Friday, July 31, 2009

The Headline That Wasn't

In all the GDP and other headline data today, the headline that has been under-reported is that the consumption data remains terribly weak.

from Bloomberg:
Consumer spending, which accounts for about 70 percent of the economy, fell at a 1.2 percent pace following a 0.6 percent increase in the prior quarter. It was forecast to drop 0.5 percent, according to the survey median. Purchases slid 2 percent since the peak at the end of 2007 -- the most since a 2.4 percent decline in the 1980 recession.

Devastated Dollar

Wages Stagnate

WASHINGTON (AP) -- Employment compensation for U.S. workers has grown over the past 12 months by the lowest amount on record, reflecting the severe recession that has gripped the country.

The Labor Department said Friday that employment costs rose by 1.8 percent for the 12 months ending in June, the smallest annual gain on records that go back to 1982.

The department said that for the April-June quarter, its Employment Cost Index rose by just 0.4 percent, just slightly above the 0.3 percent rise in the first quarter, which had been the smallest quarterly gain on record.

Companies, struggling to cope during the current hard times, have been laying off workers, trimming wage gains and holding down overtime to save costs.

The 1.8 percent increase in overall compensation for the past 12 months included a record low 1.8 percent rise in wages and salaries, which account for 70 percent of compensation costs.

Treasuries Rise Following GDP Data

from the bond blog, Across the Curve:

GDP in Q2 declined less than expected in Q2 at -1.0percent versus the consensus forecast of -1.5 percent.

Revisions to prior period data show that the economic contraction was deeper than originally reported with the YOY change -3.9 percent versus an expectation of something closer to -3.0.

The biggest disappointment in the data is the consumption slice which showed that consumption fell 1.2 percent in the quarter after rising 0.6 percent in the previous quarter.

Here are some thoughts from FTN Financial economist Chris Low on consumption and GDP:

The drop in consumption in Q2 was a disappointment, because it is the one important piece which does not fit the bottoming-out narrative. And, it’s a very important piece. Cash for Clunkers will boost consumer spending in Q3, however, and the pattern of the monthly consumption data suggests the quarterly changes of the last two quarters were flukes. Real consumption is essentially trending sideways. Still, trending up would be nicer. As long as consumption is flat or falling, there will be doubts about the sustainability of any economic recovery.

Stocks Erratic After GDP

July 31 (Bloomberg) -- The U.S. economy shrank at a better- than-forecast 1 percent annual pace in the second quarter as a jump in government spending masked a deeper retrenchment by consumers.

The drop in gross domestic product followed a 6.4 percent contraction in the prior three months, the worst in 27 years, Commerce Department figures showed today in Washington. Revisions showed the economic downturn last year was even deeper than previously estimated.

While today’s figures signal that what has now become the worst recession since the Great Depression is approaching an end, the erosion in consumer spending -- which makes up about 70 percent of the economy -- and rising unemployment suggests a muted rebound, analysts said. Stocks headed lower and Treasuries higher after the report.

“We’re heading to a sluggish recovery,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. “We’ll get more support from government programs in the second half, but if you want a strong recovery you need a strong consumer, and we are not seeing that.”

Thursday, July 30, 2009

Cap and Trade Is A "Pig In a Poke"

from Arlan Suderman tweet:
Cap and trade looks like pig in poke. No one, not even USDA has idea of what it will do to food supply.

pig in a poke: Something that is offered in a manner that conceals its true nature or value.

Wilbur Ross: Economic Crisis "Not Over By a Long Shot"

More Bubble Mania!

Trouncing Treasuries!

Worries about whether the government can continue to sell the quantity of mounting debt is weighing on treasuries!

Wednesday, July 29, 2009

Troubled Treasuries

The U.S. Treasury sold $39 billion in five-year debt Wednesday in an auction that drew poor demand, raising worries over the cost of financing the government's burgeoning budget deficit.

It was the second lackluster showing in as many days, convincing analysts that the stellar results of debt auctions just a few weeks ago were a fluke and that Thursday's $28 billion seven-year offering could suffer a similar fate.
Under the weight of the ballooning deficit, the government has raised auction volumes and analysts now wonder whether the strain on the market is showing.

"Obviously everyone is inferring that tomorrow's won't be good either," said James Combias, head of government bond trading at Mizuho Securities USA in New York. "Maybe you will see more interest tomorrow but I think the increase in the auctions and the size of them may be starting to have an effect. These are very large auctions."

Demand for the five-year notes was below average, measured by the bid-to-cover ratio of 1.92, the lowest in almost a year.

This followed a poor two-year auction on Tuesday. In a further sign of a weak sale, yields at the auction were well above expectations, known as a "tail."

A key proxy for foreign interest, the indirect bidder category, was slightly above the average of auctions over the past year at 36.6 percent but far below the most recent sale.

"It was just a horrendous result," said William O'Donnell, head of U.S. Treasury strategy at RBS Securities in Greenwich, Connecticut.

"It was the weakest bid-to-cover since September 2008, and by my numbers it was the biggest tail since February 1993. It was just a very, very weak result."

The tail indicates that dealers drove an unexpectedly hard bargain to raise yields, and lower prices, to buy the bonds. Ultimately, this could raise interest rates throughout the economy at a faster rate than might be appropriate given the lingering effects of the worst recession in decades.

"If rates unwind higher and too quickly — driven not by the Fed but by the old bond vigilantes — that will be the house of pain for all risk markets," said George Goncalves, head of fixed income rates strategy with Cantor Fitzgerald in New York.

Stocks Drop Modestly Following Auction

July 29 (Bloomberg) -- U.S. stocks extended their decline after the Treasury sold five-year notes at a higher-than- forecast yield, increasing borrowing costs for the government as it pays for its economic rescue package.

The Standard & Poor’s 500 Index dropped 0.9 percent to 971.25 at 1:03 p.m. in New York.

I wouldn't be surprised if stocks rebound. This isn't that much of a reaction.

Treasuries Plunge Following Auction

July 29 (Bloomberg) -- Treasury five-year notes fell as the government sold a record $39 billion of the securities, the third of four auctions totaling $115 billion that is the largest amount of so-called coupon securities sold in a single week.

The notes drew a yield of 2.689 percent, compared with a forecast of 2.635 percent in a Bloomberg News survey of eight of the Federal Reserve’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered was 1.92, compared with an average of 2.2 at the last 10 auctions.

“We’ve got $39 billion in fives here,” said Charles Comiskey, head of U.S. Treasury trading in New York at HSBC Securities USA Inc., one of 18 primary dealers required to bid at Treasury auctions, before the sale. “It’s a ton of paper.”

Bottom Feeding Grains

Arlan Suderman at Farm Futures calls this bottom feeding. As long as the broader market remains weak today, this will be an effective strategy. It's possible that prices could break and go lower, too. I guess I'm a bottom feeder, then!

New Natural Gas Downtrend

Crude Oil Conquered

Crude oil has been badly battered today! Wow!

Daily Chart - look at that drop today! Down $6/barrel in 2 days!

Dollar Breaks Into New Uptrend

This will dampen demand for commodities, too!

Gold Continues Downtrend

Wheat Reaches New 2009 Low

China's Stock Market Declines 5%

Funny that this hasn't shown up in my ETF charts yet! That's a bit worrisome!

July 29 (Bloomberg) -- Chinese stocks plunged the most in eight months, dragging emerging markets lower, on speculation the government will curb investment to prevent a bubble. Oil led a drop in commodities.

The Shanghai Composite Index fell 5 percent, its biggest decline since Nov. 18, snapping a five-day, 7 percent advance. The MSCI Emerging Markets Index sank 1.2 percent to 826.68 at 11:50 a.m. in London, the lowest level since July 13. Oil and copper fell the most in three weeks. The yen and the dollar rose as investors shunned higher-yielding currencies.

“Speculation the central bank may take steps to rein in liquidity worried the market,” said Gabriel Gondard, deputy chief investment officer at Fortune SGAM Fund Management Co., which oversees about $7.2 billion in assets. “A lot of people were looking to take profits” in China, he said.

Chinese stocks are trading at 35.3 times reported earnings, more than twice the average in emerging markets, after a 79 percent surge in the Shanghai index this year on prospects for a global economic rebound. Federal Reserve Bank of San Francisco President Janet Yellen said yesterday the U.S. economy’s recovery is likely to be “painfully slow” as consumers spend less and save more.

Copper Turns Bearish

John Mauldin, in his newsletter, had recently mentioned that China, in its distaste for the Dollar, has stockpiled monstrous amounts of copper. However, it has warehoused so much of the stuff that there is now a global copper glut. The price is already starting to fall! I got a sell signal on my charts today!

From Bloomberg:

Copper’s 80 percent rally this year may soon end on signs that China has stockpiled more than it can use in new homes, cars and appliances.

Inventories monitored by the London Metal Exchange posted their first back-to-back weekly gains since February, increasing 8.6 percent from an eight-month low. Sumitomo Metal Mining Co., Japan’s second-largest smelter, said Chinese imports are slowing after record purchases boosted domestic supplies, and U.S. copper-scrap exporters report shipments to Asia are dropping.

Prices will also decline because the 4 trillion yuan ($585 billion) of economic stimulus spending by China, the world’s biggest metals user, won’t make up for weak demand elsewhere, said Michael Pento, chief economist at Huntington Beach, California-based Delta Global Advisors, which manages $1.5 billion. The global economy will contract 1.4 percent this year, deeper than forecast in April, and a sustained recovery from the worst recession since World War II may be a year away, the International Monetary Fund said July 8.

“I’m looking for a pullback right now in copper,” said Pento, who correctly forecast in January the price would rise at least 77 percent this year. “Base metals have just gotten overextended as people bet on the China story. Investors should exit this market now as the price comes down to match reality.”

The metal for delivery in three months jumped to $5,646 a metric ton ($2.563 a pound) on July 27 on the LME, the highest price since Oct. 8, and traded at $5,470 a ton today. Copper has rallied more in 2009 than it has in any year since 1987.

On the New York Mercantile Exchange’s Comex division, copper futures climbed to a nine-month high of $2.579 a pound, topping Pento’s January forecast of $2.50 by year-end.

‘Likely to Fall’

Refined copper imports by the Chinese more than doubled to 1.78 million metric tons in the first half and reached a monthly record of 378,943 tons in June, customs data show.

“China’s copper imports are likely to fall in the second half of this year because it bought so much in the first half, the government has stopped buying and demand from end-users may not be as big as people anticipated,” said Zhao Mingwang, manager of futures trading at Zhuji, China-based Zhejiang Honglei Copper Co., which produces about 100,000 tons of wires and rods a year. “The imports were so large it’s hard to fathom where it all went.”

Most of the gains in LME-monitored inventories during the past month reflect the eightfold jump in the volume of material in warehouses in Singapore and South Korea, the closest to China.

Durable Goods Worse Than Expected

It is interesting to me how Bloomberg portrays this "worse-than-expected" report as "good news":

July 29 (Bloomberg) -- Orders for U.S. durable goods fell more than forecast in June, depressed by declines in demand for volatile categories including automobiles, aircraft and defense equipment that overshadowed gains elsewhere.

The 2.5 percent drop in bookings for goods meant to last several years was the first decrease in three months and followed a 1.3 percent increase the prior month, the Commerce Department said today in Washington. Excluding transportation equipment, orders unexpectedly climbed 1.1 percent, the most in four months.

The figures used to calculate economic growth showed companies were planning to boost investment in coming months, adding to evidence the worst recession in five decades was starting to ease. Caterpillar Inc. is among companies seeing steadier demand as government stimulus plans here and abroad start to kick in, signaling an economic recovery is in sight.

``Manufacturing is still weak, but the weakness is abating,'' said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. ``We should see orders turning up in coming months, specially now with auto production ramping higher. That would set the stage for an upturn in business investment and an economic recovery.''

Economists expected a 0.6 percent drop in orders, according to the median of 73 forecasts in a Bloomberg News survey, after a previously reported 1.8 percent gain in May. Estimates ranged from a decline of 2 percent to a gain of 2 percent.

Excluding transportation equipment, orders were forecast to be unchanged, according to the Bloomberg survey. Commerce revised the May figures in this category to show a 0.8 percent gain, down from the 1.1 percent increase previously reported.

Volatility in Transportation

Orders for transportation equipment were down 13 percent, with commercial aircraft dropping 39 percent. Plane bookings had jumped 60 percent in May.

Automobile demand dropped 1 percent after an 8.7 percent decrease in May, today's report showed. Factories at General Motors Co. and Chrysler Group LLC were closed for at least part of the month, worsening the slump in bookings for autos and parts.

Orders excluding defense equipment decreased 0.7 percent as bookings for military gear slumped 28 percent.

Bookings for non-defense capital goods excluding aircraft, a proxy for future business investment, climbed 1.4 percent after a 4.3 percent increase the prior month. Shipments of those items, used in calculating gross domestic product, rose 0.1 percent, the first gain since December.

Drop in Stockpiles

Ongoing inventory drawdown in manufacturing is setting the stage for future growth. Stockpiles fell at an $87 billion annual rate in the first quarter, the biggest drop on record, according to figures from Commerce. Companies cut inventories by 0.9 percent in June, today's report showed.

The economy will grow at an average 1.5 percent rate in the last six months of the year, according to economists surveyed by Bloomberg in the first week of July. That follows a projected 1.5 percent decline in the second quarter and a 5.5 percent rate of contraction in the first three months of 2009.

``The pace of decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization,'' Federal Reserve Chairman Ben S. Bernanke told Congress last week.

Caterpillar, the biggest maker of earthmoving equipment, posted second-quarter profit that exceeded analysts' highest estimate and raised its full-year forecast, saying stimulus programs are starting to support global demand.

``We are seeing signs of stabilization that we hope will set the foundation for an eventual recovery,'' Chief Executive Officer Jim Owens said in a statement July 21. ``Fiscal policy and monetary stimulus have been introduced around the world, and we are seeing signs, particularly in China, that they are beginning to work.''

Tuesday, July 28, 2009

Job Cutting -- It May Get Worse

from Wall Street 24/7:
Analysts have hoped that the rate at which Americans become unemployed will slow in the second half of 2009. There has been some evidence that the period in which the economy would lose 600,000 or more jobs a month is over. That may not be the case.

The press has observed that layoffs are one of the main reasons behind improved earnings in the second quarter. Sales at many companies are not up, but expenses are down, in many cases considerably. But, second quarter results may not only be the result of jobs cuts; they may be the cause for more, which will mean that the period in which the economy faces rapidly rising unemployment is not over.

Verizon (VZ) announced that it will cut 8,000 jobs. Its results for the last reporting period were below par. The recession is one reason for that. Another is that customers are canceling their landline phones and using cellular phones or VoIP instead. The poor economy and new technology are overwhelming Verizon’s old way of doing business. The same thing has happened to AT&T (T).

Bank of America (BAC) will probably close over 600 branches, according to The Wall Street Journal. The move may be good business. Bank customers are turning to the Internet to handle their relationships with financial firms. B of A can take advantage of that, even though it means several thousand more people will be out of work. Other large banks with big branch systems including Citigroup (C) and Wells Fargo (WFC) will most likely follow B of A’s example. The financial industry is not done pruning jobs, not by a long shot.

The recession and improvements in the technology that allows customers to control their relationships with companies with which they do business are combining to drive what is likely to be a very large swell in job reductions between now and the end of the year. Airlines are able to book more reservations through online ticket outlets. A drop in passenger demand would make it necessary to cut more jobs in the industry anyway.

The sector that is still most likely to cut tens of thousand of additional workers is the retail industry. Consumer spending could actually continue to fall as unemployment moves above 10% and more people put money toward savings and less toward buying. The trend affects businesses from car dealers to electronics stores. Layoffs in retail are likely to accelerate, if the 2009 holiday shopping season begins to look bad.

The Fed and private economists have projected that unemployment rates will stabilize in late 2009 and early 2010. That will not be the case if earnings in the third and fourth quarters are weak. Companies still do not have access to credit to get them through a hard winter. Recent data show that banks are still extremely reluctant to lend money. This is likely to be an acute problem in industries that financial firms view as risky because of the recession.

Unemployment rates may rise more quickly between now and the end of the year than is expected by most economists. Job cuts may have worked to help company margins in the first half. Another stretch weak sales will show that the first round of job cuts at many companies was not enough.

More Regulation On It's Way

ALL the data has consistently shown that speculators in commodity markets bring stability of prices, NOT higher prices. Speculators serve a critical role in commodity markets by providing liquidity and risk capital necessary for development of resources that brings fresh supplies into the market. Without that capital, SHORTAGES and HIGHER PRICES are the inevitable result!

A CFTC study late last year proved this. They found:
1) Speculators represented a SMALLER percentage of Open Interest in 2008 than just two years earlier, when commodity prices were much lower.If speculators were driving prices, the opposite would have been the case.
2) Speculators represented only about 16-18% of all open interest in any commodity.
3) Speculators were evenly split between longs and shorts
4) Speculators, by nature, must off-set their position to exit the market without taking delivery. This is by design and guarantees that every long spec will be off-set by a short spec.
5) Commodities that are NOT traded in futures exchanges show more price swings and LARGER UPWARD price movements than futures-traded commodities. The smaller the liquidity pool, the more erratic and higher prices go.

I know that there is a tendency to look for villains and scapegoats for commodity prices that we don't like, but this just provides the politicians with cover that ultimately harms the American people by appearing to take action, when they are really doing more harm than good. Did it ever occur to you that the politicians look for an easy target because it allows THEM to evade taking responsibility for their own destructive policies?

Just look at the price chart for Jan-Jun for crude oil. Now look at the same chart for the Dollar. They are an almost perfect mirror image of each other. Overspending and overprinting devalue the Dollar and drive the price of all commodities much higher. If you want to see cheap prices, then pressure Congress to reign in spending.

Trying to control prices by onerous regulation of speculative capital will do the following:
1) Drive prices HIGHER, not lower. Over the longer term, capital will flee the US to other futures exchanges in Asia, Europe, and the Mid-East. This will collapse the Dollar and drive commodity prices higher. Capital flight always devalues the local currency. Always!
2) Starve the markets of risk capital that brings fresh supplies into the market. This will REDUCE supply, especially of FOOD commodities, thus pushing prices higher. Farmers are especially aware of this, and are glad to have the risk capital available to them to sell their product.
3) Create more erratic price movements in commodities. Prices swings both higher and lower will be much larger.The whole purpose for creating futures was to stop the huge price swings that made it impossible for farmers and end users of products to get fair and stable prices.
4) INCREASE the influence of large funds, not decrease it. If you have to swim with a blue whale, you'd rather swim in the ocean than in the local swimming pool. The Hunt Bros were able to corner the world silver market BECAUSE of its small size. Once the price of silver rose high enough, so many new participants entered the market that prices collapsed. A large liquidity pool prevents large players from throwing their weight around.

By trying to control prices by shrinking the futures markets, HIGHER prices and SHORTAGES will be the certain result. Hugo Chavez didn't want to believe it either, but his attempts to control prices have brought higher prices and shortages of all types. The same thing will happen in the U.S. I hope you all have lots of food stored at home, but you may need it if onerous new regulations are implemented.

If you want to see lower gas/food prices, encourage Congress to keep the Dollar stable by STOPPING all the spending! That will do more than all the regulation they can dream up to keep prices stable!

They're Baaaack!

Grains have surged this week. They're baaaack!

Pressure to Curb Speculation Will Have Opposite Effect -- Higher Prices

from Reuters:

Some fear new rules to curtail speculation could make markets less efficient by reducing trading volumes and moving traders to offshore exchanges. Fewer speculators would mean fewer traders willing to absorb risk and lead to higher prices.

Imagine that! Excessive regulation leading to higher prices and shortages! When hasn't that been the case! Just look at what Chavez has done to Venezuela as the latest example. Also, as speculators send their capital elsewhere, the capital flight will crush the Dollar, which -- surprise -- leads to higher commodity prices!

If Safety is King, Then Why Is Gold Plunging?

Dollar Becomes Safe Haven Again!

What a stunning reversal. After hitting a fresh low for the year, the Dollar has rebounded due to plunging confidence. The fear trade is back!

Plunging Consumer Confidence Sends Investors Fleeing Back to Treasuries

Time to run for cover!

Consumer Confidence Plummets, And So Do Stocks

The stock market had been down overnight, but rallied strongly on news that housing prices rose last month for the first time in several months. However, when the new consumer confidence figures dropped, the stock market plunged!

Dollar Reaches New 2009 Low, Then Rebounds

What a repeating story!

Monday, July 27, 2009

Even More Treasuries -- $211 Billion

Reuters is reporting that even more treasuries are to be sold this week. Todays TIPS auction was oversubscribed significantly:

The Treasury launched a record week of debt auctions Monday by selling $6 billion of 20-year inflation-protected securities, or TIPS, at a high yield of 2.387 percent. But investors remain worried that the global market may have difficulting digesting the $211 billion of debt to be sold this week.

The TIP sale, which was expected to do well, had a record bid-to-cover ratio—which measures how much the auction is oversubscribed—of 2.27.

Monday's auction will be followed by the sale of $42 billion of 2-year notes Tuesday, $39 billion of five-year notes Wednesday and $28 billion of seven-year notes Thursday.

In addition to the note auctions, the Treasury will also sell shorter-term bills, which could bring to over $200 billion the total amount of U.S. debt to be auctioned this week.

"We expect demand to develop for the Treasury auctions, but $211 billion is a lot of paper for a summer holiday week," said Andrew Brenner, senior vice president at MF Global in New York.

Treasuries Break Through Support On Record Auctions This Week

NEW YORK (MarketWatch) -- Unlike years past, the U.S. stock market will pay close attention this week as the Treasury sells a record amount of government debt, including $115 billion in notes and $6 billion of its inflation-indexed 20-year bonds.

"The one thing that makes this all plausible is that last week, the Fed Chairman [Ben Bernanke] in his testimony to Congress stated that while the recovery may be underway, it will not likely include inflation," said Kevin Giddis, head of fixed income trading and research, Morgan Keegan.

"This was the best news the markets could hope for and it is likely the reason for the rally in stocks," said Giddis of last week's trade, which on Friday had the Dow industrials closing at their highest level since early November.
On Monday, stocks and Treasury prices fell "as traders and investors prepare for a Treasury onslaught never before seen in our lifetime," Giddis said.

Information technology and consumer shares feed the declines as the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 9,085, -8.54, -0.09%) fell 49.5 points, or 0.5%, to 9,043.74. The S&P 500 Index /quotes/comstock/21z!i1:in\x (SPX 977.97, -1.29, -0.13%) declined 6.6 points, or 0.7%, to 972.66, while the Nasdaq Composite [s: comp] shed 18.36 points, or 0.9%, to 1,947.60.

"If the stock market is right and the economy in the second half of the year will have a strong rebound, then interest rates are going higher due to higher inflation and demand on the part of foreigners, who own half our debt, and others for higher yields for the enticement of buying the enormous new supply," said Peter Bookvar, equity strategist at Miller Tabak.

Dollar Dips, Rebounds

This was a fresh 2009 low for the Dollar. Crude oil rose as a result.

Stocks Sell OFF on Good Economic Data?

This was a surprise. This morning, strong housing sales for June caused a temporary jump (see chart), but then sold off and are negative for the moment. This is a shift of sentiment. Even "less bad" news has been a good reason for stock markets to move higher -- until now!

Crude Oil Continues to Climb Toward $69

from Platts:
There was some hope that the decline in Mexican output would stabilize itself this year. Mexican officials had given indications to that effect. But today, the state-owned oil company Pemex reported that the country's June crude output was down 11% year-on-year, to 2.519 million b/d.

But here's the more stunning figure: what's happened in two years. In July 2007, Pemex reported crude output of 3.165 million b/d. That's a 20.4% decline in 23 months.

Just imagine the pressure on OPEC if Mexico's decline was a mere 4% or 5%, and Nigeria's output was more toward normal. Platts' Jacinta Moran recently reported that Nigeria's oil production has fallen to 1.48 million b/d after a recent wave of attacks had made further cuts to the country's output. That means the country is down about 50% from its capacity, since an official of Nigerian National Petroleum Corp. had said that 1.5 million b/d of the country's crude production was currently shut, with the Niger Delta crisis accounting for 80% of the losses.