Friday, January 30, 2009

Market Reflections 1/30/2009

Fourth-quarter GDP, at -3.8 percent. proved weak but far from "staggeringly" weak like the White House warned just yesterday. The Chicago purchasers' report and the Reuters/University of Michigan consumer sentiment report point to continued but non-accelerating contraction so far in the first quarter. Optimism that the government will create a "bad bank" to absorb troubled bank assets, optimism that has helped the stock market over the past week, was deflated by a CNBC report that warns the plan, to be unveiled next week, lacks both details and means of funding.

Company news was headed by strong profits from oil giants Chevron and Exxon Mobil, the latter posting a record $45.2 billion profit in 2008. Oil companies are yet to show the effects of the collapse in oil prices. Despite the collapse in oil prices, refinery workers are threatening to go on strike over the weekend, news that added support, but only moderate support, to oil and gasoline prices. Oil ended little changed at $41.60.

Money moved out of risk and into safety during the session. The Dow industrials fell 1.8 percent while the dollar gained nearly 2 cents against the euro to end at $1.2794. Yields in the Treasury market moved slightly higher.

A big gainer on the day was gold which rose 2.2 percent to $929.90. But more important than the gain was a jump in open interest indicating that hot money, that is hedge funds, are back in gold.

The house Bill Revisited

To give you a “taste” of what this pork-laden monstrosity contains, check out this excerpt from Speaker of the House Nancy Pelosi’s appearance on CBS.

CBS: Can you honestly say that every program in this plan is solely to stimulate the economy?
Pelosi: (nods) Yes I will.

CBS: How does $335 million in STD [sexually transmitted disease] prevention stimulate the economy?
Pelosi: I’ll tell you how – there is a, uh... I’m a big believer in prevention. And we have, uh – there’s a, uh, part of the bill on the health side of it that is about prevention. It is about, uh, it being less expensive to the states to do these prevention measures...

Okey dokey, Ms. Pelosi. I guess she took the word “stimulate” to mean something else there... hoping folks will loosen up and have a little more fun perhaps?

Market Reflections 1/29/2009

The White House warned Thursday to expect a "staggering" contraction for fourth-quarter GDP in data to be released Friday, news that didn't help any appetite for risk. Durable goods data for December in fact showed staggering losses as did new home sales. Weekly jobless claims continue to deteriorate pointing to another month of severe payroll contraction. All the day's news sent stocks, which had shown resistance to bad news over the last few sessions, down sharply with the Dow industrials losing 2.7 percent.

Earnings news was headed by a massive $5.9 billion loss for Ford and included big losses by big and small companies alike. Earnings have proven far worse than expectations, now at -35% year-on-year vs. expectations at the beginning of the month for barely a 1% decline (data provided by the courtesy of Thomson Reuters).

Money moved back into the safety of gold which gained $20 to end back over $900 at $909.80. All the bad news isn't hurting oil where talk of a strike at Shell refineries and heavy talk of OPEC cutback compliance are keeping prices over $40. However bad conditions are here talk is building that they may be worse in Europe where questions are now being asked over the future of the euro. The dollar gained more than 2 cents against the euro to end at $1.2950.

Money moved out of the Treasury market following a poorly received 5-year auction, a massive $30 billion auction that attracted limited interest and raises questions over how many buyers are left for the government's debt. The 3-month yield rose 4 basis points to 22 basis points with the 30-year up a very steep 22 basis points to 3.63 percent.

Thursday, January 29, 2009

The Congressional "bailout/stimulus" bill

I am deeply dissappointed to see that the House is totally uninterested in clarity, truth in labelling or anything remotely resembling the CHANGE our President was elected to effect.

This bill that passed the house contains every Pork program that Democrats have dreamed about for the last 20 years.

It is not a jobs bill. Its a PORK bill.

It is not a stimulus bill it is a PORK spending bill.

I am of the opinion that every member of the House should be required to go out an spend the next 6 months trying to start a business that hires 20 people. Let them dream up an employment project, incorporate, hire , get liscences and permits, pay payroll taxes and a salary for themselves without going bankrupt in six months.

It will be fascinating to see if President Obama will rise to the challenge and eliminate all programs that do not provide immediate stimulus to the economy. That would be honest and true to his campaign promise.

It is no wonder that Congress has such a low rating. These guys cant even abide by Truth in Labelling. This bill bails out nobody and provides no stimulus.

Fed Keeps Target Fed Funds Rate at 0-0.25%

Jan 28: FOMC decided to keep its target range for the federal funds rate at 0 to 1/4 percent, lowest since 1990 when Fed began publishing the rate. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs. The Committee is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets

FOMC: Economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time

So, why is the market moving yields on long dated Treasury bonds UP!!

10:48 am today 10yr treasury yield is 2.687% up 0.023%
30yr treasury yield 3.436% up 0.018%

Market Reflections 1/28/2009

The FOMC statement wasn't a surprise but the stock market's rally may well be described that way. The Dow industrials surged 2.5% on reports that the administration is setting up a "bad bank" that will absorb bad debt from financial institutions. Bank shares posted big gains led by Wells Fargo, up 31 percent, Citigroup, up 19 percent, and Bank of America up 14 percent.

The stock market has been rallying all week, gains however that do not reflect strength in underlying earnings. Earnings in fact are proving significantly weaker than expected as weakness spills out far beyond the financial sector. Many are labeling the gains a bear market rally that could crumble on a run of bad economic news, such as for instance a big drop in durable goods orders or a big spike in jobless claims, reports to be issued tomorrow.

The FOMC statement pointed to a major risk that economic recovery may not take hold this year. The Fed said it will do everything it can to help the economy including kicking off a new program, called TALF, that will be aimed at unlocking credit for consumers and small businesses. The Fed said it may also begin buying Treasuries but it didn't commit itself, a fact that pushed money out of the Treasury market with the 3-month yield up 5 basis points at 0.18 percent and the 30-year up 17 basis points at 3.41 percent.

Huge swelling in stocks of crude oil couldn't hurt oil prices which like stock prices have proven resistant to bad news lately. February crude ended up slightly at $42.28 though talk is heavy in the oil market that prices may soon dip back to last month's $32 - $33 low for the now expired January contract. The move in stocks gave accounts confidence to sell gold which ended about $10 lower at an $889 level that is still very close to $900. The dollar ended little changed at $1.3152 against the euro.

Wednesday, January 28, 2009

Seasonal weakness over

The tendency to seasonal weakness in the first 3 weeks of January is now over.

We are looking at some tendency to market strength in the next three weeks followed by a likely slow improvement in markets into early Spring.

So a strategy of selling covered calls on stocks should produce nice returns if these tendencies hold.

Einstein: the miracle of compound interest

Albert Einstein thought compound interest was more miraculous than E=MCsquared!

To compound your money into a fortune, you need four things:
  • Compounding takes time. The more time you give it, the more money it'll generate for you. This is why it's so important to teach your children about compounding. Time is the driving force.
  • You need commitment. Compounding is boring. It requires no trading, predicting, or risk taking. That's because there is no risk. Most people don't have enough self-control to let their investments stand for long periods of time.
  • You need to save. No one likes to save money... especially 19-year-olds. But for compounding to work, you need to save money from a young age.
  • Finally, you need a safe investment that generates interest, dividends, or retained earnings. Small increases in yield turn into huge increases in fortune when you compound over many years.

This is the advice I give to my 22-yr old College senior about to enter the working world for the first time. This is the investing technique I try and follow myself.

Its quite good advice. People like Buffet, Gates, Sam Zell all made fortunes much bigger this way.

Right now, the government is doing everything it can to prevent you from using this amazing technique. It cut interest rates to zero. It's inflating the money supply, which undermines true interest rates. And it would like to raise tax on dividends and interest receipts.

Sheesh! what to do?

Fortunately, there are still ways to make compounding work for you. Take advantage of 401ks, IRAs, DRIP plans, and tax-sheltered investments like MLPs. They'll defer your tax liabilities until you're finished compounding.

Look to the stock market for safe, high-yield investments. The financial crisis was a huge stroke of fortune for young income investors. The safest municipal and investment-grade corporate bond funds are paying yields over 10%. The riskier ones will pay you over 20%. You can make 20% income by selling covered calls on the strongest American blue-chip stocks. Even boring pipeline investments pay 10% dividend yields.

My children...

If you want to be rich, you should build a portfolio of these safe, high-yield investments, shelter them from tax, add to your account every year, and let your earnings compound for 40 years. You'll easily accumulate a million dollars, and probably a lot more...


Geithner China Comment from Davos

The World Economic Forum, in Davos Switzerland, began today...

This is usually a huge economist boondoggle, but this year, it has a different look to it. You see, the U.S. boys and girls that normally attend, are missing this year, as they don't want it to look silly after they took bailout, TARP, and any other kind of government handout.

Right out of the starters blocks this morning, we have the economists that did show up in Davos, ripping U.S. Treasury Sec. Geithner,.. The "ripping" centers around the statement that China was "manipulating" their currency and that they should seek to allow the currency to appreciate...
"Allowing the yuan to strengthen would be "economic suicide" amid an economic slump, Stephen Roach, Morgan Stanley's Asia Chairman, told a panel in Davos, Switzerland, today. "I've never seen an economy in recession voluntarily raise their currency. It's horrible advice." (remember, that the renminbi is the official name of the Chinese currency and the yuan is the slang name... It's easier to say, and spell, so the media uses the slang name!

"Shouting from Washington to Beijing is not going to make a difference," said South Africa's Finance Minister Trevor Manuel on the same panel."

And just for the record, ever since Geithner made his call on Monday, the Chinese have basically told him what to do with his thoughts!

The Chinese officials have allowed the renminbi to weaken VS the dollar the last 3 nights! ...

Of course, I prefer the Chinese pushing the renminbi softer, than the alternative of selling their Treasuries!
This from Bill Bonner at Everbank:
" You know what gets my goat about what Geithner said? (it's important to remember that I believe it was Obama's words that Geithner spoke) It's why point the finger at China and not every other country in the world that "fixes", "pegs", and manipulates their currencies? There's a whole laundry list starting with Hong Kong, and ending with Saudi Arabia, with the likes of Japan, Singapore, and the other oil states in between... "

Gold & Commodities, encore comment

Market focus has shifted almost completely to the size and impact of the U.S. fiscal stimulus package currently under construction.

Few are considering the consequences of such reckless spending, least of all how it will be paid for.

The unspoken truth is that the Fed may eventually "monetize," or print new money to finance the Treasury Dept.'s funding needs, if necessary.

I think the assumption that this new government spending will debase the U.S. dollar at an accelerating rate is going to become apparant by year-end.
The rush to inflation hedges like gold and oil, should likewise accelerate before the year is out.

Markets 1/27/2009

Negative news couldn't put a dent in the stock market where the Dow industrials gained 0.7 percent. Shares of financial firms were big gainers despite poor earnings from American Express which is raising its bad debt allowance further. News after the market close was definitely negative as online portal Yahoo posted a surprise loss, a big contrast to powerhouse earnings posted last week by Google.

Talk of bulging supplies and news that Shell is selling floating inventory sent a chill through the oil market where oil fell steeply to end at $41.85. Gold couldn't quite hold over $900, ending slightly lower at $898.

The dollar was little changed at $1.3150 against the euro while Treasuries were mixed, with yields rising slightly for T-bills and falling for bonds.

Tuesday, January 27, 2009

Geithner, Obama and China

As a follow on to my comments on this topic here is an article written by David Kotok of Cumberland Advisors that is exquisitely to the point.

This is required reading for all.
By David Kotok

Following Treasury Secretary designee Tim Geithner's public confirmation hearing, an extensive Q & A occurred in writing. We have posted a copy of the US Senate Finance Committee's 100-page text on our website. See:

This is must reading for any serious investor, economist, strategist, analyst, or observer. In this text you will find what is on the minds of the Senators, and you will gain insight into the policies that will be forthcoming from the Obama administration.

One telling example is found in the following quote that has already created international consternation. Geithner twice answered questions about currency and China. In so doing he has placed the Obama administration squarely in the middle of the tension between the United States and the largest international buyer and holder of US debt: China. This happened as the same Obama administration is unveiling a package that will add to the TARP financing needs and the cyclical deficit financing needs and cause the United States to borrow about $2 trillion this year. Two trillion dollars of newly issued Treasury debt -- and this is how the question was answered. Not once but twice.

Geithner (on page 81 and again on page 95) answered: "President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China's currency practices.""Manipulation?" "Aggressively?" This is strong language. Geithner did not do this on his own authority. These are prepared answers. He is citing the new President, not once but twice.

China's response was fast and direct. China's commerce ministry said in Beijing that China "has never used so-called currency manipulation to gain benefits in its international trade. Directing unsubstantiated criticism at China on the exchange-rate issue will only help US protectionism and will not help towards a real solution to the issue."

Are we seeing the world's largest and third largest economies calling each other names in the middle of a global economic and financial meltdown?

The world is in recession. The economic growth rates in the major and mature economies are now negative numbers. In China the growth rate is at least 4 and maybe as much as 8 points below last year. All the governments of the world that are running deficits are enlarging them in order to finance stimulus packages. Their central banks are bringing the policy interest rates toward zero. Trillions will need to be borrowed by those governments. Either they will be financed by the outright massive printing of money through the central bank mechanism, or they will be financed by those in the world who have savings.

China is the largest single holder of financial savings in the world. Japan is next.

Why are we picking a fight with China?

The implied question is why are we alluding to one with Japan, whose currency is currently the strongest of the G4 majors? In a world where global finance is mostly in US dollars, British pounds, euros, and yen, this is engaging in a dangerous sport.

The pound has lost one third of its value against the dollar since the crisis began. It is destined to weaken more. The euro struggles because of the structural issue of having to conduct monetary policy in the sovereign debt of the various euro zone member countries. The gap between those sovereign interest rates has reached nearly 3% between the weakest and strongest. This is an extremely difficult task for the European Central Bank to manage.

And Japan is getting killed by the flight to the strong yen. Japan will intervene soon to weaken the yen; they have as much as said so. The yen is strengthening against the Chinese Yuan; that is Japan's largest trading partner. The yen is 1.5 standard deviations above the JPY/USD exchange rate. It is nearly 3 standard deviations above the JPY/EUR cross rate that has been established during the ten years the euro existed. And it is over 3 standard deviations above the JPY/GBP cross rate.

So that leaves the dollar likely to get stronger. Right now it is the default choice of the world. We have currency strength not because we are so desirable but because we are currently better than the others. All bad; we're not as bad as they are. Or all bad and the others are even worse.
So what do we do within 72 hours of launching the Obama administration that says it is seeking "change?" We fire the first public salvo in what could easily become a trade war or a threat to global financial integration.

What makes us so credible?

Is it our proven record of regulatory oversight of our financial markets, as demonstrated by the Madoff scandal and the SEC? Is it the way our rating agencies work so diligently to place a coveted "AAA" on paper that was peddled to the rest of the world and was found out to be highly toxic? Is it the way we honor the promises of federal agencies by having tier-one-eligible Fannie and Freddie preferred held in the US and abroad by institutions, and then essentially cause a structural default on that preferred (actually, dividend suspension)? Or is it the way the actions of Treasury and the Federal Reserve allowed a primary dealer (Lehman) to fail, thus triggering a global contagion?

C'mon? Where is the plan to restore confidence and credibility and transparency and consistent policy for the United States? And how does the Obama administration believe that launching a fight with China is beneficial?

In the 1930s the severe recession of 1929-1931 was turned into the depression of 1931-1933 because of protectionism. Every historian knows that. Every economist learns it in school. This is well-known by Geithner and even better-known by Larry Summers and Paul Volcker. They are the three members of the Obama economic troika.

The statement Geithner repeated twice was certainly known to them in advance. Why did they not temper it? What is the plan? Do they want to threaten and see if China backs down? This, too, is dangerous. Do they intend to pursue the Schumer tariff scheme? There are more questions than answers.

Lastly, Larry Summers was going to attend the World Economic Forum in Davos, Switzerland. He has cancelled. Why? Was it because he did not want to have to face the private conversations that would follow such statements as have been made by Geithner in the name of the President?

Watch Davos closely. And remember that the absence of statements is as revealing, if not more so, than the presence of them. Not one mention of trade openness appears in our reading of the 100 pages of answers to the Senate. Maybe someone else can find an affirmation of free and open trade. I cannot.

We fear protectionism. It starts with rhetoric. We now have that threat. If it is pursued, it ends badly for everyone. No one wins.

Geithner's answers are sobering. We are now in the realm of fiscal policy and national policy. This is not in the realm of the central bank; the Federal Reserve is not the player here. The Fed is doing all it can to unfreeze the financial system and restore it to functionality. If permitted to complete its task, that policy will work. If stymied or corrupted by conflicting policy in trade or federal finance, the recession will worsen and the pain will become more severe.

I couldnt agree more!! Corecap


The up move in gold has stalled.

It looks like the $90 barrier for GLD( Spider Gold Trust - Exchange Traded Fund) held a third time since September. The $50 level is likewise formidable resistance for RGLD (Royal Gold Inc.)

Some support on the charts exists at $81 for GLD and at $45 and then $41 for RGLD.

Lets assume these are the current trading ranges. An hypothetical purchase of RGLD at the bottom of this range ($41) in mid December and a sale at year end at $49 would have made a simple 19.5% gain in about a month and a half. Repurchasing it again at $41 in mid January (14th) and selling it yesterday at $49 would have made another 19.5% simple gain, this time in less thana month.

The moral of the story: a little time spent looking at a chart on or will help identify these ranges. It is possible to make a little money in these dire times with simple trades like thie.

DISCLAIMER: this is an illustration. Trading is not suitable for everyone, especially the desperate, and there is a considerable risk of loss, possibly all of the money bet. Get help from a knowledgeable professional, because these current patterns may not repeat and probably wont.
Nothing written here is meant as investment advice and we are not responsible in any way for your use of this information. Thank you legal department.

China, Obama, Geithner and IMF declare Trade War

Tim Geithner was confirmed as our U.S. Treasury Sec.

This is scary stuff !!

In his confirmation he said, not once, but twice, that "President Obama, backed by the conclusions of a broad range of economists, believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China's currency practices."

If in his confirmation, he's making statements like that, you can expect that Obama will push for legislature to put tariffs on Chinese goods... Protectionism... This is ALL GOING IN THE WRONG DIRECTION!!!!!!! And believe me now and hear me later... he didn't just make up this response! This was given to him by Obama, and he made certain that everyone hear him, by repeating the answer!

Protectionism is to a currency, like kryptonite is to Superman... So... Not only is the Gov't on the path to spending even more than the previous administration spent, they look as though they will go down this protectionism path... Add to that, the recession and zero interest rates, and you've got the ingredients for a huge swat at the dollar... down she goes!

The IMF's Managing Director, Strauss-Kahn, was talking yesterday, and said, "I have said repeatedly that the renminbi is undervalued" He went on to add, "What we need is for the Chinese to change their policy and shift to more domestic-led growth than to focus on exports. Most Chinese officials are convinced that this is in their own interest."

So... The IMF believes the renminbi is undervalued, and that the Chinese should do something about it, and so does the Obama administration... And you say, "Trade wars"? I bet you can! And not a good time for them either! Not when the whole globe is suffering... Dolts, all of them, they can't see the Big Picture... !

Market Reflections 1/26/2009

There was good economic news on Monday! Existing home sales jumped in December, boosted by lower mortgage rates and, here's the downside unfortunately, sharply falling home prices. Money moved into the stock market on the report, pushing the Dow industrials up 0.5 percent. But gains were limited by a deep and unusual run of company layoff announcements that included cuts by General Motors and Caterpillar to name just two.

News from U.K. financial firm Barclays that it won't need capital injections was more good news in the session, news that pushed up demand for sterling and the euro and pushed down the dollar which lost nearly 2 cents against the euro to end at $1.3168. Money moved out U.S. Treasuries where yields moved slightly higher, from 1/2 basis point on the 3-month T-bill to 6 basis points for the 30-year bond, ending at 0.10 percent and 3.38 percent respectively.

Oil and gold were little changed with oil holding firm above $45 on reports of deep OPEC output cuts and gold holding over $900 at just under $910. Copper was a big gainer on the day, ending 10% higher on expectations that rising home sales may lead to improved demand for construction and electrical products.

Monday, January 26, 2009

Stock market Seasonal tendency

We are approaching the end of the Seasonally weak first three weeks of January.

True to its weak seasonal tendency the various stock and bond markets in the USA are enduring a substantial decline.

There is a tendency, historically, for these markets to rally upwards for the three and a half weeks following January 27th or so. That coincides with the end of the current earnings season.

So, perhaps we are in for a respite from the unrelenting bad news starting on Wednesday. I surely hope so.

Obama administration and bank nationalization

The Obama administration and Democratic congressional leaders said they are considering a number of options to help banks in the U.S. and to stabilize the economy.
But the question on many people's minds is whether they are considering nationalizing much of the banking system. The Obama team has avoided the word altogether, while House Speaker Nancy Pelosi indicated that there is an internal debate going on regarding nationalization.

Nationalizing banks so government burocrats run them is absolutely a disastrous idea.

The problem the banks face is that they own billions( maybe trillions) of dollars worth of mortgages. These may or may not be performing for the mean time.

They also own billions of dollars worth of assorted valueless securities connected in one way or another with mortgages.

Politicians need to solve the mortgage problem and the constipation of lending that the banks suffer from will be massively relieved.

In this great USA home ownership is a right that is far more economically important that the right to free health care or free education. Allowing this mortgage crisis to continue is economic suicide.

Let the Treasury issue as many new 30-yr bonds as necessary to buy all owner-occupied mortgages at face value and replace them with new 4% 30 yr mortgages based on payments not exceeding 30% of last reported Gross Income on tax return. Issue these via The Federal Reserve and or Freddie Mac/ Fannie Mae.

Hire an army of contract lawyers to write mortgage agreements that obligate willing homeowners to repay the difference between the old value of the mortgage and the new value at sale of their property.

And watch out for the rush to release homeowners from their bondage!

Geithner China Comment

Is Tim Geithner's recent China bashing comment a goof?

I think so. Read this story from China:

"BEIJING (Nikkei)--Calls are growing in China for the government to reduce its holdings of U.S. Treasury securities, as some observers expect their prices to decline amid heavy issuance to fund U.S. economic stimulus plans.
Such sentiment -- in part motivated by indignation over recent American assertions that China is partially responsible for the global financial crisis-- threatens to cast a cloud over relations between Beijing and the new U.S.administration.
"China should sell some of its U.S. government bonds and increase its euro and yen assets," Yu Yongding, a former member of the People's Bank of China's policy board, wrote in a Chinese newspaper earlier this month. Yu warned that the supply of Treasuries may far exceed demand in the future.
Such remarks by Yu, who currently serves as director-general of the Chinese Academy of Social Sciences' Institute of World Economics and Politics, has sparked discussion within the government on how to manage its foreign reserves, according to a source familiar with the matter."

I'm not saying that "this is finally the last shoe to drop" . Just because a Chinese official calls for Beijing to sell their Treasuries, doesn't mean Beijing does. However, look at the damage done to the dollar, and Treasuries when we have a single individual within China calling for this!

A shot across the bow to Geithner, Schumer et al. China bashing is not only wrong in theory but has real world consequences for the USA. The US $ dropped nearly 1% over the weekend.