Economic Recovery? Not So Fast, Say Income Tax Revenues!

from Barron's online:
The collapse in tax revenues should show the FOMC how far short the economy is from recovery.

THE FEDERAL OPEN MARKET COMMITTEE supposedly is discussing an "exit strategy" at its policy meeting that ends Wednesday. That presumes that its destination is anywhere in sight.

Notwithstanding the so-called green shoots that appear to be popping up in various series of economic statistics, other numbers show things to be withering, if not rotting outright. What's more these data are not seasonally adjusted or otherwise fudged. They're tax receipts, and nobody pays taxes on phony, phantom jobs or earnings.

According to Trim Tabs, income-tax withholdings in the past four weeks are down 6.1% from a year ago; in the last two weeks, they're down an even bigger 8.1% from last year. That marks a sharp deterioration from May, when income-tax withholdings were off "only" 4.8% from a year ago.

"The deterioration in growth since May indicates wage declines and job losses have accelerated," according to note to TrimTabs' clients.

Meanwhile, "other" taxes were down 39.5% year-on-year, down from 33.6% in May. Corporate income taxes were down 35% from a year ago in the latest four weeks after having been down 12.3% year-on-year in May.

TrimTabs' numbers corroborate the dismal numbers on state personal tax revenues, which were down 26% in first four months of the 2009 from a year earlier.

According to the Nelson A. Rockefeller Institute of Government, 34 of 37 states that submitted data reported declines. Arizona, one of the epicenters of the housing collapse, saw the biggest drop, a stunning 55%. The Nos. 2 and 3 states were South Carolina and Michigan, with declines of 38.6% and 34.4%, respectively. California, whose massive budget woes are front and center, had the fourth-highest decline, at 33.8%

Not only do plunging tax revenues tighten the fiscal vise on the federal, state and municipal coffers, they provide unambiguous confirmation of the truly dire straits of the economy.

These numbers, of course, are at odds with the surge in the stock market, which had lifted the averages by about a third from those March lows. Now, however, equities appear to be rolling over, which could be nothing more than profit-taking to nail down wins ahead of the end of the second quarter.

But the advance also seems to be losing steam in bourses abroad as well as in commodities, which suggests much of the surge was liquidity-driven, not unlike last summer's spike in crude oil prices to $147 a barrel. We'll see.

ONE BOURSE THAT HAS HAD an "official" bear market appropriately enough is Russia. The RTS index, which is denominated in dollars, fell another 2.9% Tuesday, bringing its decline since June 2 to 21%.

Faring even worse has been the Templeton Russia and East European Fund (ticker: TRF), which was among the egregiously overpriced closed-end funds featured here a couple of weeks ago ("The Closing of the American (Investor) Mind", June 10.)

Since then, the price of the Templeton Russia and East European Fund has come crashing down even harder, to 15.95 from 23.15, a loss of 31% in a mere fortnight.

Part of that reflects the air coming out of the closed-end fund's premium over net-asset value, which was deflated by half. Even so, TRF still commands an outrageous 48% premium to NAV, down from the absurd 98% premium when I pointed it out in my earlier column. That's the danger of paying too much for a closed-end fund, or anything for that matter, no matter how hot the stock seems at the time.

Stocks Begin Selling On Fed Statement

Treasuries Crash, Interest Rates Rise on Fed Statement

Treasury Buying Is Back

Treasury Bears Come Back

Once the auction was complete, the treasury bulls and bond vigilantes came back into the market. Look at the sharp reversal!

Treasury Auction Went Well

It appears from this 50-tick chart that the treasury auction went very well less than 20 minutes ago. Treasuries are rising very powerfully! Still, over the long haul, I and other traders (see my last post) are very bearish on treasuries. The shear volume of debt is staggering and unsustainable!

Watch the Dollar, Treasuries

I've been feeling this same way for the past week or so. From Mike Hinman at Lind/Waldock:

U.S. Dollar Takes Centerstage, by Mike Hinman

In just about every market, there has been a unique theme presenting itself during the last few months: the U.S. dollar has taken the global center stage. If you want to survive these trying times, I think you have to keep your eye on the dollar. Why? You don’t want to get caught up in multiple trades that will ultimately have the same end result. This is the first big mistake I am seeing these days. Some traders believe they have positions that are independent of each other, when in reality, it’s like having multiple units of the same position. This correlation has been high as of late across the board. It doesn’t hold true every single day for every market, but it does tend to get back to the same end result over time.

The next big question is what to do. There are two schools of thought on this subject. The first one is to diversify across the board. You will have a better chance catching the one that outperforms, but you will also be caught in the one that underperforms. I understand the reasoning behind this, but I don’t recommend it. The right answer, as far as I’m concerned, is to identify the leader and load up on that one regardless of how many units you need. It’s not the easiest thing in the world to pick out the “perfect” market, and sometimes you pick wrong. But in the long run if there is a clear leader for the trade you want, it usually ends up most profitable (or less costly, you can’t win them all) if you go this route.

Ok, so now the big question is what is the U.S. dollar going to do? Let’s take a look at a daily chart of the ICE Dollar Index futures contract, which tracks the value of the dollar against a basket of six global currencies.

First things first – I see a bullish flag formation establishing higher lows and a flat top. The breakout should come on the flat side, and we should be getting close to that day. The swing trade should bring this market up to the mid 82’s, so that’s my first objective until the next pull back and buying opportunity. These numbers coincide with a few trend lines that I don’t necessarily follow or would recommend trading off of, but it’s a good thing to keep an eye on and be aware of.

One thing I do pay attention to is the sentiment index and how investors feel. When the dollar was on its lows just three weeks back, the Daily Sentiment Index for the dollar was showing 6 percent were bullish. So 94 percent of people were bearish the U.S. dollar in the short run. The individuals who make up this index are the same people who always seem to show up late to the party. That boat was heavily lopsided, and finally tipped.

Your average investor can’t understand how the U.S. dollar could go higher with our government printing money and issuing debt at an unheard of pace. There are two reasons for what is occurring. The first has to do with the amount of wealth and U.S. dollar-denominated debt that is being destroyed. At this stage of the game, there is more destruction than creation. It’s like pouring water into a well that never fills up.

The second part of the equation has to do with the financial health of the rest of the world and how investors would much rather flock to the U.S. dollar than anything else in a crisis. This is what I see in the short run. We are in the very early stages of major trend reversals if my overall analysis is correct. I can’t give you an exact definition on the “short run” just yet. It may be three months, six months, or even two years, I’m not sure yet.

Inflation Likely Ahead

In the long run, which I am guessing is two years or more, I see the exact opposite of what I just described. All that U.S. debt and printed dollars will make their way into circulation. I think the value of the dollar will collapse. Inflation will take charge and all commodity prices will head higher. It won’t happen now because too many people are anticipating it. It will most likely come when you least expect it.

Now that you have my view on the U.S. dollar in the short run, you can probably tell that I have turned bearish on commodities and currencies in general. The key is to pick the sick sister of the bunch. I personally think corn and the metals, specifically gold and silver, look the worst.

Treasuries

Let’s now look at Treasury bond futures. Investors are bearish bonds. The daily sentiment index for Treasury bonds was 8 percent bullish just last week. These individuals think the dollar is worthless, the world will look for a new reserve currency, interest rates will have to go up to attract investors and everyone, specifically China, will start selling their bonds. I don’t think this is going to happen. I just made the case for a strong dollar in the short run. The world will not look for a new reserve currency–not yet anyway. That will take years, and I have doubts it could even happen in my lifetime. And, China couldn’t sell that much U.S. debt without causing them grave financial stress. The bottom line – look for bonds to head higher with the dollar in the short run.

How to Survive as a Trader

Liquidity and volume have been drying up in general recently. This has caused all the markets to be more volatile without rhyme or reason on a daily or even hourly basis. This is not the environment I enjoy. The first and most important rule in choppy times is to reduce your size. This keeps you around tomorrow if you go on a cold streak. Most people over-trade and chase their losses in poor times. Double down when you are making money, not losing.

You must truly believe in the positions you are entering. I have found the right way to tackle good trades is to first decide what you want to do, and then get in. That usually means buying when it looks awful, and selling when it looks good. Don’t get this confused with picking tops or bottoms. I’m talking about getting in on counter-trend moves.

Last but not least, when you have profits, take the money and run. It disappears too quickly if you don’t. Pushing positions in this environment has not been turning out well. Don’t get caught in that trap. The time will come for trend following, it just isn’t here today.

Corn, Wheat Continue Distribution

I think soybeans are still overbought, but corn and wheat are certainly continuing the liquidation trend. Corn and wheat are now very close to the support levels from which they rallied this past Spring ('09). We should see them find support again soon. That said, this liquidation is so powerful, it may drag soybeans off its perch, too! The most recent USDA planting report showed that more acres would be transferred to soybeans that had been intended to be planting in other crops, but even with these recent changes, the soybean crop is expected to be smaller than the 2008 crop.

CornWheat

Investors Show Caution

this is amazing given that it is from the Obamapoligist Network, CNBC:

A growing chorus of economic signs pointing to slow growth is sending some investors away from risk amid worries that a market correction is in the works.

The results of such fears have been evident in the stock market over the past week.

While Wall Street on Wednesday was poised to avoid its seventh down session in the past eight trading days, analysts were worried that some of Fed Chairman Ben Bernanke's "green shoots" were turning brown.

While no one is putting forth any doomsday scenarios—calling the low in March still seems a safe bet—the idea of a substantial summer pullback is gaining momentum.

"Slow growth and higher taxes—that's not a recipe for higher stocks," says Michael Pento, chief economist for Global Delta Advisors in Parsipanny, N.J. "The threat of a deflationary spiral is looking pretty good for now and that's what spooked the market."

The dour signs for the economy have been piling up lately. The White House on Monday conceded that 10 percent or worse unemployment is fairly inevitable, while the World Bank earlier that day predicted slow global growth.

At the same time, talk has accelerated for a Fed exit strategy from its onslaught of money easing and other liquidity measures. On top of all that, the Mortgage Bankers Association predicted far fewer originations this year than originally thought, and the National Association of Realtors said existing home sales in May gained less than expected, which was followed by a report that new home sales had unexpectedly decreased.

Wednesday's report on durable goods orders provided a brief respite from the gloom, but all of the economic noise has caused portfolio managers to start preparing for slower growth.

"The one thing that we can be sure of is that recoveries follow recessions. It's a safe bet that the economy will recover," says Peter J. Tanous, president and director at Lynx Investment Advisory in Washington, D.C. "What has to change are two things: 1) Our estimate of future growth. That may be a sea-change. It may not be as fast as thought. Secondly, how we build our portfolios to safeguard our original investment."

Investors who stayed heavily in stocks during the downturn lost portfolio value of 35 percent or more.

For Tanous, the steep, rapid slump should be a lesson that US investors were too weighted toward risk and leverage and need to rethink their strategies as the economy embarks on a journey that likely will take years before full recovery.

"Investors just got a punch to the gut," he says. "Did you learn anything? Are you going to listen to the people who say stocks are really cheap now? They are, and you should own them, but maybe you should own less of them than you used to."

Predictions vary as to how much of a pullback stocks will see, but the consensus seems to be around 10 percent.

Linda Duessel, equity market strategist at Federated Investors in Boston, says the Standard & Poor's 500 could see as low as 830 but thinks the damage will be minimal and merely reflective of a natural retracement following the dramatic run-up.

"From an investing standpoint, the question I'm getting asked most often is, do you think it's too late to get in," Duessel says. "A pullback to the 800s might be a nice time to get in."

Some investment advisors say they are staying in stocks but are returning to quality after a whipsaw rally from March to June that saw the biggest gains in the hardest-hit sectors of the previous slump, a phenomenon that Morningstar analyst Paul Larson calls a "junk rally."

"As financial innovation goes into reverse a little bit and things get a little simpler, that's going to be a drag on economic growth at least for a few years," Larson says. "My strategy is to focus on the high-quality names, the ones that are going to be assured survivors."

That's a recurring theme from portfolio managers who are looking for strategies to pursue in the next wave of the market cycle. Many of them agree that the rally off the March lows is just about out of steam and are trying to position themselves going forward.

It's a Rally!

Stocks rallied, breaking a losing streak that brought us to the dynamic support level of the lower Bollinger Bands. Improved durable goods orders are given much of the credit.

from Reuters:
An unexpected jump in U.S. durable goods orders last month backed hopes that the economy was healing, but news from the hard-hit housing market remained mixed.

New orders for long-lasting U.S. manufactured goods rose by a much stronger-than-expected 1.8 percent in May, Commerce Department data on Wednesday showed.

Analysts polled by Reuters had forecast durable goods orders would decline 0.6 percent last month.

May's increase, the third gain in 4 months, followed a revised 1.8 percent gain in April.

U.S. stocks opened higher after the much durable goods data, while U.S. government bond prices fell, although trading was also somewhat overshadowed by a Federal Reserve policy statement due later.

"The economy is bottoming here, and we're looking for the Fed to maybe change its statement slightly and maybe start to suggest a more neutral balance of risk. A nod, basically, to an exit strategy," said Kim Rupert at Action Economics LLC in San Francisco.

The Fed is due to deliver its policy decision about 2:15 p.m. EDT. It is expected to leave interest rates unchanged in a range between zero and 0.25 percent, and many economists think it will lean against rate hike speculation by emphasizing they will stay low for an extended period.

Housing Recovery Still Distant

from Reuters:
Sales of previously owned U.S. homes rose for a second straight month in May but were weaker than expected, adding to growing fears of an anemic economic recovery from a deep recession.

The chief economist of the National Association of Realtors, which released the data on Tuesday, said sales in some areas appeared to be slowing and warned of the danger of a "delayed" housing market recovery.

from CNBC:

I hate to say I told you so, but on May 1st and again on June 1st, I told you about the potential negative ramifications of the Home Valuation Code of Conduct. Today the Realtors confirmed what I had been hearing all across the mortgage industry.

“In the past month, we have suddenly been bombarded with many stories of, at the last moment, transactions falling apart because appraisals are coming in unrealistically low,” said National Association of Realtors Chief Economist Lawrence Yun. “As a result it opens up a new round of negotiations between a buyer and a seller or in many cases the buyer just steps away.”

Weak Stocks Boost Treasuries, Cut Yields

Stock market weakness and consolidation are boosting treasuries, as investors once again flee to what is perceived as a safe haven (see gold also in earlier post). My concern over the long-term is that eventually, treasuries will no longer be perceived as a safe haven. Then, commodities will likely sky-rocket as investors buy anything physical. If government and politicians try to intervene, then investors will flee the Dollar, causing commodities to rocket even higher, and there will be shortages of many commodities.

StocksTreasuries

Dollar Drubbing

The Dollar is taking a beating today.

Dollar
EuroAussieBritish Pound

...and Commodiities Rebound Higher!

Crude Oil
Soybeans
Gold

In Sign of Reversal, Russia's Stock Market Moves Into Bear Market Territory

from Bloomberg:
Russia’s Micex Index tumbled more than 20 percent from its 2009 peak, becoming the world’s first benchmark equity index to enter a bear market since global stocks began rallying in March.

The index of ruble-denominated shares slid 7.8 percent to 937.98 as of 6:46 p.m. in Moscow, bringing its decline since June 1 to 22 percent. The 30-company gauge led a worldwide retreat in stocks this month on concern the global recession will persist for longer than investors anticipated.

“The market needs to pause because it has been going up too much,” said Nicholas Field, who helps manage about $11 billion in emerging-market stocks at Schroders Plc in London, including Russian equities. “Nothing goes in a straight line.”

The MSCI All-Country World Index slid 5.8 percent from its 2009 high, paring its gain from a six-year low on March 9 to 39 percent.

The Micex, which rallied as much as 135 percent since October, is tumbling this month after reaching the most expensive level relative to profit estimates since January 2007, according to data compiled by Bloomberg. Russia’s economy may shrink 7.5 percent this year as industrial production collapses, unemployment rises and investors pull capital from the world’s largest energy exporter, the World Bank said today. That compares with the Washington-based lender’s forecast for a 2.9 percent contraction in the global economy.

Treasuries Rally, Stocks Swoon

TreasuriesStocks

World Bank: It's Going to Be Worse Than We Thought

from Bloomberg:
The World Bank said the global recession this year will be deeper than it predicted in March and warned that a flight of capital from developing nations will swell the ranks of the poor and the unemployed.

The world economy will contract 2.9 percent, compared with a previous forecast of a 1.7 percent decline, the Washington- based lender said in a report today. Growth will be 2 percent next year, down from a 2.3 percent prediction, the bank said.

The bank, formed after World War II to fund health and development projects in poor countries, said that while a global recovery may begin this year, impoverished economies will lag behind rich nations in benefiting. The lender called for “bold” actions to hasten a rebound and said the prospects for securing aid for the poorest countries were “bleak.”

“The recovery is not going to be V-shaped,” said Alvin Liew, an economist at Standard Chartered Bank in Singapore. “We may see slower consumer demand over a prolonged period.”

The bank is more pessimistic than its sister organization, the International Monetary Fund. The IMF, which is forecasting a global contraction of only 1.3 percent this year and growth of 2.4 percent in 2010, said June 19 that it plans to revise estimates “modestly upward.”

California Credit To Take Another Hit

from Bloomberg:
California’s credit rating, already the lowest among U.S. states, may be cut several levels by Moody’s Investors Service as government leaders seek ways to eliminate a $24 billion budget deficit.

The move would affect $72 billion of debt, Moody’s said in a statement today. California’s full faith and credit pledge is rated A2 by Moody’s, five steps above junk.

Standard & Poor’s put California on watch for a possible reduction earlier this week, and Fitch Ratings did the same thing May 29. The rating companies cited the most-populous state’s deficit -- more than 20 percent of the general fund -- and lawmakers’ inability to agree on how to close the gap.

“If the Legislature does not take action quickly, the state’s cash situation will deteriorate to the point where the controller will have to delay most non-priority payments in July,” Moody’s said in a report today. “Lack of action could result in a multi-notch downgrade.”

Earlier this week, Republican Governor Arnold Schwarzenegger said he would refuse to back any tax increase as Democrats proposed a budget that would raise $2 billion from cigarette consumers and oil companies to help the state deal with declining revenue. The veto threat signaled an escalating battle over the deficit just a month and a half before the most- populous U.S. state is forecast to run out of money to pay its bills.

‘Clear Warning’

“I don’t think I’ve ever seen the phrase multi-notch in a ratings write-up,” said Schwarzenegger’s budget spokesman H.D. Palmer. “It’s another clear warning from the financial markets that there will be costly consequences if the Legislature doesn’t’ quickly send the governor a budget plan that he can sign.”

Stocks: Giving Up the Gains

After a solid rally out of the gate this morning, stocks have reversed and give up most of their gains for the day.

Super Soybean Sell-Off

Reports from Arlan Suderman indicate that acreage has been shifted to grow more soybeans, less corn. Both are selling quite aggressively today despite a weaker Dollar.

Cheap Meat!

from Feedstuffs.com:

(6/19/2009)

Rod Smith

People have to eat, a contact said this week, "but what are they eating?" Apparently, chicken wings and hot dogs as chicken wing prices were almost double this week what they were last year, and turkey wiener production was an all-time high, indicating the extent to which consumers have shifted down and around in the protein chain. "Value has a new definition," the contact said: "Cheap." This is illustrated in consumer spending. Influenced by recession, consumer spending declined 1.5% in the fourth quarter last year, but consumer food spending decreased 4.4% to, as a percent of total spending, an historic low at 13.1%, according to Dr. Tom Elam, an agriculture and food economist at Farm Econ LLC in Carmel, Ind. Consumer food spending is strongly correlated with demand, and consumer spending on higher-value meat and poultry cuts isn't likely to recover significantly until the economy and consumer confidence in the economy recovers, he said. That recover, he projected, is probably a year away. In the meantime, consumers will buy pork rather than beef, poultry rather than pork and cheaper processed products rather than breasts, chops and steaks, sources said. This will keep livestock and poultry prices under extreme pressure for the rest of this year and into next year, sources said. There is ample evidence. HealthFocus International, a consumer market research firm focused on health and nutrition, has reported that 35% of consumers responding to a recent survey said they are buying cheaper brands to save money. HealthFocus said this is a consequence of decreased incomes and fright, noting that one third of primary grocery shoppers said their households have experienced income reductions in the last six months, and 85% said they are nervous over the economy. Wal-Mart Stores Inc. has reported that it is expanding its private-label line, Great Value, in response to consumer demand for cheaper, in-house brands -- sales of which are expanding 10% per year, compared with 2.8% for national brands. Livestock and poultry producers are decreasing production in an effort to get production low enough to get prices for meat and poultry high enough to get prices for livestock and poultry high enough to cover costs, and across the protein sector, all production this year will be under year ago (Feedstuffs, June 15). That's unprecedented, Elam said, but the upside is that when the economy and consumer confidence do recover, the meat and poultry production base will be extremely tight, which should be supportive to price rallies. However, the issue is how many producers will be there when that happens.

Hey, What Happened?

What happened to new financial regulations of Fannie Mae and Freddie Mac? These two quasi-government agencies were the instigators of the entire financial crisis. So why is there no new regulation of these two companies? Just a new regulatory agency to "approve" new loan "products". Is it because these two corrupt companies have been controlled and protected from regulatory overhaul by the Democrats for twenty years? Hmm! I wonder!

Upcoming Record Debt Auction

from CNBC:
The Treasury announced Thursday a record $104 billion worth of bond auctions for next week, part of its herculean efforts to finance a rescue of the world's largest economy.

The sales will exceed the previous record of $101 billion set in auctions that took place in the last week of April and consist of two-year, five-year and seven-year securities. That record was matched by another $101 billion week in May.

Though next week's total was broadly in line with expectations, worries about supply have weighed on the U.S. government bond market, which will see a mammoth $2 trillion worth of new debt issued this year.

"Maybe the Treasury market reacted a little negatively and it will continue to be like this," said Suvrat Prakash, U.S. interest rate strategist with BNP Paribas in New York. "Supply announcements and auctions on the horizon will make the market a bit nervous about upcoming debt."

Bond prices were lower already in anticipation of the Treasury's announcement and continued to sell off in reaction.

The U.S. bond market has been under pressure for three months, with benchmark yields surging to an eight-month high of 4 percent last week, as investors worried about a budget deficit expected to reach an astounding 13 percent of the economy this year.

Interest Rates Rising Again

After interest rates falling 5 consecutive days, interest rates are rising again today, as supply for U.S. debt once again begins to overwhelm the demand. Interest rates have risen today enough to eliminate all the slide of the previous four days. Here is the daily chart:

Dollar Debt Still Beats BRIC Debt

from Bloomberg:
For all the criticism of the U.S. currency by leaders of the so-called BRIC nations, dollar bonds sold by the largest emerging-market countries are outperforming debt traded in reais, rubles and yuan.

Russian President Dmitry Medvedev, Chinese President Hu Jintao, Indian Prime Minister Manmohan Singh and Brazilian President Luiz Inacio Lula da Silva called for a “more diversified” monetary system yesterday to reduce dependency on the world’s reserve currency. The four leaders met in the Urals city of Yekaterinburg, where they planned to discuss buying each other’s bonds and foreign exchange, said Arkady Dvorkovich, Medvedev’s top economic adviser.

“It’s not up to politicians to determine which currency will be the world reserve currency,” said Lutz Karpowitz, a currency strategist at Commerzbank AG in Frankfurt. “In the end the market decides it.”

Dollar bonds sold by China earned 11.4 percent in the past year, more than double the 4.6 percent for debt in yuan, JPMorgan Chase & Co. indexes show. Brazil’s U.S. currency bonds returned 3.6 percent as real-based notes lost 4.9 percent, and Russia’s dollar bonds outperformed with a 1.9 percent loss compared with a 7 percent drop in ruble debt. India doesn’t have dollar-denominated debt.

‘Illiquid Market’

Bonds sold in dollars have beaten domestic debt in part because Russia and China manage the ruble and yuan. Those denominated in the U.S. currency can trade more freely, giving fund managers confidence they can sell the securities and get their money when they need it.

The result is limited foreign investment in local-currency bond markets, said Ward Brown, who manages $5 billion of emerging-market debt at Massachusetts Financial Services in Boston. Only Brazil’s real is free-floating. India imposes capital controls to protect the rupee.

China and India are “highly restrictive on the local debt side” and Russia has “quite an illiquid market” for foreign investors, said Cristina Panait, an emerging-market strategist at Los Angeles-based Payden & Rygel, which manages more than $50 billion. “Currency performance is a big portion of returns.”

The real rallied 11.2 percent last month, the ruble gained 6.9 percent and the rupee rose 6.4 percent against the dollar. The yuan appreciated 21 percent between July 2005, when the government allowed it to trade more freely, and July 2008. China has prevented the currency from strengthening since then as the economy slowed.

The Chinese government today sold 28.27 billion yuan ($4.13 billion) of yuan-denominated bonds maturing in 2019.

IMF Bonds

Political and financial leaders in the BRIC countries say they want to take a larger role in the world financial system as their foreign reserves swell and the U.S. economy endures its worst crisis since the 1930s. The Dollar Index, which measures the U.S. currency against those of six trading partners, has dropped 9.4 percent from a three-year high in March.

The BRICs account for 15 percent of the world economy and hold $2.8 trillion in foreign-currency reserves, or about 42 percent of the total, according to data compiled by Bloomberg.

Last week, Russia and Brazil announced plans to buy $20 billion of bonds from the International Monetary Fund, after China said it was considering purchasing $50 billion of the securities. The purchases would both support the IMF, established to help nations rebuild from the ruins of World War II, and diversify some of their holdings.

Too Early

The BRIC leaders, among the biggest holders of U.S. assets, alternate between critiques of the dollar and support. Premier Wen Jiabao called in March for the U.S. “to guarantee the safety of China’s assets” and central bank Governor Zhou Xiaochuan the same month proposed a new global currency to reduce reliance on the dollar.

Treasury Secretary Timothy Geithner said on June 2 Chinese leaders hadn’t expressed concern about the safety of U.S. debt during meetings in Beijing and said they “expect the dollar to be the principal reserve currency for a long period of time.”

Medvedev said earlier this month that the dollar wasn’t in a “spectacular position.” On June 13, Finance Minister Alexei Kudrin reassured investors of the country’s confidence in the greenback by saying it was “still early to speak of other reserve currencies.”

Treasury Holdings

In May, China and Brazil began studying a proposal to move away from the dollar to settle trade and use yuan and reais instead. Brazilian Finance Minister Guido Mantega said on June 10 the government’s decision to switch reserves into IMF bonds wasn’t aimed at weakening the dollar.

China and Russia agreed to use each other’s currencies more in bilateral trade to lessen dependence on the dollar, Medvedev told reporters in the Kremlin today after talks with Hu.

The leaders of the BRIC nations didn’t discuss the possibility of buying each other’s bonds during the summit in Yekaterinburg yesterday, Brazil’s Lula told reporters today in Astana, the capital of Kazakhstan.

China trimmed its holdings of U.S. Treasuries by $4.4 billion to $763.5 billion in April, Russia’s slipped by $1.4 billion to $137 billion and Brazil’s by $600 million to $126 billion. In May, the BRIC nations spent more than $60 billion buying foreign currencies, mainly dollars, to stop their currencies from gaining, according to central bank data and strategist estimates.

While the ballooning budget deficit is keeping the U.S. reliant on foreign financing, the world’s biggest economy is almost double the size of Brazil, Russia, India and China combined, based on 2008 figures compiled by Bloomberg. America’s market sustains the world’s biggest developing nations, with China increasing sales to the U.S. to $337.7 billion last year from $321.4 billion in 2007.

‘Political Gesture’

The dollar accounted for 64 percent of central bank reserves worldwide at year-end, up from 62.8 percent in June 2008, according to the IMF. The currency has underpinned exchange rates since the 1971 collapse of the Bretton Woods system, which linked their value to gold.

Statements about changing the global foreign exchange system are “just a political gesture,” said Pablo Cisilino, who manages $10 billion in emerging-market debt at Stone Harbor Investment Partners in New York. “At the end of the day, there is only one reserve currency on the planet.”

Good News: 2 Banks Repay TARP

from NYT:

With the wiring of nearly $10 billion to the United States Treasury, U.S. Bancorp and BB&T on Wednesday became the first large financial institutions to announce that they have repaid the government in full for the preferred shares it bought last fall under the federal bailout program.

U.S. Bancorp, based in Minneapolis, said Wednesday morning it redeemed $6.6 billion in preferred stock from the Treasury. BB&T, based in Winston Salem, N.C., said that it had bought back the preferred shares for $3.1 billion plus a final dividend payment of about $13.9 million.

Later in the day, JPMorgan Chase and Morgan Stanley also announced the return of their federal aid, signaling that the nation’s top bankers are regaining their confidence after the financial crisis that shook Wall Street last fall.

Now, if the Treasury will just repay the taxpayers!

Financial Overhaul Objective: "Loans" to "Workers"

It concerns me gravely that the stated objective of this radical overhaul is to take the nation's capital resources and redistribute them to make "loans" to "workers", not INVESTMENTS. Could we have devised a more Marxist political objective?

MR. OBAMA'S INAUGURATION PROMISE: TO "REMAKE" AMERICA!

When Mr. Obama promised in his inauguration speech to "re-make" America, NOT re-BUILD America, he chose his words carefully. When he speaks of "economic justice" and "democracy of capital", he is using the language of radical Marxism to persuade -- yes, even deceive -- the American people to adopt his radical policies. The LAST thing America needs is to consolidate MORE power in the hands of the FED and other thugs who were largely responsible for this crisis, yet that is precisely what they seek to do!

It only makes sense that Wall Street would respond favorably to this, since they love the bailouts that are extracted by force of a government gun from the tax-payers of which they on Wall Street are the primary beneficiaries. All those $$ Trillions end up -- unearned -- in their pockets, so they are positively gleeful!

CARL MARX -- LAUGHING FROM HIS GRAVE!

Centralization of capital and credit in the government was a key tenet of Carl Marx. He must be laughing from his grave and his permanent residence in Hell. His victory is complete, albeit belated!

"ANARCHY AND TYRANNY COMMENCE" - John Adams

Contrast the above, with this statement by one of the Founding Fathers:
"The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence. If `Thou shalt not covet' and `Thou shalt not steal' were not commandments of Heaven, they must be made inviolable precepts in every society before it can be civilized or made free." -- John Adams (A Defense of the American Constitutions, 1787)

We have debased our laws, and slaughtered the goose that laid the golden eggs of prosperity in America for 225 years. There will be the Devil to pay with all that we have done. Ultimately, we will unfortunately get the leadership and the results we deserve -- and neither one will be pretty!

Dealing With Trading Addiction

from Dr. Brett:

My recent post reviewed research that suggests a link between risk-taking and addictive behavior. It's not just that an "addictive personality" will take undue risks; in addition, repeated large risk taking alters the structure and function of the brain so as to sustain addictive behavior. Many traders I've worked with never had discipline problems or out-of-control behaviors until they began frequent daytrading. When you think of traders at some firms placing 100 or more trades a day--basically one every four minutes--it's difficult to imagine that such frequent and unremitting risk/reward swings *wouldn't* affect the workings of mind and brain.

What's more, as Dr. Bruce Hong notes, is that exhausting frustration tolerance and willpower on one set of tasks appears to make us less disciplined on subsequent ones. That is how bad trading often leads to further bad trading, but also can lead to poor decision-making in other facets of life.

One of my first clues that a trader might be out of control is that he/she can't take a break from trading when he/she is losing money and can't reduce his/her risk after a series of losing days. This is very similar to the drinker who cannot stop imbibing alcohol even after the point of consequences.

If you are losing money and cannot stop yourself from trading--during a single trading day or after days of loss--I encourage you to take the hard look in the mirror at what you might be doing to your trading account, your emotions, your brain, your relationships, and your life.

Here are some posts regarding trading addiction that shed useful light--and offer helpful suggestions--regarding this painful and sensitive topic:

* When Trading Gets Out of Control

* Addictive Trading and Getting Your Life Back

* Craving Trading Highs

* Warning Signs of Trading Addiction

Russia's Medvedev Says World Needs New Reserve Currency

Despite Medvedev's comment, the Dollar is only modestly lower today.

Soybean Update - Down $1/10% From Its Highs

Soybeans daily
Soybeans intradayfrom Bryce Knorr at Farm Futures:

China has been the big story of the soybean market this year, as is the case most years. The mood of the world's largest soybean importer typically determines the strength of post-harvest rallies, and strong demand this year helped drive prices steadily higher over the last six months.

Chinese buying is beginning to ease, however, with cancellations continuing again in the latest week. But domestic buyers back in the U.S. were reportedly eager to snatch up cancelled loads, a trend confirmed by this morning's monthly crush for May reported by the National Oilseed Processors Association. Spurred by margins approaching $1 a bushel on the Board, there's even been talk lately that the U.S. may turn to imports if supplies run out.

NOPA crush was again below year-ago levels, but the gap narrowed to its closest level of the entire marketing year. That raises the possibility that crush for the year may up as much as 25 million bushels greater than USDA currently forecasts, suggesting even more export cancellations would be needed to keep supplies from running impossibly tight.

Corn Update -- Not Much Going On

Corn dailyCorn intradayfrom Bryce Knorr at Farm Futures:

After failing to make new highs last week, the corn market appears ready to come under pressure as the second half of June approaches. How much pressure likely depends on outside markets as much as it does corn market fundamentals.

With the crop up and growing, there's little direct news for corn to move traders one way or the other. A big improvement in crop ratings might spark additional liquidation, but July futures are likely to find support around $4 to $4.10. Long-term, end users appear to accept USDA's projections that supplies will tighten into 2009. So breaks should spark at least some buying interest until it's clear the 2009 crop is safe from harm.

With crop development so delayed, that judgment will take time, lots of it. That could make corn a great place for short-term traders, while at the same time keeping investor money on the sidelines.

Jump In Housing Starts Doesn't Reflect Reality

from Diana Olick at CNBC:

So my first thought was: there’s got to be something wrong with this number. A 17 percent surge in housing starts didn’t make a whole lot of sense to me at first, but after talking to my minions I’m now getting the picture.

First of all, the biggest part of the gain was in multi-family, up 61.7 percent month to month, but that’s after falling 49 percent in April. Patrick Newport, an economist at HIS Global Insight, says the multi-family market is still in a “deep slump,” despite the monthly jump. “Permits, which better gauge underlying conditions, fell 8.3 percent, the 11th consecutive monthly decline, to a record low of 110,000 units 9annual rate,” says Newport. “The recent sharp decline in this market is related to financing. Some builders are overwhelmed with debt. Others cannot find funding to finance projects with positive net present values.”

As for single family, Dan Oppenheim over at Credit Suisse tells me that “the bit of stabilization earlier this year (the end of buyer paralysis after the end of last year) led a few builders to get their plans set for more.”

But analyst Ivy Zelman gave me a huge nugget: 50 percent of sales in May were on spec. She says we’re seeing a lot of spec homes now because, “today’s consumer wants to touch and feel the house.” The positives are that cancellations are down, sales are better and there’s less negative pricing, although discounts are still prevalent. “The patient was without a pulse in the fourth quarter,” Zelman notes, “and now the patient’s in ICU.”

So why all the spec now? Because builders are trying to jam all these homes into buyers’ pockets before the expiration of the $8000 first time home buyer tax credit. It turns into a pumpkin November 30th.

The big wrench in that tactic is mortgage rates. Zelman claims, “the market collapsed last week.” Yes, it’s now summer, but she says that in Northern California, Las Vegas, Seattle, Chicago, the numbers went back to fourth quarter lows. The spring offered incredible affordability, but the rise in interest rates and the impending end of the tax credit could choke that off in summer.

And then there is the foreclosure issue.

I’m not trying to be a bear here, just a pragmatist. The government and industry programs to ease foreclosures are not showing big successes. A lot of Alt-A borrowers are in big trouble and many won’t qualify for any of the bailout programs. With interest rates in the mid 5’s, refinancing isn’t going to do much of anything for many borrowers. There is no sign of abatement in delinquencies, and while investors are in there, using old-fashioned cash to eat up inventories of distressed properties, there are plenty more foreclosures in the pipeline just waiting to hit the market.

This is remarkable commentary, especially given that Diana is from CNBC, which is very pro-Obama, and she has been extremely bullish in recent months.

Wheat Market Update

Wheat Daily

Wheat Intraday
from Bryce Knorr at Farm Futures:

This spring's rally in the wheat market always appeared the most suspect of any in the grain trade, if not the broader commodity world. While the crop suffered a variety of ills, production appeared adequate thanks to large old crop stocks.

Most of the rally seemed to be short covering, especially in Chicago, and funds were selling again last week, breaking prices below the support line for the rally. Now the path of resistance looks lower into harvest, with little in the way of bullish support until the July USDA report updates production estimates and class supply and demand data.

Selling Resumes

$134 Billion in U.S. Bonds Seized

$134 billion in U.S. government bonds were seized while being smuggled across the Italian-Swiss border. There are only four bond-holders in the world have that quantity in bonds. All are governments. Who is trying to either dump their Dollar-denominated bonds or counterfeit such monstrous sums for cash? Hmm!

Country Apr '09
China $763.5
Japan $685.9
United Kingdom $152.8
Russia $137.0

Rising Credit Card Defaults Endanger Bank Rebound

from CNBC:
U.S. credit card defaults rose to record highs in May, with a steep deterioration of Bank of America's lending portfolio, in another sign that consumers remain under severe stress.

Delinquency rates—an indicator of future credit losses—fell across the industry, but analysts said the decline was due to a seasonal trend, as consumers used tax refunds to pay back debts, and they expect delinquencies to go up again in coming months.

Bank of America—the largest U.S. bank—said its default rate, those loans the company does not expect to be paid back, soared to 12.50 percent in May from 10.47 percent in April.

In addition, American Express, which accounts for nearly a quarter of credit and charge card sales volume in the United States, said its default rate rose to 10.4 percent from 9.90, according to a regulatory filing based on the performance of credit card loans that were securitized.

Credit card losses usually follow the trend of unemployment, which rose in May to a 26-year high of 9.4 percent and is expected to peak near 10 percent by the end of 2009.

If credit card losses across the industry surpass 10 percent this year, as analysts and bank executives expect, loan losses could top $70 billion.

The "Dumb" Money Gives Bearish Signal

from the Technical Take blog:
Investor sentiment continues on the same path as the two previous weeks as the "Dumb Money" indicator is moving to new bullish extremes. Typically, this is a bearish signal.

The "Dumb Money" indicator is shown in figure 1. The "Dumb Money" indicator looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investor Intelligence; 2) Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio.

Figure 1. "Dumb Money"/ weekly

Going back to early March, 2009, the "optimal" time to buy into the market was when the S&P500 closed at 756.55 on March 13, 2009. The "optimal" time to sell was at the close April 17, 2009 with the S&P500 at 869.60. This represents a gain of 15% gain over 5 weeks or 3% per week. This is annualized to a 156% gain, and this is what one would expect at the bottom of the price cycle when the trend changes from down to up. We get an acceleration of prices higher.

From our "optimal" sell signal to this past Friday's close, the S&P500 has gained 9% over 8 weeks or 1.13% per week. This is annualized to a 59% gain, which isn't too shabby but certainly less than the move from the "optimal" buy to the "optimal" sell signal. As an aside, "optimal" doesn't mean best. "Optimal" assumes all occurrences over the length of the observable data. Could the "sell" signal have been better timed? Yes, but over the past years the "optimal" time to get out of the market and protect profits was the "optimal" sell signal. We should note that the "Dumb Money" indicator had yet to move to a bullish extreme, and we were basing our signals on prior bear market experiences.

Then on May 8, 2009, the "Dumb Money" moved into the extreme bullish zone, and this is a bear signal. On May 8, 2009, the S&P500 closed at 929.23. Since that time the S&P500 has gained 1.8% over 5 weeks or 0.36% per week. This is annualized to a 18.72% gain. Once again, this isn't too shabby, but clearly much less than the move off the bottom or from our initial "optimal" sell signal.

Yet, with the "dumb money" now bullish to an extreme, this is the part of the price cycle that appears to be attracting the most attention and most acceptance from investors. Yet, this is the part of the price cycle where the markets haven't gone anywhere. It does seem kind of odd -doesn't it? The time to have been bullish was when investors were fearful.

To embrace higher prices with sentiment so extremely bullish, you must embrace the notion that we are in a new bull market. You must embrace the notion that higher oil and higher interest rates don't matter. You must embrace the notion that second derivative growth will lead to real, sustainable growth. You must embrace the notion that our housing and commercial real estate troubles are all behind us. You must embrace the notion that a PE of 150 on the S&P500 doesn't matter. You must embrace the notion that we can have an economic recovery without any meaningful change in unemployment. And we can go on and on and on....

I have picked my poison. It is a monthly close over the simple 10 month moving average on the S&P500. Once this occurs, I will add equity exposure (that is adjusted for the inherent risk of the asset (equities) and adjusted for the other assets in my portfolio). Personally, I don't like it, and this is at odds with my own analysis that leads me to state that this is not the proper launching pad for a new bull market in equities. But then again, the market cares little what I think or do. Nonetheless, this is how I am choosing to play it. The Faber strategy, which I discussed last week, is a strategy that helps me manage money and manage risk. It is not a "call" on the markets.

For the record, the "Smart Money" indicator is shown in figure 2. The "smart money" indicator is a composite of the following data: 1) public to specialist short ratio; 2) specialist short to total short ratio; 3) SP100 option traders.

Figure 2. "Smart Money"/ weekly

Bernie Sanders (and All Politicians) Should Learn the Painful Lessons of History

from Platts:

Bernie Sanders and onions

This is not going to be a steady "dump on Bernie Sanders" blog, though this is the second time in days that we have written about him. But a second proposal that the senator from Vermont made this week, if looked at through the prism of something written this week by one of the better market analysts out there, brings home how crazy it is for government to try to control markets by fiat.

Sanders introduced a bill that would require the Commodity Futures Trading Commission use its emergency authority to halt what he is calling sudden or unreasonable price movements in commodity prices. In a statement, Sanders said the usual: "The last thing people need now is to be ripped off at the gas pump because speculators on Wall Street -- some of the same people who received the largest taxpayer bailout in US history -- are allowed to jack up oil prices through price manipulation and outright fraud."

Right about that time, the weekly report of the estimable commodities research team at Barclays was released. The report, from the group headed by Paul Horsnell, is always insightful and also entertaining. There's always an obtuse question in there, usually too hard for me to answer, and this week's concerned the identity of a commodity that went bananas up and down in price before everything else did. No, it wasn't bananas.

The answer: onions. "The average price in the US went from more than $50 in April 2007 to less than $5 in December 2007, although we did not tell you that those prices are for a hundredweight of the commodity," according to the report. "(The) average price of onions did fall very sharply over that period. Indeed, they lost 96% of their value between April 2007 and March 2008, before quadrupling in the following month."

Now, what does any of this have to do with Bernie Sanders? The relationship is this: onions are the only commodity that has an outright ban on futures trading in the US, because of a bill in the late 1950's pushed through the Congress by then-Rep. Gerald Ford. The idea, of course, was that if we just got those greedy futures traders out of the onion market, everything would be fine. The swings spelled out by Barclays certainly are not what Ford
had in mind.

Ford's 1950's goal and Sanders' 2009 goal certainly seem to be in sync. The problem is that if futures traders cause prices to swing madly, why did the price of onions -- where futures trading is banned -- move in such violent fashion? Even oil didn't swing that much.

So maybe the conclusion that it's traders that produce volatility or make the price move too high ought to be considered carefully before being the basis of new law.

Credit Card Losses Spike 10% -- In One Month!

from Clusterstock:
Credit card losses continue to get worse. Card issuer Capital One (COF) said in an SEC filing this morning that its annualized charge-offs hit 9.41% in May, which is up 10% from an 8.56% rate in April.

Worse, as noted by Reuters, is that the rate of deterioration would have been worse had it not been for an accounting change.

Here's the note from the SEC filing:

A change in bankruptcy processing resulted in an improvement in the U.S. Card charge-off rate that is reflected in the May results. The impact was approximately 50 basis points. While our internal guidelines require bankrupt accounts to be charged off within 30 days, our practice had been to charge off customer accounts within 2 to 3 days of receiving notification of bankruptcy. Due in part to an increase in the volume of bankruptcies, we have extended our processing window to improve the efficiency and accuracy of bankruptcy-related charge-off recognition. The new process remains within Capital One’s internal guidelines, as well as FFIEC guidelines that bankrupt accounts must be charged-off within 60 days of notification.