Friday, June 19, 2009

Weekly Market Update (06/19/09)‏


The Bureau of Labor Statistics announced a 1.3% decline in the Consumer Price Index year-over-year, the sharpest 12-month decline in prices since April 1950. more..

Interest rates ended the week largely unchanged despite intra-week volatility as investors position for record supply and a Federal Open Market Committee meeting on June 24th. more...

Large-Cap Equities
The stock market fell for the first time in four weeks on falling commodity prices and lowered ratings on banks. more...
Corporate Bonds
Investment grade primary activity continued its torpid pace as geopolitical issues took center stage. more...

Mortgage-Backed Securities
Despite intra-day volatility, agency mortgage performed favorably as interest rates oscillated in a tight range. more...

Municipal Bonds
The municipal bond market established a more solid footing this week as yields fell by about 8 bps in the 10-year maturity range of the AAA-rated general obligation (GO) curve. more...

Along with the equity market, High Yield took a breather this week. Going into Friday, the broad high yield market was 1.3% lower and 25 bps wider relative to Treasuries on the week. more...

Western European Equities
European stocks went down this week. The sectors with the worst performance were basic resources (-10.7%) and autos & parts (-10.4%). more...
Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) lost -4.1% this week, while the Russian stock index RTS went down -10.3%. more...

Global Bonds and Currencies
Major non-US government bond markets saw modest gains across the curve over the past week, extending progress made at the end of the previous week. more...

Emerging-Market Bonds
Emerging market dollar-pay debt spreads were wider this week as investors continued to move to the sidelines after the strong rally over the past two months. more...

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Obama follows Roosevelt and will devalue the Dollar

By Richard Russell in Dow Theory Letters:

It's clear (at least to me) that Obama is following the path Roosevelt took during the Great Depression.

In 1933, the government devalued the dollar by 41% by raising the official price of gold from $20.67 to $35 an ounce. Devaluation makes debt easier to handle. In a devaluation, the dollar value of debt remains the same, but all other assets would be worth more (in nominal terms) whether it was a house, a stock, a car or an ounce of gold.

How our creditors who own trillions of dollar in their reserves will react to a dollar devaluation I really don't know, but a devalued dollar is a lot better than nothing. The Bernanke Fed is trying desperately to bring back inflation, and devaluing the dollar is the surest and quickest way to inflate.

Learn more about the excellent Dow Theory Letters.

Market Reflections 6/18/2009

The economic outlook picked up smartly on Thursday led by declines in jobless claims data and a decline in the insured unemployment rate that points possibly to a top for the overall employment rate, a top that would appear sooner than most expected. Conditions in the Mid-Atlantic manufacturing sector are nearly steady, pointing to a forthcoming 50 reading in the ISM's national report that would indicate stable month-to-month conditions. The LEI rounds out the good news, jumping for a second month and likewise pointing to better conditions and soon.

The good news drove the S&P 0.8 percent higher to 918.37. Investors saw less need for the safety of Treasuries where yields rose steeply, up 9 basis points for the 2-year note to 1.25 percent and up 16 basis points for the 10-year to 3.85 percent. The dollar ended firmer, up 0.6 percent on the dollar index to 80.65. Commodities were steady with oil ending at $71.25.

Thursday, June 18, 2009

Jobless Claims

Released on 6/18/2009 8:30:00 AM For wk6/13, 2009
Prior Consensus Consensus Range Actual
4-week Moving Average - Level 621.75 K 615.75 K
New Claims - Level 601 K 610 K 590 K to 625 K 608 K

Unemployment claims are showing tangible but not dramatic improvement in the jobs market. First-time jobless claims, at 608,000 in the June 13 week, were in line with most expectations, up 3,000 from the prior week which was revised 4,000 higher to 605,000. But the four-week average fell 7,000 to 615,750 for its lowest level since the beginning of the year. A mid-month to mid-month comparison with May, which is useful to gauge change in the household survey of the monthly employment report, shows a 28,000 improvement in the week and a 14,000 improvement in the four-week average.

Continuing claims show special progress, down a sizable 148,000 to 6.687 million to end a very long streak of increases dating back to the very beginning of the year. Also improving was the unemployment rate for insured workers, down 1 tenth to 5.0 percent and offering a signal that the overall unemployment rate, at 9.4 percent, may also be coming down in what would be a major development for the economic outlook and global markets.

But one week's data is not a month of data, making for a very limited initial response though demand for Treasuries is slipping with demand for oil and other commodities on the rise. The results may give the stock market a slight lift and they are certain to spark fresh talk of green shoots.

Market Consensus Before Announcement
Initial jobless claims fell 24,000 in the June 6 week to 601,000. The improvement was clearly evident in the four-week average which fell 10,500 to 621,750 -- its lowest level since February. However, while job losses are slowing, the number of unemployed rose further in the latest week. Continuing claims for the May 30 week rose 59,000 to 6.816 million, another record high.

New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating (improving) labor market. The four-week moving average of new claims smoothes out weekly volatility.
Why Investors Care
Jobless claims are an easy way to gauge the strength of the job market. The fewer people filing for unemployment benefits, the more have jobs, and that tells investors a great deal about the economy. Nearly every job comes with an income that gives a household spending power. Spending greases the wheels of the economy and keeps it growing, so a stronger job market generates a healthier economy.

There's a downside to it, though. Unemployment claims, and therefore the number of job seekers, can fall to such a low level that businesses have a tough time finding new workers. They might have to pay overtime wages to current staff, use higher wages to lure people from other jobs, and in general spend more on labor costs because of a shortage of workers. This leads to wage inflation, which is bad news for the stock and bond markets. Federal Reserve officials are always on the look out for inflationary pressures.

By tracking the number of jobless claims, investors can gain a sense of how tight, or how loose, the job market is. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked jobless claims and adjusted their portfolios to anticipate these events.

Just remember, the lower the number of unemployment claims, the stronger the job market, and vice versa.

MBA Purchase Applications

Released on 6/17/2009 7:00:00 AM For wk6/12, 2009
Prior Actual
Purchase Index - Level 270.7 261.2

MBA's purchase applications fell back a disappointing 3.5 percent in the June 12 week to 261.2. The refinance index fell back very sharply, down 23 percent to 2,605.7. Both reflect the dampening effect of rising interest rates along with still limited credit availability. Mortgage rates dipped back in the latest week but still remain much higher than a month ago, about 75 basis points higher for 30-year loans which averaged 5.50 percent in the latest week. Yesterday's strong gains in housing starts were a big plus, but sagging mortgage applications and indications of limited buying interest in Monday's housing market index point to disappointing home sales data at month end.

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 Investors 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

FYI Obama's Financial Regulation Reform

President Obama today outlined his plan for reform of the regulation of the U.S. financial system. The plan would change how banks and other financial institutions are regulated and create a new consumer protection agency.

The plan merges the Office of Thrift Supervision (OTS) into the Office of the Controller of the Currency (OCC). Many see the OTS as a relatively soft supervisor, noting it oversaw AIG, IndyMac, and Washington Mutual.

Obama's plan would create a council of regulators to monitor system-wide risk with the Treasury Secretary being the chair and working with the Fed.

The plan would create a new consumer protection agency, focusing on protecting consumers from deceptive or financially dangerous mortgages and credit cards. The new agency would have power to issue new regulations.

The Fed would be given new powers, including the ability to require financial firms that are not banks to keep reserves set aside.

On the issue of financial derivatives, the Administration's plan would require firms creating certain securities, including derivatives, to retain 5 percent of the securitized exposure so that the firms have incentives to create securities that perform well.

Also, the FDIC would gain more power to take over deeply troubled financial companies that are not banks and then be able to unwind them. -- R. Mark Rogers

Market Reflections 6/17/2009

Higher energy costs have not yet been reflected in the CPI which showed very benign, incremental increases in May. The report had little impact on the markets which closed little changed with the S&P 500 fractionally lower at just over 910. President Obama proposed sweeping changes to financial regulation including the creation of a consumer protection agency. The changes would put the Treasury Secretary at the top of a regulatory council and would require firms that sell certain derivatives to hold some of their creations in their own account.

The dollar index fell 0.7 percent to 80.24, not helped by a flood of calls from policy makers out of the BRIC summit for global diversification out of the dollar. The dip in the dollar also follows reaction in Asia to yesterday's drop in industrial production, one that some say pushes back the prospect of economic recovery and Federal Reserve rate hikes. Oil firmed 50 cents to $71 despite a strong build in gasoline inventories. Unrest in Iran has had little effect on prices.

Wednesday, June 17, 2009

Market Reflections 6/16/2009

Housing starts offered good news on the housing sector, jumping 17 percent and showing a 4 percent gain for permits. Single-family homes, the core of the housing sector, rose strongly for a second month. But industrial production data were a disappointment, showing a 1.1 percent fall with capacity utilization falling deeper into record lows, now at 68.3 percent. Weakness was centered in mining, utilities, and autos with ex-auto manufacturing showing less weakness -- an important positive pointing to non-accelerating rates of contraction. But contraction in the auto sector is unfortunately accelerating, underscored by comments during the session from General Motors that it's aggressively cutting production. Producer prices showed a rare decline at the core level but also signs of pressure in earlier stages of production, pressure tied to rising energy prices. Rounding out the day's data was more weakness in weekly chain-store reports that point, so far, to a big disappointment for June retail sales.

But the international scene was as important to Tuesday's session as economic data. Pulling the dollar down was a reversal by Russia which again is calling for a new reserve currency, this time at the first meeting of the BRIC (Brazil, Russia, India, China). The dollar index fell 0.6 percent to 80.71 with gold, which benefits from uncertainty in the dollar, firming to $935. Unrest in Iran has yet to hit the market with oil ending above $70 at $70.50. The mixed economic data along with international uncertainty didn't help the stock market where the S&P 500 fell 1.3 percent to end just over 910. Demand for Treasuries firmed with the 10-year yield down 6 basis points to 3.65 percent.

Tuesday, June 16, 2009

Market Reflections 6/15/2009

A story in the Wall Street Journal questioning whether this year's 40 percent rally is too much too much fast led many to ask the same question, tripping profit-taking on long positions and the setting of shorts. A weak Empire State report raised questions on how soon the manufacturing sector will begin to expand, while a disappointing housing market index raised the prospect that the housing sector may be a continued drag on the recovery. Stocks posted steep losses with the S&P 500 down 2.4 percent to just under 925.

G8 comments over the weekend on the importance of the dollar, including from dollar-skeptic Russia, made for a strong rally in the dollar index which jumped 1.2 percent to 81.63. The gains in the dollar cut into the inflation-hedge premium for commodities which were down from grains to basic metals. But natural gas wasn't down, up nearly 10 percent on the session. Given lack of available storage for natural gas and forecasts for cooler than normal weather, traders were left asking whether investment demand, not physical demand, was behind the enormous jump. The G8 in their communique fired a shot at investors and speculators, blaming them for this year's run-up in commodities and warning of oversight in related derivatives.

Monday, June 15, 2009

Commodity Boom over? Hmmm?!

China Hoarding Drives Commodity Boomlet

Friday, June 12, 2009 12:17 PM

By: Dan Weil

Much of the massive Chinese purchases of commodities in recent weeks have gone to stockpiles rather than to satisfy current demand.

That means the huge Chinese buying is unlikely to continue, and that in turn means commodity prices may be unable to sustain their recent advance.

As for the stockpiling, at least 90 freighters stuffed with iron ore that are floating at China’s ports will have to wait as much as two weeks to unload their cargo because port storage facilities are full, shipping company executives tell The New York Times.

The Chinese have been hoarding everything from oil to aluminum to copper to canola and soybeans.

The oil buying has helped push prices above $70 per barrel.

“There has been enormous stockpiling of all commodities” by China, but that can’t continue indefinitely, Tim Huxley, chief executive of Wah Kwong Maritime Transport Holdings, tells The Times.

Some even say the China buying represents a commodities bubble.

“The past two weeks have been nuts and, rather than cheering this sudden comeback of the dry bulk market, I do have a considerable amount of concern that we are seeing the same bubble again,” Kenneth Koo, chief executive of Tai Chong Cheang Steamship Co., tells The Times.

But some experts remain bullish on commodities for the long term.

“I know we’re in a secular bull market for commodities,” investor Jim Rogers tells Moneynews.

“Things are going on that are good for the fundamentals of commodities.”

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