from Bespoke Investment:
For the tenth time in the last eleven trading days, the TED spread is once again widening today. For those unfamiliar with the indicator, the TED spread measures the difference between the three-month T-bill interest rate and three-month LIBOR. When the spread is high it is indicative of a higher level of perceived risk in the credit markets as banks increase the rate at which they are willing to lend to each other. As shown in the chart below, the TED spread has been getting steadily wider since early March. In early May, the crisis in Greece caused the spread to spike, and when the EU announced its bailout for the Greek government the spread saw a two-day reprieve before resuming its uptrend once again.
While the spread is considerably higher today (39 bps) than it was two months ago (13 bps), the spread is still nowhere near the highs of the credit crisis (450+ bps), and it still has a ways to go before even reaching 52-week highs.
Friday, June 4, 2010
from Bespoke Investment:
"The collapse in the commodity index is telling us that the peak in global industrial growth is imminent; it's here right now. Markets are going to have to deal with the reality of a slowdown."
-- Lakshman Achuthan, Economic Cycle Research Institute
Nevertheless, the month of May brought the largest drop in commodity prices since the failure of Lehman Brothers (when commodities declined by 55% in the preceding five months in 2008 and signaled the deep fall in U.S. GDP), raising the specter that worldwide economic growth will disappoint in the quarters ahead.
According to Bloomberg, the Journal of Commerce Industrial Price Commodity Smoothed Price Index, "which tracks the growth rate of steel, cattle, hides, tallow and burlap, plunged by 57%" last month. This index is usually a reasonably good tell on prospective growth as it includes a number of commodities that aren't exchange-traded and are therefore less apt to be controlled by speculators. As well, the index of 18 industrial materials "declined the most since October 2008."
Many pay special attention to the price of Dr. Copper -- the commodity is famously said to have a PhD in economics. This is not surprising, for as seen in the chart below, the correlation between copper prices and the S&P 500 is unusually high.
from the National Federation of Independent Business:
WASHINGTON, June 3, 2010 — William C. Dunkelberg, chief economist for the National Federation of Independent Business, the nation’s leading small business organization, issued the following statement on May job numbers based on NFIB’s monthly economic survey that will be released on Tuesday, June 8. The survey was conducted through May 31 and reflects 823 small business owner respondents:
“Since January 2008, the average employment per firm has been negative every month, including May 2010, which yielded a seasonally adjusted loss of negative 0.5 workers per firm. Most firms did not change employment in May, but for those that did, 8 percent increased average employment by 2.4 employees and 20 percent reduced their workforces by an average of 4 employees. Small business job creation has not crossed the 0 line in over 2 years. Government (including healthcare and education) and manufacturing (a large firm activity) are providing what few jobs are created.
“The number of owners with unfilled (hard to fill) openings fell two points to 9 percent of all firms, historically a weak showing.
“Over the next three months, 7 percent plan to reduce employment (unchanged), and 14 percent plan to create new jobs (unchanged), yielding a seasonally adjusted net 1 percent of owners planning to create new jobs, a gain of two points and the first positive reading in 19 months.
“Overall, the job creation picture is still bleak. Poor sales and uncertainty continue to hold back any commitments to growth, hiring or capital spending. Job creation plans have been running far below comparable quarters in the recovery from two other major recessions."
“Temporary tax credits change behavior temporarily. It’s simply shifted
demand forward. ... It actually created some price appreciation that’s not
supportable long term.”
Douglas Duncan, Fannie Mae Chief Economist, June 4, 2010
from Tyler Durden at Zero Hedge:
Three days into the month, and the Treasury has already redeemed $169 billion in debt, of which $137 billion in Bills. Run-rated (for Bills alone) this is about $5.5 trillion annually, or basically 63% of all marketable US debt. And somehow the Treasury is lowering the amount of new bond issuance beginning next week. We wonder just where Tim Geithner will get the much needed cash to plug not only the increasing daily deficit spending (today alone the US burned $21 billion net of debt transfers, gross the number was even worse), as well as to fund daily rolls once rates start eventually increasing. This is financial suicide, although the Treasury knows that all too well. It is now stuck in a corner and has no way out than to hope for the best.
Total US debt today was $13.06 trillion. Total debt on March 6, 2009 was $10.95 trillion. The government has spent $2.1 trillion dollars to create a bear market rally which has now fizzled, and to fund a fiscal stimulus that is now dancing its death rattle. GDP will now gradually roll over, the unemployment rate will once again start increasing, diffusion indices, manufacturing and all other economic output will begin declining, but not before the bill is in. It cost Americans $2.1 trillion in debt to generate a 14 months sugar high (for which all will promptly receive a much higher tax bill). Luckily, we will never pay this debt off, so perhaps "the joke is on them" after all.
Natural gas always seems to march to a different drummer. It is skyrocketing on yesterday's EIA report. But if this deflationary trend catches on, it will likely deflate soon also.
Grains -- deflation
Crude Oil -- deflation
Industrial Metals (Copper) - deflation
Natural Gas rises to its own drummer
Yesterday, there was a story about a Census worker whistle-blower that reported that census workers were being counted multiple times. The whistle-blower's own boss released a letter confirming that they were being counted sometimes 3-4 times! Stock futures showed the Dow down about 200 points pre-open. U-6 was at 16.7%, an improvement over last month. The birth/death ratio added 215,000 jobs; these were not real jobs, but assumed ones!
The U.S. Labor Department said nonfarm payrolls rose by 431,000 last month, the largest gain since March 2000. That followed an unrevised 290,000 increase in April.
Economists polled by Dow Jones Newswires were expecting payrolls to rise by an even higher 515,000.
Taking into account revisions to prior months, the U.S. economy added an average of nearly 200,000 jobs a month in the January-May period, a positive sign for the job market as it recover from the worst recession since the 1930s.
However, the May figure was boosted by the hiring of 411,000 temporary workers for the decennial count of the U.S. population. Only 41,000 private-sector jobs were added.
In a sobering reminder the labor market will take a long time to heal, the unemployment rate, which is calculated using a separate household survey, fell only moderately, to 9.7% in May from 9.9% the previous month. Economists were expecting it to drop to that level.
Following the most severe recession that most Americans can remember, there are still around 15 million people who would like a job but can't get one. Even though the economy started to grow again almost a year ago, companies have until recently been reluctant to ramp up hiring as they awaited for more evidence of a stronger economy, and focused on producing more with fewer workers.
The report Friday showed that the private sector created 41,000 jobs in May, after adding 218,000 jobs in April. Employment in professional and business services rose by 22,000. Manufacturing continued to trend up, rising by 29,000. The industry, which has been leading the economy's recovery, has added 126,000 jobs over the past five months. Construction, a sector of the economy that remains soft, lost 35,000 jobs in May.
Total government employment, which includes state and local jobs, rose by 390,000, boosted by the influx of Census workers.
Hungary is on the verge of national insolvency today. The Dollar is surging, and despite the ECB's pledge to defend the Euro, the currency has dropped through support at about $1.2150.
Euro -- fallen through support
US Dollar -- surging on fresh European debt worries
Wednesday, June 2, 2010
More debt deflation coming!
When the housing crisis erupted in early 2007, banks began to curtail their originations of HELOCs. In spite of this, a study published by Equifax Capital Markets in October 2009 found that 45% of prime borrowers with securitized first mortgage loans that were still current in July 2009 also had a HELOC. Worse yet, the average outstanding balance on these HELOCs increased steadily from roughly $83,000 in mid-2005 to $118,000 four years later.
It is very likely that a considerable number of financially-strapped HELOC borrowers are using their line of credit to cover the first mortgage payment and avoid default. Unfortunately, banks have begun to reduce or eliminate the available line of credit in states where home prices have declined substantially.
Last September, Equifax estimated that there were roughly 13.6 million HELOCs outstanding. Nearly all of them were second or "junior" liens that stood in line behind the first lien holder in the event of a foreclosure. When added together, they pose a tremendous financial burden for the vast majority of these 13.6 million homeowners.
Several key analyses of so-called "underwater" homeowners do not include these outstanding HELOCs in determining whether a property is underwater or not. Some do not include the refinancing of first mortgages which we have looked at. To omit either or both of them will cause a real underestimation of the number of homeowners with negative equity and in serious danger of defaulting.
It is not an exaggeration to say that the massive refinancing undertaken during the bubble years of 2003-2006 is a burden that will probably push back the housing recovery well into the future.
Tuesday, June 1, 2010
from Zero Hedge blog:
It is no secret that Robert Precther has long predicted a massive crash in the stock market. While we see no need to recap the events of the past two years culminating once again with the economic, financial and geopolitical crises of the past month, is the Elliott Wave Theorist finally about to be vindicated? Prechter's concern is that just as the record swing in the market on the way up caused a sense of false security, and, well, overall giddiness for lack of a better word, the crash will be accompanied by a variety of important adverse socio-behavioral demonstrations. While these can likely easily be anticipated by most, as they summarize pretty much what the first few days of the apocalypse would look like, here is a complete list of what Prechter expects on the way down, pulled from an October 2003 issue of the Elliott Wave Theorist.
from Zero Hedge blog:
With all the grace of a drunk Keynesian at an Austrian economists meeting, the Central Banks once again kill the EUR shorts and intervene to prop it up, for a ridiculous 250 pips intraday move. And thanks to Germany's Economics Minister Rainer Bruderle, we now know that the Fed is actively manipulating the FX pairs. Thank you Ben Bernanke for making sure that Atari has some confidence left in the manipulated market, as no humans are left any more.
Monday, May 31, 2010
Will this cause margin calls that could collapse the market again? We'll see!
June 1 (Bloomberg) -- John Paulson, Louis Bacon and Andreas Halvorsen navigated the global market turmoil of 2008 with little or no damage. They weren’t as successful last month as the Dow Jones Industrial average had its worst May since 1940.
Hedge funds lost an average of 2.7 percent through May 27, according to the HFRX Global Hedge Fund Index, as the sovereign debt crisis in Europe triggered declines in stocks, the euro and commodities, and the gap in yields between U.S. short-term and long-term debt narrowed. It was the biggest decline since November 2008, when hedge funds lost 3 percent in the wake of Lehman Brothers Holdings Inc.’s bankruptcy two months earlier.
Almost every strategy lost money in May, according to Hedge Fund Research Inc. in Chicago, as the Dow index of 30 big stocks sank 7.6 percent including dividends amid speculation that Greece’s debt problems would spread to nations such as Spain and Portugal. Some of the best-known funds saw their gains for this year erased.
“Attempting to manage risk in an environment where everything that could go wrong does go wrong seems like a fruitless endeavor,” said Brad Balter, who runs Balter Capital Management LLC, a Boston firm that invests in hedge funds for clients. “The only defense that seems to work in months like these is being in cash.”
Paulson’s Advantage fund dropped 6.9 percent through May 21, dragging it to a year-to-date loss of 3.3 percent, according to investors with knowledge of the results, who asked not to be named because the information is private. Halvorsen’s Viking Global fund fell 3.4 percent in the same span and 2.9 percent for the year. Bacon’s Moore Global declined 7.7 percent as of May 20 and 4.8 percent in 2010, investors said.
Good trade for me at almost exactly 6 pm. It caused the S&P 500 futures to drop about 7 points (28 ticks).
June 1 (Bloomberg) -- Chinese manufacturing expanded at a slower pace in May, adding to signs that growth may moderate in the world’s third-biggest economy.
The Purchasing Managers’ Index fell to 53.9 from 55.7 in April, seasonally adjusted, the Federation of Logistics and Purchasing said in an e-mailed statement today. That was less than the median 54.5 estimate in a Bloomberg News survey of 18 economists. Readings above 50 indicate an expansion.
A government crackdown on property speculation is cooling the economy by damping sales and construction, while Europe’s sovereign-debt crisis could exacerbate a slowdown by cutting demand for exports. China’s policy makers may delay raising benchmark interest rates or letting the yuan appreciate against the dollar even after the economy grew 11.9 percent in the first quarter.
The “chances of further policy tightening are fading as a result of events in Europe and a still unfolding correction in the property market,” Ben Simpfendorfer, a Hong Kong-based economist at Royal Bank of Scotland, said before today’s data. He forecasts rates to stay unchanged this year and the yuan’s peg to the dollar to remain until at least the end of the third quarter.
SAO PAULO (Reuters) - Advanced economies face years of anemic growth and the risk of a double-dip recession as their citizens cope with sluggish employment and highly indebted governments, economist Nouriel Roubini said on Monday.
A sovereign debt crisis in the euro zone has rattled financial markets in recent weeks as investors worry that fiscal austerity measures dictated by a $1 trillion European Union-International Monetary Fund rescue plan could stifle already hobbled global growth.
In contrast, some emerging markets risk overheating and are showing symptoms of a potential asset bubble.
"Labor market conditions will remain very weak in some advanced economies," said Roubini, known as Dr. Doom and most famous for having predicted the U.S. housing crisis.
"Savings will have to rise faster than consumption for the coming years. That is why growth will remain anemic," Roubini, who heads U.S.-based economic consultants RGE Monitor, told attendants at a seminar in Sao Paulo.
FRANKFURT/MADRID (Reuters) - The European Central Bank warned on Monday that euro zone banks face up to 195 billion euros in a "second wave" of potential loan losses over the next 18 months due to the financial crisis, and disclosed it had increased purchases of euro zone government bonds.
As the euro recouped losses but remained on the back foot after a cut in Spain's credit rating and China warned that the global economy remained vulnerable to sovereign debt risks, Spain assured investors it would reform its rigid labor market even if employers and trade unions cannot agree.
The ECB said euro zone banks would need to make provisions for further losses this year of 90 billion euros, and 105 billion in 2011, on top of some 238 billion euros in bad debts written off by the end of 2009. That was the first time it has given an estimate for next year.
Although total write-downs from bad loans and securities between 2007 and the end of 2010 were likely to be lower than previously expected, the ECB said in its latest Financial Stability Report, write-downs this year and next year would be still larger if heightened sovereign debt risk and the impact of government belt-tightening dragged down economic growth.
The ECB began buying up mostly Greek, Portuguese and Spanish bonds on May 3 in a contentious move to calm debt markets and support an $1 trillion stabilization package for the euro agreed by the European Union and the International Monetary Fund.
The central bank said in a statement it had settled 35 billion euros in bond purchases by May 28, up from 26.5 billion a week earlier. It did not detail the nationality of the debt but ECB officials have said it is mostly from south European countries hardest hit by financial market turmoil.
The ECB acknowledged in its report that euro zone debt tensions may force it to delay a phasing-out of cheap lending operations designed to help banks through the financial crisis.
After Lehman Brothers collapsed in September 2008, the ECB began offering euro zone banks unlimited, flat-rate loans in a bid to revive inter-bank lending and keep credit flowing to the real economy.
ECB governing council member Axel Weber, president of Germany's powerful Bundesbank, urged a tight cap on the bond buying program and said the extraordinary steps taken to ease the euro zone debt crisis posed a risk to price stability.
"The purchases of government bonds in the secondary market should not overshoot a tightly-capped limit," Weber said in a speech prepared for delivery in Mainz, Germany. He did not suggest a figure.
Spain, the fourth-largest euro zone economy, saw its credit rating downgraded a notch by Fitch Ratings agency from the maximum AAA to AA+ late on Friday after a 15 billion euro austerity program squeaked through parliament by a single vote.
Market reaction to the downgrade was limited, partly because U.S. and British markets were closed for holidays on Monday.
The euro recouped losses incurred after the Spanish debt downgrade to trade at around $1.23 but remained on the back foot as the downgrade highlighted ongoing structural weaknesses in the euro zone. The 10-year Spanish-German bond spread widened only slightly but Spanish stocks fell 0.7 percent while the index of leading European shares gained 0.4 percent.
Spanish Economy Minister Elena Salgado told a conference in Madrid that the government aimed to pass a much anticipated labor market reform by the end of June with or without consensus with the unions and business representatives.
The minority Socialist administration extended the deadline for an agreement by one week from Monday but officials have said the social partners are still far apart.
The left-leaning daily El Pais said the government planned to allow companies to make greater use of cheap work contracts for a broader range of employees, reducing redundancy payments and making it easier to fire workers.
Trade unions have threatened to strike if the government imposes the reform by royal decree, a move that would set the ruling Socialists on a collision course with their traditional allies in organized labor.
In a sign of continued international concern about the impact of Europe's problems, China warned that Europe's struggle to contain ballooning debt posed a risk to global economic growth, raising the specter of a double-dip recession.
Premier Wen Jiabao, addressing business leaders during an official visit to Japan, issued his warnings a day after France admitted it would struggle to keep its top credit rating.
"Some countries have experienced sovereign debt crises, for example Greece. Is this kind of phenomenon over? Now it seems that it's not so simple," Wen said. "The sovereign debt crisis in some European countries may drag down Europe's economic recovery.
He added it was too early to wind down stimulus deployed during the 2007-2009 financial crisis.
Governments around the world ran up record debts during the $5 trillion effort to pull the economy out of its deepest slump since the Great Depression and now face a tough balancing act: how to reduce debt without choking off growth.
ECB Governing Council Member Mario Draghi warned that austerity programs by European governments could snuff out a fragile recovery unless they were coordinated internationally.
Economic sentiment in the euro zone fell in May, defying analysts expectations of a slight improvement, in part due to the wave of austerity announcements.
However, ECB President Jean-Claude Trichet said the economy may expand more than expected in the second quarter.
The fact that not just fiscally weak southern European countries, but also nations such as France and Germany at the euro zone's core are under pressure to cut debt and deficits amassed during the financial crisis, is adding to concerns.