Saturday, August 14, 2010

2-Year Treasuries

8/14/10 2-Year Treasuries

"We are spending more money than we have ever spent before, and it does not work. After eight years we have just as much unemployment as when we started, and an enormous debt to boot". U.S. Treasury Secretary Henry Morgenthau, May 1939

The Federal Reserve is undertaking a "dangerous gamble" by keeping rates at near zero for so long, and must start raising rates or risk damaging the nascent U.S. recovery, a top Federal Reserve official said on Friday. "To be clear, I am not advocating a tight monetary policy," Kansas City Reserve Bank President Thomas Hoenig said in the text of a speech to the Lincoln, Nebraska, Chamber of Commerce. "I am advocating a policy that remains accommodative but slowly firms as the economy itself expands and moves toward more balance." Hoenig has been the lone dissenter on the Fed's policy-setting panel, which on Tuesday repeated the U.S. central bank's pledge to keep interest rates extraordinarily low for an "extended period.

The Automatic Earth: "Clearly we have a long way to fall in the next leg of deflationary deleveraging that is now underway, and the effects on the real economy will begin to be felt in the not too distant future.
Those who do not learn the lessons of history are destined to repeat them."

Palos Heights, Ill.-based Palos Bank and Trust Company was closed by regulators Friday, marking the 110th U.S. bank failure of 2010. Palos Bank and Trust Company had $493.4 million in assets and $467.8 million in deposits as of June 30, the Federal Deposit Insurance Corp. said in a statement. The bank's failure will cost the deposit-insurance fund $72 million, the FDIC said.

Doug Noland: "Not many weeks ago the focus was on the Fed's "exit strategy." Apparently, policymakers now recognize that there is no way out. It was suppose to have been a case of the Federal Reserve having used its balance sheet as an extraordinary policy tool in response to the 2008 Credit seizure, with the Fed dedicated to unwinding this unprecedented stimulus as the system stabilized. Today, not only is the Fed unwilling to normalize its securities holdings, it has signaled to the markets that it is able and willing to expand its balance sheet on an as needed basis. At least that's the way the markets will see things: the Fed is there ready to act quickly and forcefully as a reliable system backstop. No more worries about "exit" issues; and as the debt markets turn increasingly overheated, it's sure comforting to know the Fed is there to ensure marketplace liquidity. This is a very big deal....Today, extreme activist fiscal and monetary policies inflate the Global Government Finance Bubble. After the 2008 fiasco, I have a difficult time comprehending how analysts can remain dismissive of Bubble risks. And with an increasingly conspicuous Bubble at the heart of our monetary system, our central bank should not be encouraging the market perception that the Fed is there to backstop the markets and economic recovery with open-ended Treasury purchases. Instead of a well-functioning marketplace (and central bank) working to discipline a profligate Washington, dysfunctional monetary and market environments continue to accommodate perilous Credit excess."

Mike Burk: "The market had a rough week, but it is now oversold going into a seasonally strong week.
I expect the major averages to be higher on Friday August 20 than they were on Friday August 13."

Buying a home has gotten cheaper since the 2006 peak, but things have gotten worse for renters, whose costs have risen 12%.

With the real yield on five-year TIPS now in negative territory, the debate rages over what the bond market's deflation outlook is for the next five years.

New drilling permit rules prompted by the Deepwater Horizon disaster are idling shallow-water rigs, even though they're not covered by the moratorium affecting rigs that drill in deep water.

"All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in the presence of an agent of the I.R.S." President F.D. Roosevelt, 1933

Charles Hugh Smith: "But the gap between the super-rich, the wealthy and "the rest of us" has widened, forming what is in essence two Americas -- the top 5% and the bottom 95%. And this is creating a situation where economic growth, as measured by GDP, may increasingly mean that 95% of Americans are still not doing better financially."

2-year treasury bonds yield .53%. There is a defined risk on the short side. I view this as an unusual opportunity similar to the yield curve that went flatter and flatter. Being a contrary investor can be lucrative at select moments.

The US economy is almost certainly headed back into a double dip recession, and economists aren't seeing it because they're using "the old rules of thumb" that don't apply this time, well-known economist David Rosenberg told CNBC. Consumers' focus on shedding debt rather than spending will prevent the economy from growing and bring a halt to the recovery, said Rosenberg, a former Merrill Lynch economist who now works at Gluskin Sheff, an advisory firm based in Toronto.
"The risks of a double-dip recession—if we ever got out of the first one—are actually a lot higher than people are talking about right now," he said. "I think that it's almost a foregone conclusion, a virtual certainty."

Andy Xie: "How many flats in China are sitting empty? The media recently floated a story – denied by power companies – that 64.5 million urban electricity meters registered zero consumption over a recent, six-month period. That led to a theory that China has enough empty apartments to house 200 million people.
Statistical transparency is lacking in this area, so the truth about empty apartments remains under wraps. Publishing accurate data should be of the highest priority, since the size of the nation's unused apartment stock is perhaps the most important measure of the extent and seriousness of China's property market bubble. Indeed, it's a grave concern for policymaking, since unpublished data may indicate not only a price bubble but a quantity bubble burdening the market."

“The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” --10th Amendment

There is no instance of a nation benefitting from prolonged warfare.
Sun Tzu

Friday, August 13, 2010


8/13/10 Danger

Sales at U.S. retailers increased 0.4% in July to a seasonally adjusted $362.7 billion, the Commerce Department estimated Friday. Sales increased for the first time after two straight monthly declines. Sales fell an upwardly revised 0.3% in June. Details of the July report were weak. Most of the gain came from autos and gasoline. Excluding these two sectors, retail sales were down 0.1% in July. Ahead of the report, economists surveyed by MarketWatch expected total sales to rise 0.5% in June. Excluding the 1.6% rise in motor vehicle sales, retail sales rose 0.2% to $299.7 billion, in line with expectations.

The index for U.S. consumer prices rose 0.3% in July, pulled up by energy prices, to reach the largest gain since August of 2009, the Labor Department reported Friday. The energy index in July rose 2.6%, its first gain since January. Meanwhile, food prices fell 0.1%, the largest decline since September. The core rate, which excludes volatile food and energy prices, rose 0.1% in July. Economists surveyed by MarketWatch had expected the overall CPI to rise 0.3%, and for the core to gain 0.1%. Over the past 12 months, overall consumer prices have climbed 1.2%, while core prices have gained 0.9%. Prices for shelter, apparel and tobacco are rose in July, while there were price declines for medical care, recreation and airline fares.

Belgium food retailer Delhaize said Friday that its second-quarter net profit declined 8.2% to 114 million euros. Revenue rose 4.7% to 5.3 billion euros after currency translation moves. Delhaize cut its operating profit growth guidance range for the full year to a range of -2% to 2%, from a previous range of 2% to 5%. It gave a commitment to continued price investments, a lower-than-expected outlook on U.S. inflation for the rest of the year, a persistently difficult and volatile economic and competitive environment in the U.S. Southeast and an increasingly tough environment in Greece, as the reasons for this move.

News Corp. explores national news app for iPad, mobile phones.

"The Association of American Railroads (AAR) today (Monday, actually, - G) reported that monthly rail carloads for July 2010 were up 4.1 percent compared with the same period last year, but still down 14.6 percent compared with July 2008. According to AAR’s August Rail Time Indicators Report, intermodal traffic in July was up 17.3 percent compared with the same month in 2009, but also down 5.1 percent compared with July 2008. "

ZeroHedge: "the 5 criteria of the Hindenburg Omen are as follows:
That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.
That the smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is a function of the 2.2% of the total issues.
That the NYSE 10 Week moving average is rising.
That the McClellan Oscillator is negative on that same day.
That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.
Today, all five conditions were satisfied. June 2008 was another such reconfirmed event, and as Barron's pointed out then, "there's a 25% probability of a full-blown stock-market crash in the next 120 days. Caveat emptor." Boy was the emptor caveating within 120 days (especially if said emptor was named Dick Fuld). Which brings us to the present: should the Omen be reconfirmed within 36 days, all bets are off."
The indicator may suggest “a savage equity downturn is imminent,” said Albert Edwards, a London-based strategist at Societe Generale SA, who has told investors to favor bonds over stocks for more than a decade. “Equities are tottering on the edge as increasingly recessionary data becomes apparent. It would not take much to tip them over that edge.”
The Hindenburg signal was triggered yesterday as the proportion of stocks reaching new one-year highs and lows both exceeded 2.2 percent of the total listed on the NYSE, according to Michael Riesner, a technical analyst at UBS in Zurich.

Cardinal Climax + Hindenburg Omen=Danger

Arch Crawford: "There are an unusual number of harsh, or difficult aspects to Neptune, over a two-and-a-half-day period, which may bring focus on highly inflationary developments. Beginning Wednesday August 18 around 3:52 p.m. [U.S. Eastern time] with a Mars 135 to Neptune followed in the evening with a Sun contra-parallel Neptune (8:38 p.m. EDT) and on Thursday at 7:15 a.m. EDT Venus 135 to Neptune and 2:44 p.m. EDT Mercury contra-parallels Uranus ["sudden changes; unexpected information"] and early Friday at 6:07 a.m. EDT Sun opposes Neptune.
"After that, there are 4 more Lunar hits that may keep going, or hold it up... or not! The last 2 are at 12:46 and 12:50 p.m. EDT and we won't push it past that unless sitting in front of trading computers with fingers on buttons."

Productivity in the U.S. unexpectedly decreased in the second quarter after employers expanded the workweek by the most in four years even as the world’s largest economy cooled.
The measure of employee output per hour fell at a 0.9 percent annual rate, the first drop since late 2008, the Labor Department said today in Washington. Hours worked climbed at a 3.6 percent rate, leading to a 2.6 percent increase in the amount of goods and services produced.
A lengthening workweek signals employers have reached efficiency limits after productivity climbed by the most in five decades in the 12 months to March. Federal Reserve policy makers today announced additional steps to bolster growth.

Consumer Spending Was Tepid in July, MasterCard Says. Shoppers dug in their heels in July, bad news for the stalling economy and worse for struggling retailers. Excluding gasoline and autos, U.S. retail sales rose a meager 0.1% last month from June, according to figures released Thursday by MasterCard Advisors' SpendingPulse, which estimates spending in all forms including cash. Excluding autos, sales fell — 0.9%.

The president’s approval ratings have been sliding dramatically all summer, with the latest Rasmussen Daily Presidential Tracking Poll of US voters dropping to minus 22 points, the lowest point so far for Barack Obama since taking office. While just 24 per cent of American voters strongly approve of the president’s job performance, almost twice that number, 46 per cent, strongly disapprove. According to Rasmussen, 65 per cent of voters believe the United States is going down the wrong track, including 70 per cent of independents.
The RealClearPolitics average of polls now has President Obama at over 50 per cent disapproval, a remarkably high figure for a president just 18 months into his first term. Strikingly, the latest USA Today/Gallup survey has the President on just 41 per cent approval, with 53 per cent disapproving.

The US is the only nation that levies income tax on money earned abroad. As of 2013, foreign banks will be required to withhold 30% of withdrawals from an American’s account, effectively turning bank employees into US tax agents.

Russia says it will undertake a key step next week towards starting up a reactor at Iran's first nuclear power station. Russia's state atomic corporation, which is building the plant, said engineers will begin loading the Bushehr reactor with fuel.

U.S. business inventories rose 0.3% in June as sales fell 0.6%, the Commerce Department said Friday.

Consumer confidence as measured by a Reuters/University of Michigan poll improved to 69.6 in August from 67.8 in July, according to reports.

The Dow Jones industrials ($INDU), which had been in the black for much of the afternoon, finally faded in the last half hour of trading, closing down 17 points to 10,303.
The Standard & Poor's 500 Index ($INX) was down 4 points to 1,079. The tech weakness resulted in a 17-point decline in the Nasdaq Composite Index ($COMPX) to 2,182.

Thursday, August 12, 2010

Price Reductions

8/12/10 Price Reductions

ZeroHedge: "German Die Zeit reports that, in a stunning move, the EU has ordered Germany to count the holdings of WestLB and Hypo Real Estate (the latter of which failed the stress farce from last month which nobody cares about or remembers anymore) as government debt! As Bloomberg notes, "That could raise Germany’s debt to 90 percent of gross domestic product, Die Zeit said."

Charles Hugh Smith: "The Plunge Protection Team's emergency red phone is ringing. If they fail to answer the call right now, their Prime Directive--propping up the stock market--could turn to dust. "

There’s “no end in sight to price reductions” in the national housing market, said real estate search engine Trulia Inc.
One in four of the homes on the market in the United States as of Aug. 1 has had its price cut by the seller at least once.
Half of the country’s 50 biggest cities have reached the point where 30 percent of their listed homes have had price cuts, Trulia said. Minneapolis, where 42 percent of homes on sale have been reduced in price, broke a record for highest percentage of reduced listings.
Long Beach was the top California city on the list, with 28 percent of listings reduced at least once. Los Angeles was next, with 25 percent.
Locally, San Francisco had a 25 percent rate, while Oakland’s was 17 percent.
San Jose’s housing market had a lot of price cuts in July and August. In July, 16 percent of San Jose homes for sale had been discounted. By August, that rose to 18 percent.
Luxury homes costing $2 million or more “continue to provide massive discounts of 14 percent off the original listing price, on average,” Trulia said. The average discount on cheaper homes is 9 percent.
Nationwide, the total dollar amount cut from home prices in those 50 biggest cites was $30.1 billion as of Aug. 1.
Trulia is based in San Francisco.

President Barack Obama’s plan to let lapse the Bush-era tax cuts for the highest-income Americans would have little effect on 76 percent of those taxpayers, a study says.
Under the Democrats’ plan to end a tax break for those earning more than $200,000 per individual or $250,000 per couple, the 3.8 million filers who fall in the $200,000 to $500,000 income range would pay $2 billion more in 2011 taxes, or an average of $532. Most Americans would go along with temporarily extending the Bush tax cuts for all taxpayers, including the wealthy, until the economy recovers, a new NBC News/Wall Street Journal survey has found.

America is a "Mickey Mouse economy" that is technically bankrupt, according to Jochen Wermuth, the Chief Investment Officer (CIO) and managing partner at Wermuth Asset Management.
"America today looks like Russia in 1998. Consumers, companies and the government are all highly indebted. America as a result is a bankrupt Mickey Mouse economy," Wermuth told CNBC.

Motley Fool: "Aug 13th, black Friday ?
Not saying it will be a black Friday, but this week is crucial for the market.
If you believe head and shoulder pattern, this week DOW will form the right shoulder. On the weekly chart, there are 15 weeks from week 1/10/10 (high=10723) to week 4/25/10 (high=11258). This week is the 15th week from 4/25 to now. And DOW is at 10702. Time, space, shape are matching with the left shoulder.
If you believe Fibonacci numbers,
Dow, 11258(4/26) - 9614(7/2) = 1644 * 0.618 = 1015 + 9614 = 10629
SP500, 1220 (4/26) - 1011(7/1) = 209 * 0.618 = 129 + 1101 = 1140
We are very close to these numbers now.
If you believe technical analysis, DOW and SP500 were moving inside a triangle since end of June. The triangle also is ending this week. It shows we could reach the end of this run too.
If you are interested in ISE Sentiment Index, here are the numbers. Last week, 73% people were bullish, same as the week of 1/10/10. Another similarity is, DOW was higher in week 1/17/10 than week 1/10/10, but ISE index was lower. Now, DOW is higher than week 7/25/10, but ISE index also is lower than a week ago.
If you care about Cardinal Climax, On August 16, 2010, Jupiter in Aries opposes Saturn in Libra.
All these seem point to the down side, but what can be the trigger?"

Prices of goods imported into the United States increased 0.2% in July, after two months of declines, the Labor Department reported Thursday. Fuel-import prices rose 2.1% in July, while prices for non-fuel imports fell 0.3%. Import prices are up 4.9% in the past year, with a gain of 14.8% for fuel imports, and a 2.8% increase for non-fuel imports. Export prices fell 0.2% in July, including a 0.1% decline for agriculture exports, and a 0.2% decline for non-agricultural exports. In June, export prices were down 0.7%. For the year, export prices are up 3.9%.

The number of initial claims for regular state unemployment insurance benefits rose 2,000 to 484,000 in the week ended August 7, reaching the highest level since February, the Labor Department reported Thursday. Economists polled by MarketWatch had expected a level of 463,000. The four-week average of initial claims -- a more accurate gauge of employment trends -- rose 14,250 to 473,500, also the highest level since February. For the prior week, the initial claims level was revised higher to 482,000 from a previous estimate of 479,000. The number of workers who continued to receive state unemployment checks fell by 118,000 to 4.45 million in the week ended July 31. The four-week average of these continuing claims fell 64,500 to 4.52 million. Altogether, about 9.8 million people were collecting some type of unemployment benefit in the week ended July 24, up from about 8.6 million in the prior week. Much of the gain is from resumed payments to beneficiaries following Washington's recent approval of new federal funds for extended benefits.

The number of U.S. homes lost to foreclosure surged in July, another sign lenders are moving quicker to take back properties from homeowners behind in payments.
Lenders repossessed 92,858 properties last month, up 9 percent from June and an increase of 6 percent from July 2009, foreclosure listing firm RealtyTrac Inc. said Thursday.
Banks have stepped up repossessions this year to clear out the backlog of bad loans. July makes the eighth month in a row that the pace of homes lost to foreclosure has increased on an annual basis.

Pessimism over the economy is rising and the grim mood could hurt both parties in the November 2 congressional elections, according to an NBC News/Wall Street Journal poll released on Wednesday.
Almost two-thirds of Americans believe the economy will worsen before it gets better, up from 53 percent who felt that way in January, the poll found.
Nearly six in 10 of those surveyed said the country is headed in the wrong direction, a percentage that has held steady in NBC/WSJ polling throughout the year.
More than half of respondents said they disapprove of the way President Barack Obama is handling the economy. The poll also found Americans were split on Obama's overall job performance, with 48 percent saying they disapprove and 47 saying they approve.

NY Times: "During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back.
The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association.
Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcy and because the value of the homes, the collateral backing the loans, has often disappeared.
The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up.
“When houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats,” said Christopher A. Combs, a real estate lawyer here, where the problem is especially pronounced. “Their chances are pretty good of walking away and not having the bank collect.”
Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.
Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. “People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”

Today natural gas storage: Exp: 35B VS Prev: 29B. The five-year average is 37.2 bcf. EIA storage for 8/6 is + 37.
Working gas in storage was 2,985 Bcf as of Friday, August 06, 2010, according to EIA estimates. This represents a net increase of 37 Bcf from the previous week. Stocks were 158 Bcf less than last year at this time and 219 Bcf above the 5-year average of 2,766 Bcf. In the East Region, stocks were 21 Bcf above the 5-year average following net injections of 43 Bcf. Stocks in the Producing Region were 111 Bcf above the 5-year average of 859 Bcf after a net withdrawal of 9 Bcf. Stocks in the West Region were 87 Bcf above the 5-year average after a net addition of 3 Bcf. At 2,985 Bcf, total working gas is within the 5-year historical range.

Per ICI, the week ended August 4 saw an outflow of ($2,788) MM, bringing the total to over $46 billion in domestic equity redemptions year to date.

Rex Nutting: "Who cares what it costs to borrow when no one wants to take out a loan?"

The Automatic Earth: "If no-one's borrowing, the overall money supply goes down. That spells deflation, and the Fed is powerless against it. It can't force you to borrow. And if no economic growth materializes, you're not going to increase borrowing. Because you'll be losing your jobs, or famliy, friends, neighbors will, and you’ll be forewarned.
And they know it too, Bernanke and Geithner. The Fed doesn't support you, the American people, it supports the zombie banking system at your cost. Seen from that particular angle, by the way, it's doing a great job. I’ll leave it up to you to decide where the Treasury, and the US government in general, stand on this. Think Fannie and Freddie."

Russian oil giant LUKOIL has resumed gasoline sales into Iran in partnership with China's state-run firm Zhuhai Zhenrong, even as the United States urges the international community to be tough with Tehran.
Iran is the world's fifth-largest oil exporter but lacks adequate refining capacity to meet domestic demand for motor fuel, forcing it to import up to 40 percent of its requirements.
Russia and China, both permanent members of the U.N. Security Council, signed up to the latest round of U.N. sanctions on Iran, but refused to support measures that targeted the Islamic Republic's oil and gas sector.
The U.S. has since passed additional unilateral sanctions allowing it to penalise fuel suppliers to Iran, measures criticised by both Beijing and Moscow.

The U.S. economy has a “significant likelihood” of entering a double-dip recession if the government doesn’t step in to help the unemployed, economist Robert Shiller told MarketWatch News Break on Wednesday.

Jerry Cope and Charles Hambleton report:"The numbers of birds, fish, turtles, and mammals killed by the use of Corexit will never be known as the evidence strongly suggests that BP worked with the Coast Guard, the Department of Homeland Security, the FAA, private security contractors, and local law enforcement, all of which cooperated to conceal the operations disposing of the animals from the media and the public.The majority of the disposal operations were carried out under cover of darkness. The areas along the beaches and coastal Islands where the dead animals were collected were closed off by the U.S. Coast Guard. On shore, private contractors and local law enforcement officials kept off limits the areas where the remains of the dead animals were dumped, mainly at the Magnolia Springs landfill by Waste Management where armed guards controlled access. The nearby weigh station where the Waste Management trucks passed through with their cargoes was also restricted by at least one sheriff's deputies in a patrol car, 24/7." via George Washington and ZeroHedge

Total outstanding student loan debt now exceeds credit card debt, as reported yesterday in the Wall Street Journal which in turn elaborated on a web article by Mark Kantrowitz, publisher of Revolving consumer credit according to the Federal Reserve is $826 billion. Kantrowitz calculates outstanding student loan debt at almost $830 billion.

BP Agrees to Pay a Record $50 Million Fine for Safety Violations at Texas City Refinery.

Gold futures on Thursday closed at their highest in six weeks as concerns about the economy boiled over. Gold for December delivery, the most active contract, rose $17.50, or 1.5%, to $1,216.70 an ounce on the Comex division of the New York Mercantile Exchange. Silver tracked gold's gain, recapturing the $18-an-ounce mark to close 0.9% higher at $18.06 an ounce.

Facebook Inc. will pull in an estimated $1.28 billion in advertising spending this year, according to a report published Thursday by eMarketer. Meanwhile closely-held Facebook's rival in the online social-networking market, News Corp.'s MySpace, will see only $347 million in advertising revenue this year, according to the report.

The Dow Jones Industrial Average fell 59.88 points, or 0.6%, to end at 10,319.95. The S&P 500 index dropped 5.86 points, or 0.5%, to end at 1,083.61, led lower by a 1.7% drop in the technology sector. The Nasdaq Composite fell 18.36 points, or 0.8%, to 2,190.27.


Wednesday, August 11, 2010

Unusual Uncertainty

8/11/10 Unusual Uncertainty

Growth in the U.S. economy from April through June was probably softer than first estimated by the government, private economists said Wednesday after updated trade figures for June were published showing higher imports. Instead of growing at a 2.4% annualized pace in the second quarter, real gross domestic product will likely be revised down to a 1.3% annual rate, according to economists surveyed by MarketWatch.

The U.S. trade deficit widened sharply by 18.8% in June to $49.9 billion, the Commerce Department said Wednesday. This is the largest trade gap since October 2008 when global trade activity froze in the wake of the collapse of Lehman Brothers. The trade deficit was much larger than the consensus forecast of Wall Street economists of a deficit of $42.5 billion. Imports rose while exports declined in June. The U.S. trade deficit with China widened to $26.2 billion in compared with $18.4 billion in the same month last year. This is the largest trade gap with China since October 2008.

The Japanese yen on Wednesday hit a new 15-year high versus the U.S. dollar. The dollar traded as low as 84.71 yen, according to FactSet, after taking out its previous low for the year near 85.00 yen. The dollar recently changed hands at 84.90 yen.

Sea Island Co. late Tuesday said it has reached a deal to sell "substantially all" of its assets to a partnership formed by Oaktree Capital Management LP and Avenue Capital Group. Sea Island, a resort and real estate development company, said it has also filed for bankruptcy. The assets are being sold for $197.5 million and Sea Island is escaping from $600 million in debt, according to press reports.

The International Energy Agency on Wednesday revised higher its estimates for global oil demand for this year and 2011, citing slightly higher economic assumptions and baseline adjustments. Forecast global oil demand for 2010 and 2011 is revised up by 80,000 barrels a day and 50,000 barrels a day respectively. Oil demand is thus expected to average 86.6 million barrels a day in 2010 and 87.9 million barrels a day in 2011. However, concerns that the global economic recovery may falter from the second half of the year "pose a significant downward risk to the forecast," the IEA said in its monthly report.

China’s industrial output rose the least in 11 months, retail sales growth eased and new loans climbed less than estimated, adding to signs that a slowdown in the world’s third-biggest economy is deepening.
Production rose 13.4 percent in July from a year earlier, the statistics bureau said in Beijing today. Inflation quickened to 3.3 percent, the fastest in 21 months, boosted by a low year-earlier base for comparison and rising food costs.
The government is cracking down on real-estate speculation, curbing credit and closing factories to meet energy-efficiency targets after three quarters of growth of more than 10 percent. China can sustain an expansion of more than 9 percent in the third and fourth quarters, with inflation likely to peak this month and then fall, Morgan Stanley said.
“The overall picture is quite benign and a soft landing is underway,” Wang Qing, a Hong Kong-based economist with Morgan Stanley, told Bloomberg Television. The government may ease investment controls and a 7.5 trillion yuan ($1.1 trillion) annual limit on lending in the fourth quarter, Wang said.

EIA Petroleum Inventories: Crude -2.99M vs. consensus of -2.0M. Gasoline +0.41M vs. consensus of 0. Distillates +3.46M vs. consensus of +1.6M. Crude futures -1.9% to $78.71.

The 10 Year is now pushing below 2.70%, last hitting 2.69%, the lowest in over 16 years, as the 2s10s is at 219 bps, or the tightest since April 2009.

Q1 GDP could very well be revised to well under 1.0%.

Laurence Kotlikoff: "Our country is broke and can no longer afford no- pain, all-gain “solutions.”

Job openings at U.S. workplaces were flat in June compared with May, remaining at 2.94 million, the Labor Department reported Wednesday. Openings have increased about 17% in the past year. There were about five unemployed people for every job opening in June. In government, the number of separations, such as quits and layoffs, rose to 540,000 in June from 331,000 in May as the government let go temporary Census workers, while private-industry separations dipped to 3.81 million from 3.82 million. Meanwhile, the number of people hired fell to 4.25 million in June from 4.58 million in May. Private-sector hiring rose to 3.93 million from 3.85 million, while government hiring declined to 323,000 from 735,000.

The Dow Jones Industrial Average fell 265.42 points, or 2.5%, to 10,378.83. The S&P 500 declined 31.56 points, or 2.8%, to 1,089.50. The Nasdaq Composite shed 68.54 points, or 3%, to 2,208.63.

The U.S. government ran a budget deficit of $165 billion in July, the Treasury Department reported Wednesday, marking the 22nd consecutive month of red ink. Outlays totaled $321 billion in the month while receipts were $156 billion. July is usually a deficit month since there are no tax due dates.

Cisco Systems Inc's quarterly revenue fell slightly short of Wall Street's expectations, disappointing investors who thought an improving economy and growing Internet traffic would have spurred even stronger sales of routers and switches.
Cisco, the world's biggest network equipment maker, said on Wednesday that revenue in the quarter ended July 31 rose 27 percent from a year earlier to $10.8 billion. That was slightly below the average analyst forecast of $10.9 billion, according to Thomson Reuters I/B/E/S.
Its net profit rose to $1.9 billion, or 33 cents a share, from $1.1 billion, or 19 cents a share, a year earlier. Excluding special items, its profit rose to 43 cents a share, a penny above Wall Street's forecast. The shares dipped 8% to $21.83 in after hours trading. Days Sales Outstanding surge from 27 to 41 days. Customers increasingly refuse to pay on time.

Macy's raised its forecast for full-year same-store sales growth to a range of 4 percent to 4.2 percent. It earlier expected 3.0 percent to 3.5 percent.
The company also raised its full-year profit outlook by 10 cents a share to a range of $1.85 to $1.90, compared with Wall Street's average forecast of $1.87.
Macy's shares were up 5 percent at $20.33 on the New York Stock Exchange.

Tuesday, August 10, 2010

Fed Credit

8/10/10 Fed Credit

There is a "significant" chance the U.S. economy will slip back into recession in the next two years although a reversal is unlikely in the next few months, researchers at the San Francisco Federal Reserve Bank said on Monday. The probability of another recession over the next 18 to 24 months is higher than that of expansion, researchers said in the latest issue of the regional Fed bank's Economic Letter.

“I think investors will most certainly be focusing on the growth of the economy, which right now we regard as a half-speed recovery,” says Sam Stovall, Standard & Poor’s chief investment strategist. “It’s growing at about 3 percent compared with the more normal 7 percent we usually see during the early part of an economic expansion, so there’s still a question as to whether we have finished with this correction.”

The average maturity of US Treasury debt is now 58 months from just 48 months at the end of 2008.

Crude oil for September delivery fell $1.64 to $79.84 a barrel in electronic trading on Globex. Gold for December delivery fell $7.40, or 0.6%, to $1,195.20 an ounce.

Productivity of the U.S. non-farm business sector fell at a 0.9% annual rate in the second quarter from a 3.9% gain in the first quarter, the Labor Department estimated Tuesday. Economists were expecting productivity to decline 0.4% in the second quarter. Output increased at a 2.6% annualized rate while hours worked rose 3.6% in the second quarter. Unit labor costs - a key inflationary signal - rebounded at an annual rate of 0.2% in the second quarter after a sharp 3.7% decline in the first quarter. Real hourly compensation was flat. On a year-on-year basis, productivity slowed to a 3.9% increase after a 6.3% rate in the first quarter. Unit labor costs are down 2.8% year-over-year compared with a 2.7% drop in the first quarter.

Chinese shares suffered their worst fall in more than a month on Tuesday as weaker-than-expected July imports data raised concern that consumption on the mainland was slowing. The Shanghai Composite dropped 2.9% to 2,595.27, it worst percentage fall since June 29, while the Shenzhen Composite index tumbled 3.3% to 1,085.63.

China’s trade surplus reached an 18- month high as exports rose to a record and import gains slowed, adding pressure on officials to allow faster appreciation of the yuan and signaling a diminished contribution to global growth.
The gap surged 170 percent from a year earlier to $28.7 billion, the customs bureau said, exceeding the forecasts of all 29 economists in a Bloomberg News survey. Exports increased 38.1 percent to $145.5 billion and imports advanced 22.7 percent to $116.8 billion, the bureau said on its website today.

The National Federation of Independent Business (NFIB) said its optimism index fell 0.9 point to 88.1 in July.
"We don't have any confidence that the economy is going to get fixed, that it's going to improve," William Dunkleberg, the group's chief economist, told CNBC. "We really crashed when it came to expectations for business conditions. Not good."
Dunkleberg said the main reason for the drop in sentiment was because of weaker expectations for business conditions in six months.
Only 2 percent of respondents said they had plans to create new jobs. That actually represented an improvement from June's 1 percent reading.

The Obama administration's determination to allow the Bush tax cuts to expire for the wealthiest Americans is akin to "operating on an economic body without the benefit of anesthesia," says John Mauldin, president of Millennium Wave Advisors. "What we're doing is a grand experiment."
No fan of tax hikes in ordinary times, Mauldin says raising taxes now -- with the economy at "stall speed" and inflation near zero - is "very dangerous."

Economic Disconnect: "We have had almost 2 years of free money and no one is running over their mother to grab any of it. The law of diminishing returns comes into play here. If you could borrow at 5% instead of 10% that is something. Borrowing at 3.2% instead of 3.5% is really not going to get anybody too excited. How's that ultra low rates being a structural part of the US economy working for you? I told you this would happen."

Earlier this summer, Prime Minister Wen Jiabao of China promised to use an “iron hand” to improve his country’s energy efficiency, and a growing number of businesses are now discovering that it feels like a fist.
The Ministry of Industry and Information Technology quietly published a list late Sunday of 2,087 steel mills, cement works and other energy-intensive factories required to close by Sept. 30.

Reserve Bank credit is now $331 billion GREATER than it was one year ago; it has grown over the past 365 days by 16.7%, as of August 4, 2010.

ZeroHedge: "According to the US Minerals Management Service and a consortium of oil companies, including BP, themselves - as little as 2% of the oil which spilled from BP's oil well ever made it to the surface, any formula based on surface spills is worthless. In other words, as much as 98% of the spilled oil may not yet have even made it to the surface, but may have been suspended under the surface the whole time.
And since the government and BP have been using Corexit to sink the small proportion of oil visible from the surface, that means that more than 98% of the oil might be lurking beneath the surface....The bottom line is that the government's entire response to the oil spill is to try to cover it up, just as the Soviets tried to do with Chernobyl, and just as the U.S. government has done with the financial crisis, torture, 9/11, the anthrax attack, and every other crisis."

"Recent reports seem to say that about 75% of the oil is taken care of and that is just not true," said John Kessler, of Texas A&M University, who led a National Science Foundation on-site study of the spill. "The fact is that 50% to 75% of the material that came out of the well is still in the water. It's just in a dissolved or dispersed form."

Gates also asked the armed forces to identify U.S. military bases for closure and said he was shutting down the U.S. Joint Forces Command (JFCOM), which has 2,800 U.S. military and civilian staff and about 3,000 contractors.

Personal incomes fell across the U.S. last year except in areas with a high concentration of federal government and military jobs, the Commerce Department said Monday. They declined most in places with a lot of housing and finance jobs.
Among the 52 metro areas with populations of more than one million, in only three did both net earnings and the broader measure of personal income both rise.

“The growth rate of the Employment Trends Index slowed sharply in the past three months, suggesting that employment growth will remain too weak to keep up with the increase in the working-age population,” Gad Levanon, associate director of macroeconomic research for The Conference Board, said in a release. “The disappointing employment numbers may indicate that the low levels of household spending and confidence are making businesses more cautious when it comes to hiring.”

Despite all the anticipation over today's Federal Reserve meeting, there's little else the central bank can do now to help the economy recover, Pimco's co-CEO Mohamed El-Erian told CNBC.

The 2s10s is now at the flattest it has been since May 2009 at 227 basis points. This was my number one trade for 2010. Now I'm ready to lock in the profits. Rather be conservative.

The New York Fed said in a statement after the FOMC decision that it will concentrate its purchases of Treasury securities in the 2- to 10-year sector of the nominal Treasury curve, although purchases will occur across the nominal Treasury coupon and TIPS yield curves. The New York Fed will typically refrain from purchasing securities for which there is heightened demand or of which the System Open Market Account already holds large concentrations. It will also announce its first tentative schedule of purchase operations on Aug. 11 at 3 p.m. Eastern and plans to start buying Treasury securities on or around Aug. 17. The System Open Market Account held $2.054 trillion in securities as of Aug. 4, 2010.

Federal Reserve policymakers on Tuesday decided to take a small easing step given that the recovery is likely to be more modest in the near term than had been expected. The Federal Open Market Committee announced that it would reinvest maturing mortgage-backed securities back into the market so that its balance sheet does not shrink. Fed watchers described this as a symbolic move designed to show concern with the outlook. As expected, the Fed kept its benchmark interest rate at a record low level. The central bank made no changes to the key pledge to keep rates "exceptionally low" for an "extended period." Thomas Hoenig, the president of the Kansas City Federal Reserve Bank, dissented for the fifth straight meeting in favor of getting rid of the "extended period" pledge. He also said he did not support reinvesting MBS securities.

The Dow Jones Industrial Average fell 54.50 points, or 0.5%, to end at 10,644.25. The S&P 500 index dropped 6.73 points, or 0.6%, to 1,121.06, weighed down most by the technology sector, which fell 1.2%. The Nasdaq Composite lost 28.52 points, or 1.2%, to 2,277.17.

Yields on 10- year Treasuries fell 7 basis points, or 0.07 percentage point, to 2.76 percent after declining below 2.75 percent for the first time since April 2009.

ZeroHedge: "BofA's Jeffrey Rosenberg provides the breakdown of the total amount of securities that roll off (MBS, Agency and USTs) over the next 12 months: the total is $340 billion, including the $230 billion (and possibly more) in MBS. Alas, this means that on a straight line monthly basis (and the finally outcome will likely be far more jagged), there will be on average just under $30 billion a month in incremental 2-10 Year Treasury Purchases. As Joseph Abate said earlier, this is not nearly enough to be considered a new stimulus, and at best seeks to retain the status quo. What is notable is that BofA believes today's action should have been priced into the market. Judging by the kneejerk reaction in stocks and bonds, the reality is anything but."

Monday, August 09, 2010

Economic Outlook

8/9/10 Economic Outlook

The Federal Reserve is poised to downgrade its assessment of the U.S. economic outlook when it meets Tuesday, according to a report by the Financial Times, which didn't identify sources. The Federal Open Market Committee will use the statement to signal greater concern about the economy, even as it is unlikely to agree to take major, new steps to boost growth, the report said. However, the report said a plan to reinvest proceeds from maturing mortgage-backed securities may be approved.

Mike Burk: "Last week the NYSE advance decline line (ADL) hit a new all time high....The market held up pretty well last week considering the historical weakness of the period. Most of the breadth indicators deteriorated last week, perhaps it was just the seasonal bias.
I expect the major averages to be lower on Friday August 13 than they were on Friday August 6.
Last week the blue chips were up while the secondaries were down."

via John Mauldin. James Pethokoukis: "Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages - one in five - are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama's loan-modification effort. HARP was just extended through June 30, 2011.
"The move, if it happens, would be a stunning political and economic bombshell, less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17, when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie."

Japanese Finance Minister Yoshihiko Noda said Monday he is watching the foreign-exchange market as the U.S. dollar is marking multi-month lows against Japan's currency, according to reports. "Excessive, disorderly foreign exchange moves would have adverse effects on the stability of the economy," Noda was quoted as saying by Reuters, with a Dow Jones Newswires account adding Noda's pledge to "closely monitor the market." The remarks resembled comments Noda made last week, and appeared to be an effort to talk down the yen by implying possible intervension in the forex market. However, both Reuters and Dow Jones Newswires cited analysts saying Japan was unlikely to intervene anytime soon. The U.S. dollar bought 85.41 yen midday Monday in Asian trade, roughly flat from its ¥85.42 level in late North American trade Friday.

BP said the cost of dealing with its ruptured oil well in the Gulf of Mexico has risen to $6.1 billion, including $319 million in compensation payments to businesses and individuals affected by the spill.
About 145,000 claims had been submitted as of August 7, and 103,900 payments have been made, the company said on Monday.

John Hussman: "Put simply, there is a lot of apparent "cash on the sidelines" because the government and many corporations have issued enormous quantities of new debt, often with short maturities, while other corporations have purchased it. It is an equilibrium. The assets that are held in the right hand represent debt that is owed by the left. You cannot call that pile of short-term marketable securities an asset without calling it a liability. The cash on the sidelines is evidence of debt incurred to fund economic activity that is already in the past. It will remain "on the sidelines" until the debt is retired. The government debt has been issued to finance deficit spending. At the same time, a great deal of corporate debt has been issued over the past year apparently as a pre-emptive measure against the possibility of the capital markets freezing up again.
What's fascinating about the "corporate cash" argument is that few observers recognize that a great deal of this cash is not retained earnings but new debt issuance. Brett Arends of MarketWatch puts present levels of corporate cash in perspective: "According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That's up by $1.1 trillion since the first quarter of 2007; it's twice the level seen in the late 1990s. Central bank and Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP."

Consumer borrowing fell in June for a fifth straight month as households keep cutting back on credit card use.
Borrowing dropped at an annual rate of $1.3 billion in June, the Federal Reserve reported Friday. That marked the 16th drop in overall credit in the past 17 months.
Americans backed away from swiping their credit cards for the 21st straight month. That offset a rise in the number of auto loans.

Chrysler Group LLC says growing sales helped it narrow its second-quarter loss to $172 million, a year after emerging from bankruptcy protection
The U.S. and Canada are Chrysler's primary markets, and both have seen more demand for cars and trucks since a recession-related slump last year. Chrysler says revenues rose 8.2 percent to $10.5 billion compared with the first quarter, largely because of a 22 percent jump in sales.

Nabors Industries has agreed to buy Superior Well Services Inc. for $22.12 a share in cash, the two companies said Monday. The transaction is valued at $900 million, the pair said. The offer price represents a premium of 21% to Friday's closing price of $18.23 a share.

More than 20 percent of the nation’s mortgage borrowers owe more than their homes are worth. At 21.5 percent for the third quarter, it is a small improvement over the previous quarter, when 23.3 percent of loans were underwater, according to real estate Web site
This so-called negative equity is a hotly watched statistic because it is a prime predictor of foreclosure — second only to loss of income.
“It is the paramount challenge facing housing markets,“ said Stan Humphries, Zillow’s chief economist. “We already have had record levels of foreclosure and, combined with high unemployment, negative equity is very toxic to the market.“

Mumbai’s Jawaharlal Nehru Port, India’s busiest container harbor, suspended operations as salvage workers tried to recover hundreds of cargo-boxes shed by a vessel following a collision in the Arabian sea.
It is unclear when the port will re-open, Dock Master B.S. Kumar, said today by phone.

China Risks 'Sacrificing' Growth as Energy Curbs Slow Factory Production. China’s growth may have weakened in July as the government shuttered energy- intensive factories, highlighting how environmental goals risk damping industrial outputgrowth just as export orders soften.

Following release of Friday’s government report on unemployment and job creation, consumer and investor confidence has fallen to the lowest level of 2010. Just 21% of Adults nationwide now believe the economy is getting better. That’s down from 30% on Friday morning. The number who believe the economy is getting worse is now up to 54%.

The price of barley, an important feed grain for the European livestock industry, has more than doubled in six weeks in response to the drought affecting Russia and Ukraine, prompting fears of increases in the cost of meat and poultry.

McDonald's posted its biggest monthly increase of a key U.S. sales figure in more than a year on Monday, saying its new fruit smoothies and frappes were a hit with customers during a hot and steamy July. Overall, the measure rose 7 percent around the globe. It climbed 5.3 percent in Europe and 10.1 percent in the rest of the world, the world's largest hamburger chain said in a statement on Monday.

U.S. home values fell 3.2 percent year-over-year, and declined 0.6 percent quarter-over-quarter, marking the 14th consecutive quarter of year-over-year declines. Home values declined year-over-year in 99 of the 144 metropolitan statistical areas (MSAs) tracked by Zillow.

July Employment Trends Index: 97 vs. 96.7 in June, the 14th straight month of increase. “The growth rate of the [Index] slowed sharply in the past three months, suggesting that employment growth will remain too weak to keep up with the increase in the working age population,” The Conference Board says.

The Dow Jones Industrial Average rose 45.19 points, or 0.4%, to end at 10,698.75. The S&P 500 index gained 6.15 points, or 0.6%, to 1,127.79, led by the consumer discretionary sector. The Nasdaq Composite rose 17.22 points, or 0.8%, to 2,305.69.

Crude for September delivery added 78 cents, or 1%, to $81.48 a barrel on the New York Mercantile Exchange. Natural gas, however, again tanked, down 3.5%. September natural gas lost 16 cents to settle at $4.31, their lowest in two months.