5 Year Bond Auction Results
I failed to include the results of yesterdays 2 Year auction because I was both short on time and the final results were far from clear, at least to me. This evening the results of the 5 Year auction are known, and with a little help from a friend I can offer some discussion.
The Housing Time Bomb has a compilation chart up that covers the auction in detail (reproduced with permission):
The authors take:
"As you can see above, the bid to cover was a measly 1.92! This was not officially considered to be a failed auction even though many economists will tell you that anything under a 2 BTC is considered to be a failure.
The primary dealers "(Goldman, Morgan Stanley, etc.)" were forced to eat more then half of the auction as world demand plummeted. They had to put up $24 billion of their own cash in order to close out the auction. Indirect bidders(China and the other FCB'c) gobbled up only $14 billion.
Folks, the fact that the indirect bidders are disappearing this early in the year is frightening. We still need to sell over a trillion dollars worth of debt. I have been screaming "how are they going to sell all of this stuff all year?"
The indirect bidder component here is very important. Very recently the rules for just who was an "indirect bidder" were changed and that metric shot up over the past couple of bond auction rounds. Many ascribed this to the rule change, which made comparison hard with past results. The key point is that indirect participation was much higher under the new rules until today's result.
This is a development worth watching in tomorrows sale of 7 Year notes. The market was unimpressed with today's poor showing, but then again nothing scares this market anyway.
US Durable Good Reports - A Study in Contrast
Today the US durable good report was released and came in a bit short of expectations. Estimates were for a 0.5% decline, but the print was a 5X larger 2.5% screamer to the downside. So this kind of target miss to the downside was a problem right? Not so fast.
Immediately upon release all kinds of disclaimers were put out with it attributing the miss to aircraft orders and other such items, and the better than expected part of the report was instead all the focus. This put me in a mind of last months repost which came in better than expected, again mainly on defense and aircraft items. I thought it might be instructive to see how one news outlet handled both releases and in what manner they were both reported.
Cast your mind back to last month. Green shoots were all the rage and light was seen across the economic landscape of second derivatives. CNN Money on June 24, 2009 had this take on the upside surprise of the durable goods number:
Durable orders in surprise gain
WASHINGTON (Reuters) -- New orders for long-lasting U.S. manufactured goods rose by a much stronger-than-expected 1.8% in May, Commerce Department data showed Wednesday, providing further evidence that the battered U.S. economy was finding its feet.
Analysts polled by Reuters had forecast durable goods orders would decline 0.6% last month. May's increase, the third gain in 4 months, followed a revised 1.8% gain in April, previously reported as a 1.7% rise.
New orders excluding transportation advanced 1.1% last month, compared with a forecast for a 0.4% decline, buoyed in part by a 7.7% rise in new machinery orders. This was the largest percentage increase in that category since March 2008, the Commerce Department said.
And now today's CNN Money durable goods report:
Durable goods orders tumble 2.5%
WASHINGTON (Reuters) -- New orders for long-lasting U.S. manufactured goods fell more sharply than expected in June, notching their biggest decline in five months as demand for communications and transportation equipment slumped, a government report showed on Wednesday.
The Commerce Department said durable goods orders fell 2.5%, the largest drop since January, after rising by a revised 1.3% in May, previously reported as a 1.8% surge. This was worse than market expectations for a 0.6% decline. Orders had advanced for two straight months.
New orders excluding transportation unexpectedly rose 1.1% in June, after climbing by 0.8% in May. Excluding defense, orders slipped 0.7% in June, after two months of straight gains.
Analysts polled by Reuters had expected orders excluding transportation to be flat.
To be fair with CNN Money, they presented all the relevant data, and one with an eye for these things could have seen the hard quantitative facts here. What I would like to point out is that when the May durable goods report came out better than expected, CNN Money had this qualitative note to add to the numbers;
"..providing further evidence that the battered U.S. economy was finding its feet."
So one would expect the same treatment for a 5X miss to the downside after today's number. Maybe a line like;
"..in new evidence of a contracting economy"
"..eroding recent signs of recovery"
would have made the piece as a qualitative note.
Instead the CNN article just reports the numbers as is with no leading statements or inferences at all, just as any economic reporting should do when not an opinion piece.
Any positive data will be piled on and puffed up, while anything negative will be pushed out without commentary. I could have dug up any two posts on the topic from many sources and the treatment would have been the same. Cheerleading should not be an active part of financial reporting.
The Two Markets
I read an item over at The Mess That Greenspan Made today that got me thinking:
The big news out of China this morning is that share prices saw their steepest decline in eight months after rumors swirled that the government was about to clamp down on the excessive bank landing that has led to excessive speculation in stocks and housing.
The Shanghai composite index was down almost eight percent earlier in the day before closing with a loss of about five percent following a huge public offering for China State Construction Engineering, the nation's largest homebuilder, where more than 4 billion shares changed hands - about four times the total trading in the Standard & Poor’s 500 Index.
If the China growth story is real and there are underlying structural pillars upon which the monster rise in the stock market was supposedly based on, why the huge flight on the mere rumor the government might, just might, pull back some of the easy money?
The Chinese learn fast. The best way to influence monetary policy here in the US is for the market to throw a "hissy fit" to the tune of down 5% in response to any take away of the punch bowl. Greenspan was a total sucker for this play, and recently the TARP was passed on it's second attempt after a daring market drop played out by Wall Street.
What this shows is that there is no real lift in China, nor America that is not entirely based on government spending. If Bernanke and Geithner announced tomorrow that TALF, the discount window, TGLP, and any 2 other support programs were ending on Monday, the indices would go to "lock down" at the opening drop. And then repeat it a few times.
I try to keep this in mind while all the cheerleaders are waving their pom poms and heralding the new recovery. Recovery bought and paid for by the government. Of course there is no such thing as "the government" really, just taxpayers paying to get robbed.
An article on Minyanville today by Minyan Peter touched upon this game as well and the ending stuck with me all day long:
"..But while banks were busy taking whatever securities-related profits they could from their balance sheets, their core banking businesses were decidedly mixed. On the good-news front (unless, of course, you're a saver), banks lowered deposit rates and raised transaction fees left and right.
At the same time, loan portfolios showed continued credit deterioration across the board. Worse, loan loss reserves appear to have been sized for an immediate recovery, rather than positioned for any kind of continuing economic malaise.
As I have written before, I don't believe that accounting changes the ultimate outcome -- just the timing. In the second quarter, as the tide back came in, banks accentuated the positive and postponed the negative.
Should a sustainable recovery occur, no one will likely ever know the difference. But realize: That's the bet. And from where I stand, the bank “gain cupboard” is now officially bare.
What struck me, and it fits in with the China story, is that clear manipulation and fungible number play is right now being accepted; pair this with the government backing of all things financial and we see there are indeed two markets. The base free market which is much lower, and the current supported market which is much higher.
As Minyan Peter says the bet is that some kind of recovery will come from some place that will more closely align these two markets, which right now are worlds apart in price. I would offer that recovery had better show up real soon.
Have a good night.