Friday, September 18, 2009

Weekly Market Update (9/18/09)‏


The steeper-than-expected increase in August retail sales signals that consumer spending may be on the road to recovery. more...

Treasuries traded lower this week, with 5-year yields underperforming all other maturities on the yield curve. more...

Large-Cap Equities
The stock market continued to rally this week on stronger-than-expected retail sales data and analyst earnings upgrades. more...

Corporate Bonds
Investment grade primary activity continued its blazing pace this week as investors bought anything they could get their hands on. more...

Mortgage-Backed Securities
Mortgages modestly outperformed Treasuries in the rally. Thirty-year current coupon spreads were tighter by 4 basis points from the previous week as steady demand trumped originator supply. more...

Municipal Bonds
Yields on municipal bonds moved lower across all maturities this week. Yields on bonds maturing in 10 years dropped 6 basis points, to 2.73%. more...

As the equity markets continue to counter the trend of historically weak Septembers and as the recent economic data has been largely positive, the high yield market is benefitting from these positive trends and has been able to maintain its strong momentum. more...

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +3.4% this week, while the Russian stock index RTS went up +4.1%. more...

Global Bonds and Currencies
Most major non-US sovereign bond markets ceded ground over the past week, broadly in line with losses in US Treasuries. more...

Emerging-Market Bonds
Emerging market bonds continued to outperform US treasuries this week as spreads tightened by 35 basis points. more...

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Canadian Royalty Trusts General Information

Canadian Royalty trusts are a different animal than U.S. Royalty Trusts. First, they renew their holdings and operate more like an oil and gas company than does a U.S. Royalty Trust. Generally the Canadian trusts do not do exploratory drilling. When they do drilling it would generally be to increase production of their existing fields and holdings. Most of the Canadian royalty trusts provide dividend payments which are based on the oil and gas production. Royalty trusts pay monthly or quarterly income that varies over time as the production of their underlying assets varies. Payments to unitholders will also vary with the market price of oil and natural gas. As Canadian Royalty Trusts replenish their reserves (versus U.S royalty trusts that do not replenish their reserves), the distributions of Canadian royalty trusts are generally considered to be eligible for the 15% tax rate. We have not found any official confirmation of the eligibility of Canadian Royalty Trusts for the 15% tax rate and the potential investor should confirm this eligibility from other sources. On February 25, 2005 the Government of Canada passed Bill C-33. Under the terms of Bill C-33, commencing January 1, 2005 a non-refundable withholding tax of 15% will be applied to the entire distribution paid to U.S. residents by "Canadian Royalty Trusts", including both the taxable and return of capital portions of the distributions. Similarly, non-residents of countries with whom there is no reciprocal tax treaty with Canada will be subject to a non-refundable withholding tax of 25% on the entire distribution paid. These withholding taxes will be applied uniformly to units held in both taxable and home jurisdiction tax-exempt accounts. Non-resident unit holders are strongly advised to consult a resident tax advisor to determine the deductibility of these taxes in their resident jurisdiction. This Canadian law means that tax exempt accounts such as IRA's will be subject to the 15% withholding and that the recovery of the Canadian withholding amounts will be probably difficult or impossible to achieve making Canadian Royalty Trusts a questionable choice for tax exempt accounts such as IRAs. Taxable accounts should be able to claim the 15% Canadian withholding as a credit on their U.S. income tax return and therefore easily recover the withholding amount.

Thursday, September 17, 2009

Market Reflections 9/17/2009

Initial jobless claims came in well below expectations, leading to a run of revisions to monthly payroll forecasts which are centering at a decline a bit under 200,000 in what would be another incremental improvement. Housing starts data were mixed but aren't derailing expectations for continued recovery in housing.

The S&P 500 slipped 0.3 percent to 1,065 in narrow trading. Though markets were quiet during the session there's heavy debate whether the historic run from 666 is way too much. Many say yes but not Federated Securities which argues the "real" market low hit in October at 840, when the greatest number of shares hit extreme lows, not just financials as in March. Given the 840 base, Federated says the six-month gain is not outsized for the early stages of economic recovery. Commodities were steady with oil ending at $72.50 and gold at $1,016. The dollar index was little changed at 76.26.

Wednesday, September 16, 2009

Market Reflections 9/16/2009

Industrial production showed a second month of strong gains for manufacturing, pointing to recovery as early as July and echoing Ben Bernanke's comments that the recession is probably over. Manufacturing isn't the only sector on the mend. Housing data continue to show gains, this time it was the homebuilders index which posted a third straight monthly increase. The CPI was skewed higher by energy prices and didn't see much effect from cash-for-clunkers, leading a Bureau of Labor Department official to argue that dealers must have pocketed some of the stimulus.

The S&P rose 1.5 percent to an 11-month high of 1,068, but the central focus of the markets is probably the dollar which continues to decline. The dollar index fell 0.4 percent to end at a new 12-month low of 76.19. The weak dollar is helping commodities including gold which ended near $1,020 with silver continuing to outpace gold's gains, ending at $17.40 for a nearly $1 jump on the day. Oil, up more than $1 to $17.25, got a special lift from a large draw in weekly crude stocks.

Market Reflections 9/15/2009

Retail sales were expected to be strong -- and that's what they proved to be showing wide strength in August outside of cash for clunkers. But whether this strength will continue is uncertain given continuing losses in the jobs market. Producer prices showed a big jump but one related to month-to-month swings in oil. Equities got only a mild lift from the retail sales results with the S&P 500 up 0.3 percent to 1,052. Commodities firmed with oil regaining $2 to $71 and gold digging in above $1,000, ending at $1,008. The dollar index dipped 0.2 percent to 76.50.

Tuesday, September 15, 2009

Economic Results

The August Producer Price Index came in with a 1.7% month-over-month increase, which is better than the 0.8% monthly increase that economists, on average, had come to expect after the index posted a 0.9% month-over-month decline in July. Excluding food and energy, producer prices increased 0.2% month-over-month, which is a bit more than the 0.1% monthly increase that was widely expected. The previous month's data showed that prices had slipped 0.1%. Advance retail sales for August made a strong 2.7% increase. They had been expected to increase 1.9%. The increase marks a sharp upturn from the downwardly revised 0.2% decline that was registered in July. Excluding autos, retail sales were up a more modest 1.1% in August. The consensus called for a 0.4% increase. Still, the sales less autos figure marked a considerable improvement from the 0.5% decline that was made in July. Last on the list is the Empire Manufacturing Survey, which came in at 18.9 for September. That marks its sixth straight month of improvement. It was also better than the reading of 15.0 that was widely expected.

Market Reflections 9/14/2009

President Obama used the anniversary of the Lehman Brothers collapse to say the need for government involvement in the markets is waning. Boosted by building reports of possible mergers, the S&P rallied 0.6 percent to 1,049 and showed no reaction to a brewing trade dispute after the U.S. placed tariffs on Chinese-made tires. The dollar was little changed but at least didn't weaken further with the dollar index up 0.1 percent at 76.70. Most commodities were little changed with gold holding at $1,000 and oil ending at $69.00. Natural gas was an exception, jumping 15% off deep lows on short-covering ahead of winter and on upbeat comments from Goldman Sachs.

Monday, September 14, 2009

The China Tire Trade Dispute..a must read

Courtesy of Jack Crooks at Black Swan Trading
Monday 14 September 2009
Key News
• A U.S. decision to impose special duties on Chinese tires could open the door to a host of trade complaints against Chinese products, creating tensions as Western nations seek Beijing's support at the G20 meeting. (Reuters)
• Euro zone industrial output fell in July and employment dropped again in the second quarter. (Reuters)
• U.K. banks are less than half way through posting 240 billion pounds ($398 billion) of losses on loans and securities, according to Moody’s Investors Service Ltd. (Bloomberg)
“The conventional view is based on the notion that free trade is always a win-win proposition and that our trade with China fits the conditions of the traditional free-trade model. These include the assumptions that the markets are perfectly competitive, that exchange rates are not manipulated, that there are no economies of scale, that there is no cross-border investment or cross-border transfers of technology, and that there are no government subsidies or export requirements. If this were a true picture of our trade in tyres with China, then imposing tariffs would truly be harmfully protectionist and not be justified.
“But this is not even close to the reality of our trade with China, which far from embracing orthodox free trade has openly adopted a neo-mercantilist, export-led economic growth strategy. China keeps its renminbi undervalued against the dollar in order indirectly to subsidise its exports. Foreign direct investment in China is often induced by the use of special, targeted tax and financial incentives. Foreign companies investing in China are often required to export the bulk of their production as a condition of being allowed to enter the Chinese market. This is the case with Cooper Tires, which agreed to export 100 per cent of its production in return for being allowed to invest in a Chinese tyre factory. The tyre industry is characterised by enormous economies of scale and imperfectly competitive markets in which a few oligopolistic producers divide the market among themselves. It is Chinese industrial policies and not market forces that are currently determining the trade flows and the location of production and jobs to the detriment of the US tyre industry.
“Nor is the detriment only to the US industry. Orthodox unilateral free-traders argue that, even if the US tyre workers lose their jobs, the US economy will enjoy a net benefit from lower consumer prices. But this is true only if the shuttered US factories and laid-off workers quickly shift to some other equally productive and well-paid activity. If, as we know, they cannot, the entire economy will suffer a loss of productivity and wages.
Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or
individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be
suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully
read Black Swan’s full disclaimer, which is available at
“This kind of trade is not win-win. Rather it is a classic zero-sum game. It is well-known to game theorists that in such situations a tit-for-tat response is the optimal strategy. Unilateral acquiescence to the aggressive initiatives of another player (the orthodox unilateral free-trade response) is a sure way to lose.”
Clyde Prestowitz, Financial Times editorial 9/10/09
“The American press is Confucianizing itself. A key factor is that increasingly in the last twenty years, media professionals have been subjected to a litmus test on trade. Those who embrace laissez-faire ideology have seen their careers flourish. Those who don’t haven’t.”
“The litmus test is applied by various players with considerable power to influence a journalist’s career. Take, for instance, high-placed news sources in government, in business, in the think tanks, and on Wall Street. For top journalists, easy access to such sources have long been aggressively in Beijing’s camp. In the classic Confucian fashion know throughout East Asia, such sources seek to marginalize and indeed ostracize any reporter who tries to uphold the freedom of the press on China-related issues.”
“Even before reporters get the chance to talk to sources, they are already subjected to a litmus test by media proprietors…Proprietors who apply the litmus test include not only Ruper Murchoch’s News Corporation but General Electric (the ultimate owner of NBC) and Viacom. It is no coincidence that these companies have assiduously cultivated business links with China over the years.”
“…While not all corporate America’s socialization of media people is necessarily so Machiavellian, the fact is that literally trillions of dollar are at stake in the free-trade debate. The debate is of historic concern not only in China, and its corporate friends but also to all the Confucian nations—nations that, by no coincidence, have traditions going back millennia on the sort of politically motivated personnel management we have seen in the American in recent decades.”
Eamonn Fingleton, In the Jaws of the Dragon
FX Trading – Hats off to China—They have made their intentions clear.
It may at times be a cozy symbiotic relationship that has been beneficial for the US; especially as it relates to the US consumer getting increasingly higher quality and very inexpensive goods from China—that does increase domestic purchasing power. But, our relationship with China is not free trade in the “usual” sense. Based on empirical evidence, i.e. read real world not theory, if we continue down this road the US economy will be completely hallowed out of advanced manufacturing—which is important.
Granted the US has the lead in technology, but when US multi-nationals willy-nilly share that technology with key competitors, what’s the competitive advantage?
Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or
individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be
suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully
read Black Swan’s full disclaimer, which is available at
The most powerful interests in America will continue to try and convince us it is free trade and will invoke Adam Smith and David Ricardo blah, blah, blah…all in an effort to too keep the game going (there is likely a mix of true believers and those who know better but have the look of the Cat that swallowed the canary).
It won’t take much, except facing up to the most powerful entrenched interests in the world to at least convert the US-Chinese relationship into at least pseudo free trade; that should be the objective.
So, a full-court press of Obama trade policy bashing will likely be filling the airwaves. No Obama fans are we. No Union fans are we. But it is just plain stupid to continue to call our trade relationship with China free.
China has proven again and again to be many steps ahead of its Western counterparts. It is in their interest to do so—so their actions cannot be faulted in the game of great powers. Those going into China to manufacture know the rules (most of them), China has clearly established the ground rules both explicitly; and implicitly by actions. They make no secret of the fact they want to receive technology transfer as quid pro quo, requiring domestic production for access, instead of just shipping in goods, as happens in a trade relationship almost every place else on the planet. Chinese policymakers make no secret of the fact they want foreigners to establish a domestic partner so that said technology can be replicated by a Chinese domestic firm and sold into the Chinese domestic market. Western manufacturers volitionally accept this situation. A situation they don’t seem to accept anywhere else.
So we are not spinning China into the bad guy here. Hat’s off for playing the West like a violin.
That said, any disruption to the China-US trade relationship could rock markets big time. But, given the power behind the status quo, the tire dispute will likely fade from memory as just another Western anti-trade action. And so it goes.
Jack Crooks
Black Swan Capital LLC

This Week's Market Moving Events...

A three-day extravaganza for indicators! On Tuesday, the barrage begins with PPI and retail sales. Mid-week brings us the CPI and industrial production. The indicator show ends with housing starts on Thursday—just before Friday’s quadruple witching.

Tuesday: PPI & retail sales 8.30am
Wednesday: CPI,Industrial Production, Petroleum Report
Thursday: housing starts, jobless claims, nat gas report

Simply Economics Trade, sentiment help recovery

By R. Mark Rogers, Senior U.S. Economist

Markets are continuing to adjust to the likelihood that the economy is in recovery. Equities rebounded further from lows earlier this year and there are signs of strengthening in the consumer sector and in international trade. (click to read entire article)