.e. inflate away the debt problem by paying it off witheven more worthless paper. This is why you might have heard bonds referred to as, Certificates of Confiscation.
The scary part about what’s going on now is that governments present are running out of trees to cut down so they can print more paper in their vain attempts to conjure up a little headline inflation; it makes them look very bad compared to their inflationist counterparts past. A pathetic performance indeed it is. Mr. Summers, put down that Diet Coke and get going buddy! We still have plenty of trees in our neighborhood, and I’ve even seen a few around Washington. No excuses!!! In fact, if we really cared about our country, we would each donate a tree to help out our Treasury. It is the least we could do for all they do for us.
Do you notice why our government is having so much trouble achieving their goal of inflationism?
If you said Velocity of Circulation, you would be correct! Congrats! For those of you not versed in such arcane jargon, and be very thankful you are not, let me put it this way:
You can lead a horse to water but you can’t make him drink!
If you and I are very worried about our future earnings disappearing because our companies aren’t doing so well because there is little demand for its products or services, which represents most real people I know, then we are not predisposed to heading out to the store to find something shiny new to buy for us or our loved ones. Multiply this human action, which by the way is the title of the best book on economics ever written, by Ludwig von Mises, over and over and over again amongst the US population that does not either work for, or do business directly with, the US FederalGovernment, the only place with booming growth, and you can see why the Velocity of Circulation of money is falling, off a cliff.
And this goes to one of the major problems, I think, for all those neo-Keynesian economists that keep flowing from the woodwork to tell us we need more spending:
Econometric models still have a little problem with human action. They have a little trouble measuring, what they would say is “irrational behavior.” But those of us that live in the real world would call it quite rational behavior. When we are nervous about the future we make a logical decision to change the way we act with a thing called money. We viciously cut waste out of our budget. We change our spending habits dramatically. Our incentive system adjusts accordingly.
And when we watch our government commit $42,105 for every man women and child to “help” us, and eat away at the stored wealth built up by hard working Americans past, it makes us even more nervous. Thus, what the neo-Keynesians see as a rationale response, we see as incredibly irrational. And thus, we decide it’s time once again to reduce the Velocity of Circulation of our money.
Thus we end up with a self-reinforcing nasty feedback loop created by people who actually believed everything Keynes said in the General Theory, instead of moving on to von Mises Human Action and getting it right. And so it goes.
Jack Crooks
Black Swan Capital LLC


“Action is purposive conduct. It is not simply behavior, but behavior begot by judgments of value, aiming at a definite end and guided by ideas concerning the suitability or unsuitability of definite means. . . . It is conscious behavior. It is choosing. It is volition; it is a display of the will.”

Ludwig von Mises

Market Reflections 6/11/2009

Expectations of economic recovery continue to rise, boosted Thursday by mostly solid retail sales data and an easing in the number of jobless filing new claims. Retail sales ended two months of decline with a solid gain in May, though improvement was centered at gas stations in a reflection of rising pump prices. Outside of gas stations, most retail sectors did post gains but making for only a very small net gain. Though the best news in jobless claims data centered on new claims, which fell 24,000 to 601,000, the recent pace of increase in continuing claims has been slowing. Stocks were boosted by the data with the S&P 500 rising slightly to just under 945.

A big issue for the markets right now is oil, which is the focus of a commodity sector where prices are rising not only on expectations of improving demand but on hedging should dollar inflation begin to appear. At $72.50 for oil, many argue weak demand and heavy supply point to a price half of that. Talk is heavy in the commodity sector whether the dollar is under attack by the federal government and its policies of stimulus spending and quantitative easing. Aluminum is the new center of concern, up 15 percent in the last week on talk of heavy short covering and an absence of sellers. The dollar fell 1.2 percent on the dollar index to end the day at 79.42.

All the concern didn't upset the week's Treasury auctions where the day's 30-year auction was very well received. Demand for Treasuries improved in flattening trade with the 30-year bond down 7 basis points to 4.69 percent. Gold tested $960 before settling back at $955 while silver ended at $15.39.

Thursday, June 11, 2009

Market Reflections 6/10/2009

The Beige Book offered a much less optimistic view of the economy than many had feared, that's right feared. Talk of economic strength has raised concern of inflation and led to a spike in interest rates, neither of which will help the economy. The Beige Book said the economy and price pressures are still weak. But the news didn't raise demand for Treasuries where the 10-year yield rose 9 basis points to 3.95 percent. A sloppy 10-year auction pressured Treasuries as did word out of Russia that it will reduce its Treasury holdings.

Other economic data included a trade report that shows declines in exports, reflecting weak foreign markets, but an important gain in consumer goods imports that points to strength in the domestic consumer sector. Weekly inventory data on petroleum products showed wide draws but still high levels of supply and still weak demand for gasoline. Oil ended more than $1 higher at $71.25 while the S&P 500 slipped slightly to just under 940. The dollar keeps firming, up 0.5 percent on the dollar index to 80.26 helped by financial turmoil in the Baltic nations that is moving money out of the euro.

Wednesday, June 10, 2009

“It's the dumb money,”

“It's the dumb money that thinks you can correct a generation-long period of credit growth in 24 months...with less than 10% unemployment.

“Stocks have now been in a rally for three months. The longer this goes on, of course, the dumber money gets. People come to think the bounce is a permanent bull market.”

Bill Bonner

Negative savings rate for the first time since 1931

“Due to federal government spending, for the first time since 1931 the US economy is reporting negative net national (personal + corporate + government) savings. In 2008, the negative savings were -$124.6 billion or 0.94% of GDP. In Q1 2009, the negative savings were -$183 billion or 1.3% of GDP.”

This is ominous for a whole host of reasons, but three key reasons come to mind:
1) US savings rates have soared and still can’t cover the spending by the drunken sailors at the helm
2) Loss of the ability to generate wealth is not just a game of numbers, but is sparked by numerous disincentives to produce wealth in the first place and can self-feed. Does anyone remember Atlas Shrugged? In Rand’s brilliant novel producers when on strike because they got tired of the parasites stealing their wealth for the “masses.”
3) Proves that this team in power has little respect for the market and its ability to heal itself by cleansing away the excess baggage. Every connected political crony needs to be saved, according to this crowd.
So, as they say: “How’s that hopey-changey thing working out for you?” If you are a Federal government employee or one of the masses being “saved” by your government through the confiscation of others wealth, or you know nothing about how the market works, then you are likely loving hopey-changey. But those who have worked 7-days a week for many years to build businesses all over American are hoping we can get some changey very soon!

from:Jack Crooks
Black Swan Capital LLC

Market Reflections 6/9/2009

Ten banks said they are paying back the TARP funds that helped keep many of them afloat during the worst of last year's credit panic, headlining an otherwise steady session that was anything but quiet. The recent surge in interest rates is raising talk whether the government should cut short its massive stimulus program, redirecting nearly $800 billion in unspent stimulus funds to pay down the deficit. There's talk that should the recovery take hold and stimulus efforts are not reversed, inflation will be the result -- a risk that explains strong and rising inflows into commodities.

Oil toyed with $70 through the session while copper jumped 5 percent on the day. Continued increases in commodity prices will hurt the recovery and raise the risk of an inflation-induced recession. Investors are on the look out for any troubles at this week's Treasury auctions, trouble that would indicate investors are no longer comfortable with dollar-based fixed income instruments. But there's absolutely no sign of that yet as today's giant $35 billion 3-year note auction found very strong demand. The dollar did fall back in the session but in a reversal of yesterday's gains, ending down 1.3 percent at 79.82 on the dollar index. Stocks were little changed with the S&P 500 up 0.4 percent at just over 940.

Tuesday, June 9, 2009

The depression quietly deepens

The depression quietly deepens
It is lonely in the diminishing camp of bears, says Ambrose Evans-Pritchard

Those of us who still question whether the world has purged its toxins are reduced to the same tiny band of moaning Druids from early 2007, when we shook our heads in disbelief as the carry trade swept Iceland to fresh madness and bankers laughed off sub-prime rot at Bear Stearns.

We learned then to thicken our skins with walnut juice, lie down in dark rooms, and dissent from Goldman Sachs. Such seclusion is called for once again as Goldman replays its BRIC anthem and raises its oil forecast to $85 a barrel this year, betting that the world will roar back on a tidal wave of liquidity.

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Ed Balls deserves his chance at No 11It is perhaps unkind to mention that Goldman issued a $200 call at the top of the speculative frenzy last year, just before oil crashed, but they have broad shoulders.

Note that Total's Jean-Jacques Mosconi said markets are awash with so much crude that almost 100m barrels (a near record) are stored on tankers at sea. Note too that May electricity use fell 10pc in China's industrial hub of Guangdong from a year earlier. This is revealing, given that China's fiscal boost has reached peak and will fade later this year.

For guidance on where we are in this long-drawn saga, I look to Berkeley's Barry Eichengreen, author of the Great Depression classic Golden Fetters – which avoids the error of viewing the 1930s through a US prism.

He has crunched the latest data with Trinity College Dublin's Kevin O'Rourke for VoxEU, concluding that the global rupture over the last nine months has been more violent than in the early slump. This is logical. Global debt leverage is much greater this time.

The fall in industrial output has been roughly equal to the 1929-1930 stage for Germany and the Anglo-Saxons, but worse for Japan, France, Italy, and Eastern Europe. The collapse in world trade has been swifter: the global equity crash has been twice as bad. "It's a depression alright. The good news is that the policy response is very different. The question now is whether that response will work," they said.

The elastic was bound to snap back, just as it did in the bear rally of early 1931. Whether the underlying economy has begun to heal is another matter. World Bank chief economist Justin Yifu Lin said capacity utilization is running at an historic low of 50pc-60pc. Companies will have to fire a lot of workers. This is where the danger lies, and why he fears that deflation is creeping up on us.

Trade data from Asia are flashing warning signals again. Korea's exports were down 28.3pc in May, reversing the April rebound. Malaysia has slipped to -26pc, and India has touched a new low of -33pc.

US freight data is getting worse, not better. The Association of American Railroads said traffic was down 22pc in the third week of May from a year earlier. Canadian freight was down 34pc.

The American Trucking Association (ATA) said it saw fresh drops of 4.5pc in March and a further 2.2pc in April. Tonnage is down 13pc over 12 months. Bob Costello, the ATA's chief economist, said companies have not cut inventories fast enough to keep pace with declining sales. The contraction in truck volume has "accelerated".

Yes, the Baltic Dry Index for bulk shipping of resources has quadrupled since January, but this reflects China's bid to stockpile metals while prices are low.

Stephen Roach, Morgan Stanley's Far East chief, fears an "Asian Relapse", saying the region is prisoner to its fatal dependency on exports to the West. The export share of GDP has risen from 36pc to 47pc across developing Asia over the last decade.

"China's incipient rebound relies on a time-worn stimulus formula: upping the ante on infrastructure spending in anticipation of an eventual rebound of global demand," he said. The strategy cannot work this time because Americans have exhausted their credit, and their desire to borrow. Consumption will fall from its peak of 72pc of GDP to the "pre-bubble norm" of 67pc, if not more.

David Rosenberg from Gluskins Sheff expects Americans to retrench ferociously as 78m baby boomers face the looming threat of penury in old age. "The big story is that the personal savings rate hit a 15-year high of 5.7pc in April. I believe it could test the post-War peak of 15pc. Too many pundits are still living in the old paradigm of Americans shopping till they drop," he said.

If he is right, this will shatter the surplus economies of China, Japan, and Germany, unless they adjust fast to the new world order. Germany does not even seem to understand the problem it faces. Chancellor Angela Merkel lashed out last week at quantitative easing by the Fed, the Bank of England, and the European Central Bank, repeating the silly mantra that this will set off an inflationary storm.

How can it do so when the velocity of circulation has collapsed, and unemployment is rising everywhere? The Fed's "monetary multiplier" ended last week at 0.867, half its average of 1.7 over the last decade. The credit mechanism is still broken. This is what happened in Japan in its Lost Decade.

The ECB says the eurozone economy will contract until mid-2010, at best. Germany's trade association (Wirtschaftsverbände) warned Mrs Merkel last week that the credit drought threatens to become "life-threatening by the summer at the latest".

The list of countries in deflation is growing every month: Ireland (-3.5), Thailand (-3.3), China (-1.5), Switzerland (-1), Spain (-0.8), the US (-0.7), Singapore (-0.7), Taiwan (-0.5), Belgium (-0.4), Japan (-0.1), Sweden (-0.1), Germany (0).

Yet markets seem to think otherwise, and this has its own awful consequences. Inflation fears have driven 10-year US Treasury yields to 3.86pc, a full point above levels in March when the Fed intervened to force rates down. US mortgage rates have jumped to 5.29pc. Gilts have reached 3.92pc, and French 10-year bonds are at 4.05pc.

This bond revolt is enough to bring any global recovery to a shuddering halt. The irony is that those fretting loudest about inflation may themselves tip us into outright deflation, with all the perils of a debt compound trap. It is Angela Merkel who plays with fire.

Market Reflections 6/8/2009

Talk of a Fed rate hike spread further Monday, making for continued selling in short-end Treasuries where the 2-year note rose another 13 basis points to end at 1.43 percent. Before Friday's better-than-expected jobs report, the note was yielding 90 basis points. Rising interest rates indicate that economic expectations are improving, and in this case quickly. Strength in Wednesday afternoon's Beige Book would further raise expectations as would strength -- and especially so -- in Thursday's retail sales report.

Though long Treasury yields are also rising, they're rising at a much slower pace than short rates, making for a flattening in the yield curve that reflects a movement out of safe-haven investments, in this case funds sidelined in the low yielding 2-year note, and an eventual movement toward higher returns, perhaps in the stock market. But the stock market hasn't benefited much yet, little changed on the S&P 500 at just under 940. Remember, stocks are up 40 percent from early March, a fact that is limiting buying spirits. Charles Schwab advised its clients on Monday to increase their exposure to the stock market, but suggested that they wait to buy on dips.

Big news in the session was a sovereign ratings downgrade for Ireland, news that pushed money into the dollar which rose nearly a cent against the euro to $1.3906. The strength in the dollar limited questions over inflation in the session, but inflation will be the inevitable concern should the economy actually begin to recover.

Talk of rate hikes, not the prospect of inflation, affected many commodities including silver, which aside from its value as a monetary substitute is also an industrial metal. Silver fell 2 percent from Friday to $14.95. Copper, zinc, lead and nickel also posted declines in the session.

Monday, June 8, 2009

Double-Digit Bear Market Income

The Double-Digit Bear Market Income process involved buying depressed shares of the safest blue-chip companies in the world... companies like Microsoft, Procter & Gamble, Coca-Cola, and Verizon. The bear market drove shares of these companies down to mouth-watering valuations... and we bought when no one else would.

Most of these companies pay dividends in the 3% to 6% range... and most importantly, they raise their dividends year after year, which is great for compounding your wealth. Now, here's the other half of the process...

Last October, the VIX reached an all-time high of 89. The VIX is known as Wall Street's "fear gauge." It's an index that measures the price investors are willing to pay for protective options... the price of "portfolio insurance." People were paying extraordinary prices for options back then. This made it lucrative to sell "covered call options."

A covered call strategy is when you sell the potential future upside in a stock to another investor in return for a large fee, paid in cash, immediately. This fee is an "option premium." By collecting this option premium, it's easy to double or triple the income you receive from your stock positions. Your downside hasn't changed, except now you have the option premiums to pad your returns.

If you believe a stock is going to shoot the moon, you don't want to sell away your upside. But in a bear market, selling away upside on giant, stable companies for 12% upfront cash payments makes perfect sense. The cash payments give you both safety and income.

Take Coca-Cola as an example. We bought the stock for $42.27 in November, during the heart of the stock market crisis. Then we sold a May $47.50 call option against our stock. If Coke stock rallied past $47.50 in six months, we were required to sell it at $47.50. We earned $3.70 upfront in cash for selling this option...

Between November and May, we also received $0.82 in dividends from Coca-Cola. In other words, we made 11% cash income from our Coca-Cola investment in six months. Then the stock market bounced, and Coca-Cola's stock rose, too. We sold for $47.50 and made 18% on the stock price... for a total 30% return on investment.

We used the exact same technique to make...

· 15% from Altria (12% was cash income)
· 21% from McDonald's (13% was cash income)
· 28% from Microsoft (12% was cash income)
In the past few months, however, the stock market has calmed down. Since March, the VIX has declined from 50 to 30. We no longer have the "slam dunk" conditions we had... where traders were willing to pay us huge premiums.

I'm currently recommending holding off on opening new covered call positions. It's much more difficult to find great opportunities .

You should keep a close eye on the VIX. There's still plenty of danger out there... gigantic government debts... falling commercial real estate prices... rising interest rates. The VIX could easily return to the 35 or 40 area. If the VIX reaches these levels, the Double-Digit Bear Market Secret strategy is back on.




“While payrolls slid by 345,000, much below the consensus guess, it was the usual hokey number, getting a lift from the wonderful birth/death model, which somehow summoned up 220,000 jobs and did so, magically, out of thin air. “The harsh truth is that, using the regular payroll data, a rather formidable 14.5 million people are out of work. Moreover, if we look at the category we feel gives a more accurate picture -- the so-called U-6 tally -- which includes people too discouraged to keep looking for a job and those working part-time because they can't find full-time slots, the unemployment rate shot up to a new high of 16.4%. That means that something around 25 million folks are effectively on the dole. Ugh!”
Alan Abelson, Barron’s