TOLDJA!! The Dollar Broke Lower—So Now What?
by ilene - March 21st, 2011 3:21 pm
Courtesy of Gonzalo Lira
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Excerpt:
Once Quantitative Easing-2 ends this coming June, the Treasury bond purchases will be extended indefinitely—call it QE-3. The amount of each month’s purchase of Treasury bonds by the Federal Reserve will be at least $75 billion—but don’t be surprised if it’s as high as $100 billion to $125 billion. Per month.
Yes.
In the long term? If the clowns running the circus remain in place, my guess is the dollar will soon enough hit The Big Bagel.
Read the whole article here >
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Enjoying Coffee in the Lodge with Jesse
by ilene - March 17th, 2011 3:45 pm
THE BANKS MUST BE RESTRAINED, AND THE FINANCIAL SYSTEM REFORMED, WITH BALANCE RESTORED TO THE ECONOMY, BEFORE THERE CAN BE ANY SUSTAINED RECOVERY – Jesse
Enjoying Coffee at the Lodge with Jesse
By Ilene
I have long been a fan of Jesse’s Café Américain. Jesse is a brilliant writer and a deep thinker who uniquely transcends politics, easily seeing through lies and disinformation. He has a great feel for what really matters, and the courage to speak out about it. Jesse and I have spoken before about the economy, markets and politics, and being at a crossroads once again, it was a perfect time to catch up.
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Ilene: Hi Jesse, since our last interview, I would guess that we’d both agree that nothing has been done to clean up the financial system – the banks and government interconnectedness, conflicts of interest, and out-and-out fraudulent activities. Are things better or worse, or in line, with what you were expecting over a year ago?
Jesse: I think things are progressing in line with what I had expected, with the Fed and the government trying to prop up an unsustainable status quo by monetizing debt. I am still a little shocked by the brazen manner in which the financial markets are being conducted and regulated, and the news is reported in the US. It is one thing to hold a theory that says something will happen, but it is quite another to see it actually happening, and so blatantly, almost without a word of protest.
Ilene: How do you view our financial system and the global financial system now, with no progress towards any kind of reform?
Jesse: The US is now being run by an oligarchy, with lip service being paid to the electorate in allowing the people to vote for the candidates that the parties and the powers will put forward. There will be no recovery for the middle class until they assert themselves. I know I have stated this often in my tag phrase, “The banks must be restrained…” But it is the case.
There are areas of resistance to this trend on what one might call ‘the fringes of Empire,’ those client states which have been ruled by powerful cliques with the support and the protection of the US. Although certainly not a great analogy, it does remind one of…
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Mad Dash Into Junk Sets October Record
by ilene - October 30th, 2010 5:03 pm
Mad Dash Into Junk Sets October Record
Courtesy of Mish
The mad dash into junk bonds continues. Please consider Junk Sets October Record, Mortgage Bonds Rally
Sales of junk bonds in the U.S. set a record for October as returns topped investment-grade debt and more borrowers were raised than cut. Government-backed mortgage bonds may beat Treasuries by the most in at least 10 years.
Fortescue Metals Group Ltd. and Calpine Corp. led speculative-grade companies issuing $33 billion of debt this month, according to data compiled by Bloomberg. The notes have gained 2.32 percent on average in October, compared with a loss of 0.16 percent for high-grade securities, Bank of America Merrill Lynch Index data show. Not since March have high-yield, high-risk securities outperformed by such a wide margin.
Investors have driven relative yields down to the lowest in five months on confidence the Federal Reserve will flood the economy with money, allowing the neediest borrowers to access capital and refinance debt. The rally is robust enough to extend into next year, said James Murren, chief executive officer of Las Vegas-based casino operator MGM Resorts International, which sold $500 million of notes rated CCC+ on Oct. 25.
“The bond market will get better,” Murren said yesterday in an interview at Bloomberg headquarters in New York. “People are going to start to have a more positive outlook toward 2011. They’re going to be searching for yield and they’re going to go down the rating scale and that’s going to benefit companies like us.”
U.S. junk bonds have gained 14.4 percent this year, compared with the record 57.5 percent in all of 2009. The 1.96 percent increase this month in the Bank of America Merrill Lynch Global High Yield & Emerging Markets Plus index exceeds gains on the Global Broad Market Corporate Index by 215 basis points, after outperforming by 233 basis points last month.
Global corporate bonds have lost 0.19 percent in October, after rising 0.22 percent in September and the worst performance since losing 0.4 percent in May. Year-to-date returns total 8.84 percent.
Lehman High Yield Bond ETF
S&P 500 Weekly Chart
Buy the Dip?
The last two downturns in January and May of 2010 were buying opportunities. Will buy the dip work next time? Fundamentally I see no reason it should, but that does not mean it won’t.
I have been saying for 18
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QE Engine Revs, Car Goes Nowhere
by ilene - September 28th, 2010 8:45 pm
QE Engine Revs, Car Goes Nowhere
Courtesy of Mish
The economy is stuck in neutral so stepping on the QE gas pedal is highly unlikely to accomplish much except increase the noise level. Yet, the philosophy at the Fed seems to be, if gas doesn’t work, give the engine more gas.
So the engine continues to rev louder and louder, and treasury yields drop, but that does not and will not put Americans back to work.
5-Year Treasury Yields at All-Time Low
Curve Watcher’s Anonymous notes Treasury Five-Year Yields Near Lowest Since 2008 Before Auction
Treasuries rose, pushing five-year note yields to the lowest level in almost two years before today’s auction, as a drop in consumer confidence spurred bets that the Federal Reserve will increase debt purchases.
Bonds also advanced as an official said the Bank of England should step up quantitative easing and Standard & Poor’s said the price of bailing out nationalized lender Anglo Irish Bank Corp. could exceed $47 billion
“The engine is revving, but the car is going nowhere,” said Thomas L. di Galoma, head of U.S. rates trading in New York at Guggenheim Capital Markets LLC, a brokerage for institutional investors. “It’s the combination of QE and a possible QE2 in England. You’ve got some sovereign-debt problems, which is also sending a safe-haven bid into Treasuries.”
Yield Curve Weekly Close
Providing unneeded liquidity may or may not help asset prices (please see Sure Thing?! for a discussion) but if quantitative easing helped the real economy, at some point yields would stop falling.
Clearly the Fed has no clue as to what to do, but it wants to "do something". The only thing the Fed can think of doing (or is willing to do) is have another round of quantitative easing, so the Fed eases whether it makes any sense or not.
The amazing thing here is talk of "Sure Things" regarding equities, with treasuries universally despised.
Of course it is no "Sure Thing" for treasury yields to drop either, but arguably it is more likely given the economic engine is stuck in neutral.
The simple fact of the matter is increased borrowing power or lower interest will not cause businesses to expand. I have discussed this point at length in
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Prepare for Currency/Trade Wars; How Might China Respond to US Tariffs?
by ilene - September 27th, 2010 1:57 am
Prepare for Currency/Trade Wars; How Might China Respond to US Tariffs?
Courtesy of Mish
Patience of US legislators regarding the value of the Yuan has finally given out. Last Friday, Congress jumped into the fray after exceptionally harsh statements from Treasury Secretary Tim Geithner, who up until now had always preached diplomacy. Here is a brief sequence of events.
Patience Runs Out
MarketWatch reports Patience runs out on quiet diplomacy on China currency.
Sept. 15, 2010
Patience appears to have run out in Washington for the standard White House approach that favors quiet diplomacy for dealing with China over the dispute over the value of its currency.In testimony to the House Ways and Means Committee, a wide array of experts said that quiet diplomacy has essentially been a failure. The only debate at the hearing was what new approach should be tried.
Geithner Enters the Battle
One day later Geithner calls for faster yuan appreciation
Sept. 16, 2010
“China needs to allow significant, sustained appreciation over time to correct this undervaluation and allow the exchange rate to fully reflect market forces,” Geithner said in testimony prepared for the Senate Banking Committee. Geithner will also talk about the yuan with the House Ways and Means Committee this afternoon.“It is past time for China to move,” Geithner said.
An undervalued yuan has helped China to boost exports and encouraged U.S. companies to outsource manufacturing to China from the U.S., Geithner said. He added that the yuan is held at a undervalued level by “heavy intervention” even as Chinese officials have pledged to allow the yuan’s value to be guided more by market forces.
China Rebuffs Geithner
Responding to Geithner China says it won’t repeat Japan’s mistake
Sept. 20, 2010
China pledged not to repeat Japan’s mistake and allow its currency to rise in response to foreign pressure, countering criticism from U.S. lawmakers that the yuan is undervalued amid a growing cross-Pacific row over Beijing’s currency regime.“China will not go down the path that Japan did and give in to foreign pressure on the yuan’s exchange rate,” Li Daokui, an economist and member of the monetary policy committee of the People’s Bank of China, was cited as saying in a report by the state-run China Daily.
Li’s comments appeared to reference to the 1985 Plaza Accord that resulted in coordinated government
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Curve Watcher’s Anonymous Investigates the Question “Is the Bond Bull Dead?”
by ilene - September 22nd, 2010 4:29 pm
Curve Watcher’s Anonymous Investigates the Question "Is the Bond Bull Dead?"
Courtesy of Mish
Curve Watcher’s Anonymous is looking at various long-term and intraday charts of treasuries and the stock market following Tuesday’s FOMC meeting.
$TNX: 10-Year Treasury Yield Intraday Chart
Click on any chart to see a sharper image.
Note the initial spike higher in yields right on the announcement. This headfake is very typical of FOMC announcements.
SPY: S&P 500 Index Shares Intraday Chart
As with treasuries, the S&P 500 had an initial spike that quickly reversed. Both charts show fat tails.
Ultimately the rally failed (which would be typical given the flight to safety trade in treasuries).
Every FOMC meeting it seems we get the same fake reaction: The first move is typically a false move. Sometimes there is a double fake, but only rarely does the initial move keep on going. I would be interested to see comments on this.
Given that I seldom concern myself with intraday or even short-term action however, the more serious question is "Where to from here?"
2-Year Treasuries vs. the S&P 500
The pattern may not continue, but for quite some time rising treasury yields have generally been directionally aligned with rising equities. In three instances (the first three red boxes), a drop in treasury yields preceded (led) a subsequent drop in equities. The fourth box (where we are now) is unresolved.
2-Year Treasuries – Monthly Chart
Two year treasury yields have fallen to a record low, yet stocks have been rising.
5-Year Treasuries – Monthly Chart
The all time low in 5-year treasury yields is but a stone’s throw away.
10-Year Treasury Yields – Monthly Chart
New lows in 10-year treasury yields are in sight.
To help put things into perspective here is a weekly chart of $TYX 30-year treasuries, $TNX 10-year treasuries, $FVX 5-year treasuries, and $IRX the 3-month treasury discount rate. The other symbols are yields.
$TYX, $TNX, $FVX, $IRX Weekly Chart
The chart depicts weekly closing values.
Is the Bond Bull Over?
Judging from 2-year treasuries or 5-year treasuries, pronouncements of the "death of the bond bull" were certainly premature. Moreover, given how weak the economy is, I think it is odds-on the 10-year treasury note touches if not breaks the previous yield lows.
Only the 30-year long bond yield seems reluctant to drop. It may not…
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Market Cheers 1.6% Growth; Treasuries Hammered; What’s Next?
by ilene - August 27th, 2010 3:51 pm
Market Cheers 1.6% Growth; Treasuries Hammered; What’s Next?
Courtesy of Mish
Today the DOW has crossed the 10K line for the umpteenth time (at least 3 times in the past 3 days alone depending on how you count), smack on the heels of "fantastic news" that second quarter GDP was 1.6%.
For a change, economists were a bit too pessimistic but to get to that point, their estimates had to be ratcheted down twice from 2.5% to 1.4%. Now the market, temporarily at least, thinks 1.6% is good.
It isn’t. More importantly, GDP expectations looking forward for 3rd quarter are in the neighborhood of 2.5%, a number that is from Fantasyland. I expect a negative print.
GDP News Release
Inquiring minds are digging into the BEA’s report National Income and Product Accounts Gross Domestic Product, 2nd quarter 2010 (second estimate) for additional details.
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.6 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent.
The GDP estimates released today are based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 2.4 percent (see "Revisions" on page 3).
The increase in real GDP in the second quarter primarily reflected positive contributions from nonresidential fixed investment, personal consumption expenditures, exports, federal government spending, private inventory investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
The deceleration in real GDP in the second quarter primarily reflected a sharp acceleration in imports and a sharp deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending.
Real personal consumption expenditures increased 2.0 percent in the second quarter, compared with an increase of 1.9 percent in the first. Real nonresidential fixed investment increased 17.6 percent, compared with an increase of 7.8 percent. Nonresidential structures increased 0.4 percent, in contrast to a decrease of 17.8
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Treasury Rally Continues in Normal Fashion; No Reason to be Short Treasuries
by ilene - August 14th, 2010 6:53 pm
Treasury Rally Continues in Normal Fashion; No Reason to be Short Treasuries
Courtesy of Mish
In the wake of anemic retail sales in July, treasuries could have been expected to rally and they did.
Yield Curve as of 2008-08-13
Curve Watchers Anonymous notes that the biggest treasury gains (drops in yield), occurred on the longest durations. This is a normal yield curve reaction.
This is in contrast to the pattern we have been seeing for weeks, with the middle of the curve reacting the strongest.
Here is a chart over time from Front Running the Fed – Who Knew?
Once again the 7-year treasury is in the sweet spot.
click on chart for sharper image
Yield Curve May 2009 Thru Present
click on chart for sharper image
The 30-year long bond has finally broken through that shelf at the 4% mark. There is plenty of room for further rallies is the economic data remains weak. There is no reason to expect anything other than weakness, thus no reason to be short treasuries here.
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FOMC Update: Well I Guess the Fed IS That Stupid After All…
by ilene - August 11th, 2010 5:17 am
FOMC Update: Well I Guess the Fed IS That Stupid After All…
Courtesy of Jr. Deputy Accountant
Last night, I guessed that the FOMC wouldn’t have the guts to do much of anything this time around simply because there is not an agreement on just how bad things are out there. Apparently I was wrong:
To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.
My guess is that a lone voice shot down a brand new round of Treasury buying with freshly-printed money (sorry, freshly-printed blips) just for kicks and that this was the best they could agree on without starting a shootout at the conference table.
Ahem:
Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee’s ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve’s holdings of longer-term securities at their current level was required to support a return to the Committee’s policy objectives.
Hahahaha I’m all for dissent as you all know but not sure where this modest recovery is hiding out, must be cowering under the FOMC table where only they can see it.
Anyway, that’s that.
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Punxsutawney Fed Keeps Rates So Low They Barely Cast a Shadow
by ilene - August 10th, 2010 3:13 pm
Punxsutawney Fed Keeps Rates So Low They Barely Cast a Shadow
Courtesy of Joshua M Brown, The Reformed Broker
So the Fed Groundhog came out of his hole at 2:15 pm today, sniffed the air, took a glance at the data and decided that there will be 6 more months of kitchen-sink policy. He certainly signaled a continuation of economic winter.
The Fed Funds target rate will remain at 0 to .25% and the Mortgage Backed Securities/Treasuries eating contest will continue apace.
Below is the full text of the statement. For fun, note how badly they wanted to use the "D" word (deflation) but how deftly they restrained themselves…
Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.
Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.
Source:
Fed Statement Following August Meeting (WSJ)
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW.