Saturday, March 14, 2009

Market Reflections 3/13/2009

Premier Wen Jiabao reminded everyone Friday that Chinese demand for U.S. Treasuries is a lynchpin of the global economic recovery. Jiabao said he's worried about the extent of China's exposure to U.S. financial assets and called on the U.S. to honor its words and ensure the value of the dollar and the safety of China's holdings.

The comments had surprisingly little effect, with Treasuries showing no change and gold showing no gains. Stocks managed to rally on the session, gaining 0.8 percent on the S&P 500 and closing a very important and very positive week, a week that saw big rebounds in financial shares on tangible hopes that the worst for banks may be passing.

Oil ended at just under $46 for April WTI ahead of Sunday's OPEC meeting which is widely expected to result in a token output cut, one that nevertheless is expected to trip short covering and a move toward $50. The dollar ended little changed against the euro at $1.2918.

Friday, March 13, 2009


This week, Fed Chairman Ben Bernanke acknowledged that “The world is suffering through the worst financial crisis since the 1930s, a crisis that has precipitated a sharp downturn in the global economy,” during a speech on reforming the financial sector.

U.S. Treasury yields continue to settle in to a trading range, exhibiting little volatility this week as investors pause to assess the direction of economic growth and inflation.

Large-Cap Equities
The stock market rallied for the first time in five weeks due to positive comments from banks regarding profits for the quarter.

Corporate Bonds
Investment grade primary activity remained rampant as the search for any incremental yield continues to be the major driving factor in the mind of investors.

Mortgage-Backed Securities
The agency mortgage market benefited from a recovery in equity valuations and benign movement in Treasury yields.

Municipal Bonds
Municipal bond market weakness continued this week. While shorter-maturities were broadly unchanged over the course of the week, the 10-year maturity range showed the softness in the market.

The markedly improved tone in the global equity markets since the beginning of the week is aiding with the stability of the high yield market. more...

Western European Equities
Stocks in Western Europe gained ground over the past week. The stocks with the best performance were banks (+21.8%) and insurance (+17.2%).

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +10.8% this week, while the Russian stock index RTS went up by +13.2%.

Global Bonds and Currencies
Major sovereign bond markets were mostly weaker in the past week, with the exception of the long-end of the UK Gilt curve, which continued to benefit as the Bank of England (BoE) began its £75 billion (US$106 billion) program of quantitative easing.

Emerging-Market Bonds
Emerging market dollar-pay debt spreads tightened this week as a result of the more positive tone to risk markets. For more information, please contact 800 5-PAYDEN or visit

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Have a great weekend!

GE and GE Capital Lose Their 'AAA' Ratings: What Next for GE?

March 12: GE and its finance arm lost the top-level 'AAA' rating from S&P that they’ve held since 1956 as earnings are under immense pressure with exposed potential risks for the company as the deteriorating economy will produce mounting credit losses at GE Capital

S&P balanced the “excellent risk profile” of GE’s industrial businesses against the prospects of weaker earnings or a “modest net loss” at GE Capital. The one-level downgrade to ‘AA+’ with a “stable” outlook will affect the long-term debt. Under debt guarantees and covenants, GE would have had to post additional collateral if the ratings fell below AA-/Aa3 or A-1 and P-1

Market Reflections

The day that the great Ponzi swindler Bernard Madoff was led to jail in handcuffs was, fittingly, a good day for the financial markets. Stocks in fact are putting together a blockbuster week, reacting to strong improvement in company news and emerging indications, such as today's retail sales report, that the worst of the recession may have passed. The S&P 500 rallied strongly near the close to end a great session, up 4.1 percent at 750.74.

Money moved out of the dollar, which slipped slightly to end a $1.2922 against the euro, but money barely moved out of the Treasury market which saw another very strong auction, this time for 30-year bonds. And money didn't move out of gold either, which got a boost to more than $925 after the Swiss central bank surprised markets with a rate cut, a move that shifted safe-haven flows out of the Swiss franc.

Thursday, March 12, 2009

Cassano responsible for the Depression?

And people thought Jerome Kerviel's blow up was spectacular. In an interesting piece out on abcnews, more light is being shed on AIG's small financial products London office which even AIG now acknowledges was ground zero for roughly $500 billion in losses, as well as the person who ran it, Joseph Cassano. Joe, who previously had made waves after the Washington Post first profiled him in October 2008, had "earned" $280 million during his tenure with AIG and who left the company with a $1 million a year consulting contract, and owns houses in London and Connecticut, was so confident in his huge risky bets that he is quoted as saying "It is hard for us with, and without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions."It is a little easier to see a scenario where Cassano would end up losing $500 billion.

Cassano's nearsighted actions have had staggering repercussions: everyone knows about the secret 21 page mutual assured destruction memo, the billions in cash downstreamed to AIG's counterparties, the systemic impact AIG's collapse has had on both the U.S. and global economy and all the other indirect consequences of the near $200 billion in taxpayer money that AIG's failure has so far cost.

It is somewhat surprising that while Barney Frank et al have been so focused on the executives of the major banks, Joe has been flying low under the public radar. After all, if allegations against Cassano prove true, his loss will have the tenfold impact of Madoff's ponzi scheme, however unlike with Bernie, who impacted a small group of people to a high degree, Cassano's $500 billion loss has to be shared equally amongst all taxpayers. And while hubris and reckless risk management are not criminal acts, incentives will always exist for traders to take on outsized risk unless there is some regulatory intervention, which really cuts to the heart of the whole problem.

Greenspan others responsible for the Financial Crisis

Former Fed Chairman Alan Greenspan defended his "easy money" policies today in the Wall Street Journal, saying they did not cause the housing bubble. He placed the blame on the extreme growth in China and other emerging markets, which led to an excess of savings that pushed global long-term interest rates down between 2000 and 2005. Before this phenomenon, Greenspan argues, mortgage rates and the benchmark fed-funds rate moved "in lockstep."

Greenspan can say what he wants. But when the government guarantees the balance sheets of Fannie and Freddie (not to mention every other large bank in the country)... when it encourages the creation of an enormous amount of credit by lowering short-term interest rates to 1%... and when Congress insists on providing loans with no down payments to low-income and first-time homebuyers, you will eventually have a disaster.

There was either no risk, or very little risk, to home speculators. Banks didn't rein in lending because depositors don't care how risky a bank's loan book becomes – their deposits are guaranteed. Fannie and Freddie could buy an unlimited amount of subprime debt (with almost no loss reserves) because they had a line of credit with the Treasury. Greenspan didn't worry about the credit bubble because the market is efficient. Everyone acted like a fool because no one was going to be responsible for his actions.

Parsing the blame accurately is probably impossible, but one thing should be obvious to all of us: Greenspan had a hell of a lot more to do with it than 99% of his fellow Americans, who are now left with a multitrillion-dollar bill to clean up the mess.

Sell airlines short

Warren Buffett hates airline stocks. He bought a preferred stock issue from U.S. Air in 1989. By 1995, the company had lost $3 billion, and Buffett's preferred dividend was suspended. Since then, he has been very vocal about his feelings toward the aviation industry.
The net wealth creation in airlines since Orville Wright has been next to zero. If a capitalist had been at Kitty Hawk and shot him down, he would have done us a huge favor... The worst sort of business is one that grows rapidly, requires significant capital to engender growth, and then earns little or no money. Think airlines.
But... knowing the airline industry has always been a loser for investors makes airline stocks very easy (and safe) to sell short. In fact, right now, you can easily find a half-dozen airlines that cannot afford the interest on their debts, suffer from plummeting revenues, and face huge losses related to commodity hedging.

Budget Deficit Widens on Lower Tax Revenues and Massive Spending

The Federal deficit hit $765
billion in the first five months of the budget year, approximately 65% higher than the gap for all of the prior year. The
Congressional Budget Office estimates the U.S. budget deficit will top $1.2 trillion in the fiscal year 2009. The deficit
reached $192.8 billion in February, a record for the month but below expectations of $205.7 billion. The slow
economy sharply reduced the government’s tax revenue last month to $87.3 billion, 17% below the previous year.
Meanwhile, government spending soared.

Market Reflections 3/11/2009

The stock market didn't rally sharply but it didn't reverse, posting a slight gain but one on top of yesterday's giant surge. The S&P 500, which gained 6.5 percent yesterday, rose 0.2 percent to end at 721.36. Bank shares were once again big winners including JP Morgan, up 5% at $20.42 after saying that it too, like Citigroup, is posting a profit so far this year.

Money moved out of the safety of the dollar which fell nearly 2 cents against the euro to end at $1.2852. But money moved into the Treasury market following strong demand at the month's 10-year note auction. The 10-year yield fell 11 basis points to 2.89 percent. The Treasury, in its endless blizzard of offerings tied to the government's surging debt, auctions $11 billion of 30-year bonds tomorrow. Treasury budget data during the session shows the federal deficit, only five months into the fiscal year, at more than $750 billion.

A rise in weekly crude inventories helped push oil lower with April WTI down 6% on the day at $42.94. Gold edged 1% higher to $904.30.

Wednesday, March 11, 2009

GMAC vs GM - Big Difference‏

As the new administration makes a critical decision about the future of General Motors Corporation,. it is very important to remember that GMAC and General Motors Corporation are separate and distinct entities with different ownership. Cerberus Capital a very big hedge fund, owns half of GMAC, and General Motors owns the rest.

GMAC has been "saved". GMAC’s institutional bondholders took different bonds and gave equity to the company. This meet the government's requirements for capital levels at banks, allowing GMAC to become a bank. GMAC now has FDIC insured deposits and can issue government guaranteed bonds just like Morgan Stanley, Citicorp and Goldman. GMAC earned $1.8 billion in 2008 and has an “unqualified letter” from its accountants. This means they do not fear for it to continue to be a going concern.

General Motors Corporation, on the other hand, is in big trouble. Losing billions, with sales down over 50%, its accountants issued a letter that they believe it may not be able to continue as a "going concern".

This is why GMAC bonds are currently at a much higher in price than GM bonds. We believe that investors who can bear the reasonable risk should continue to hold GMAC bonds, with the view they are likely to pay interest and principal when due unless there are many more catastrophic changes in our economy. GMAC now has $20 billion in equity, and could most likely go into a “runoff” and still pay off its debt obligations. GMAC bonds are offered as low as 24.

GM bonds should be held for a completely different reason. These bonds are now so low-priced that by holding them through a possible bankruptcy or reorganization may return a higher result than selling them under current conditions. GM bonds are being bid as low as 12.

The balance sheet and income statement for GMAC from their 2008 10K is now available along with the unqualified opinion on GMAC of Deloitte & Touche LLP. Contact info@coreportfolio for information.

Credit Contraction and inflation, why the banking system fix will unleash mammoth inflation

Analyst Meredith Whitney expects outstanding U.S. credit-card lines – which now total about $5 trillion – to shrink by $2 trillion in 2009 and another $700 billion in 2010. She points out most credit cards were issued when unemployment was below 6%.

Whitney also dispelled the popular myth that America's credit cards are maxed out. They aren't. Just 17% of total credit-card lines were drawn on at the end of 2008. But that percentage will ramp up sharply when credit-card issuers start pulling credit lines from borrowers who lose jobs and fall behind on payments.

The contraction of credit-card lines... the rapid rises in home foreclosures and corporate defaults... the bank failures... These all have the effect of shrinking the money supply.

Most of our money is not created by the Federal Reserve. Most of our money is lent into existence by our banking system. That's why the Fed doubling its balance sheet in world-record time last fall didn't have inflationary consequences.

The Fed's fiat money merely provides the fuel for inflation. The real engine, where $1 is multiplied many times over, is the banking system... and it's broken. The Fed's balance sheet has expanded dramatically since September, but the banks' balance sheets are still contracting as mortgages and other loans continue to go bad. That reduces lending capacity – money-creation capacity.

More capacity will evaporate later this year and next year. Option-ARM loans will hit reset levels, causing more mortgage delinquencies and defaults. Insurance companies will get hit by corporate-bond defaults. (Insurance companies, especially life insurance companies, have been the largest buyers of corporate debt going back to the Great Depression. They're also huge commercial real estate lenders.)

Perhaps the hardest thing for you to believe is that all this credit destruction is good... but it is. Less borrowing means more saving. Economic growth requires saving, not borrowing and spending. Savings is the horse. Borrowing, spending, and higher tax revenues are all in the cart. If you put the cart before the horse, you won't get very far. If you put the horse in front, you can go anywhere you want.

When the banking system gets fixed and the banks start lending again watch out for rabid inflation. Remember $1 of reserves gets multiplied many times (perhaps as much as into $10 of new money creation)since the reserve ratio is a fraction of the actual reszerves.

So the bank lending process will reverse the money supply contraction and all that new money will chase after a much shrunken supply of goods and services.

Bingo!! Up go prices. The next bubble will be started.

Weaker US dollar coming

Vincent Chaigneau, head of currency and interest rate strategy at Societe Generale, said "The current account deficit and the massive government bond issuance suggest heavy dollar losses over the next 6 to 12 months.
Investors aren't buying risky assets and are focused on Treasuries. With the amount of bonds the government is issuing, investors will demand higher yields. Yields will remain low if the Fed buys bonds. The dollar will have to fall to improve returns."

Our sentiments exactly.

Muni & Corporate bond Comments 3/11/09

The treasury market continued its selloff yesterday, while Muni's and Corporates are both cheapening in price, widening in spread.

The Muni market hit a wall about two weeks ago, spreads have been widening versus the MMD scale ever since. Supply in the muni market has also been very robust, with 7BB worth of New Issues coming in each of the last few weeks.

In the high tax states, 10yr Ma State GO has widened over 25 BP's, now trading at +35 to scale.. NY City GO's have widened about 30, now trade +155 over the MMD.. Cal is trading +150 these days, but that widening took place earlier.

Corporate Bonds, which had tightened at a torrid pace from November thru mid February have slid recently

In both sectors, the market had moved too far, too fast. Take advantage of these back ups. The recession will pressure both sectors from a credit perspective, but diligent selection will provide great opportunities. Quality Investment Grade Bonds yielding 4 to 7.5% make great sense, and Muni's will be in greater and greater demand over the next few years as inevitably State and Federal Tax Rates rise.

In Agency Securities, the FDIC Insured Corporate Bond sector continues to explode in size. The market has now grown to over 100BB, since its initial issuance in November. These bonds have NO CREDIT RISK, as they carry the governments Full Faith and Credit backing.. 2 year bonds trade at 70 Basis Points over Treasurys @ 1.70% 3 year Bonds @ 80 Over Treasurys or 2.20%... More than ever, FNMA FHLMC and FHLB will be leaned on by the government to help resolve the Mortgage Crisis, and I reckon that credit risk in those entities is miniscule. Bonds with at least 1 year of call protection are the best value.

LIQUIDITY FOR SECURITIES THAT ARE IMPAIRED REMAINS AWFUL. In credit, there are MANY MANY MULTIPLES OF SELLERS of AIG and its entities International Lease Finance, and American General, HSBC, Citigroup, Bank America, Merrill Lynch, Prudential, Genworth Financial, Hartford Insurance, Ford, and GMAC FOR ANY BUYER... CPI Floating Rate Notes, and Bill Based Floating rate notes also struggle to find a Bid Side..

The large global Financial Issues (1BB+ in size) which in previous years would have a daily trading volume of 30-40mm Bonds per day, in today's market might only trade a few million, sometimes much less on a given day.

In Municipal's, bonds that have only insured ratings, and/or weak underlying ratings are also a struggle to sell. In my opinion, the market has had a structural change with the losses of a number of large brokerage company balance sheets, and the liquidation of so many levered hedge funds..In the past, these were the buyers of last resort, who could be counted on providing a "down" bid..but it was liquidity nonetheless.

On the flip side, keep in mind that quality paper in any sector will have a decent bid, in even poor market conditions. In Muni's, that means Hi Quality State, County and City GO's and essential purpose revs.. In Corporates, companies that have solid investment grade ratings, and good cash flow.

The banking crisis and the economy will still be down for longer than anyone wants to believe.

Market Reflections 3/10/2009

News from Citigroup that the troubled bank is running at a profit this year pulled investor money off the sidelines and made for one of the very best days in memory. Stocks ended at their highs with the S&P 500 up 6.4 percent at 719.46. Shares of Citigroup (C) jumped 34 percent to end at $1.42. Percentage gains at banks with higher share prices were nearly as strong, underscoring the strength in the day's surge: PNC up 24 percent at $24.51 and JP Morgan up 20 percent at $19.15. Also helping the market is talk in Washington of changes to mark-to-market accounting, which has been widely blamed for adding to the troubles in the financial sector.

Investors sold gold to buy stocks. Gold fell nearly $25 to end at $897.90. There wasn't much movement in the dollar which dipped slightly to end at $1.2674 against the euro. But Treasury yields did move as money was pulled out of the market and put into the stock market. Yields were up as much as 15 basis points on the long end of the curve where the 30-year bond is yielding 3.72 percent. Despite the rise in yields, demand was very strong for the day's heavy run of auctions capped off by a very strong 3-year offering. The Treasury will auction 10-year notes and 30-year bonds on Wednesday and Thursday. Oil dipped back to $45.76 for April WTI.

Tuesday, March 10, 2009

Monkey See, AIG Do

By Dr. Joseph R. Mason Hermann Moyse, Jr. - Louisiana Bankers Association Endowed Professor of Banking, Louisiana State University; Senior Fellow, The Wharton School; and Partner, Empiris, LL.

Policy rhetoric is now taking a turn to the ludicrous. I feel like real life is approaching the stories reported in the Onion. Bernanke is suddenly “angry” at the AIG bailout. “AIG exploited a huge gap in the regulatory system, there was no oversight of the financial- products division, this was a hedge fund basically that was attached to a large and stable insurance company.” REALLY!?!? “[The company] made huge numbers of irresponsible bets, took huge losses, there was no regulatory oversight because there was a gap in the system.” AMAZING!

Suddenly we are shocked to learn that the first $150 billion – granted with virtually no controls over an insolvent firm – was inadequate to turn the firm around. Even more shockingly, AIG officials were reluctant to sell off portions of the firm, which would have substantially reduced the value of their holdings and put them out of their jobs. SHOCKING! Managers acting in their own self- interest? ABSOLUTELY SHOCKING!

When AIG modeled its operations after hedge funds, it leveraged its off-balance sheet operations to create massive unfunded counterparty exposures that made the firm “systemically important.” Reports suggest that there remain some $300 billion in net notional exposures that must be resolved. Hence, I think the magic number for government infusions here is $300 billion, because the bleeding won’t stop until Treasury commits at least that much, if they want to “reduce the systemic importance.” More than $300 billion will be required if any direct investors are to be rescued. At the end of the road, however, there are few tangible assets to support any substantial going concern value. Critics, including former AIG Chief Executive Officer Maurice “Hank” Greenberg, said the strategy of breaking apart the insurer and selling units wouldn’t reap enough to repay AIG loans.

The fallacy lies in acting as if the result is somehow unprecedented. We have seen this all before. AIG’s business was spread across 130 countries and 400 regulators. None of those regulators apparently caught the hedge fund play and resolved the “systemic importance” issue. Remember the BCCI scandal? Before BCCI failed in 1991, it built up a corporate structure so complex that it could operate virtually unregulated all over the world. BCCI used more than 400 shell companies, offshore banks, branches, and subsidiaries, and unregulated accounts in the Cayman Islands and elsewhere to hide crooked operations with fictitious transactions.

Like AIG, BCCI based its operations in countries where regulation was weakest. If BCCI encountered a legal impediment, it would often be able to circumvent the problem by creating a new affiliate or acting through one of its myriad existing entities. [For further reading, see the December 1992 Report to the United States Senate Committee on Foreign Relations at] The international context of AIG makes BCCI look puny.

In the meantime, the public policy rhetoric is attempting to sell taxpayers a bill that is not theirs to pay. Bernanke said the revised bailout gives taxpayers “the best chance” of eventually recovering “most or all of the investments” the public has made. Such specious statements are translatable as “AIG has us up against the wall, so we have to throw good money after bad.” Otherwise, the threat is that AIG won’t be able to support its counterparty relationships with “the banks.”

Which banks, in particular? Apparently it is those banks that… well, also modeled their operations after hedge funds and are also, therefore, “systemically important,” by the Federal Reserve’s and Treasury’s accounts. Banks’ total assets as of December 31, 2008 were just over $13.9 trillion, with total industry equity capital of $1.3 trillion. But bank notional derivatives exposures as of December 31, 2008 were $201 trillion, sitting on top of another $7.2 trillion in commitments to lend, $2 trillion in securitized assets, and $1 trillion in standby letters of credit and foreign office guarantees, for a total exposure of $225.1 trillion, or a leverage ratio of about 173:1 on total industry capital!

Of course, today’s situation is primarily focused on large banks. Looking only at the 86 U.S. banks with assets larger than $10 billion, there are still notional derivatives exposures as of December 31, 2008 of $201 trillion, sitting on top of another $5.6 trillion in commitments to lend, $2 trillion in securitized assets, and nearly $1 trillion in standby letters of credit and foreign office guarantees, for a total exposure of $219.4 trillion, or a leverage ratio of more than 241:1 on large-bank capital of $909 billion.

According to Timothy Geithner, “AIG is a huge, complex, global insurance company attached to a very complicated investment bank/hedge fund that was allowed to build up without any adult supervision.” The adults not only supervise the play, however, they also help choose good playmates. The question begs to be asked, therefore, who allowed the large banks to enter counterparty relationships with AIG in the first place? That would be the bank regulators – the same ones now threatened with the large banks’ leverage of 241:1.

I disagree with Geithner’s assertion that because of “the risks AIG poses to the economy, …the most effective thing to do is to make sure the firm can be restructured over time.” There is no core at AIG to restructure. With a failed business model and all the assets hypothecated elsewhere, the only asset of value is the copy machine toner. Providing more capital and liquidity to others in the industry won’t help, either, since many other firm assets are also hypothecated to cover similar off-balance sheet commitments.

The way out of this situation, therefore, is not further support for the unstable and opaque counterparty relationships that are causing the “systemic importance,” but revealing those relationships and unwinding the exposures. It is a large task, but one that is not optional. Will policymakers continue to fiddle while our financial markets and economies burn?

Inflation coming?

OK... I've been reading a book that was written some time ago, by Christopher Wood, called the "Bubble Economy"... Sounds like he was writing about the U.S. eh? I'm afraid not! He was writing about Japan in the 90's... And you know me, I've been writing about how we are following Japan's footsteps to their disastrous decade of the 90's, so I just had to pick up this book and read it, to see what other comparisons could be picked up... And half way into the book, I found it... OK... Now that I've already told you that this is Japan in the 90's, you are aware that it's not the U.S. now... But... I'm sure you'll see what I'm talking about here... So, here's Christopher Wood... "Debt Deflation" was a term used by American Irving Fisher, a Yale economist, in an article written in 1933 at the nadir of the Great Depression. The Debt Deflation Theory of Great Depressions, was revolutionary. It identified two stages on the road to depression. First, too-high levels of aggregate debt depress economic activity because of all the money spent servicing that debt. (paying interest) Fisher termed this debt deflation. This is what Japan has suffered in their property markets as asset values have collapsed and debts have gone bad. Fisher argued that debt deflation only leads to general depression when there is a fall in the general price level. Just as a bad cold leads to pneumonia, so over-indebtedness leads to deflation." Now... Doesn't that sound exactly like what happened here in the U.S.? I'm turning Japanese, I really think so... OK... Enough of that... How about mixing in some Warren Buffett to my story about how that on the other side of this deflationary asset price scenario that's going on right now, is soaring inflation? Well... Warren, welcome to my wagon! Let's listen in to Mr. Buffett... Billionaire Warren Buffett, whose Berkshire Hathaway, Inc. posted its worst results ever in 2008, said the economy "has fallen off a cliff and that efforts to stimulate the economy may lead to inflation higher than the 1970's."

The next bubble to pop?

You must recall, me saying on more than one occasion that I believed U.S. Treasuries were the next bubble to pop... If you're with me on that, then let's talk about something that might cause that bubble to pop... Ahhh...

Here we go! We have 3 separate auctions going on this week with a total of $92 Billion of Treasuries on the selling blocks...
We start with an astronomical $63 Billion of 3-year notes, followed the next day by $18 Billion of 10-year Notes, and finally $11 Billion of 30-year bonds...

Now... Let's circle back to the financing of our deficit...
Recall that many times I've explained how The deficit needs to be financed by foreigner purchases... And when those foreigner purchases aren't enough to finance the deficit, the Gov't only has two choices...
They can raise interest rates aggressively in an attempt to attract foreign investment... (but by doing so, would bring their economy to their knees) -OR- The Gov't can allow / force a debasement of their currency, a general weakening if you will, to allow those purchases to be made at a "discount".

For you see, any foreign investment into Treasuries, has to be made with dollars, so the foreigner needs to convert their currency for dollars... If those dollars are at a "discount" then the foreign investors gets the bargain!

So... Here we go with the big crescendo... The fears late yesterday and in the overnight markets is that these auctions carry notes and bonds with yields that just aren't of the making to attract enough investment interest to be covered... Well... If the auction doesn't go well, that means we have a financing problem, and with our economy in the shape it's in, there's no ability to aggressively raise interest rates... So... the only choice is to have a weaker dollar! And here's where I get to mock those that believed that "deficits don't matter"... They all come home to roost eventually folks...

Market Reflections 3/9/2009

Warren Buffett made the headlines Monday, saying in a lengthy CNBC interview that the economy has "fallen off a cliff" and that consumer behavior has changed to a degree the 78-year-old billionaire has never seen before. But Buffett is optimistic saying the banking sector will recover and that, on a long term basis, stocks are a good investment. Stocks rallied at the opening but faded through the session to end down 1% on the S&P 500 to 676.53. News of a giant $41 billion merger between drug rivals Merck and Schering-Plough failed to lift spirits. Other markets showed a gain for oil, at $47.09 for April WTI, and a dip for gold, ending at $920.60. The first Japanese trade deficit in 13 years, reflecting the export bust, sent the dollar up one full yen to end at Y98.85. Against the euro, the dollar firmed to $1.2607.

Monday, March 9, 2009

Washington’s Record as Investment Manager

Think the markets are kicking you around in 2009? Be thankful your portfolio isn’t performing like that of the federal government in its role as investor of last resort.

The Government Relief Index, created by the Nasdaq OMX to measure the performance of the 21 stocks that received at least $1 billion in emergency government funding, is down a whopping 58 percent.

And that’s just since January 5, when the index started.

This index, with the ticker QGRI, started with a value of 1,000 and on Friday it closed at 418.27.
Think the markets are kicking you around in 2009? Be thankful your portfolio isn’t performing like that of the federal government in its role as investor of last resort.

The Government Relief Index, created by the Nasdaq OMX to measure the performance of the 21 stocks that received at least $1 billion in emergency government funding, is down a whopping 58 percent.

And that’s just since January 5, when the index started.

This index, with the ticker QGRI, started with a value of 1,000 and on Friday it closed at 418.27.

By comparison, the S&P 500 Index is down 25.9 percent over the same 60 days, the Dow Jones Industrial Average 25.4 percent and the Nasdaq 20.4 percent.

Granted, the QGRI has a bit of a disadvantage compared to the other measures – it’s loaded with shares of banks, insurance companies and General Motors.

The worst-performing holding in the QGRI is Huntington Bancshares, down 86.7 percent since January 5, followed by Citigroup, down 84.7 percent. Bank of America and AIG are both off 77.7 percent.

A single stock in the QGRI is positive during the period – Morgan Stanley, which is up 7.1 percent. Northern Trust, down 9.1 percent, and Goldman Sachs, off 10.4 percent, are next.

Ford Motor Co. is looking all the better for not taking any emergency money from Washington. Its shares have declined 31 percent, roughly half of the slide experienced by General Motors, which is down 60 percent over the 60-day period.

Index Summary 3-6-09

● The major market indices were lower this week. The Dow Jones Industrial Index (1) fell 6.17 percent. The S&P
500 Stock Index (2) lost 7.03 percent, while the Nasdaq Composite (3) finished 6.10 percent lower.
● Barra Growth (4) outperformed Barra Value (5) as Barra Value finished 8.83 percent lower while Barra Growth
declined 5.55 percent. The Russell 2000 (6) closed the week with a loss of 9.76 percent.
● For the week, the Hang Seng Composite (7) finished lower by 4.66 percent; Taiwan (8) rose by 2.12 percent, and
the Kospi (9) fell 0.75 percent.
● The 10-year Treasury bond yield closed at 2.88 percent, down 17 basis points for the week.