Cost to Insure U.S. Government Debt Through the Roof

From Oxbury Publishing:

“While the Bernanke hearings were underway, CNBC decided to take a break in the coverage and shoot over to America’s most recent gladiator for free markets: Rick Santelli; the bringer of truth (only in the past couple of weeks) and tea parties.
“Santelli had an interesting bit of news to share with the world’s viewers of cable television. He reported that for the first time the cost to insure U.S. debt with credit default swaps had risen to 100 BP. In other words, it will now cost you $100,000 to insure $10 million worth of Treasury debt for 5 years against default. That figure has increased 5-fold since shoes started dropping in September of 2008. Prior to financial markets going from beauty to beast after the collapse of Bear Stearns, the cost to insure government debt against default was near 1 BP; what can you say about a 10,000% increase in a few short years?”

Here is the full story.

$11.6 Trillion and Counting

From Bloomberg today:

"The U.S. government has pledged more than $11.6 trillion in the past 19 months on behalf of American taxpayers to bail out banks and stimulate economic growth...
"It hasn’t been enough to stop banks from collapsing. Regulators seized 14 lenders this year, including eight this month. Last year, regulators shuttered 25 banks, including Washington Mutual Inc., the biggest bank failure in U.S. history.
"The S&P 500 Banks Index slumped 9.9 percent today, halting a four-day advance of 30 percent spurred as concern eased that banks would be nationalized and Obama’s first budget proposal asked for more financial-bailout funds."

Here is the full story.

More alarming, perhaps, than the amount of the total tab is that it continues to grow with no end in sight!

Another Down Day for Stocks, But It Could Have Been Worse

Given the magnitude of the negative news today, today's lower close could have been much worse.

S&P 500 Hits New Intraday Low

Obama's War on Wealth!

Pres. Obama has effectively declared war on wealth, broadly and aggressively expanding the size and grab of government on private assets, in his new administration. A recessionary period is usually considered to be the worst possible time to raise taxes and expand government, but that is precisely what the new President is doing. This is an extremely risky strategy, effectively doubling down his bets on expanding government at the moment of greatest vulnerability for the U.S. economy.

Perhaps he senses that there is a backlash building, and so he wants to cash in on his political capital while he still has it, and before the backlash crushes the goodwill he has. Apparently, he doesn't care. He is more interested in his agenda of expanding the scope of government, than in effectuating an economic recovery that will bring jobs to the American people.

4Q GDP Shock: Worse Than Expected, Down 6.2%

What is even worse about this number is that since it is a preliminary number, the government almost always revises this figure downward in later revisions. Based upon past history, it is almost certain to be revised even further downward in future months. It's bad, and it's going to get worse!

U.S. Government Converts Citi Preferreds, Clobbers Stocks

This may well be a day for the record books!

Staggering Deficits Beyond the Pale

It is easy to miss, but look at the last histogram graph at the far right of this chart. It puts into perspective the current year's budget deficit compared with past years. Wow! The deficit this year alone amounts to more than $25,500 for every taxpayer in America. For every $1 in tax revenue the government receives, it will spend $2. These amounts are incomprehensible!

From Bloomberg:

The U.S. is borrowing so much that it may have trouble paying the money back, said Jaemin Cheong, a bond trader in Seoul at Industrial Bank of Korea, the nation’s largest lender to small- and mid-sized companies.

“Yields are headed higher,” Cheong said in an interview. “More issuance will be needed to support the economy. The possibility of default is more and more as time passes.”

Here is the full story.

Already, we are beginning to see interest rates start to rise. The increasing risk of U.S. government default is forcing investors to demand higher rates to accept that risk.

Stocks Turn Red

The financial markets today are stressing over the size and breadth of the budget deficit announced today, including the cost of President Obama's health care bill. We've now slid into negative territory for the day, with one hour to go to the end of trading. And of course, we all know that anything can happen in the last hour of trading.

Either Way, We Pay

There are ultimately only three ways that the U.S. government can pay for its spending:

1. Print/create more money. By printing money, we ensure that inflation is the natural result. Inflation is defined as "a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency" (source: Dictionary.com). Inflation is considered to be a "hidden" tax because it robs the middle class of its spending power by devaluing the currency. Congress loves it, because while its spending is the primary cause, it can insulate itself from the blame or the consequences!
   
2. Raise taxes. This pays the bill, and is the most responsible way to pay for government spending, but it also stifles economic activity at some point.
3. Borrow the money. Even if the government borrows the money needed to pay for a deficit, that borrowing must also be repaid at some future date. That borrowed money can only be repaid by -- you guessed it -- (#1) printing more money, or (#2) raising taxes.
   

Stocks Give Up Rally Following $3.55 Trillion Budget Announcement

The Dow has given up 100 points of its 120-point rally following the announcement of his budget by President Obama. The part the blew my mind was that the deficit amounts to nearly 50% of the entire budget -- $1.75 trillion! Wow!

Gold Plunges $75 From Recent Highs

New Home Sales Lowest in 45 Years!

Crude Oil Surges Well Above $43

Crude oil has surged to well above $43/barrel today. This story has been lost or ignored with the slate of other news. This is a nearly 25% increase in one week from the lows near $34 in recent days! Ugh! That is going to hurt at the gas pump!

Stock Traders Accept Today's Bad News With a Shrug

Despite a deeper plunge in durable goods orders, record numbers of new unemployed, and an announcement that GM is still facing bankruptcy, investors have decided this morning that the fresh round of bad news is "already priced in". Now that's news to me!

Think Speculative Traders Are Bad for Commodities? Think Again!

The following comment was placed by a farmer in a forum on Agweb.com:

Illinois/Wisconsin border: If the CBOT ever vanished, we would all be in serious trouble. How else would you be able to offset your risk? That’s the job of the futures market...to allow me to put off my risk onto someone else (think speculators). If you want to call the CBOT a "legalized gambling center" with "manipulated markets" and "insider trading" then that’s your business. But just remember, those "gambling market manipulators" gave you the option to sell $7 corn through 2010 and $6.50 corn for 2011. In my opinion, you lose the right to complain if you are given an opportunity but don't take advantage of it. I certainly didn't sell all my crops at those prices but I can't blame anyone but myself because the opportunity was there.

What would happen to farmers and agriculture commodity prices without the current futures markets? This farmer gives a stark view of what would happen! Here's a hint: Think higher!

The Yen and the Yang! What Goes Up....

After rising strongly during last Fall ('08) and into the New Year, the Yen has been falling sharply over the past month on weakness in the Japanese economy. Japanese exporters will no doubt be happy!

Don't Fall Off the Stock Market See Saw!

What a day to trade stocks! I keep very tight reigns on my trades on a day like today! Treasuries likewise, but today, I have restricted myself only to shorting treasuries.

Mixed-Up Soy Complex

What an odd day for soybean traders! The complex was extremely mixed, with soybean oil sharply higher, soybean meal solidly lower, and soybeans mostly flat!

Soybeans -- marginally flat to lower
Soybean Meal -- sharply lower
Soybean Oil -- sharply higher

U.S. Guzzles Gas Unexpectedly

A surprising drop in gasoline inventories, despite continued rising crude inventory, is causing gasoline futures to rise rapidly today.

U.S. Sells 5 Yr Notes. Rates Rise As Everyone Else Does, Too!

Interest rates rose at the hour that the U.S. Treasury sold $32 billion in 5-year notes today. Treasuries were in selling mode despite the weakness of stocks.

Corn, Bean Oil Go Ballistic

Even on weak stock market performance, corn and soybean oil have rocketed higher. Interestingly, soybeans and soybean meal have sagged. Wheat is also higher. Interesting mixed grain market today!

Stocks Sink Again!

Another see saw day in stocks! Grains are holding onto gains, but showing signs of running out of momentum also.

Rebound in Financial Markets

Stocks
Grains
The similarity of the charts is surprisingly similar, but not entirely coincidental. The same worries that hit or lift stocks, for the time being, also tend to sink -- or lift -- demand for food commodities.

Grains -- Building a Base... or Not?

I had begun to believe that grains were building a solid base for a bottom, since prices have moved modestly higher overnight, but the renewed selling pressure on stock index futures today has also put pressure on grain prices at the opening bell. It will be interesting to see if we can maintain a bottom and rise again from here. The March '09 corn contract is trying to hold support at around $3.40 -$3.50/bushel, and has been successful thus far over the past several days. Price levels lower than that may affect farm production negatively. (I am trading the May '09 contract, since it has four times the open interest.)

Stocks Unable to Sustain Rally

If we can't even sustain a stock market rally after Pres. Obama and Chairman Bernanke's bullish remarks yesterday, we're in big trouble. Real estates sales data was also bearish this morning. Chairman Bernanke will be testifying before Congress again today, so we'll keep a close eye on what he says that may guide the market.

Bernanke's Bull!

Take that title however you will. Stocks are substantially higher today, eliminating all the losses from yesterday.

Gold Contracts $40 from Upper Trend Line

This daily chart for gold shows the contraction from the upper trend line today. Look at the blue circle above the green arrow at the top right. My previous post shows the magnitude of the pullback on the intraday charts. This one shows the contraction on the longer-term chart. The second panel also shows a bearish divergence on the volume indicator, and an overbought signal on the stochastic indicator.

Grains - No Direction

Gold Gets Pummeled

Gold has taken a major hit today after a long rise since mid-January. The price is off more than $40 from the recent high last week. If the stock market rebounds significantly, then gold is likely to experience a significant retracement. Also, with gold having struck the $1,000/oz. price level, it appears somewhat overbought and ripe for a retracement. Since the price of gold has been close to the upper trend line for the past few days, I have anticipated the likelihood of a retracement or consolidation. Personally, I believe a consolidation is more likely. Today, we are seeing significant profit-taking in precious metals. Time will tell how much prices will drop.

Economic Headlines

This is a screen capture of a major news website that summarizes the business/economic news today.

Treasuries Trading Within Tight Range, But Still Joined At the Hip With Stocks

What an odd arrangement! Treasuries have lately been trading within an extremely tight price range, but still trading in mirror opposite to the fortunes of stocks. More of the same! If treasuries continue for long in this consolidation pattern, we are likely to see margins fall to more common historical levels; when I began trading, the margin for trading the 10-year treasury futures was only about $800. Today, it's $2970!

Grains: Higher Overnight, Lower on Market Weakness

This is an intriguing chart because it shows the close link at this time between price strength in the grains, and price strength/weakness in the other financial markets. Grain prices followed stock index futures higher in Sunday evening and overnight trading, but have sunk with the stock markets during the day today. Corn and soybeans are still trading higher than Friday's close, but opening the day session weaker, mirroring the weakness of stocks. Corn has given up nearly all its gains, showing just 2 cents higher since Friday, while soybean have held onto 8 cents.

Despite the somewhat bullish fundamentals for grain prices, we have now retraced to the 76.4% fibonacci level for corn, soybeans, and wheat, from the December grain rally (see daily chart below with fibonaccis marked). We've given up the ghost -- er, I mean gains! Or should I say grains! I remain short grains for now, but am eagerly awaiting the day when either 1) the grain fundamentals break free from the link to the stock market and economic news, and/or 2) weather-related news begins to exercise greater influence over grain futures prices.

Stocks: Death By a Thousand Cuts

Today had begun with great hope for a rally. Stock futures moved solidly higher Sunday evening and throughout the night, showing solid gains during the European trading session. The intraday chart above shows this. However, at about 10 am EST, just 30 minutes into the trading day on the stock exchanges, stock turned south and are now in somewhat of a holding pattern. It is anyone's guess whether we will find support and rally, or if things will sour and only get worse from here.

Stock market futures continue to drop lower and lower day by day. This daily chart of the S&P 500 futures shows that since the beginning of 2009, stock have slide lower with only a few brief one- or two-day rallies. It's death by a thousand cuts!

Economic Stimulus -- Assessment Thus Far

From Money and Markets:

...Let's not waste our breath debating whether the plethora of government actions and programs since 2007 are philosophically right or wrong.

The fact is, they have failed.

In addition to the $152 billion Bush stimulus package in the spring of last year and the $700 billion Troubled Asset Relief Program (TARP) in the fall, the U.S. government has loaned, invested or committed $200 billion to nationalize the world's two largest mortgage companies, Fannie Mae and Freddie Mac … over $42 billion for the Big Three auto manufacturers … $29 billion for Bear Stearns, $150 billion for AIG, and $350 billion for Citigroup … $300 billion for the Federal Housing Administration Rescue Bill to refinance bad mortgages … $87 billion to pay back JPMorgan Chase for bad Lehman Brothers trades … $200 billion in loans to banks under the Federal Reserve's Term Auction Facility (TAF)

… $50 billion to support short-term corporate IOUs held by money market mutual funds … $500 billion to rescue various credit markets … $620 billion for industrial nations, including the Bank of Canada, Bank of England, Bank of Japan, National Bank of Denmark, European Central Bank, Bank of Norway, Reserve Bank of Australia, Bank of Sweden, and Swiss National Bank … $120 billion in aid for emerging markets, including the central banks of Brazil, Mexico, South Korea, and Singapore … trillions to guarantee the Federal Deposit Insurance Corporation's new, expanded bank deposit insurance coverage from $100,000 to $250,000 … up to $500 billion in Fed purchases of asset-backed securities … plus trillions more for other sweeping guarantees.

Grand total: Over $9 trillion … and counting!

But based on the overall net results to date, every single one is an outright, unambiguous, proven failure:

The economy was not stimulated...

The housing bust was not avoided...

Public confidence was not restored; it has been sinking nearly nonstop…

The credit crunch was not contained...

The danger of a global debt collapse was not reduced; it has actually gotten far worse... In other words, a global debt collapse is even more likely today than it was before the U.S. government began its massive interventions.

The finances of the nation's banks were not shored up...

Here is the full article.

Credit Contraction May Have Further to Go

From Marketwatch:

The credit crunch may only be in its early stages and a bigger contraction in lending in coming months could have "serious implications" for the U.S. economy, Standard & Poor's Rating Services said Friday.

Banks are replacing loans as they mature, but there's little net new loan growth, she noted.

"That could mean that the slowdown in lending is just an opening act, and a true credit crunch may yet take the stage," Azarchs warned.

Banks are making fewer and fewer commitments to lend, and new issues of bonds and securitized assets have slowed to a trickle, the analyst said.

"This portends a contraction in total credit available in the coming months," she wrote. "Since this lack of lending may have serious implications for the economy, the U.S. government has been devising policies that would encourage banks to lend."

Here is the full story.