Tuesday, June 9, 2009

Bond, Treasury Bond

Cold and rainy is rough in June! On a personal note my last two articles were picked up by Seeking Alpha and that now makes over 50 posts from Economic Disconnect that appear there. Pretty cool!

Supreme Court Cancels Stay on Chrysler Deal
From the department of no surprise the US Supreme Court cancelled their stay issued just yesterday on the Indiana State Pension fund lawsuit trying to block the Fiat/Chrysler deal. There was never any real chance the SCOTUS was going to take this case, and another avenue of recourse is lost to anyone anywhere trying to slow down a government bent on fixing things the way they see fit regardless of laws, opinions, or results.

Consumers "Priced to Perfection" Chart Style
A LONG time ago (September 30, 2007 WOW! Have I been writing that long?) I wrote the following article which likens the US consumer to the old tech stock days mantra "priced to perfection". During the tech bubble crazy high valuations were justified by saying that "the stock is fully valued IF the company executes everything perfectly and nothing goes wrong. The stock is "priced to perfection". That went well as many may recall.

Here is the relevant piece:
By expanding payments over time, consumers are able to become sort of like a stock for a company. The share price of a company is determined by the companies total profits over all time, divided by shares. Share prices fluctuate as the future prospects of the company rise and fall and investors regauge their numbers. In this loose sense, the consumer is taking their total earnings for all time going forward, and spending it in the current time. Almost every penny is budgeted per month, and as more income is made, more monthly payments are incurred. The US consumer is "Priced to Perfection" to borrow another stock term. Any stop in income flow or stop in income increases will throw the system into disarray. This mentality is going to be tested I think in the near future by two major occurrences:
1. Unemployment is going to rise
2. Home Values are falling and will continue to fall

I was thinking about that post today as I saw some great charts over at The Big Picture, from Barry:
In my opinion, consumer spending remains an unhealthy ~68% of the economy. While this is down from a peak of ~71%, it is way up from the 63% of the 1950s. The difference over that period has been the massive increase in revolving credit and accessible secure lending (2nd mortgages, HELOCs, etc.).

Please note the vicious jump right at the collapse of the stock market in 2000-2001.

It's almost funny, but I think the US consumer could have heaped the debt on for many more years if nothing had gone wrong. Of course, something will always go wrong! One may wonder about the soundness of an economic system that cannot tolerate even mild downturns without substantial damage.

Bond, Treasury Bond
You would think I am in love with bonds or something judging by my last few posts on the topic! These often ignored instruments are getting a bunch of attention and there were a couple of items I noticed today.

FED is All Over the Place
The FED is a train wreck in real time. Today they were subpoenaed to provide information regarding any possible tactics used to get Bank of America to buy Merril Lynch even as MER losses were escalating. I imagine the FED will simply decline, or hide behind some "systemic risk" curtain of silence.

Added to this is yet another flip flop by the FED regrading issuing their own debt:
Fed Said to Retreat From Seeking Debt-Issuing Power
June 9 (Bloomberg) -- The Federal Reserve has backed off from seeking a new tool to forestall inflation, refraining from asking Congress for the power to issue its own debt, according to a person familiar with the matter.
Putting off the issue may avoid a political clash over whether the Fed should begin winding down its emergency lending programs while unemployment remains elevated. The central bank intends to rely instead on paying interest on banks’ reserve deposits to prevent a flood of cash into the economy.

It seems clear that the FED and the Congress have moved into a full blown antagonistic relationship. The FED is keen to stay clear of votes or any congressional snooping for details on any of their actions. This is a bad development on the one hand as it will mean the FED will expand their "behind the scenes" creative use of power but it may wake up the Congress to just how dangerous the FED is. We shall see.

This Weeks Bond Sales Will be Spectacularly Good
Faced with a market rally that is slowing down on lower and lower volume, the more bullish sort are trying to find a reason. Reason's for a 40% move up were not good enough, now a stalled rally has to be explained.

I submit this laugher from Minyanville today regarding this weeks 10 year and 30 year bond auction:
Bond Auction Could Spark Real Rally?
Just a friendly reminder: Please remember how important tomorrow’s 10-year auction will be for near-term equity direction. And with regard to Thursday’s 30-year auction: The market will extrapolate how that will go based on tomorrow’s 10-year results.
If the auction goes well (i.e. no large yield tails, a good bid to cover, a good amount of indirect bidders), and bonds mount a nice rally, then the S&P should react in kind -- and you’ll see 950 in the rearview mirror. A breach of 950 will then set up a test of target levels (at 980).

Now this kind of story seems like good analysis. The problem is that the story has already been written.

Look, the FED has noticed yields going up and the rejection of the quantitative easing campaign is not lost on the FED. A troubled bond auction at this point would be a serious setback. Therefore, it will not happen.

I fully expect the FED has been on the phone all week placing "orders" with all kinds of buyers an it would fit the bill if there was either pressure being exerted or some kind of special guarantees for this weeks buyers. There is no way the carefully orchestrated market rally will be sidetracked by a poor bond showing. In the spirit of the "Stress Tests" that of course showed all was well I am predicting a spectacular 10 and 30 year bond auction this week. This is yet another "artificial" market data point that will be pounced on as a "green shoot". Any random auction may have some use as a data point, but not any bond auction this week. If equities are indeed on pause due to concerns about the auctions, late Thursday will be the green light to go full speed ahead. I cannot see how the "fix" will not be in this time.

Have a good night.


Lisa said...

I'm in mourning for my country right now. Although I didn't expect the SC to stop the Chrysler deal (and they did leave the door open), the ruling is disgusting. As is the TARP "payback" situation. Our country has not seen this kind of chaos in our modern times, and it's about to get even worse. The bond auction may indeed go well. What does that matter? Actually, it matters not at all. You asked again about charts, and I repeat my last answer: they are broken and one cannot reasonably analyze them. The only thing they show is corruption and "hope." I'm not participating in the market these days, as I see no reason to. Beating my head against a brick wall of corruption is not my idea of a good time.
I'm a soldier, first, last, and always. I took seriously my oath to protect the Constitution. I'm preserving my sanity by staying out of the noisy market, so I am able to fight the real battle ahead of us.

GawainsGhost, I think you are wonderful.

getyourselfconnected said...

between the SCOTUS taking a hands off approach to government overstep and now manipulated markets (bond auctions, last 30 minutes tape painting) I agree things have deteriorated to levels never seen before. Keep your head up.

GawainsGhost said...

I love you too, Lisa.

Sigh. Well, it doesn't surprise me that the Supreme Court chickened out. Gutless cowards that they are.

The Chinese have a saying, may you live in interesting times. Yeah, I love interestings times, because they are, uh, interesting, not boring. These are perilous times, and I don't love those at all.

Anyway, as to the future of the American automotive industry, who knew that Robert Heinlein predicted it all fifty years ago?