Today's Market: Convergence of Reality and Perception

Monday’s market reflected the convergence of reality vs. perception. Economic weakness may persist longer than many anticipate and the signs of improvement or abatement pale in comparison to pre-Lehman days.

Notes & Comments for June-22-2009

Financial Sector: An analyst cited that Citigroup’s (C) shares could fall as much as -21% upon completion of its debt exchange next month (See AP news for full story). Another side note is that banks are forced to increase base salaries and guarantee bonuses in order to retain their top talent. The irony is that regulatory proposals perversely thwart the principle of pay for performance, not to mention that it encumbers banks with increased fixed expenses (See Financial Times). This might fly in an industry with robust growth prospects, but as Wall Street struggles through the financial crisis, it becomes a pain in the bottom (line). Related securities: C: XLF; SKF

Economy: The Washington based World Bank reduced its forecasts for global growth in 2009 to -2.9% vs. its previous estimates for -1.7% contraction. Developing nations could experience a flight of capital and decline in foreign direct investment. The World Bank sees global trade falling -9.7%. I think that it would be remiss of economists in both the public and private sectors not to revisit their theses and confirm whether they remain intact. Investors seemed to do exactly just that Monday as equities, commodities, and interest rates fell while bonds, volatility indexes such as the VIX , and the U.S. Dollar index headed northward in price. Should we see more downward macro-economic revisions from bulls and frowns from the clowns in the financial media as they recover from the sting of reality’s hard slap, there could more potential downside for stocks than anticipated. Related securities: SPY; EEM; USO; UUP; TLT; GLD; [[DBC; DBA; FXA; FXC

Fed Watch/Bond Market: On June-23-2009, the Treasury will aucton off $29bn of 4 week T-Bills. In Monday’s trading, the Fed scooped up $7.5bn of treasury notes maturing between 2013-2016. This leaves $122.5bn for additional Treasury purchases if the Fed executes its plan of $300bn. The clock is ticking, but robbing Peter to pay Paul works for now. In the big picture, this strategy is inflationary, but with current unemployment rates above 9% and fast approaching 10% and total capacity utilization running barely above 68%, inflation is likely to remain contained until the economy shows credible proof of a sustainable turnaround. On Wednesday, June-24-2009, look for the Fed to articulate an exit strategy in its FOMC meeting announcement. Meanwhile, in the corporate market, Merck (MRK) will issue $3.5bn in bonds maturing in 2-6-10 and 30 years. Related securities: TLT: TBT; MRK

Commodities: A rising dollar and belief that China’s stockpiling of base metals may be easing sent commodity prices lower. Related securities: DBB; SLX; DBC

Managing unrealistic expectations is rarely easy, but investors are gradually realizing that the new definition for "normal" will resemble a mere shell of its former self.

Hillbent Economic Monitor

Economic & Market Indicators	Time Period	Reported #s
Economic Bellweathers
Leading Indicators	May 2009	+1.2%
S&P 500 Index	MTD % Chg	893.04 (-2.84%)
M2 Money Supply	June-06-2009	$8353.8bn
Fed Funds Target Rate	Daily	25 bps
Ted Spread	Daily	42 bps
2 -10 Yr Yld Curve Spread	Daily	256 bps
Avg Workweek	May 2009	33.1 Hours
Industrial Production	May 2009	-1.1%
Total Capacity Utilization	May 2009	68.3
Purchasing Mgrs Index	May 2009	42.8
Copper Futures Index	MTD % Chg	226.15 (+2.91%)
Baltic Dry Index	MTD % Chg	4029 (+15.31%)
Real GDP (Revised)	Q1 2009	-5.7%
Trade Deficit	April 2009	-$29.2bn
Consumer Bellweathers
Unemployment Rate	May 2009	@ 9.4%
Initial Jobless Claims	June-13-2009	608k
Continuing Jobless Claims	June-13-2009	6.687mm
Avg Time Unemployed	April 2009	21.4 weeks
Consumer Confidence	May 2009	54.9
Consumer Spending	14 Day Avg	$62 (+1)
Personal Savings Rate	April 2009	@ 5.7%
Consumer Credit	April 2009	-$15.7bn
U.S. Dollar Index	MTD % Chg	80.77 (+1.80%)
U.S. Gasoline Fund	MTD % Chg	31.75 (-1.31%)
Inflation Bellweathers
10 Yr - TIP Spread	Daily	209 bps
CRB Index	MTD % Chg	246.07 (-2.76%)
Producer Prices	May 2009	-5.0%
Consumer Prices	May 2009	-1.3%
Est. Population	May 2009	306.749mm
Real Estate Bellweathers
S&P/Case-Shiller 20 Index	May 2009	139.99 (-19.1%)
Housing Starts	May 2009	532k
Pending Home Sales	March 2009	84.6 (+3.2%)
Existing Home Sales	April 2009	4.68mm
New Home Sales	April 2009	352k
DJ Real Estate Index	MTD % Chg	119.50 (-8.67%)
DJ Home Construction Index	MTD % Chg	207.58 (-4.98%)

Disclosure: Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.