Financial Market Report For November 4, 2010
Bonds And Stocks Moved Sharply Higher At Market Opening
Traders reacted to yesterday’s Fed announcement of QE of money printing operations to buy short duration debt, by calling the short duration interest rates lower and placed carry trade investments in value, dividend, financial, banking, consumer stocks, commodities.
Silver and gold massively higher, and the US Dollar through the floor and into the basement.
Bonds Rose As US Central Bank Liquidity Depressed The Short Duration Interest Rates, While Interest Rates On The Long End Remained Basically Unchanged
The yield curve is a graph of what benchmark bonds such as US Government bonds are yielding across different maturities. The 30 10 US Sovereign Debt Yield Curve, $TYX:$TNX, exploded and steeped massively higher to 1.625 suggesting that peak investment value, that is peak credit, perhaps better said, peak debt was achieved today November 4, 2010. Today’s steepening yield curve inflated the financials; the European Financials, EUFN, rose 3.4%; American Express, AXP, 4.0%, Community Banks, QABA, 4.0%, Too Big To Fail Banks, RWW, 4.5%, Banks, KBE, 3.3%, India Earnings, EPI, 2.9%, and Mortgage Finance, KME, 4.6%. The the small cap pure value shares, RZV, which are interest rate sensitive and carry trade sensitive, rose 3.1%, I envision that the yield curve, will over time the yield curve will steepen from here. Some would say, that this would be economically stimulative, but, as the 30 year rate rises over the 10 year rate, then the longer out government and corporate bonds will fall in value, causing Governments to introduce austerity and corporations to cut back as interest rates rise. An ever steepening yield curve will cause the loan markets to dry up, and businesses will not take on new projects, there will not be economic growth but contraction; there will deflation like in Japan. The US small cap shares, the Russell 2000, IWM, rose 2.5%; they have likely reached their maximum expansion. As the 30:10 US Sovereign Debt yield curve, continues to steepen, then these companies will be decapitalized by both a rising 30 Year US Government Bond Interest Rate, $TYX, and unwinding carry trade investment. Given the large amount of US Government Debt, and the dependency of these small companies upon a well functioning credit system, providing relatively low cost loans, America will be at the global epicenter of austerity and hardship.
The Interest Rate on the 30 Year US Government Bond, $TYX, traded basically unchanged a little above 4%.
But the Interest Rate on the 10 Year US Government Note, $TNX, fell lower.
The mortgage backed bonds, MBB, rose 0.14%. The preservation of these is the unstated goals of QE2.
Dave in Denver in The Golden Truth article On A Clear Day You Can See Inflation writes: The yield on the long bond shot up to 4.07%. It was around 3.90% just a couple of days ago and was approaching 3.5% a few months ago. The long end of the yield curve typically reflects market expectations of both sovereign U.S. credit risk and inflation risk. Since it is now apparent to all that the Fed is willing to print enough money to prevent a U.S. Govt bond default, we have to assume that the higher yields on the long end of the Treasury curve are starting to reflect inflation expectations.
The distressed securities, FAGIX, rose 0.21%. Fagix approximates the value of the investments taken in by the US Federal Reserve under QE 1, when it swapped out US Treasuries for toxic bank debt in the amount of 1.1 Trillion Dollars.
World government bonds, BWX, rose 0.68%
Emerging market bonds, EMB, rose 0.51%
The Zeroes, ZROZ, fell 0.30%
The 10 to 20 Year US Government Bonds, TLT, rose 0.78% to the edge of massive head and shoulders pattern, thus “setting” it for a fall lower.
The 3 to 7 Year US Government Bonds, IEI, rose 0.32%
The 2 Year US Government Notes, SHY, rose 0.02%.
Junk Bonds, JNK, had one of its strongest days ever; it rose 1.03%
AvidTrader relates the MBA Mortgage Application Index fell 5.0% last week, after the index that can be quite volatile on a week-to-week basis, increased 3.2% in the previous week. The decline came as the Refinance Index dropped 6.4%, more than offsetting a 1.4% rise in the Purchase Index. The downward move in the overall index came amid a 3 basis point increase in the average 30-year mortgage rateto 4.28%, just above the record low of 4.21% on October 8.
Brendan A. McGrail and Alexandra Harris of Bloomberg report LA County Transit Leads Week in $740 Million Sale: Muni Credit: The Los Angeles County Metropolitan Transportation Authority, the second-largest U.S. transit agency behind New York’s, leads issuers with a $740 million debt sale to expand its rail service from downtown to the suburbs. Proceeds from the offering, which includes $600 million in Build America Bonds, BAB, the agency’s first sale of the taxable securities, will be used to finance the Metro Gold Line Foothill extension to Azusa and phase two of a light rail to Santa Monica, according to preliminary offering documents. The debt carries Standard & Poor’s top rating and an Aa2 from Moody’s Investors Service, third-highest.
Total Bonds, BND, Aggregate Bonds, at 82.96, AGG, at 108.92 and Lehman Aggregate Bonds, LAG, at 57.96, closed at new rally highs. Peak Bond wealth may have come in today.
Economists Review QE 2
DragonParadox in article Economists React: Chairman Bernanke's Brave New World:
–No one really knows how effective the QE2 will be on the economy. There is so much liquidity in the economy that additional liquidity may not do much for the economy. The U.S. banking system has over $1 trillion of excess reserves deposited at the central bank earning the interest rate of 0.25%. You can lead a horse to water, but can’t make it to drink. –Sung Won Sohn, Smith School of Business and Economics.
–The Fed is panicked over deflation and is prepared to expand the balance sheet until their panic subsides. The Treasury curve will steepen, risk spreads inside of 10 years will blow out (as Treasury yields are artificially depressed), and inflation concerns are going to build, especially if the economic data continue to exhibit an improved tone, as they have in recent days. Welcome to Chairman Bernanke’s Brave New World. –Stephen Stanley, Pierpoint Securities.
–The way to think about this prize So now the Fed is buying longer-term debt – but still only 5-year debt, with a current interest rate of slightly over 1 percent. How much more effective is that likely to be? And $600 billion really isn’t a lot when you’re trying to move a $15 trillion economy. One more thing: the Fed statement basically reaffirms the existing inflation target, it doesn’t raise it. So not much traction on the expectations side either. In short: meh. –Paul Krugman, Princeton University.
–Bernanke has committed to purchasing at least $600 billion of Treasuries, which, when completed, would mean a 12% sponsorship of the U.S. government bond market. Importantly, the FOMC has left the final dollar amount of QE2 open-ended, which will allow policymakers to adjust purchases to reflect the evolution of price pressures; we expect the program will end up lasting through the third quarter of 2011 and measure around $1 trillion when all is said and done. –Guy LeBas, Janney Montgomery Scott.
–The Fed’s new program of asset purchases is not going to pull the U.S. economy out of its current malaise because, given the scale of the balance sheet problems affecting households and financial institutions, it is simply too modest When the Fed realises that QE2 isn’t working it will have two choices: Admit this is a lost cause or increase the size of its purchases. No central bank would ever want to admit it was out of ammunition so we suspect in those circumstances the Fed would scale up its purchases. Indeed, the accompanying statement left open the possibility that the size of the programme could be adjusted in time. It is easy to envisage QE2 giving way to QE3, QE4 and beyond because now that the Fed has started down this road again, it will be very hard to stop unless there are clear signs of improvement in the economy. –Paul Ashworth, Capital Economics.
–Along with the monthly reinvestments, the Fed will be purchasing about $100-$110 billion per month. Should prepayment speeds accelerate though, that number could increase. The Federal Reserve, in the face of stubbornly high unemployment, uncomfortably low inflation measures and a contracting fiscal policy, stands ready to support the recovery the only way it knows how, by lowering interest rates. The rest of the story is details. –Dan Greenhaus, Miller Tabak
–Today, the Federal Reserve has entered uncharted territory. Diluting the value of the dollar by continually increasing the supply of money poses an incalculable risk. Instead, Congress needs to embrace pro-growth fiscal policies to stimulate our economy rather than masking our fundamental problems by artificially creating inflation. The American people deserve a government that protects the purchasing power of the dollar. –Rep. Mike Pence (R., Ind.)
–In the past, the Fed’s preference for inflation as its preferred policy tool was a love that remained largely unspoken. But in its recent policy statements, and especially in today’s pledge of $600 billion of printed dollars to monetize Treasury debt, the Fed has cast shame aside and has unabashedly professed its love. But the progeny that results from this courtship with inflation will offer nothing but grief for the U.S. economy. –Peter Schiff, Euro Pacific Capital
–We think that QE2 will provide little benefit to the economy but will further undermine the dollar and boost gold and commodity prices over the coming months. We entirely agree with Kansas City Fed President Hoenig’s dissent. Hoenig worries about the impact on financial stability and longer-term inflation risks from further quantitative easing. The rest of the voting members of the FOMC, however, seem able to drink the quantitative easing Kool-Aid. –RDQ Economics
Most All Currency Carry Trades Expanded, Providing Market Liquidity To Both Stocks and Junk Bonds.
The World Stocks Yen carry trade, ACWI:FXY, rose strongly higher, as did most yen based carry trades.
The Swedish Krona Yen carry trade, FXS:FXY
The New Zealand Dollar Yen carry trade, BNZ:FXY
The Australian Dollar Yen carry trade, FXA:FXY,
The British Pound Sterling Yen carry trade, FXB:FXY
The Indian Rupe Yen carry trade, ICN:FXY
The Brazilian Real Yen carry trade, BZF:FXY
The euro yen carry trade, seen in the chart of FXE:FXY, did not rise higher as both rose in roughly equal amounts
The Euro, FXE, rose 0.57% to close a5 141.50.
The taking the European shares, VGK, higher, and the European Financials, EUFN, into the stratosphere.
Ben Bernanke’s Quantitative Easing inflated the basic material sector significantly today.
Silver Miners, SIL, 7.2%
Junior Gold Mining, GDXJ, 7.85
Gold Mining, GDX, 4.8%
Copper Mining, COPX, 5.4%
Metal manufacturing, XME, 4.5%
Steel Manufacturing, SLX, 3.7%
Energy Service, OIH, 3.4%
Countries Around The World Rose Strongly
World Shares, ACWI, 2.2%
New York Composite, NYC, 3.0%
S&P, SPY, 1.9%
The United Kingdom, EWU, 3.0%
Germany, EWG, rose 2.0%. Germany has risen 6.8% since October 13, 2010.
Peking, PEK, 4.3%
South Africa, EZA, 1.9%
Turkey, TUR 3.6%
India, INP, 4.0%
Australia, EWA, 3.3%
Australia Small Caps, KROO, 3.6%
New Zealand, ENZL, 2.8%
Thailand, THD, 3.1%
Brazil, EWZ, 2.8%
Brazil Small Caps, BRF, 2.7%
Hong Kong, EWH, 2.6%
Singapore, EWS, 1.5%
Asian High Paying Dividend, DNH, 2.7%
Emerging Markets, EEM, 2,3%
Mexico, EWW, 1.0%
Chile, ECH, 1.8%
Poland, EPOL, 2.5%
Austria, EWO, 2.0%
Emerging Europe, ESR, 4.1%
Europe, VGK, 2.5%
Value, Dividend, Banking, Financial And Debt Laden Shares Rose Strongly
Small Cap Pure Value, RZV, 3.1%
Russell 2000, IWM, 2.5%
India Earnings, EPI, 2.9%
International Dividend, DOO, 1.4%
Emerging Market Financial, EMFN, 2.4%
Nelnet, NNI, 3.0%
Nicholas Financial, NICK, -1.0%
American Express, AXP, 4.0%
Community Banks, QABA, 4.0%
Too Big To Fail Banks, RWW, 4.5%
Banks, KBE, 3.3%
India Earnings, EPI, 2.9%
Mortgage Finance, KME, 4.6%
Private Equity, PSP, 2.3%
Consumer Discretionary Shares Rose Strongly
Small Cap Consumer Discretionary, XLYS, 3.0%
International Discretionary, IPD, 3.2%
Gaming, BJK, 3.2%
Retail, XRT, 2.55
Retail Holders, RTH, 1.9%
Home Builders, ITB, 4.6%
Airlines, FAA, no change.
US Healthcare Providers, IHF, 1.4%
Biotech, PBE, 1.1%
Growth Shares Rose
Semiconductors, SMH, 2.5%
Internet, HHH, no change
Nasdaq Internet, PNQI, no change
Dow Internet, FDN, 0.9%
Deflationary Stocks Rose
Japan, EWJ, 2.3%
Japan, TOK, 2.9%
Japan, ITF, 2.4%
Japan Small Company, JSC, 2.1%
Solar Energy, TAN, 1.7%
Nanotechnology, PXN, 2.1%
Clean Energy, ICLN, 1.8%
Nuclear Energy, NLR, 2.4%
International Utilities, IPU, 1.5%
Brazil Small Caps, BRF, 2.7%
Tax Managed Buy Write, ETW, 1.4%
Diversified Utility, Centerpoint Energy, CNP, 1.2%
Italy, EWI, 1.5%
Spain, EWP, 0.7%
Natural Gas, UNG, 1.3%
Commodities Rose Strongly
Tony C. Dreibus of Bloomberg reports: Commodities Jump to a Two-Year High on Expanded Federal Reserve Stimulus. Commodities rose to a two-year high after the Federal Reserve said it would expand steps to boost the world’s largest economy, spurring demand for raw materials as a hedge against inflation. The Standard & Poor’s GSCI Index of 24 commodities gained as much as 1.5 percent to 586.046 points, the highest level since Oct. 3, 2008.
Commodities, DBC, 2.4%
Base Metals, DBB, 2.7%
Lead, LD, 3.7%
Tin, JJT, 1.9%
Nickle, JJN, 3.1%
Precious Metals, JJP, 6.5%
Timber, CUT, 1.9%
Gold, GLD, 3.45
Silver, SLV, 5.7%. Silver established itself as the world’s sovereign investment today.
Agriculture commodities, RJA, 2.8%
Food commodities, FUD, 2.1%
Oil, UCO 4.1%
Oil, USO 2.1%
Today investment liquidity from the US Central Bank and Currency Traders was “full on”: liquidity flowed like a river and the global investment bubble expanded significantly.
Announcement of The US Federal Reserve’s QE 2 money printing operations to buy short duration US Government Debt, SHY, and IEI, inflated both stocks, ACWI, and bonds, BND, LAG, AGG, especially the most speculative, like Las Vegas Sands, LVS, European Financials, EUFN, mortgage-backed bonds, MBB, Junk Bonds, JNK, leveraged buyout debt, PSP, and distressed securities, FAGIX.
Junk Bonds, the epitome of speculative investment, rose 1.3%, on both a reaction to QE2 and on carry trade investing. This type of rise is usually seen only in a whole weeks of trading. Junk bonds have been rising for he last 14 weeks in anticipation of QE 2, and today the speculators threw a boisterous party in celebration of their investment foresight.
Ben Bernanke’s QE 2 announcement, depressed short duration interest rates on US Government Notes and Bonds, $UST2Y. World currencies, DBV, and emerging market currencies, CEW, soared, while the US Dollar, $USD, traded by the ETF, UUP, crashed. Hot money flowed from carry trade investing into popular yen carry trade destinations such as Emerging Europe, ESR, Poland, EPOL, Turkey, TUR, and Peking, PEK.
Currency traders sold the US Dollar, $USD, as the US Federal Reserve’s QE 2 constitutes monetization of debt. When a central bank monetizes its debt, commodities, DBC, such as precious metals, JJP, base metals, DBB, cotton, BAL, agricultural products, RJA, and food commodities, FUD, inflate.
Inflation was definitely the order of the day. Monetization of government debt stimulated investment demand for gold, GLD, and silver, SLV again today with gold rising 2.8% and silver rising 5.2%.
The chart of small cap pure value shares, RZV, relative to small cap pure growth shares, RZG, RZV:RZG, rose today to 0.805, as the interest rate on the 30 Year US Government Debt, $TYX, was restrained, and FX carry trade investing was strong.
When bond vigilantes called the interest rate on the 30 Year US Government Bonds, $TYX, higher on October 7, 2010, and the currency vigilantes called the major currencies, DBV, and the emerging market currencies, CEW, lower on October 15, 2010, then the ratio of RZV-to-RZG fell.
The RZV-to-RZG ratio will fall once again when bond vigilantes call the interest rate higher on the 30 Year US Government bond, and when currency vigilantes call the world currencies, DBV, and emerging market currencies, CEW, lower, on falling world government debt, BWX which bubbled to a rally high today.
Currency traders commenced competitive currency devaluation, that is competitive currency deflation, on October 15, 2010, as they sold the US Dollar, $USD, fell lower from 77.5, as the Interest Rate on the 30 Year US Government Bond, $TYX, started to rise.
The chart of the Optimized Currency ETN, ICI, shows a close lower at 47.02; and suggests that currencies overall are topping out.
The British Pound Sterling, FXB, rose 1.21% and closed at 162.07
The New Zealand Dollar, FXA, rose 1.29% and closed “above parity” at 101.70.
The Euro, FXE, rose 0.60, and closed at 141.54.
The Yen, FXY, rose 0.62, and closed at 122.67.
The US Dollar, $USD, fell 0.78% and closed at 75.88.
Ben Bernanke in announcing QE 2 has established himself as the Global Seignior. The word Seignior comes from Old English, and means top dog banker who takes a cut, as he effects seigniorage. The chairman of the US Federal Reserve has risen to power through globalization and global corporatism, that is an ever-uniting of government and business. The US Federal Reserve is the premier global corporation; it is neither Federal, nor does it have much of any genuine, real, that is tangible reserves like gold or silver; the Federal Reserve is not part of the Federal Government, yet it is the United States central bank that is a private corporation. The Fed Chairman in announcing gave seigniorage to stocks, bonds, currencies and commodities in announcing QE 2. Yes the Fed Chairman gets a cut; it is called a salary.
Eventually, I believe that a Global Seignior, will institute unified regulation of banking globally, as referred to, in the James Politi and Gillian Tett Financial Times article, NY Fed Chief In Push For Global Bank Framework, and that the Seignior will oversee all matters of debt and credit, and implement a global currency system.
In today’s news
Michael T. Snyder writes in Seeking Alpha: 9 Reasons Why Quantitative Easing is Bad for the U.S. Economy.
Ambrose Evans Pritchard Doubts Grow Over Wisdom Of Ben Bernanke Super-put
Tyler Durden provides the FT Times report that the entire world blasts Bernanke’s announcement of QE2: China, Brazil and Germany on Thursday criticised the Fed’s action a day earlier, and a string of east Asian central banks said they were preparing measures to defend their economies against large capital inflows. Guido Mantega, the Brazilian finance minister who was the first to warn of a “currency war”, said: “Everybody wants the US economy to recover, but it does no good at all to just throw dollars from a helicopter.” Mr Mantega added: “You have to combine that with fiscal policy. You have to stimulate consumption.” Germany also expressed concern
Tyler Durden reports "Fitch Ratings has assigned a Negative Outlook for the entire U.S. Residential Mortgage Servicer ratings sector on increased concerns surrounding alleged procedural defects in the judicial foreclosure process. This industry-wide issue will cause all servicers to be under increased scrutiny from a wide range of state and federal regulators, state attorneys general, and GSEs. All servicers will be affected, even those fully in compliance with all foreclosure rules and regulations.
Disclosure: I am invested in gold bullion
Stocks: GLD, SLV, UUP, FXE, FXY, FXC, BZF, CEW, DBV, SIL, AGG, BNDS, BND, ACWI, SHY, BWY, TLT, ZROZ, ESR, VGK, BWX, EEM, IEI, MBB, RZV, EUFN, AXP, QABA, RWW, KBE, IWM, GDXJ, GDX, COPX, XME, SLX, OIH, NYC, SPY, EWU, PEK, EWG, EZA, TUR, EWA, KROO, ENZL, THD, EWZ, BRF, EWS, EWH, AUSE, EPU, EWO, EPI, DOO, EMFN, NNI, PSCD, IPD