Well, I picked a great night to have trouble sleeping.
The Euro is down 1.1 percent to 1.2233 versus the dollars as the European markets open for trading. Currently as of 4:00am EST, my screens are nothing but a sea of red with most of the major indices down 2 to 3 percent.
Back here in the U.S., S&P 500 Futures are now down 24.9 points to 1046.40.
Swap spreads are spiking higher as this is the real story here. Banks apparently are having trouble with funding as the symptoms of a credit crunch are present. I hope I am wrong but diagnosis will come with the passage of time. 2-Year interest rate swaps is now higher by 7 basis points to a spread differential over comparable maturity Treasuries of 59 basis points. In two trading days, the spread has gapped out a total of 17 basis points.
The yield on 10-Year Treasuries is down to 3.11 percent and kissing up against a major resistance level of 3.10 percent. Passing that level could be a race downward, similar to the race toward the low in yields of 2.03 percent in late 2008, which occurred off of the same resistance point.
If you accept the belief that markets are forward thinking, the pricing suggests in the aforementioned scenario the possibility of a double dip and/or deflation. In either case and regardless of that happening or not, this is getting ugly real fast. Hopefully, the markets will turn around by the time of the opening bell comes around in the morning. That would be a nice dream to have as I head off to bed. Unfortunately and judging by the issues that is currently plaguing the markets, that’s all it will be for now. A dream.
L: Doug, I’m in Belarus this week, a pit stop to help some of my students with their various business ideas. I’m struggling with my Russian, but getting along. And that has me thinking about Russia’s role on the global economic stage. I know this is something you’ve given some thought to… What do you think? Is Putin out to take over the world? What do investors need to keep in mind?
Doug: Well, the first thing to keep in mind is that any time you’re talking about a large group of people, I think it’s about 150 million in Russia’s case, it’s hard to generalize. Russia makes headlines, being one of the BRIC countries (Brazil, Russia, India, China), which are "emerging" economies seen as a sort of wave of the future. But I have to say that Russia doesn’t really belong in this group. We may lose some Russian readers by my saying this, but while Russia has a lot of resources and should have a bright future, I don’t think it will.
L: Whoa, I didn’t see that one coming. Why?
Doug: There are many reasons, and it’s hard to tease out which one is the most important driver, but taking it all together, including Russia’s history and resulting culture, I just don’t see that Russia has The Right Stuff. That culture, which is transmitted explicitly, verbally, and more subtly, attitudinally, is one shaped by centuries of state oppression. It has strong streaks of isolationism, collectivism, and brutal authority. Russia’s long history is full of sadness, fear, and violence. It’s been relatively calm for the last few years, but that’s a drop in the ocean of Russian tears.
L: Hm. They suffered under the Tsars, threw them out, only to get a greater tyranny in the form of a totalitarian socialist regime, which actively suppressed the kind of individual creative virtues that make for success on the global economic stage. I guess I could see that as a cultural handicap…
Doug: Think of it this way – if you keep mowing down the tallest poppies in a field of poppies, pretty soon…
How big can our baby "gov’t debt" bubble get – will it parallel the dot.com or housing bubbles? Or should we start worrying sooner in bubble-time? – Ilene
The phase change happened almost imperceptibly. One month we’re shedding jobs and agonizing over a long list of insolvent European countries and US states — and the next month we’re back in a bubble. U.S. employment has stopped shrinking and started growing. Iron ore is up 170% in the past year and oil is flirting with $85 a barrel. Hot money is back to chasing emerging market securities and junk bonds. Stocks, as a result of all this, are up pretty much everywhere and the media is full of stories declaring the Great Recession over and “normal” times just around the corner.
Score Round One for the unlimited printing press. Flooding the world with new fiat currency stopped the implosion, and it only took as long as it did because traumatized banks and hedge funds needed some time to recover from their near-death experience. But eventually they did recover, because that’s the nature of free money. Sooner or later someone uses it for something and turns a profit and then, terrified of being left out, everyone else joins in and the game begins again.
Now the question is whether this baby bubble (let’s call it the government debt bubble) will grow to the stature of its tech stock and housing siblings. In its favor is the fact that only a small fraction of the new reserves created by central banks have so far been put to work; when the rest hit the world’s financial bloodstream, picture Uma Thurman after John Travolta stabs her in the chest with the adrenalin needle in Pulp Fiction.
On the other hand, the bond markets seem to be figuring out that they’re the patsy in this scenario. The yield on 30-year US Treasuries has been creeping up for a while, and interest rates jumped across the board on Friday, when the U.S. reported those nice employment numbers.
Since variable rate paper ranging from Prime+ loans to option ARMs is linked to Treasury yields, a spike in interest rates would choke off the bubble and send us back to 2008. And since the US, always one to choose the dumbest,…
Tactics in California to shore up its municipal bond rating are quite humorous. Supposedly, by delaying payments to schools, California can boost confidence in its bonds.
California’s Assembly passed a bill allowing it to delay payments to programs including schools to avoid running out of cash, a move aimed at boosting confidence in bonds sold by the most-populous U.S. state.
The passage comes a day after Treasurer Bill Lockyer told lawmakers the bill was needed to send a signal to investors that California is taking steps to adequately manage its cash as it faces budget deficits through June 2011. Lockyer postponed a $2 billion sale that was initially scheduled for next week.
Assemblywoman Noreen Evans, the Democrat who chairs the budget committee, said the bill was needed so the state can return to the bond market to finance public projects that provide a jolt to the economy.
Controller John Chiang said last month that California may be forced to issue IOUs for the second year in a row because it’s spending more than it collects in revenue. The bill is aimed at preventing cash shortages projected as soon as next month by empowering officials to delay certain payments, including those to schools, universities and local governments, to conserve money for debt service and other key expenses.
California Demands Income Tax Payments In Advance
Reader "Paul" just pinged me this news affecting business owners and self-employed contractors.
Hi Mish
I just picked up tax documents from my CPA. California require me to pay 30% of my estimated tax for the year on 04/15/10 and another 50% by 06-15-10. The balance of 20% is due on 01-15-11.
They want 80% of my annual estimate after 6 months, taxing me on money I have yet to earn for the year.
Only in La-La Land could one think these actions should impress the bond market. Then again, the stock market soared mid-day after Bernanke repeated for the 40th time that he was not hiking soon. So hey, who knows?
Nothing would derail the Fed’s great reflation/recovery experiment like higher interest rates. Several notable investors including David Einhorn (see Einhorn’s thoughts here) and Julian Robertson (see Robertson’s thoughts here), have expressed their concerns over the potential for higher interest rates. The great Richard Russell of the Dow Theory Letters has long feared a spike in interest rates. In a recent note he explained that the end of quantitative easing has bond investors worried over the future of interest rates. Russell believes higher rates are the next big move in the bond market:
“Older subscribers may remember that I said that the Fed could continue its “quantitative easing” (printing money) until the bond market says it can’t. Below is a daily chart of the 30-year Treasury bond. The bond market doesn’t like what it sees. I view the pattern on this chart as a huge, down-slanting head-and-shoulder top with the bond sitting right on support. The bond appears weak, and if support is violated, interest rates will be heading higher. And that’s the last thing the Fed wants at this time.”
Nothing would derail the Fed’s great reflation/recovery experiment like higher interest rates. Several notable investors including David Einhorn (see Einhorn’s thoughts here) and Julian Robertson (see Robertson’s thoughts here), have expressed their concerns over the potential for higher interest rates. The great Richard Russell of the Dow Theory Letters has long feared a spike in interest rates. In a recent note he explained that the end of quantitative easing has bond investors worried over the future of interest rates. Russell believes higher rates are the next big move in the bond market:
“Older subscribers may remember that I said that the Fed could continue its “quantitative easing” (printing money) until the bond market says it can’t. Below is a daily chart of the 30-year Treasury bond. The bond market doesn’t like what it sees. I view the pattern on this chart as a huge, down-slanting head-and-shoulder top with the bond sitting right on support. The bond appears weak, and if support is violated, interest rates will be heading higher. And that’s the last thing the Fed wants at this time.”
Treasuries fell, with the gap in yields between 2- and 30-year securities reaching the widest margin since at least 1980, after a $13 billion offering of 30- year bonds drew lower-than-forecast demand.
The so-called yield curve touched 372 basis points, the most in at least 29 years, as the bonds drew a yield of 4.52 percent. The so-called yield curve has widened from 191 basis points at the end of 2008, with the Fed anchoring its target rate at a record-low range of zero to 0.25 percent and the Treasury extending the average maturity of U.S. debt.
Treasury officials on Nov. 4 announced a long-term target of six to seven years for the average maturity of Treasury debt and said the department wants to cut back on its issuance of bills and two- and three-year notes. The shift to longer- maturity debt has raised concern that investors will demand higher yields to offset the risk of inflation as government spending drives the deficit to a record $1.4 trillion.
“The market is continuing to worry about the massive amount of Treasury issuance that’s going to hit the market well into next year,” said Ian Lyngen, senior government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “In the very short term, part of it is going to be supply accommodation.”
Yield Curve As Of December 10 2009
Historical Yield Curve
click on any chart in this post for sharper image
Chart Symbols
$IRX – The 3 month treasury – Brown
$FVX – The 5 year treasury – Blue
$TNX – The 10 year treasury – Orange
$TYX – The 30 year treasury – Green
A 2 year treasury symbol is not available.
The above chart shows the dramatic steepening in the yield curve since January 2009. This steepening is reflective of several things: An economy presumed to be improving but not at a very good rate, the Fed holding down short-term rates, and the huge pending supply of treasuries to finance the budget.
Mad Hedge is quite a fascinating character who’s had a very exciting career in finances and more. He writes daily newsletter entries on market action, stocks and trends in the economy, and I highly recommend taking a moment to peruse his site, Diary of a Mad Hedge Fund Trader. - Ilene
Interview With A Mad Hedge Fund Trader
Introduction
Mad Hedge Fund Trader began his career in finance by moving to Japan and working at Dai Nana Securities as a research analyst in 1974. In 1976 he was named the Tokyo correspondent for The Economist magazine and the Financial Times, which then shared an office. He traveled the world interviewing famous people, such as Ronald Reagan and Margaret Thatcher. In 1982, he was named the US editor of Euromoney magazine, and in 1983 he built a new division in international equities for Morgan Stanley. After moving to London in 1985, Mad Hedge supervised sales and trading in Japanese equity derivatives. In 1989, he became a director of the Swiss Bank Corp, responsible for Japanese equity derivatives. A year later, he set up an international hedge fund which he sold in 1999.
I haven’t even covered all of Mad Hedge’s adventures, such as his latent movie star career (as an extra in the 1979 epic war film, Apocalypse Now), and who knows what else. But now, missing the adrenaline-surging excitement of active trading, Mad Hedge has returned to the hedge fund business, set up an educational website, and is busy keeping up with the demands of newsletter writing.. So let’s begin our interview with Mad Hedge by exploring his current thoughts on the markets.
Interview
Ilene: Hi Mad Hedge. You’ve had a fascinating career having little to do with your major in biochemistry. A brief review of your newsletter shows that your recommendations early in 2009 have appreciated by an average of around 400%. You’ve been writing your daily market thoughts and investment strategies at your website – www.madhedgefundtrader.com – which it’s terrific, by the way. What are your goals with this site?
Mad Hedge: This whole thing started out as a letter to investors in my hedge fund, to tell them my thinking behind my positions. Then I thought, why not post this on the web and see what happens? Six months later it is now going out to 50,000 readers a day, mostly to portfolio managers, financial advisors, and traders. The growth has been explosive.
Considering the source – this is a quite sobering warning to America of what the Chinese are thinking. Nothing surprising as we have seen China up their stake in gold, sign bilateral currency agreements with other countries to avoid the dollar, purchasing hard assets to redeploy out of dollars, move their bond purchases to near term maturities and the like, but you can see in their words both a dismay at what we have done, and what they are slowly planning for in the long term. [Feb 13, 2009: FT.com - China to US: "We Hate You Guys"] [May 21, 2009: China Becoming More Picky About Debt]
Of course, as we have said many times – for now they are stuck with us, because any move to detach from the States or our bond market would destabilize both countries.
The US Federal Reserve’s Policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.
Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy drive, said Beijing was dismayed by the Fed’s recourse to "credit easing". "We hope there will be a change in monetary policy as soon as they have positive growth again," he said.
"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so
Improvement in first time unemployment claims is slowing. Actual, not seasonally manipulated data, including an adjustment for the usual weekly upward revision, shows that the year to year rate of change is on the cusp of a possible upside breakout, which would be good news for stock market bears if it happens.
Initial Unemployment Claims Chart- Click to enlarge
Here’s why it’s mind blowing. I’ve plotted it below on an inverse scale with the S&P 500 overlaid.
Unemployemt Claims and Stock Prices - Click to enlarge
Major US Markets including (NYSEARCA:DIA), (NYSEARCA:SPY), (NASDAQ:QQQ), and (NYSEARCA:IWM) dropped over 3% each on Italian bond fears and an increased worry that Europe will not be able to bail out its 4th largest economy. Furthermore, the iShares MCSI Italy Fund (NYSEARCA:EWI) wiped out over 9% today, further illustrating the dire situation in Italy and the European Union: ...
The second economic disappointment of the day comes from the Dallas Fed, which dropped from -2.0 to -11.4 on expectations of -9.0- this was the 4th consecutive negative print month. The report was, in a word, horrible, with just 2 of the 15 constituent indices posting an increase, and the bulk solidly in the red, led by Unfilled and New Orders which dropped 16.8 and 11.2, respectively: not good for economic growth. On the employment side there was nothing good either, with both employment and hours worked declining by -...
Bloomberg reports that Diana Containerships (NASDAQ: DCIX) files to offer stock up to $172.5M. Diana Containerships says that Diana shipping will also buy $20M of stock.
Top 5 RisersStockRatingAnalysisVLOSTRONGBUYAn increasingly positive growth rate of past earnings, along with improving expectations for long term growth, make Valero a good prospect for high returns.KROSTRONGBUYKronos Worldwide has been gaining recognition from analysts as a good canditate for achieving higher than expected earnings along with higher overall projected valuation.SFIBUYiStar is one of the top candidates projected to achieve both higher than previously projected earnings in the short run and a higher earnings growth rate in the long run.AMATSTRONGBUYApplied Materials has been...
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February is now past, and the Biotech Porfolio is loaded with winners and a miss (PLX). MRK is down a bit, but I expect that trade to recover, and one could be more agressive and double down on it, or play another round at the Jan13 $30 options for roughly the same price. Below is the summary, and note the grey boxes are ones that did not fill. I am still a fan of BMRN, and like DEPO as well. Now let's look at a few others.
Table 1. PSW Biotech Plays Since January 2011
 
Our newest play is Momenta Pharmaceuticals (MNTA), who is pursuing a three-part business model which includes complex generic equivalents in partnership with the Sandoz division of Novartis, proprietary compounds, and follow-on- biologics (FOB). It seems that this company is tied up in competition/litigation wit...
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(