A post went up on Seeking Alpha suggesting that even equity-oriented investors should consider diversifying their portfolios with Treasury bonds, such as with the widely-traded ETF TLT.
This is the LINK.
The theme is familiar; there is updated information here and there, so it may be of interest.
The US markets continue to follow the Reinhart-Rogoff pattern. Economic data is coming in OK, but adjusted for Federal deficits paid for by Fed money rather than by borrowing out of real savings, it would, I think, probably still be seen to be recessionary or at best troughing.
Bill McBride of Calculated Risk is looking at yoy sales data in depressed markets such as Sacramento and noting that aggregate "used" home sales are sharply down in volume yoy. Now that Obama has been re-elected, there is less need to cheerlead the economy. In fairness to him, a year ago he was more cautious on housing for the next couple of years than he got more recently. (I use him because he links almost exclusively to Paul Krugman and his ilk on his featured blogs and columns.) Also, Robert Shiller came on CNBC and expressed a distinct lack of enthusiasm about housing prices for the next several years.
Meanwhile, over-bullish signs regarding not just sentiment but also bullish behavior by the "dumb money" are being documented not just by the short-seller's favored blog (ZH), but by the unbiased subscription-only publication SentimenTrader (behind a firewall). One can never know how long this condition persists, and it can taper off with little damage to stock prices. However, the Russell 2000 (R2K) is trading around 25X trailing earnings, and that P/E excludes the contribution from companies such as biotechs that have negative earnings. This index is wildly overvalued. The trailing 5-year growth rate
from the R2K is 5%. Meanwhile you can buy CVS at about an 8% free cash flow yield (12.5X projected free cash flow for the next 12 months), with a 20% growth rate the past 5 years and unending projected growth ahead as it begins to expand internationally. Thus I see this as an overvalued stock market but also, as it was in the 1998-2002 period, one in which some sectors are too cheap but the average stock is too expensive.
Futures positioning in the R2K is at its most bullish as far as I can find data easily (LINK). The speculators are heavily long in copper as well. The last time they went quickly from moderately bearish to heavily long was coming out of the Great Recession. Copper was $3.50 a pound when they bulled the price up. As of December 2012, the price was $.350. Copper went nowhere for 3 years.
Should this pattern recur, Treasury yields are getting near or have already seen their peak.
With the Fed loose and the Federal government loose but less lose than in 2009, I do not foresee a collapse in stocks. The lack of good competing alternatives leads me to cover the bases with recession-resistant securities that pay dividends. Stocks in that category generally are shrinking or holding steady the share count. This includes Blackrock (BLK) and IBM (IBM). Stocks are risky; bonds with any "decent" yield are risky. Pick your risk. I choose some from column A and some from column B.
Finally, per the name of this blog, there are two posts up recently worth reading and thinking about:
LINK and LINK. Please check them out. The second one is a Seeking Alpha article that improves part-way into the body. I have not even finished it. Both linked articles are interesting.
Futures are, not unusually, bright green again. The inflationary 'boom" that the Fed and the Feds are engineering is going on apace. This could be 2011 again. Please don't chase hot stuff unless it's with a well-defined profit goal.
Showing posts with label Treasury bonds. Show all posts
Showing posts with label Treasury bonds. Show all posts
Tuesday, February 12, 2013
Sunday, May 29, 2011
Gold and Bonds
It's hard to see the fundamental case for gold vs. the U. S. dollar (USD) as other than strong when a flawed currency, the New Zealand dollar (NZD), has just now broken to an all-time high against the USD. Why is the NZD a flawed currency?
Because the policy interest rate is 2.5% while the latest inflation rate is 4.5%. The Prime Minister of NZ is a former Merrill Lynch banker. These guys do like printing money, that's clear. So if a country that is rebuilding after the Christchurch earthquake is doing it with cheap money, then gold should be appreciating against the NZD, all things being equal. (Please note that the NZD was one of the three currencies I highlighted last summer when I made the case for the following weak dollar plays: gold, silver, and foreign currencies. The other two courrencies I listed were those of Brazil and Norway.)
Except for countries near default, such as Greece, and with some exceptions such as Brazil and Chile, most of the world continues to operate with negative real interest rates. Sweden, for example, has a 3.3% inflation rate but only a 1.75% policy rate. All this is gold-bullish. Just last week, gold hit all-time highs in euro and British pound terms.
Is gold "too high"? Maybe, but given how depressed gold miners are, my sense is that a bull market as long and strong as gold's has been will generally end with public participation in the usual manner, namely in stocks. Instead of gold, the public has been indulging its dreams of easy money via momentum stocks of various flavors. I continue to look for $2000/ounce gold next year based on the "Elfenbein correlation" between percentage appreciation of gold and the positivity or negativity of "real" short term interest rates.
Understanding that there is a significant potential for summer weakness in all resource stocks, I also think that on a 6-12 month horizon, certain gold stock vehicles look better than bullion to me.
The big fly in the ointment, however, is the Economic Cycle Research Institute's adamant call for an important top in the global industrial economy soon. Primarily because of this, I am avoiding resource stocks except those related to gold (which has few industrial uses) and resource currencies.
As a consequence of a global industrial recession, at some point I would see capital being diverted to bonds. In that vein, I would note that the long-term downtrend line in U. S. interest rates survived the inflation scare of this winter. The chart of the same bond in New Zealand is similar at least for the past decade. (Click on chart to 
enlarge.)
enlarge.) On a trading basis, I am therefore long various U. S. Treasury debt instruments. I thus have a barbell strategy: gold as my core holding to hedge against more money-printing to make the impaired balance sheets of the TBTFs whole, and Treasuries as speculative vehicles expecting that potentially sharp downtrends in the prices of industrial commodities in association with a global industrial recession (or fears thereof) will leave capital searching for the least bad alternatives.
I also own some defensive stocks and certain specialty financials.
I intend to discuss some ins and outs of Treasury investing (speculating, really, given that I don't expect the debts to ever be repaid in other than greatly devalued dollars) in the future. In the meantime, you may wish to review a November 2010 post on the topic in which I suggested that we could then have been within months of a major top in long term rates if we were not there already (which we most assuredly were not, as it turned out).
I read lots of gold-oriented blog sites, articles on gold, etc. I don't know if I am unique, but I think it's rare to be a bull on gold and a tactical bull on intermediate to long-term Treasuries at the same time. Let's see how the months ahead go. It looks interesting, to say the least.
Copyright (C) Long Lake LLC 2011
Monday, March 22, 2010
All-Time Highs in Off-Price Retailers
Consistent with the themes of an impoverished nation and redistribution, today we saw new all-time highs in the price of McDonald's and several discount retailers, most notably Dollar Tree (DLTR), which surged over 5% on the news of an accelerated stock buy-back that will retire about 5% of its market cap with no offsetting stock issuance. TJX and Ross Stores also moved up to all-time highs. DLTR, which now trades around $60, would have to reach about $72 by summer simply to trade at its "value line" per the eponymous publication. From that price, it could easily be a strong long-term performer.
In other words, the "right" stocks may have a long way to run.
The stock market as a whole is, however, an entirely different kettle of fish.
Of some interest today is the decline in Treasury yields concomitant with the rise is stock prices. That has not happened much lately, and Treasuries rallied Friday morning when stocks opened down. In other words, the crisis feared and predicted by Bill Fleckenstein and many others, that of declining stock and Treasury bond prices, is not a happening thing.
The Chicago Fed National Activity Index was out today and showed some weakness in February, some of which might in fact legitimately be weather-related. This index also has an inflation predictor in it, perhaps related to the Phillips curve. In any case, every can see that all sorts of economic indicators look identical to multiple other post-recession charts, and sooner or later they all have given way to growth or outright boom conditions. Will past be prologue?
Probably, but from a market standpoint, methinks much of that is priced into all markets except perhaps gold.
In the meantime, I prefer Dollar Tree at under 15X predicted current year earnings to Tiffany's at 20X. And a vegetarian Big Mac.
Plus the long bond (TLT) for a trade.
Copyright (C) Long Lake LLC 2010
Tuesday, January 12, 2010
No Fibbing: NFIB Shows No Real Improvement in a Miserable Time for Small Business; and Related Matters
NFIB announced today the results of its December survey of its members, which tend to be small. The title is a bit misleading: Small Business Owners End 2009 With A Thud. Really it ended with more of the same old bad times. Here are some of the "highlights".
Ten percent of the owners increased employment (the highest reading of 2009), but 22 percent reduced employment (seasonally adjusted).
The frequency of reported capital outlays over the past six months was unchanged at 44 percent of all firms, holding at a record low level (data first collected in 1979). Plans to make capital expenditures over the next few months rose two points to 18 percent, two points above the 35-year record low.
A net negative 28 percent of all owners reported gains in inventory stocks, a new monthly record. For all firms, a net-negative 4 percent (a two point deterioration) reported stocks too low, so stocks are still considered a bit excessive relative to expected real sales volumes (which are weak).
Ten percent of the owners reported raising average selling prices, but 33 percent reported price reductions yielding a net-negative 22 percent (seasonally adjusted) of owners who cut prices in December. Plans to raise prices fell one point to a seasonally adjusted net 3 percent of owners, 35 points below the July 2008 reading.
On the cost or input side, the percent of owners citing inflation as their number one problem (e.g. costs coming in the “back door” of the business) fell two points to 2 percent, and only 3 percent cited the cost of labor.
Reports of positive profit trends were unchanged at a net negative 43 percentage points.
Owners continued to reduce compensation at a record pace, with 10 percent reporting reduced worker compensation and 9 percent reporting gains, unchanged from November.
Regular borrowers (accessing capital markets at least once a quarter) continued to report difficulties in arranging credit at the highest frequency since 1983. A net 15percent reported loans harder to get than in their last attempt, unchanged from November.
Continuing the theme that something is rotten in the American economy, Labor Dept. reports the November "JOLTS" survey on job openings and labor turnover. It shows that job openings fell in November from October by 156,000 to 2.42 million.
I am bullish on dollar stores.
I would also be bullish on Treasuries if the Government were not issuing so darn many of them. But I'm not selling what I own. Investors interested in real return with limited duration may want to consider Agency mortgage-backed securities, which repay principal with interest. Of them, Ginnie Maes are explicit Federal obligations, while Fannies and Freddies remain implicitly guaranteed. They may come on budget, but you never know. The yield differential is vanishingly small, so I would stay with Ginnies.
Of course, the market knows all the above. The argument is made that the cycle is turning/has turned, so happy days will be here again soon with no inflation pressure, so Treasury issuance will decline a lot and demand f0r gold will decline a lot as well.
I remain bullish on dollar stores and want to own enough gold that that value will likely remain protected should massive inflation (or less likely deflation) eventuate.
Copyright (C) Long Lake LLC 2010
Ten percent of the owners increased employment (the highest reading of 2009), but 22 percent reduced employment (seasonally adjusted).
The frequency of reported capital outlays over the past six months was unchanged at 44 percent of all firms, holding at a record low level (data first collected in 1979). Plans to make capital expenditures over the next few months rose two points to 18 percent, two points above the 35-year record low.
A net negative 28 percent of all owners reported gains in inventory stocks, a new monthly record. For all firms, a net-negative 4 percent (a two point deterioration) reported stocks too low, so stocks are still considered a bit excessive relative to expected real sales volumes (which are weak).
Ten percent of the owners reported raising average selling prices, but 33 percent reported price reductions yielding a net-negative 22 percent (seasonally adjusted) of owners who cut prices in December. Plans to raise prices fell one point to a seasonally adjusted net 3 percent of owners, 35 points below the July 2008 reading.
On the cost or input side, the percent of owners citing inflation as their number one problem (e.g. costs coming in the “back door” of the business) fell two points to 2 percent, and only 3 percent cited the cost of labor.
Reports of positive profit trends were unchanged at a net negative 43 percentage points.
Owners continued to reduce compensation at a record pace, with 10 percent reporting reduced worker compensation and 9 percent reporting gains, unchanged from November.
Regular borrowers (accessing capital markets at least once a quarter) continued to report difficulties in arranging credit at the highest frequency since 1983. A net 15percent reported loans harder to get than in their last attempt, unchanged from November.
Continuing the theme that something is rotten in the American economy, Labor Dept. reports the November "JOLTS" survey on job openings and labor turnover. It shows that job openings fell in November from October by 156,000 to 2.42 million.
I am bullish on dollar stores.
I would also be bullish on Treasuries if the Government were not issuing so darn many of them. But I'm not selling what I own. Investors interested in real return with limited duration may want to consider Agency mortgage-backed securities, which repay principal with interest. Of them, Ginnie Maes are explicit Federal obligations, while Fannies and Freddies remain implicitly guaranteed. They may come on budget, but you never know. The yield differential is vanishingly small, so I would stay with Ginnies.
Of course, the market knows all the above. The argument is made that the cycle is turning/has turned, so happy days will be here again soon with no inflation pressure, so Treasury issuance will decline a lot and demand f0r gold will decline a lot as well.
I remain bullish on dollar stores and want to own enough gold that that value will likely remain protected should massive inflation (or less likely deflation) eventuate.
Copyright (C) Long Lake LLC 2010
Thursday, September 17, 2009
Bonds Versus Silver
Please see the chart of the ETF 'TLT', a proxy for the long T-bond, versus the ETF 'SLV', which tracks the price of silver. SLV began trading early in 2006. Bonds were in a bear market into Q3 the next year, and have been in a bear market the past 9 months; commodities were in a long-run bull market well into 2008 and again for almost a year.
Surprise! Bonds outperformed SLV simply on price. Add in a starting yield on TLT of (say) 4.5%, multiply by 3.5 years, and voila, you have massive bond outperformance of the bond over the commodity. This of course was achieved as well with less volatility.
It is GLD that clobbered the long bond, I would say because gold is a true monetary metal, whereas silver is at best a quasi-monetary metal.
Technically, SLV is about 30% above its 200-day moving average. It went higher than that in 2008, but this is a warning sign. TLT is "trying" to break through its downsloping 150-day moving average on the "strength" of a rising 50-day ma.
Fundamentally, employment continues to lag production; to the extent that transfer payments have been supporting the unemployed, so will a turn in the employment cycle not induce as much additional spending as would have occurred absent these transfer payments.
As the data show a clearly strengthening economy, with David Rosenberg admitting he has been too bearish on the economy this year, the yield gap between the 2-year and the 10-year Treasury issues has been narrowing. This is a negative for economic growth. The markets giveth, and one day they will taketh away.
Copyright (C) Long Lake LLC 2009
Wednesday, September 16, 2009
Surprises
Per Rasmussen, some surprising polling data:
One week after President Obama’s speech to Congress, opposition to his health care reform plan has reached a new high of 55%. The latest Rasmussen Reports daily tracking poll shows that just 42% now support the plan, matching the low first reached in August.
A week ago, 44% supported the proposal and 53% were opposed.
Also surprising, Treasury bonds reversed intraday to move upwards in price, down in yield; the % moves in TLT (proxy for the long bond), TNX (the 10-year's yield), gold and the S&P 500 are essentially identical as I write, all moving about 1%.
Now that virtually all bears are hibernating, some remain uncowed. Information about a proprietary sentiment service passed on to me by one of the remaining bears, Paul Lamont of Lamont Trading Advisors, suggests that investors/speculators have digested the green shoots of recovery and then some.
It takes courage to be a full-fledged out-of-the-stock market bear when so many have at least partly capitulated, some saying not to fight the tape.
The take here remains in sympathy with Mr. Lamont's views. It would appear that this recent cycle is being driven as the last one was, with liberal doses of credit and unremitting financial speculation. The stock indices are only now perhaps surpassing their 2001-2 lows when adjusted for inflation. In this context, it is no surprise that gold continues to trudge along, up as much as the S&P 500 on the year (counting dividends) but with less volatility, but outperforming it on 1-year and longer time frames.
Given that the Government and the Fed are transferring unbelievable amounts of either borrowed or newly-printed money into the financial markets (and some directly into the real economy), it is no surprise that matters look better in the markets.
A credible skeptic of the big financial companies with an impressive track record of predicting many blow-ups over the past two years is Reggie Middleton at boombustblog.com. Suffice it to say that he feels that prices for the stocks of the largest complex financial companies and many smaller banking companies are in looney-tunes territory, and that the financial crisis is far from over.
One thing about the markets: even Yogi Berra's famous saying isn't quite correct. The markets are never over.
Copyright (C) Long Lake LLC 2009
One week after President Obama’s speech to Congress, opposition to his health care reform plan has reached a new high of 55%. The latest Rasmussen Reports daily tracking poll shows that just 42% now support the plan, matching the low first reached in August.
A week ago, 44% supported the proposal and 53% were opposed.
Also surprising, Treasury bonds reversed intraday to move upwards in price, down in yield; the % moves in TLT (proxy for the long bond), TNX (the 10-year's yield), gold and the S&P 500 are essentially identical as I write, all moving about 1%.
Now that virtually all bears are hibernating, some remain uncowed. Information about a proprietary sentiment service passed on to me by one of the remaining bears, Paul Lamont of Lamont Trading Advisors, suggests that investors/speculators have digested the green shoots of recovery and then some.
It takes courage to be a full-fledged out-of-the-stock market bear when so many have at least partly capitulated, some saying not to fight the tape.
The take here remains in sympathy with Mr. Lamont's views. It would appear that this recent cycle is being driven as the last one was, with liberal doses of credit and unremitting financial speculation. The stock indices are only now perhaps surpassing their 2001-2 lows when adjusted for inflation. In this context, it is no surprise that gold continues to trudge along, up as much as the S&P 500 on the year (counting dividends) but with less volatility, but outperforming it on 1-year and longer time frames.
Given that the Government and the Fed are transferring unbelievable amounts of either borrowed or newly-printed money into the financial markets (and some directly into the real economy), it is no surprise that matters look better in the markets.
A credible skeptic of the big financial companies with an impressive track record of predicting many blow-ups over the past two years is Reggie Middleton at boombustblog.com. Suffice it to say that he feels that prices for the stocks of the largest complex financial companies and many smaller banking companies are in looney-tunes territory, and that the financial crisis is far from over.
One thing about the markets: even Yogi Berra's famous saying isn't quite correct. The markets are never over.
Copyright (C) Long Lake LLC 2009
Tuesday, September 1, 2009
End-August Asset Class Review
Sometimes pictures tell the story better than words.
We can think and project all we want, but it is good to know objectively where we have been. You may click on all the charts to enlarge them.
The top chart represents the price of a long Treasury bond, per the ETF with the symbol TLT. It's basically in a 1-year trading range. Not shown is the multi-year chart, in the bull trend toward higher prices and lower yields is entirely intact. The reason it may well continue is that virtually no one believes the trend. Contrast that with the near-universal belief in the late 1990s in technology stocks. TLT did make a lower low in June than the recent ones in late July and early August, and has marginally exceeded the early July interim high. Substantial resistance awaits TLT around 100 if it can push that high.
Not shown is that of gold. You can get it at Kitco.com or chart the ETF GLD. Not only are these charts near-perfect, but the 150 day and 200 day moving averages for GLD have very recently gone to all-time records, exceeding those set around 8/6/08 and 10/10/08 respectively. The 50-day moving average is within about 60 cents of its record of around 4/21/08. At those times, the long-term moving averages were beginning to go convex upward rather than concave, indicating a loss of momentum; theyhave better shape today. The only overhead resistance gold now has is minor, which was the blow-off phase in early 2008 following an approximately $600 up-move from 2005-2008.
The other charts show the ETF for the S&P 500, SPY. From the end of August 2008 to the end of February 2009, SPY fell from 128 to 70. In the ensuing 6 months, it only rose from 70 to 102. What one likes to see is more energy on the upside than the downside; the chart shows the opposite.
Finally, the iconic stock GE shows a pitiful rebound over the last 6 months. GE is a fairly good proxy for the U.S. and to some degree the world economy. 60 days ago, consensus earnings estimates for GE for next year were 95 cents. Now they are 91 cents. No green shoots. GE stock is valued at over 11 times tangible book value and over 35X dividends (2.8% annual rate). It is thought here that GE is a truer gauge of matters than bank holding company stocks such as BAC because it is not a pure play and thus one would not speculate in GE if one wanted to speculate either on the financial sector or the industrial sector.
As I write this, the Shanghai Composite index is around 2700. It was established in 1990 at 100. That's about a 19% growth rate, not counting dividends. China just looks like a bubble floating in on top of a bathtub filled with dirty water. And China's stock market has, amazingly, led ours.
Received wisdom is that it's difficult to knock a stock market very far down once the economy turns; yet it happened in 2002.
Interesting times.
Copyright (C) Long Lake LLC 2009
Friday, August 21, 2009
The Case for Long Treasuries Gets Stronger Even as Leading Indicators Strengthen
The above is a chart of "TLT" since its inception. This ETF is a proxy for the long Treasury bond (20+ year duration bonds). Click on the chart for greater detail.
Please ignore the fact that few Americans consider direct ownership of Federal debt in their asset allocation.
Just consider TLT as you would any common stock (or ETF), such as GLD, Amgen or AIG. TLT came public in 2002.
The blue line is the stock price. The red line is the smoothed 50-day moving average (ma). The green line is the 200-day ma.
Currently, TLT's 50 day ma has turned up. Every year since 2003 except 2005, TLT has moved down and then turned up above an upsloping 50 day ma while the 200 day ma was moving down. In every case, buying TLT at a point such as today allowed for a meaningful winning trade. In every case, TLT moved up above the 200 day ma.
The absolute price (yield) of TLT is below levels reached in 2003, 2005, 2007 and 2008, and is far below last December's manic-depressive high of 123. So, while "everyone" "knows" that Treasury yields are "too low", "everyone knew" that fact throughout this decade and were . . . wrong. It was dividend yields on stocks that were "too low" and in my humble opinion, they remain too low. The 5-year Treasury note yields more than the average S&P 500 stock. (More on this topic in a subsequent post.)
TLT is liquid, with tiny bid-ask spreads.
Trading aside, TLT pays you the interest on the bonds it owns with very low costs of 0.15% yearly taken out for administrative costs.
There are many reasons to buy or "rent" long Treasuries, though I would not put all my funds in them. Reasons to own them include, in addition to the pattern highlighted above:
1. No one you know owns them or has the slightest interest in doing so (poetic license taken);
1. No one you know owns them or has the slightest interest in doing so (poetic license taken);
2. Financial companies must buy and hold them to sell mortgages and life insurance;
3. Foreign countries are "locked in";
4. The Fed owns them and does not want to lose money on them;
5. Inflation typically declines after recessions end;
6. Everyone so knows the recession ended in Q2 or is ending;
7. Seasonal strength is beginning;
8. Deficit projections will shrink if the economy outperforms expectations;
9. The end of every post-war recession has been followed by new cycle lows in Treasury yields;
10. The U. S. has taken Japan's route in the quick fix of creating zombie banks following a burst bubble.
Copyright (C) Long Lake LLC 2009
Friday, August 14, 2009
Trends Reversing and Implications Thereof
The content on Jesse's Cafe Americain has been informative lately. Not surprisingly, the personal income chart mirrors another one also from www.contraryinvestor.com, on retail sales.
These long downtrends will be in force until they are not. One would at the least expect a snapback, given the extreme nature of the recent declines.
This expected snapback is to a large extent priced into retail stock prices, which now sell with low dividend yields and generally high price to book and price to earnings ratios. Not that the stocks will not rise; I have no idea about Mr. Market's mood or the short or long-term "fundamentals".
Looking back to the left hand side of these charts, one sees that as the years went by, a rising trend of personal income had sharp setbacks. The dominant fear throughout much of that time was literally of a return to the deflationary depression years of the 1930s. A quarter of a century after the worst of the 1932-33 stock and economic cycle is now known to have passed, Benjamin Graham, who mentored Warren Buffett at Columbia and was one of the truly great investors of the 20th century, was able to find numerous NYSE stocks selling for less than cash on hand. This at a time when a multi-year bull market had been in force! It is much easier in hindsight now to have "bought" those dips in income than at the time.
Based on today's data on capacity utilization and industrial production, it would appear that these have hit bottom for the nonce. Paradoxically, the greatest investment opportunity from a risk and reward perspective could be in the major asset class that has performed the worst this year and that one might think suffers from the bottoming of the production cycle: longer term Treasury bonds.
They are both despised and "under-owned" by the public. Even bears such as Robert Prechter advise people to sell stocks and buy ultra-liquid very short-term debt instruments (T-bills), not bonds. Yet a cyclical industrial recovery and an upturn in personal income (or at least a cessation of the decline) means less contra-cyclical government spending, and thus a (relative!) shortage of bonds to a market that has been absorbing unprecedented supply.
Historically, T-bond yields bottom well after a recession/depression ends. The post-Great D low in bond yields was in 1940 or after. The prior 21st Century T-bond low came over a year-and-a-half after the shallow recession ended in 2001. Not that the 30-year T-bond makes sense anywhere the 2.5% it hit last December, but the 10-year is different. It would not be prudent to put all one's money in such a debt instrument given the inflation risks, but consider the following analogy. The great bridge player Marty Bergen says that the bridge point system in which an ace rates 4 points, a king 3 points, a queen two points, etc. underrates the value of the ace.
Similarly, even the fine economists such as David Rosenberg who recommend corporate bonds based on their spread over Treasuries miss the point in their public analysis. U. S. Treasuries are, like it or not, special. All the other bonds must be judged on their absolute yield and riskiness and not on the yield difference over Treasuries.
From a technical basis, the long decline in corporate bond yields has ended. The bull market for Treasury debt remains intact. The CPI is reported to have dropped 2% y-o-y as of July, the sharpest drop since 1950. Thus the instantaneous "real" yield on a 10-year Treasury is 5.5%.
Markets exist in part to surprise the greatest number of people. Can Treasuries (TLT on the NYSE and zero-coupon bonds OTC) truly be vehicles for capital gains as well as safe income?
Time will tell.
Copyright (C) Long Lake LLC 2009
Tuesday, August 11, 2009
More Life in the Bond Bull?
Please click on the chart of the yield on the 30-year Treasury bond for greater detail. The red line shows the 200 day moving average of the yield. Ever since yields peaked in 1982, there have been a series of lower lows and lower highs in this series.
A 200-year chart of long-term US Government bond yields or other highest-grade bond yields for periods when the USG had no outstanding long-term debt will show that the average yield is slightly above the current yield, at about 4.7%.
A 200-year chart of long-term US Government bond yields or other highest-grade bond yields for periods when the USG had no outstanding long-term debt will show that the average yield is slightly above the current yield, at about 4.7%.
The cycle minima in yields have less of a correlation to whether the economy is in recession or not. Yields bottomed in 1982, 1986, 1993-4, 1998, and 2003 before last year's latest historic bond yield collapse.
At all points along this exactly 27 year series, bond bears came out and to date have been incorrect other than trading opportunities. One would daresay that the public has neither bought into the long-term disinflation camp nor has been greatly promoted it by the financial community. Rather, the public has been "educated" about "stocks for the long run".
Another major asset class which has received its share of promotion is gold. The average price of gold in 1976 was about $120/ounce. The annual compounded rate of return of the gold price is about 6.4% from then till now. A laddered bond portfolio of intermediate to long-term Treasuries has beaten this return with greater safety and no storage or insurance costs.
For those who believe that Treasury rates cannot go lower, remember that Fed funds have fallen 99% from 1980, from about 21.5% at the peak to about 0.2% now. If Fed funds can fall 99%, then the DoctoRx view is that there should be no intellectual problem with believing that bond yields can fall 90%. From a peak of 15%, that would mean that 1.5% is very doable. Of course, this is Japanese territory.
In other words, buyers of Treasury bonds will get their return, absent default, with the potential for price appreciation along the way. So long as the owner has no need to sell short of maturity, nominal principal is returned. Should interest rates surge, coupons at least can be reinvested at increasing rates; more adventurous investors can get a higher yield but no offsetting reinvestment opportunities by purchasing zero-coupon Treasuries.
Strategically, in a situation where it wants to sell lots of debt, the best situation for the US Gov't is to sell lots of debt as cheaply as possible. If you want to own fractional parts of companies which you probably know almost nothing about and have no control over, fine: own stocks, the more the merrier. But of course, these are used stocks that have been looked at by every brilliant financial mind in the world; the chance that you can find a "steal" is low. And every day trader and other speculator is looking at all the same stocks as you.
What essentially no private investors are looking to speculate in is Treasury debt. Thimk different?
Copyright (C) Long Lake LLC 2009
Tuesday, July 21, 2009
Share and Share Alike?
As the highly correlated global stock markets and higher yield debt markets levitate on a flood of central bank and governmental "money", observers and investors are left to wonder what it's all about, and what comes next in the short and intermediate term.
In some ways, it's even easier to purchase common stocks than to deposit money in the bank, because the bank needs to meet its depositors in person, whereas E*Trade et al could care less about such matters. Since common stocks are what are easy to buy and what the media focus on, investors should be doubly careful about them. On the other hand, Treasuries are not so easy to buy and I don't know any investors other than my sainted parents who care about owning them. Let's compare.
Take IBM, a recent hero for a beat and raise quarter (ignoring coming in under Street revenue estimates; in a bull market, all sins are forgiven). If you give a current IBM shareholder $116 to own a share of IBM, you can expect to receive a 1.9% yield until the dividend is, presumably, raised. Let's say that IBM raises its dividend every year by 7%, tracking its possible growth in sales. After 10 years, the dividend yield at the current stock price will be 3.8%. Your average return will be about 2.8%. Where the stock will then trade is completely unpredictable. The stock has gone absolutely nowhere for 10 years. If the U. S. is like Japan, just 10 years out of phase, IBM will likely be lower in price in another 10 years. Or, it could triple or better.
Now, consider the much-despised or ignored 10-year Treasury bond. Depending on the market's mood, you will receive 3.6% every year. Not only will you have an average cash return nicely above that from IBM, you have a more certain higher return in the first years. In ten years, you can start over with your Treasury bond. You can buy gold. If rates are higher, you can invest in cash, more bonds, etc. If you own IBM, you have no exit point. Worse, you are likely to get over-optimistic and hold IBM when you should sell it, and you will tend to get pessimistic when the news is going to improve.
If you like corporations and hate the low yield of Treasuries, there are higher yields in the debt of IBM and other, weaker companies.
The lesson of Japan, Europe, many countries with stagnant stock market averages for many years, and the U. S. for the past 12 or more years is that yield and safety of principal matter. If you "make" 14% a year in a non-dividend-yielder for 5 years and then the stock takes a 50% dive-- common now and then even for IBM-- you have nothing to show for your loyalty.
In the case where bonds turn to trash due to massive inflation, forget IBM. Buy gold, gold, more gold and some other "stuff".
The people who run IBM make sure to get paid in cash. For them, stock options are a fillip. Least amongst their concerns are their loyal shareholders. That is why 2/3 of their free cash flow goes to purchase stock from the least loyal shareholders, and only 1/3 goes to dividends. Matters are worse at Cisco, which despite its giant size pretends it is a youthful grower and thus refuses to pay out a penny in dividends. Meanwhile, not only do the insiders take large cash salaries, but simply the normal volatility of the common stock guarantees that from time to time, they will be granted stock options when the stock is low, and they can cash out when it is high. Thus the stock can go nowhere for a decade but the insiders cannot lose and are guaranteed to win big on a portion of their options.
Just like the famous law firm Cheetum, Cummin and Goin.
Copyright (C) Long Lake LLC 2009
In some ways, it's even easier to purchase common stocks than to deposit money in the bank, because the bank needs to meet its depositors in person, whereas E*Trade et al could care less about such matters. Since common stocks are what are easy to buy and what the media focus on, investors should be doubly careful about them. On the other hand, Treasuries are not so easy to buy and I don't know any investors other than my sainted parents who care about owning them. Let's compare.
Take IBM, a recent hero for a beat and raise quarter (ignoring coming in under Street revenue estimates; in a bull market, all sins are forgiven). If you give a current IBM shareholder $116 to own a share of IBM, you can expect to receive a 1.9% yield until the dividend is, presumably, raised. Let's say that IBM raises its dividend every year by 7%, tracking its possible growth in sales. After 10 years, the dividend yield at the current stock price will be 3.8%. Your average return will be about 2.8%. Where the stock will then trade is completely unpredictable. The stock has gone absolutely nowhere for 10 years. If the U. S. is like Japan, just 10 years out of phase, IBM will likely be lower in price in another 10 years. Or, it could triple or better.
Now, consider the much-despised or ignored 10-year Treasury bond. Depending on the market's mood, you will receive 3.6% every year. Not only will you have an average cash return nicely above that from IBM, you have a more certain higher return in the first years. In ten years, you can start over with your Treasury bond. You can buy gold. If rates are higher, you can invest in cash, more bonds, etc. If you own IBM, you have no exit point. Worse, you are likely to get over-optimistic and hold IBM when you should sell it, and you will tend to get pessimistic when the news is going to improve.
If you like corporations and hate the low yield of Treasuries, there are higher yields in the debt of IBM and other, weaker companies.
The lesson of Japan, Europe, many countries with stagnant stock market averages for many years, and the U. S. for the past 12 or more years is that yield and safety of principal matter. If you "make" 14% a year in a non-dividend-yielder for 5 years and then the stock takes a 50% dive-- common now and then even for IBM-- you have nothing to show for your loyalty.
In the case where bonds turn to trash due to massive inflation, forget IBM. Buy gold, gold, more gold and some other "stuff".
The people who run IBM make sure to get paid in cash. For them, stock options are a fillip. Least amongst their concerns are their loyal shareholders. That is why 2/3 of their free cash flow goes to purchase stock from the least loyal shareholders, and only 1/3 goes to dividends. Matters are worse at Cisco, which despite its giant size pretends it is a youthful grower and thus refuses to pay out a penny in dividends. Meanwhile, not only do the insiders take large cash salaries, but simply the normal volatility of the common stock guarantees that from time to time, they will be granted stock options when the stock is low, and they can cash out when it is high. Thus the stock can go nowhere for a decade but the insiders cannot lose and are guaranteed to win big on a portion of their options.
Just like the famous law firm Cheetum, Cummin and Goin.
Copyright (C) Long Lake LLC 2009
Sunday, June 7, 2009
Here are several economic-financial related charts and other data presentations. The first shows the current unemployment rate as compared to the (recently-derived) "baseline" case and "more adverse" (low probability event, allegedly, according to the Fed) for the national unemployment rate.
Whoops!
Here's another example of forecasters getting it very wrong, and recently, from the Philadelphia Fed:
First Quarter 2009 Survey of Professional Forecasters
Release Date: February 13, 2009 (click on the hyperlink, then click on "First Quarter 2009):
Release Date: February 13, 2009 (click on the hyperlink, then click on "First Quarter 2009):
An upward revision to the forecast for the unemployment rate accompanies the outlook for economic growth. The forecasters predict that unemployment will rise from 7.8 percent this quarter to 8.9 percent in the fourth quarter of 2009. Previously, unemployment was forecast to rise from 7.0 percent to 7.7 percent over the same period. Unemployment is expected to average 8.4 percent this year and 8.8 percent in 2010. On the jobs front, the forecasters project job losses in the current quarter at a rate of 548,400 per month. They also see a reduction in jobs of 311,200 per month in the second quarter and 202,100 in the third quarter of 2009.
Both of the above were found at Mish's post from today.
Let us examine the facts. Also thanks to CR, consider Regulators Eye Pay Czar:
A Bankrate Inc. survey also released today showed 70% of survey respondents said they felt secure in their jobs despite the rising joblessness. Of those remaining at their jobs, 54% responded they’d received some sort of pay reduction: pay cut, reduced hours, reduced work days, suspended raises, bonuses or 401K match, or a combination of these.
So, the unemployment rate and pace of job losses are well above those projected just four months ago. Deflation in job benefits is proceeding. There is no inflation except in commodities, which are speculative.
Those seers such as Nouriel Roubini and Mish who stated in Q1 2009 that the economy would underperform the consensus forecast have been proven correct. The public is now probably more optimistic than the facts support. Others such as Robert Prechter and Paul Lamont who two or more years ago foresaw the recent, ongoing severe "debt deflation" and then a stock market pop upward beginning a few months ago are fearing a major new stock market downturn, perhaps after more optimism pushes stock prices up higher.
Amongst stocks, there are some that do not reflect the horrible bear market. Here are two charts that reflect successful businesses.
That the price of a security has fallen does not tell you that it has fallen too far. On the other hand, a security that has resisted the fall of most others tells you a lot. If its price has risen consistently over the years and has other fundamental characteristics that you like, it is not determinative as to whether one wants to own that security whether the prices of other securities are attractive.
Right now, the stocks of large consolidators such as Teva (generic pharmaceuticals) and deep discounters such as Ross Stores (clothing), the long term price charts of which are shown above, reflect businesses that are thriving and can continue to grow long-term in any economic environment (excluding complete and utter devastation). They pay dividends equal to money in the bank and have low double-digit price-earnings ratios. While their stock prices will certainly fall if the stock market makes new lows, over a full economic cycle, they are likely to be profitable investments and provide a different sort of hedge from inflation than gold.
Finally, regarding gold, I have previously commented on it as unexciting from a chart pattern. If an increasing percentage of the public remains sold on a Goldilocks scenario and continues to pay rising prices for risky assets, then the price of the perceived safe haven of gold is likely to suffer.
Short term, gold is unexciting at best.
Meanwhile, sentiment remains horrible or even beyond horrible for intermediate to long-term U. S. Treasury bonds. Yet a Goldilocks scenario for stocks has to imply diminishing counter-cyclical deficit spending and acceptable inflation, and thus cannot mean a durable bear market for Treasuries soon.
Copyright (C) Long Lake LLC
Saturday, May 23, 2009
Bonding
The above graphs show the trend of Government bond rates (left scale) since1962 and1977 for the 10-year and 30-year bonds, respectively.
For a number of reasons discussed below, both investors and speculators can now have a reasonably safe short-term and perhaps intermediate-term (or longer) investment opportunity in 10-30 year duration Government bonds. Here are some of the reasons.
1. Sentiment
A recent poll of "Big Money" showed that less than 5% of responders were bullish on T-bonds. Since that poll was published recently, the price of these securities has fallen drastically. Probably very few people you know have much if any of their own personal money invested in intermediate to long bonds, as everyone "knows" that they are in a bubble.
2. Technicals
As the above charts show, yields are in a steady multi-year, multi-decade downtrend. As we saw in houses recently, NASDAQ stocks in the late 1990s, and precious metals in the late 1970s, megatrends such as this often go to wild excess and become popularly known as "can't miss" investments before they peak. The sharp drop in yields after the panic of the late summer and fall last year has been completely reversed, and there was no serious popular talk at that time of a "new era" that said that one should buy a 30-year bond to hold it, because rates were fated to go Japanese and drop much lower.
On a short-term basis the ten-year's yield has jumped about 70% in just 5 months, from about 2% to about 3.4%. The 30-year's yield has jumped even more, about 75%, from about 2.5% to about 4.4%.
Both are within the trading ranges of the 2001-2003 bull market for these securities, providing real support.
Seasonally, Treasuries tend to outperform starting around this time of the year.
3. Fundamentals
Here are some points favoring fundamentals of T-bond ownership:
- Price inflation is nonexistent, and is probably negative
- Therefore the real return at the moment for bonds is very high
- The absolute interest rate difference between 2 year T-notes and the 10 year is high at 2.6%
- The ratio of the 10/2 yields of 3.45%/0.88% of almost 4:1 may be a record
- David Rosenberg (ex-Merrill, now Gluskin Sheff) reports that the yield on the 10-year bond has, on a 60 year basis, never ever failed to bottom after the unemployment rate peaks
- The unemployment rate almost certainly has yet to peak
- Until roughly 1960, the interest rate on the long Government was always lower than the dividend rate on high quality stocks
- Stock dividends are not overall rising any time soon
- Stocks are nowhere near trough valuations despite the Depression
- Cash is trash, and the Fed has announced that it will stay trash indefinitely
- The cyclical bottoming of the economy that is expected within the next 9 months will countercyclically diminish the Federal deficit and thus diminish the tsunami of debt now being issued
- If the economy in fact performs much worse than expected, then corporate debt will go into the toilet along with the stock market, and there will be a piling into Government debt for safety, even if the real interest rate on that debt is zero
4. Other
There are hidden costs to owning stocks. These costs range from commissions to the time taken following the price Mr. Market assigns to the stocks to following the "fundamentals" of the security, to the costs of any investment advisories, etc. In contrast, one can hold a Treasury to maturity. If one wishes to sell, liquidity is unparalleled. Treasuries can be bought directly from the Government at Treasury Direct on line; through a broker; through mutual funds; or as a stock with ownership of different durations (TLT, IEF, or IEI ticker symbols).
Copyright (C) Long Lake LLC 2009
Sunday, March 8, 2009
Sunday Night Comments
There is good news out of Treasury: Sec'y Geithner is getting some help, with three nominees for Assistant Secretary positions to be named shortly. Then there is bad news out of Treasury: Sec'y Geithner is remaining as Sec'y.
Over at Bloomberg, there is a discouraging lack of gloom on EBR's proprietary Bloomberg.com video indicator.
1. Someone named Carroll states that the Fed has awesome tools (better than bazookas, it seems);
2. Someone named Liu expects "results from China's stimulus";
3. Someone named Joy expects the U.S. economy will "recover" in H2 2009;
4. Someone named Howard states that Kellogg is "reclaiming" market share from General Mills.
Three trenchant observations on these:
A. All the above names were the commenter's last names, but all also are first names. This has to tie if not set a record.
B. Re the Fed's "awesome tools": the Fed is overstepping its bounds. Elected representatives should be making the momentous decisions the Fed is making. What do we do if the Fed becomes insolvent?
C. If Ms. Howard wanted people to be gloomy, she would moan that Gen'l Mills is losing share to Kellogg. Like, who cares? Why are these companies not Tweedledum and Tweedledee, or Humpty and Dumpty?
Less trenchant but more pertinent, one would think that after the worst 17 months of a bear market in U.S. history, worse even than the 1929-31 bear market at the same time frame, Bloomberg video would reflect rampant fear and pessimism. Not so; almost the opposite.
Finally, the suspicion amongst investors is growing both that Barack Obama doesn't care about the stock averages and that he barely knows anything about the stock market. From an online satirical site, "The New Editor" comes commentary on a malapropism Mr. Obama recently used in place of price to earnings ratio in "Barack Obama and 'Profit and Earnings Ratios'":
Oh well. Let's hope for the best. But please remember that nothing is riskless. FDR defaulted on a gold bond issued by the U.S. Federal Government during World War I. The Federal Government is financing and guaranteeing so much "stuff" that credit default swaps traders place the cumulative chance of a default on a newly-issued 5-year Treasury note at 5%. In mid-2007, the 5-year risk was a nominal 0.1%, or 0.02% per year.
It's always darkest before the dawn. But to switch metaphors, if we are in the 3rd or 5th inning of a baseball game, and the home team is getting creamed, it's bad news no matter how much any commentator wants to spin the story.
One last point. Too many economists and market veterans keep saying that the economy will get better and there will be another bull market again. They should read "The Black Swan" or "Fooled By Randomness" by Nassim Taleb. He's right, and so was John Maynard Keynes when talking about the future: the truth is that you never know. At best, history rhymes. It never ever repeats. There will be a much better likelihood, I believe, that a durable market bottom has been reached when the "experts" give up en masse and stop relying on what's happened before to advise that we act as if the stock market is the right place for money to be parked.
Financial systems, like industrial and financial systems, can exist and appear solid for years, decades, and centuries, and then just go away. It's called bankruptcy. It can happen to nations as well as to companies.
Please invest accordingly.
Copyright (C) Long Lake LLC 2009
Wednesday, February 11, 2009
Not Lovin' It Cause They're Still Doin' It
STOCKS
The only Dow 30 stock to be up year on year is McDonald's. This blog has highlighted MCD several times this year as one to watch. Unfortunately, it has begun to break down on the charts. It declined a bit today as the Dow rallied a bit and has broken to a more than one-month price low despite a recent positive earnings surprise and rising earnings estimates for both 2009 and 2010. When the leader starts rolling over despite good news, beware. Perhaps the downmarket move from Starbucks discussed here yesterday, and related competition, is behind the growing weakness in the stock.
Meanwhile, the head of the International Monetary Fund has said that the U.S. and most of the rich countries are in a depression, not recession. What is the natural trend of stock prices in a depression? Down indeed. Trying to pick a bottom remains a job for gamblers.
For example, Procter & Gamble stock has fallen almost by 1/3 in 1/2 year, to about a 5-year low. Poof! Five years worth of stock gains vanished. And that's with earnings having exceeded expectations most of that time. Let's see what happens with continued earnings estimate reductions. If this stock continues falling, then at some point analysts will point out what this blog has already detailed, which is that P&G has a large negative tangible book value. So, what is the company worth on a fundamental basis? The answer is that no one has any idea. Your guess is probably better than that of an analyst, who talks to management and therefore is continuously spoon-fed garbage.
BONDS
In other markets, this blogger put his money where his mouth was and indeed purchased 10-year Treasury bonds two days ago at what for now is the peak of the large correction/bear market in yields. The theory is that Treasuries are seriously hated and we may be at a peak in that hatred. Also, barring true Weimar Republic/Zimbabwean hyperinflation or out-and-out default, there is no such thing as a bubble in Treasuries the way there was a bubble in Internet stocks in 1999. Hold to maturity if you must and you will get the stated yield. In the meantime, I purchased a zero-coupon security, which both has a higher yield than a par bond and has greater price appreciation for every up-move in bond prices. We'll see. Not that that anyone has forgotten around these parts that going back to FDR, a Democratic President combined with a Democratic Congress have generally been bad news for bond prices. Yet the feeling remains that this is more like 1931, with more Great Recession/Minor Depression action yet to unfold, and that at some unpredictable point this year, investors and speculators will get scared again big-time and rush back to Treasuries, temporarily ignoring the tsunami of debt issuance. In that scenario, they will dump corporates and munis, just as they did last year. It should be interesting.
GOLD
Gold has gone to a six-month high. For the first time in some time, the 12-month return on gold as judged by the GLD stock is positive. Despite the positive price action and all the reasons to fear inflation, the fact is that deflation is the order of the day. Furthermore, there is so much current slack in the U.S. and global economy that even if we are at the bottom of the economic cycle, historically inflation diminishes as recovery begins. Extra production can come on at very low marginal cost, so the per-unit cost of production drops as demand increases.
(That includes labor costs.) So re gold, there is little conviction here about its next major move, but the suspicion remains that deflationary fundamentals could push it a lot lower. That would surprise the greatest number of people, it would appear, and markets love to do that, don't they?
OTHER
The Japanese stock market would look like a screaming buy if its chart were turned upside down and if the economic data had positive instead of negative signs. Japan's stocks are a disaster and represent a cautionary example for the U.S. The Japanese stock market is roughly 20 years from its peak. It is down about 80% nominally. Japanese Government bonds yield less than the dividend yield on stocks, but that was also the case months ago, when stocks were much higher. The Nikkei 225 has broken below its declining 50 day moving average and is down 2% in the morning session in Tokyo. There is no obvious bottom for the Japanese stock market.
The recent established order, the nouveau ancien regime, is crumbling. This order is/was based at its core on financialization of anything and everything that could be financialized. Enron did it. So did and do IBM, P&G, AT&T, and especially GE. Even hawkers of precious metals, God forbid, did it. Caveat emptor and caveat "holder".
For me, it's enough to recall Cole Porter: "Birds do it; bees do it; even educated fleas do it; let's do it, let's fall in love".
But don't fall in love with any financial product. For now, purchases should be with a renter's mindset.
Copyright (C) Long Lake LLC 2009
The only Dow 30 stock to be up year on year is McDonald's. This blog has highlighted MCD several times this year as one to watch. Unfortunately, it has begun to break down on the charts. It declined a bit today as the Dow rallied a bit and has broken to a more than one-month price low despite a recent positive earnings surprise and rising earnings estimates for both 2009 and 2010. When the leader starts rolling over despite good news, beware. Perhaps the downmarket move from Starbucks discussed here yesterday, and related competition, is behind the growing weakness in the stock.
Meanwhile, the head of the International Monetary Fund has said that the U.S. and most of the rich countries are in a depression, not recession. What is the natural trend of stock prices in a depression? Down indeed. Trying to pick a bottom remains a job for gamblers.
For example, Procter & Gamble stock has fallen almost by 1/3 in 1/2 year, to about a 5-year low. Poof! Five years worth of stock gains vanished. And that's with earnings having exceeded expectations most of that time. Let's see what happens with continued earnings estimate reductions. If this stock continues falling, then at some point analysts will point out what this blog has already detailed, which is that P&G has a large negative tangible book value. So, what is the company worth on a fundamental basis? The answer is that no one has any idea. Your guess is probably better than that of an analyst, who talks to management and therefore is continuously spoon-fed garbage.
BONDS
In other markets, this blogger put his money where his mouth was and indeed purchased 10-year Treasury bonds two days ago at what for now is the peak of the large correction/bear market in yields. The theory is that Treasuries are seriously hated and we may be at a peak in that hatred. Also, barring true Weimar Republic/Zimbabwean hyperinflation or out-and-out default, there is no such thing as a bubble in Treasuries the way there was a bubble in Internet stocks in 1999. Hold to maturity if you must and you will get the stated yield. In the meantime, I purchased a zero-coupon security, which both has a higher yield than a par bond and has greater price appreciation for every up-move in bond prices. We'll see. Not that that anyone has forgotten around these parts that going back to FDR, a Democratic President combined with a Democratic Congress have generally been bad news for bond prices. Yet the feeling remains that this is more like 1931, with more Great Recession/Minor Depression action yet to unfold, and that at some unpredictable point this year, investors and speculators will get scared again big-time and rush back to Treasuries, temporarily ignoring the tsunami of debt issuance. In that scenario, they will dump corporates and munis, just as they did last year. It should be interesting.
GOLD
Gold has gone to a six-month high. For the first time in some time, the 12-month return on gold as judged by the GLD stock is positive. Despite the positive price action and all the reasons to fear inflation, the fact is that deflation is the order of the day. Furthermore, there is so much current slack in the U.S. and global economy that even if we are at the bottom of the economic cycle, historically inflation diminishes as recovery begins. Extra production can come on at very low marginal cost, so the per-unit cost of production drops as demand increases.
(That includes labor costs.) So re gold, there is little conviction here about its next major move, but the suspicion remains that deflationary fundamentals could push it a lot lower. That would surprise the greatest number of people, it would appear, and markets love to do that, don't they?
OTHER
The Japanese stock market would look like a screaming buy if its chart were turned upside down and if the economic data had positive instead of negative signs. Japan's stocks are a disaster and represent a cautionary example for the U.S. The Japanese stock market is roughly 20 years from its peak. It is down about 80% nominally. Japanese Government bonds yield less than the dividend yield on stocks, but that was also the case months ago, when stocks were much higher. The Nikkei 225 has broken below its declining 50 day moving average and is down 2% in the morning session in Tokyo. There is no obvious bottom for the Japanese stock market.
The recent established order, the nouveau ancien regime, is crumbling. This order is/was based at its core on financialization of anything and everything that could be financialized. Enron did it. So did and do IBM, P&G, AT&T, and especially GE. Even hawkers of precious metals, God forbid, did it. Caveat emptor and caveat "holder".
For me, it's enough to recall Cole Porter: "Birds do it; bees do it; even educated fleas do it; let's do it, let's fall in love".
But don't fall in love with any financial product. For now, purchases should be with a renter's mindset.
Copyright (C) Long Lake LLC 2009
There's No Action Like Inaction
Outside of pledging to have a transparent plan for the U.S. financial system, laying some principles for that plan, implying that he's carrying a big financial bazooka, and announcing a new website that will carry information about the plan when there is a plan, Treasury Sec'y Geithner failed yesterday to live up to the hype about his talk. He also failed to prove his boss correct, who in his news conference the night before said there would be a Q&A after the talk.
All equities tumbled as he talked, eerily reminiscent of the phenomenon during the implosion last year that when President Bush talked, stocks tanked. Only the safe havens of gold and Treasury bonds were bought in yesterday's sharp sell-off.
On the substance, Mr. Geithner promised to "stress test" large financial institutions. Pardon me, but as head of the NY Fed, did he and his boss Ben Bernanke not have the responsibility to evaluate the soundness of the money center banks, in conjunction with the FDIC?
Financial stocks tumbled yesterday. Probably they had gotten overpriced on hopes. This down-move may be telling, however, because of the reluctance (still!) of the Obama Administration to wipe out common stockholders of financial companies that would be bankrupt were it not for Government cash and extraordinary guarantees. This could have been viewed positively by the traders, but it wasn't. The feeling here is the conventional one in the blogosphere: Citigroup and Bank of America are zombies.
The mainstream media and blogosphere are both full of commentary about the Obama-Geithner "plan", so there's no need here to spend more time on it.
To paraphrase Irving Berlin:
There's no action like inaction, like no action I know . . .
Let's just say that Timothy Geithner did not steal the show.
Copyright (C) Long Lake LLC 2009
Sunday, February 8, 2009
Weekend Wrap-up
This post, like Gaul, is divided into three parts: commentary, economics and markets:
COMMENTARY
The biggest news this weekend could be the delay in Treasury propounding its plan for repairing the financial system. It announced late last week that Mr. Geithner would talk Monday morning. Now it is to be Tuesday. The reason/excuse provided that he will be busy on Capitol Hill dealing with Congress does not persuade me.
Mr. Geithner could give his talk at 8 AM, answer questions if he wanted, and then hie himself to the Hill.
This is the burning issue of our time. The "stimulus" package will assuredly pass and will work over months and years, or not work. It is not an hour-to-hour emergency. So the talk really should occur when scheduled. Thus the suspicion is arising at this blog that our president has not made up his mind what to do. What a momentous decision for anyone to make! We all sympathize and wish him more than well. Yet, this crisis is not new; and, when the Government announces a talk that the whole world is planning to pay very close attention to, Mr. Obama should direct that come hell or high water, the talk must go on. Messrs. Obama, Geithner and Summers have to do more than walk and chew gum at the same time. Dealing with this crisis and their expansive response to it requires something more like running and playing the guitar at the same time: this is the big leagues (to mix a metaphor).
So far as the day-to-day thinking and mood of the markets, an influential British columnist has a cheery article (not!) - Bond market calls Fed's bluff as global economy falls apart: global bond markets are calling the bluff of the US Federal Reserve (Ambrose Evans-Pritchard). Here's his conclusion: My own view, sadly, is that there is no hope at all of stabilizing the world economy on current policies.
Here's some of his evidence:
The bank (of Japan) is already targeting equities on the Tokyo bourse. That is not enough for restive politicians. One bloc led by Senator Koutaro Tamura wants to create $330bn in scrip currency for an industrial blitz. "We are facing hyper-deflation, so we need a policy to create hyper-inflation," he said.
This has echoes of 1932, when the US Congress took charge of monetary policy. We are moving to a stage of this crisis where democracies start to speak – especially in Europe.
The European Central Bank's refusal to follow the lead of the US, Japan, Britain, Canada, Switzerland and Sweden in slashing rates shows how destructive Europe's monetary union has become. German orders fells 25pc year-on-year in December. French house prices collapsed 9.9pc in the fourth quarter, the steepest since data began in 1936. "We're dealing with truly appalling data, the likes of which have never been seen before in post-War Europe," said Julian Callow, Europe economist at Barclays Capital.
Spain's unemployment has jumped to 3.3m – or 14.4pc – and will hit 19pc next year, on Brussels data. The labour minister said yesterday that Spain's economy could not "tolerate" immigrants any longer after suffering "hurricane devastation". You can see where this is going.
Ireland lost 36,500 jobs in January – equal to a monthly loss of 2.3m in the US. As the budget deficit surges to 12pc of GDP, Dublin is cutting wages, disguised as a pension levy. It has announced "Rooseveltian measures" to rescue the foundering companies.
ECONOMICS
There are some wonkish and lengthy but important economic posts this weekend. Compliments of Infectious Greed is Coming Up To Date On The Great Depression by Dr. Edward Hugh, who refers favorably to comments of Dr. Paul Krugman. I couldn't read it all, but the basic message is increasing evidence that the U.S. is indeed following the Japanese experience into deflation, with what is called a liquidity trap. I do recommend that you click onto the article on peruse the two graphs showing money supply growth in Japan 1997-2004 and Japan Money Supply and different amounts borrowed by different sectors. These graphs demonstrate that rapid money supply growth can be associated with deflation.
The Japan-U.S. similarity was stated clearly here on January 6, 2009 in Land of the Setting Sun, which began: "We are Japan".
Another more controversial economics article is printed in toto in Naked Capitalism. It is titled Steve Keen: "The Roving Cavaliers of Credit (or Why Ben's Helicopter Will Fail). The intellectual gist is that credit creation precedes and dominates money supply growth. It therefore supports the empirical evidence out of Japan and out of the ongoing U.S. crisis that a real credit collapse can cause deflation despite surging money supply measures. I cannot begin to give this writeup a fair explanation. It is more revolutionary that the prior one, but it is fascinating to see intellectual support for the deflationary debt collapse hypothesis emerging. Interested parties can get the gist of the argument quickly, though the article is very long.
MARKETS
The Econblog Review proprietary Bloomberg video indicator is suggesting that it may be near time to buy intermediate Treasuries: it is reassuring that the video title: "Crescenzi Says Bear Market May Develop for Treasuries" has been present perhaps all weekend. Technically, the yield back-up has been sharp and severe: from about 2% to about 3% in less than 2 months, and the yield is approaching the prior recession's low of about 3.1%, which could represent resistance. There is deflation; the price of gold is churning; my daughter reports that a normally bustling mall in a prosperous area was empty; and "everyone knows" that other than short Treasuries, yields have nowhere to go but up.
Re stocks, our proprietary Big Mac indicator showed nonconfirmation of last week's Dow rally, as MCD barely budged. When market leaders with continued strong fundamentals and reasonable valuations can't even keep up with the market on a strong up week, one should worry that the rally is more short-covering than real.
Gold remains the beneficiary of the global anxiety. The trader in me remains wary of it for now.
Copyright (C) Long Lake LLC 2009
COMMENTARY
The biggest news this weekend could be the delay in Treasury propounding its plan for repairing the financial system. It announced late last week that Mr. Geithner would talk Monday morning. Now it is to be Tuesday. The reason/excuse provided that he will be busy on Capitol Hill dealing with Congress does not persuade me.
Mr. Geithner could give his talk at 8 AM, answer questions if he wanted, and then hie himself to the Hill.
This is the burning issue of our time. The "stimulus" package will assuredly pass and will work over months and years, or not work. It is not an hour-to-hour emergency. So the talk really should occur when scheduled. Thus the suspicion is arising at this blog that our president has not made up his mind what to do. What a momentous decision for anyone to make! We all sympathize and wish him more than well. Yet, this crisis is not new; and, when the Government announces a talk that the whole world is planning to pay very close attention to, Mr. Obama should direct that come hell or high water, the talk must go on. Messrs. Obama, Geithner and Summers have to do more than walk and chew gum at the same time. Dealing with this crisis and their expansive response to it requires something more like running and playing the guitar at the same time: this is the big leagues (to mix a metaphor).
So far as the day-to-day thinking and mood of the markets, an influential British columnist has a cheery article (not!) - Bond market calls Fed's bluff as global economy falls apart: global bond markets are calling the bluff of the US Federal Reserve (Ambrose Evans-Pritchard). Here's his conclusion: My own view, sadly, is that there is no hope at all of stabilizing the world economy on current policies.
Here's some of his evidence:
The bank (of Japan) is already targeting equities on the Tokyo bourse. That is not enough for restive politicians. One bloc led by Senator Koutaro Tamura wants to create $330bn in scrip currency for an industrial blitz. "We are facing hyper-deflation, so we need a policy to create hyper-inflation," he said.
This has echoes of 1932, when the US Congress took charge of monetary policy. We are moving to a stage of this crisis where democracies start to speak – especially in Europe.
The European Central Bank's refusal to follow the lead of the US, Japan, Britain, Canada, Switzerland and Sweden in slashing rates shows how destructive Europe's monetary union has become. German orders fells 25pc year-on-year in December. French house prices collapsed 9.9pc in the fourth quarter, the steepest since data began in 1936. "We're dealing with truly appalling data, the likes of which have never been seen before in post-War Europe," said Julian Callow, Europe economist at Barclays Capital.
Spain's unemployment has jumped to 3.3m – or 14.4pc – and will hit 19pc next year, on Brussels data. The labour minister said yesterday that Spain's economy could not "tolerate" immigrants any longer after suffering "hurricane devastation". You can see where this is going.
Ireland lost 36,500 jobs in January – equal to a monthly loss of 2.3m in the US. As the budget deficit surges to 12pc of GDP, Dublin is cutting wages, disguised as a pension levy. It has announced "Rooseveltian measures" to rescue the foundering companies.
ECONOMICS
There are some wonkish and lengthy but important economic posts this weekend. Compliments of Infectious Greed is Coming Up To Date On The Great Depression by Dr. Edward Hugh, who refers favorably to comments of Dr. Paul Krugman. I couldn't read it all, but the basic message is increasing evidence that the U.S. is indeed following the Japanese experience into deflation, with what is called a liquidity trap. I do recommend that you click onto the article on peruse the two graphs showing money supply growth in Japan 1997-2004 and Japan Money Supply and different amounts borrowed by different sectors. These graphs demonstrate that rapid money supply growth can be associated with deflation.
The Japan-U.S. similarity was stated clearly here on January 6, 2009 in Land of the Setting Sun, which began: "We are Japan".
Another more controversial economics article is printed in toto in Naked Capitalism. It is titled Steve Keen: "The Roving Cavaliers of Credit (or Why Ben's Helicopter Will Fail). The intellectual gist is that credit creation precedes and dominates money supply growth. It therefore supports the empirical evidence out of Japan and out of the ongoing U.S. crisis that a real credit collapse can cause deflation despite surging money supply measures. I cannot begin to give this writeup a fair explanation. It is more revolutionary that the prior one, but it is fascinating to see intellectual support for the deflationary debt collapse hypothesis emerging. Interested parties can get the gist of the argument quickly, though the article is very long.
MARKETS
The Econblog Review proprietary Bloomberg video indicator is suggesting that it may be near time to buy intermediate Treasuries: it is reassuring that the video title: "Crescenzi Says Bear Market May Develop for Treasuries" has been present perhaps all weekend. Technically, the yield back-up has been sharp and severe: from about 2% to about 3% in less than 2 months, and the yield is approaching the prior recession's low of about 3.1%, which could represent resistance. There is deflation; the price of gold is churning; my daughter reports that a normally bustling mall in a prosperous area was empty; and "everyone knows" that other than short Treasuries, yields have nowhere to go but up.
Re stocks, our proprietary Big Mac indicator showed nonconfirmation of last week's Dow rally, as MCD barely budged. When market leaders with continued strong fundamentals and reasonable valuations can't even keep up with the market on a strong up week, one should worry that the rally is more short-covering than real.
Gold remains the beneficiary of the global anxiety. The trader in me remains wary of it for now.
Copyright (C) Long Lake LLC 2009
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