Financial topics

[freddyv]

Consumer credit takes its biggest drop on record...

"Consumer borrowing dropped by a record $7.94 billion in November, a Federal Reserve report showed on Thursday, the latest evidence that households were unwilling or unable to take on more credit.

That was the biggest decline since the data series began in January 1943, and was far steeper than the $0.5 billion dip that economists polled by Reuters had expected...."

Read more at
http://www.cnbc.com/id/28563705

I think it was Meredith Whitney who suggested just a week or two ago that consumer credit would contract by some $2 trillion in 2009 as banks cut credit lines and consumers become unwilling to borrow. In fact, if those consumers are anything like me, their main focus these days is to save for a rainy day and then pay off any outstanding debt.

This looks likes classic deflation to me and I don't see how any amount of spending by government can stop it until it runs it course.

--Fred

[Higgenbotham]

I've seen this error several times this week, even saw it on a headline from one of the news services yesterday. Here's a typical quote:

"A 30-year bill yields a return of under 3%, 10-year just over 2% and short-term yields have periodically even dropped into the negatives."

http://www.safehaven.com/article-12256.htm

A bill is a government security having a maturity of 1 year or less.
A note is a government security having a maturity ranging from 2 to 10 years.
A bond is a government security having a maturity of more than 10 years.

There is no such thing as a 30-year bill.

This reminds me of something else I encountered 3 years ago when I was looking at dollar alternatives (before the big drop in the dollar, which I now think is over for the time being). For those who are worried about US government default on Treasury bills, here is an alternative. But let me say first why I am not concerned about a US government default on treasury bills at this time. Treasury bills are paying close to zero percent interest. Therefore, it costs the government almost nothing in interest on these bills at present. But for those who are concerned about that for whatever reason, there is a country with a balanced budget that issues government bills and that is Singapore. You might ask why they do that if they don't need to. They explain all that on their website and to find it just google "Singapore Government Securities" and you will get all the info. There is no restriction per se on US residents buying these securities. However, there are a lot of roadblocks. For example, one of the primary dealers, the Development Bank of Singapore, has a branch in Los Angeles. However, if you are an individual US depositor, it is illegal to open an account with a non-US based bank. That bank branch exists only for business accounts that have legitimate reasons to be doing transactions in Singapore dollars. So any individual account must be opened with a US bank that has a branch in Singapore. The Bank of America branch in Singapore no longer offers individual account holders the service of buying Singapore Government Securities (in other words, they are no longer a primary dealer, probably due to lack of demand). Citigroup (Citibank) may still be a primary dealer but I nixed the whole idea when I found out that Citigroup is probably the only US based dealer. The only other way to diversify into Singapore dollars would be to become a resident of Singapore as Jimmy Rogers did.

And in Singapore,

A bill is a government security having a maturity of 1 year or less.

Yes siree, it's that way all over the world.

[John]

I've seen this error several times this week, even saw it on a headline from one of the news services yesterday. Here's a typical quote:

"A 30-year bill yields a return of under 3%, 10-year just over 2% and short-term yields have periodically even dropped into the negatives."

http://www.safehaven.com/article-12256.htm

A bill is a government security having a maturity of 1 year or less.
A note is a government security having a maturity ranging from 2 to 10 years.
A bond is a government security having a maturity of more than 10 years.

There is no such thing as a 30-year bill. ...

A bill is a government security having a maturity of 1 year or less.

Did I make that mistake somewhere? (I usually avoid the issue by just
referring to all of them as "Treasuries.")

John

[Higgenbotham]

I've seen this error several times this week, even saw it on a headline from one of the news services yesterday. Here's a typical quote:

"A 30-year bill yields a return of under 3%, 10-year just over 2% and short-term yields have periodically even dropped into the negatives."

http://www.safehaven.com/article-12256.htm

A bill is a government security having a maturity of 1 year or less.
A note is a government security having a maturity ranging from 2 to 10 years.
A bond is a government security having a maturity of more than 10 years.

There is no such thing as a 30-year bill. ...

A bill is a government security having a maturity of 1 year or less.

Did I make that mistake somewhere? (I usually avoid the issue by just
referring to all of them as "Treasuries.")

John

I haven't seen anyone here make that mistake. A few pages back, somebody was asking about the "treasury bubble" that some people are talking about on other websites. He then mentioned that he was in a treasury only money market account. So as I've read discussions about this subject on other sites, it finally occurred to me why someone who is in a treasury only money market account could be confused and/or concerned. Someone might be worried that their treasury only money market account is in a "bubble" and could lose value.

That's not the case because a treasury only money market account by definition has short term paper in it, or treasury bills only. Treasury bills can lose a little value short term if interest rates on treasury bills rise, but this would only be temporary as the bills would mature at face value in less than 1 year anyway (usually substantially less than 1 year) and therefore the value of the fund would be stable. On the other hand, if a bubble has in fact happened in treasury bonds, and interest rates rise from here and never return back to the lows of a few days ago, then the value of someone's bond portfolio or bond fund will be reduced (from where it was when interest rates were at their lows) for a long time. That's why a money market fund trades at a value of 1.00, but a bond fund will trade at some other number that fluctuates.

PS That was JimZ's question down at the bottom of page 71 that I'm referring to and hopefully this addresses the question. It is amazing how confusing all this stuff must be to the average person, and how much those of us who deal with it every day take for granted.

[Higgenbotham]

Here is a weekly chart of the 30 year treasury bond.

The price of the 30 year has increased a lot as money has poured into these bonds over the past few weeks, contrary to what a lot of market observers thought would happen. Whether it's a bubble or not, I don't know, but everyone can see why some might think it is. The idea being that if it is a bubble and someone bought a 30 year bond up there around 140, then the value of the bond will be reduced proportionately if the price falls below 140.

http://futures.tradingcharts.com/chart/TR/W

You can also find daily and monthly chart links below the weekly chart to get shorter and longer term views of the prices.

[freddyv]

>>> And why would you accuse Thomson/Reuters of fraud for reporting
>>>analyst estimates? They can report on anything they want, even
>>> indicators that are notoriously horrible at turning points in the
>>> economy (analysts as a group always remain wildly bullish long
>>> into downturns, well they are normally bullish at all times
>>> anyway).

More on Thomson/Reuters; this from CNBC - http://www.cnbc.com/id/28293481 -

KB Home posted a worse-than-expected quarterly loss Friday and said unprecedented pressures on the industry and the economy would remain difficult or worsen, sending its shares lower.

The No. 5 U.S. homebuilder said its net loss narrowed to $307.3 million, or $3.96 per share, in the fourth quarter ended on Nov. 30, from $772.7 million, or $9.99 per share, a year earlier.

Wall Street had anticipated a loss of $1.51 per share, according to Reuters Estimates.

This certainly shows us that the estimates provided by analysts are nowhere near being realistic yet when they can't even get the housing market right.

One more thing about earnings: it seems that the Dow 30 earnings that are commonly reported are minus negative earnings. That is fine as long as we are being told but unless you go get the data yourself you wouldn't know. The Dow 30 P/E ratio is currently about 13-14 when including negative earnings. The DJIA is perhaps the most consistent and solid index there is so it does not tend to bounce around like the transports, the NASDAQ or even the S&P 500. Given weaker future earnings and a low P/E of 6 it is easy to imagine the DJIA going to 3,000 within the few years.

--Fred

[John]

Dear Matt,

> And I'd also like to point out to all the GD readers that I have
> finally completed the final part of my 6 Part preview for 2009 on
> the financial markets and economy. Do take a look:

This is sensational stuff. I hope you don't mind that I quoted your
conclusions in my recent article.

** The outlook for 2009
** http://www.generationaldynamics.com/cgi ... look090105

Sincerely,

John

[John]

-- Breakdown of Barack Obama's planned stimulus package

I saw a brief, convenient summary of the planned stimulus package
today on CNN:


Overall breakdown:
> Tax cuts: $300 billion - 40%
> Spending: $450 billion - 60%

Stimulus package - Tax cuts:
> Individuals:
> $500 per person
> $1000 per family
> Businesses:
> Can write off losses
> Tax credits for new jobs

Stimulus package - spending:
> Renewable energy and conservation
> Build and repair infrastructure
> Computerize health care system
> Upgrade educational facilities
> Expand unemployment and COBRA benefits


The problem is that little of this follows Richard Koo's
prescriptions an effective stimulus. The money from tax cuts, expand
unemployment, and education and health care expenses will be used to
pay down debt, and may even be used to purchase cheap foreign goods,
which would incur "leakage." In either case, it won't stimulate
anything.

What these people don't understand is that the behavior today is NOT
to maximize growth, but to minimize debt. So tax cuts and welfare
payments do nothing to stimulate growth, even though they may be
politically and/or socially desirable.

So we won't get much stimulus, and the government will go
increasingly into debt. Furthermore, the comparison with Japan in
the 1990s fails because there were countries around Asia, Europe and
America that were willing and able to import Japanese goods, while
the current financial crisis means that no one is willing to import
American goods.

Meanwhile, I hear the same political rhetoric. From the
"progressives," this is the time to spend an unlimited amount of
money on an unlimited number of "socially acceptable" projects; from
the "retrogrades," the best stimulus is tax cuts.

It's ironic that both of these approaches are failures for the same
reason: The money will NOT stimulate, but will be used to pay down
debt, and often to buy foreign goods.

Meanwhile, the price tag grows unabated.

Sincerely,

John

[John]

-- Corporate earnings

CNBC didn't post earnings results last week. If I were a suspicious
guy, I would guess that they didn't want us to know how bad they are.
But hey, it was New Year's, and the guy who posts them was probably
out getting drunk, after he discovered his stock portfolio had just
taken another big hit.

Anyway, they finally did an update yesterday:

> Earnings Central Stats

> As of Friday, January 9th:

> The blended earnings growth rate for the S&P 500 for Q4 2008,
> combining actual numbers for companies that have reported, and
> estimates for companies yet to report, fell to -15.1% from -1.2%
> due in part to constituent changes such as Merrill Lynch's
> removal.

> On July 1st, the estimated growth rate for Q4 was 59.3%, and by
> October 1st, the estimated growth rate had fallen to 46.7%. (Data
> provided by Thomson Reuters)
> http://www.cnbc.com/id/15839135/site/14081545/

And here's the resulting table:


Date 4Q Earnings growth estimate as of that date
------- -------------------------------------------
Feb 6: 50.0%
Jul 1: 59.3% Start of previous (3rd) quarter
Oct 1: 46.7% Start of quarter
Dec 5: 10.0%
Dec 12: 5.9%
Dec 19: 0.5%
Dec 26: -0.9% End of quarter
Jan 2: -1.2%
Jan 9: -15.1%


Obviously, corporate earnings growth estimates for the fourth quarter
DID fall dramatically in the last two weeks, and actual earnings have
barely started coming in. This may still be the worst quarter yet.

Sincerely,

John

[John]

> That's good news. I've been reading the first few of Roosevelt's
> Fireside Chats to look for markers on the evolution of
> generational attitudes regarding corruption and other issues. In
> his first Fireside Chat. Roosevelt tells the American people that,
> yes, financial wrongdoing occurred, that it is the government's
> job to deal with it, and the government is dealing with it. I'll
> be eagerly awaiting a national television address by Obama stating
> the equivalent, but won't be holding my breath.

> http://www.fdrlibrary.marist.edu/firesi90.html

That's interesting stuff.

However, I do think that Obama will indeed give that speech. What
has he got to lose? His job now is to blame everything that happens
on someone else. That's the job description of a politician.

Obama is apparently no longer claiming to walk on water. He's no
longer promising a major change on January 21.

In fact, his speech on Thursday was downright apocalyptic:

> We start 2009 in the midst of a crisis unlike any we have seen in
> our lifetime, a crisis that has only deepened over the last few
> weeks. Nearly 2 million jobs have been now lost, and on Friday
> we're likely to learn that we lost more jobs last year than at any
> time since World War II. Just in the past year, another 2.8
> million Americans who want and need full-time work have had to
> settle for part-time jobs. Manufacturing has hit a 28-year low.
> Many businesses cannot borrow or make payroll. Many families
> cannot pay their bills or their mortgage. Many workers are
> watching their life savings disappear. And many, many Americans
> are both anxious and uncertain of what the future will hold.

> Now, I don't believe it's too late to change course, but it will
> be if we don't take dramatic action as soon as possible. If
> nothing is done, this recession could linger for years. The
> unemployment rate could reach double digits.

> http://www.nytimes.com/2009/01/08/us/po ... ml?_r=1&hp

In another part of the same speech, he did blame the crisis on the
United States:

> For years, too many Wall Street executives made imprudent and
> dangerous decisions, seeking profits with too little regard for
> risk, too little regulatory scrutiny, and too little
> accountability. Banks made loans without concern for whether
> borrowers could repay them, and some borrowers took advantage of
> cheap credit to take on debt they couldn't afford. Politicians
> spent taxpayer money without wisdom or discipline and too often
> focused on scoring political points instead of problems they were
> sent here to solve. The result has been a devastating loss of
> trust and confidence in our economy, our financial markets and
> our government.

> Now, the very fact that this crisis is largely of our own making
> means that it's not beyond our ability to solve. Our problems are
> rooted in past mistakes, not our capacity for future greatness.
> It will take time, perhaps many years, but we can rebuild that
> lost trust and confidence. We can restore opportunity and
> prosperity.

So, with that going on, Obama will be sounding more and more like
FDR.

> Great effort. I'm looking for a catalyst along the lines of the 5
> scenarios that Strauss and Howe laid out on pages 272-273 of The
> Fourth Turning to occur, likely next year. They did some excellent
> work laying out these catalysts, considering how long ago it was.
> It seems to me that scenarios 1, 2, 4 and 5 or some combination of
> these scenarios are likely (especially some variation of 1), as
> well as others. In some of my work, I have attempted to gauge the
> market reaction (or panic reaction we might say) to various
> catalysts. There are many questions that come out of such an
> exercise. Generally, the reaction would tend to reinforce economic
> slowdown and debt default of all kinds. For example, the most
> obvious result occurs in the case of a pandemic, which would would
> effectively shut down the economy as a first response. It would be
> an interesting exercise to go through some of these scenarios and
> others and look at what the response of the various markets you
> analyzed might be and how the response might be different under
> different scenarios.

I certainly agree with you that we're waiting for a crisis catalyst,
and it might be any of several things. But whether there's one
catalyst or 10 catalysts, one of the catalysts has to be a stock
market crash of epic proportions. These huge bubbles have to implode
some time.

I wonder if you'd consider taking your research on money markets and
putting the pieces together into a formal article for the web site.
Something like, "Is your money market account safe? by C....
C........." Subtitle: "How long can the Fed keep money market
accounts from collapsing?"

Sincerely,

John