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Today's Market WrapUp 01.22.2007 Mon Tue Wed Thu Fri Hartman Archive Big Debt
Sales in Focus This Week Stock prices are under pressure to begin the week with continuing declines in technology shares on earnings concerns, broker downgrades, and higher energy prices. Two weeks ago stocks were moving higher across the board (as bonds sold off) on improving economic data, but last week the tables were turned on tech stocks with disappointing forecasts from Apple and IBM. The selling on the NASDAQ continues, but this week it is also accompanied by selling pressure in the larger-cap Dow Stocks. Pfizer is lower after reporting a decline in fourth-quarter earnings, Boeing was downgraded to market perform by Wachovia and Caterpillar is lower on some analysts' expectations that the capital spending boom has topped-out. As we continue to move through the week I expect to hear more of a slowing economy with inflation held in check which would help to make U.S. Treasury debt more attractive. As it stands, the Treasury is scheduled to sell between $40 and $42 billion of new debt over the next three days. In recent months there has been less global demand for U.S. debt paper as foreigners work to diversify their holdings away from U.S. dollars. In December we kept hearing analysts talk about the dollar falling off a cliff, but since then bond prices have fallen (moving yields/interest rates higher) while the dollar has rallied. We haven’t heard much about our “Dream Team” (Chairman of the Federal Reserve Bernanke and Treasury Secretary Paulson) and what they brought back from their trip to China last month, but I will speculate they tried to drum-up some support from China to buy our debt. Put another way, we need China to help us support our deficit spending and continue our consumption of imported Chinese goods. Six out of the last seven weeks bond prices have moved lower, making yields more attractive. I firmly believe this was done as a pre-cursor to the heavy issuance of bonds due this week AND AGAIN JUST TWO WEEKS down the road in February with the Treasury’s quarterly refunding. In the news today we are hearing of higher energy prices as crude oil holds above the $53 mark after briefly topping $54. We have already seen the beginning of price inflation in the food arena with higher corn and wheat prices. With oil beginning to move higher again one might think it could rekindle the concerns about inflation, but not this week! This week the government needs to borrow money; therefore, U.S. Treasuries need to look more attractive. Higher energy prices are now putting pressure on stocks (free-up some money for the bond market) and the media spin has higher energy prices causing the economy to slow. A slower economy is good for bonds, whereas higher inflation caused by higher energy prices would be bad for bonds. The mainstream media wants you to believe higher energy will slow the economy, not cause inflation. The spin should last for a few more weeks until the debt sales are complete, then the Wall Street Spin-Masters will be free to promote stocks once again. For now, the agenda is to sell government debt paper. The scheduled debt sales are as follows:
Two weeks later the quarterly refunding takes place as follows:
Because the government still needs to borrow more money, they will be selling additional debt later in the month as follows:
I suspect stock prices will remain under pressure throughout this week as the government promotes their debt sales via the mouthpiece of the mainstream media. If U.S. government debt isn’t right for you, you can buy a fresh new 30-year euro bond from their auction on Wednesday, or you can buy some corporate debt. Alcoa announced they will be selling $2 billion of corporate bonds in 10, 20 and 30-year maturities. Tons of Global Liquidity From many articles I read, it appears we are awash in global liquidity. Analysts and talking heads on TV continue their banter on whether or not the Fed will cut rates or raise interest rates in the coming year. The interest rate determines the cost of money but remember, it is the supply of money that creates inflation. Unless we see a housing crash, the Fed will not lower rates. As rates remain steady, the Fed is trying to orchestrate a soft landing for real estate while keeping bond and stock prices inflated. In our world of pure fiat funny-money, new money is created by being “borrowed” into existence. Have a look at Doug Noland’s Credit Bubble Bulletin at the Prudent Bear from two weeks ago and you can get a much better idea of just how much money has been “borrowed” into existence over the last year. Please note the lines that Mr. Noland underlined: Bank Credit declined $5.3 billion during the week (of 1/3) to $8.291 TN. Bank Credit expanded $803 billion, or 10.7%, over the past 52 weeks. For the week, Securities Credit fell $9.9 billion. Loans & Leases gained $4.6 billion to a record $6.080 TN. Commercial & Industrial (C&I) Loans expanded 12.9% over the past year. For the week, C&I loans rose $3.7 billion, while Real Estate loans declined $5.0 billion. Bank Real Estate loans were up 13.9% over the past year. For the week, Consumer loans added $2.2 billion, and Securities loans increased $5.5 billion. Other loans dipped $1.6 billion. On the liability side, (previous M3) Large Time Deposits surged $21.5 billion. M2 (narrow) “money” jumped $28.9 billion (3wk gain of $75bn) to a record $7.073 TN (week of 1/1). Narrow “money” expanded $376 billion, or 5.6%, over the past year. M2 has expanded at a 9.0% pace during the past 20 weeks. For the week, Currency increased $2.2 billion, while Demand & Checkable Deposits declined $13.3 billion. Savings Deposits surged $32.4 billion, and Small Denominated Deposits added $1.1 billion. Retail Money Fund assets increased $6.5 billion. Total Money Market Fund Assets, as reported by the Investment Company Institute, dipped $1.9 billion last week to $2.390 Trillion. Money Fund Assets increased $326 billion over 52 weeks, or 15.8%. Money Fund Assets have expanded at a 23.2% rate over the past 20 weeks. Total Commercial Paper dipped $1.5 billion last week to $1.990 Trillion. Total CP has increased $300 billion, or 17.7%, over the past 52 weeks. Total CP has expanded at a 22% pace over the past 20 weeks. Fed Foreign Holdings of Treasury, Agency Debt increased $7.2 billion last week (ended 1/10) to a record $1.770 Trillion. “Custody” holdings were up $239 billion y-o-y, or 15.6%. Federal Reserve Credit dropped $14.9 billion to $844.5 billion. Fed Credit was up $28.7 billion y-o-y, or 3.5%. International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $770 billion y-o-y (18.8%) to a record $4.858 Trillion. Another very worthy article about the excess of global liquidity came from Cliff Droke at the beginning of the year. The article is linked here and titled “Liquidity and the Global Bull Market of 2007.” If nothing else, check the article to see his chart of MZM Money Stock from the Federal Reserve Bank of St. Louis. I don’t agree with Mr. Droke on all accounts, but he makes some good points about the implications of the excess global liquidity. The chart of money stock says it all…inflation is baked in the cake! The excess liquidity has got to go somewhere, and in the very near-term the money is being herded toward the Treasury complex. We have to refinance our old debt that is coming due and borrow enough additional money to finance the current deficits. U.S. Leadership Called Into Question So why should the government be so concerned about selling U.S. Treasury debt paper? The bottom line is the government MUST borrow more money because if they can’t borrow, they are BROKE! Please remember that Fed Chairman Bernanke just appeared before Congress last week and said absolutely that the current deficits of the Federal government are simply UNSUSTAINABLE. Mr. Bernanke hit the nail on the head, but that was last week...how soon we forget. In the news today we are hearing the U.S. could lose its leadership in finance because U.S. regulation is a hindrance to global competitiveness. From Bloomberg: U.S.
May Lose Its Place as World's Finance Leader, Study Says Jan. 22 (Bloomberg) -- The U.S. will lose its place as the world's leading financial center in the next decade without legal and regulatory changes, a report commissioned by New York Mayor Michael Bloomberg and Senator Charles Schumer found. All the criticism so far has singled out Sarbanes-Oxley corporate-governance regulations as pushing companies away from U.S. markets. The critics have blamed the law, passed in 2002, for the decline in U.S. public share sales. The U.S. accounted for 20 percent of all IPOs last year, down from 35 percent in 2001, according to the Financial Services Forum, which represents the country's largest banks and insurers. While I’m sure the regulatory environment in the U.S. is cumbersome and costly, I believe the reason for the loss of leadership is being misdirected. I believe the unsustainable debts and deficits are the bigger reason. As we continue to spend more than we possess and wage war around the world, the dollar and our leadership are being called into question. Now back to my query about why our government officials should be so concerned about selling U.S. debt paper. Two years ago Japan and China were the big buyers of U.S. debt as they recycled trade surpluses back to the U.S. as loans. We borrow money to buy goods from China, they profit by exporting to Americans, and then they loan us back the profits from their sales. However, in the last year they have backed-off the purchase of Treasury debt and left it to the oil exporting countries to pick-up the slack with their oil profits. After Japan and China lost their appetite for U.S. debt, OPEC nations have filled the gap until late last year. Now we need China again, and I’m betting Bernanke and Paulson cut some back-room deals with China to get our paper sold. To speculate further, China probably told Bernanke and Paulson to get a better yield on our Treasury paper and get the price of energy lower (lower inflation), and we will buy your paper. That is where we are today. The following Bloomberg article will give you a better perspective on how the OPEC nations have been buying Treasury paper over the last few years to fill the gap from Japan and China. According to the article, OPEC countries shifted gears back in September to become sellers of U.S. debt rather than buyers. OPEC
Dumps $10.1 Billion of Treasuries as Oil Tumbles (Update2) Jan. 22 (Bloomberg) -- OPEC nations are unloading Treasuries at the fastest pace in more than three years as crude oil prices tumble, sending bond yields higher. Exporters including Indonesia, Saudi Arabia and Venezuela, sold 9.4 percent, or $10.1 billion, of their U.S. government debt securities in the three months ended in November, according to Treasury Department data. Members of the Organization of Petroleum Exporting Countries last sold Treasuries for three straight months in June 2003. Oil producers have surpassed Asian central banks as the largest pool of global savings, accumulating an estimated $500 billion in 2006 alone, according to research by Pacific Investment Management Co. The sales during those three months mark a reversal because OPEC countries have boosted their holdings of U.S. government bonds by 70 percent to $97 billion in the past 17 months, Treasury data show. OPEC members were selling Treasuries as crude prices declined 34 percent from a record high of $78.40 a barrel in July. They are reducing demand for U.S. government bonds at the same time as central banks from China to Romania say they want to cut holdings of dollar-denominated assets. Only Japan, China and the U.K. own more Treasuries than the 12-OPEC nations, according to Treasury data released last week. The OPEC data doesn't include securities owned by Russia and Norway, which account for 40 percent of oil producer reserves, according to Toloui at Pimco. Now I step back to see the big picture and ask myself…Where did the money go? In the first ten months of 2006 China reduced U.S. government debt holdings by 1.7% and in the last few months OPEC nations are selling U.S. debt. So what did they buy in place of U.S. dollar debt? The following article was quite an eye-opener for me: Euro
Displaces Dollar in Bond Markets The euro has displaced the US dollar as the world’s pre-eminent currency in international bond markets, having outstripped the dollar-denominated market for the second year in a row. The data consolidate news last month that the value of euro notes in circulation had overtaken the dollar for the first time. Outstanding debt issued in the euro was worth the equivalent of $4,836bn at the end of 2006 compared with $3,892bn for the dollar, according to International Capital Market Association data. Outstanding euro-denominated debt accounts for 45 per cent of the international - or cross-border - market, compared with 37 per cent for the dollar. New issuance last year accounted for 49 per cent of the global total. That represents a startling turnabout from the pattern seen in recent decades, when the US bond market dwarfed its European rival: as recently as 2002, outstanding euro-denominated issuance represented just 27 per cent of the global pie, compared with 51 per cent for the dollar. Back to the Markets for the Close Checking back on the markets I see that I spoke just a little too soon about crude oil holding the $53 level as it has pulled back to close at $52.55, down $0.85 from Friday. I also noticed that gold and silver reversed direction from earlier this morning. Early in the trading session I was happy to see the metals in positive territory in light of the fact that the dollar was stronger throughout today’s session. In the morning hours spot gold was pressing higher toward the $640 mark and silver went north of $13 an ounce, but shortly after the gold market closed in London, the goon squad got heavy handed in selling gold lower. In after-market N.Y. Access trading gold is now back down to $632 an ounce and silver stands at $12.87. It would be unusual to see gold and silver break-out higher while the Treasury is conducting debt auctions. Now that we have money running out of the stock markets (Today: Dow Industrials down 88 points to 12,477 and NASDAQ 20 points lower to 2,431), it would not be expedient to see a big move higher in commodities….the money must get funneled into Treasuries this week and more in the weeks ahead. I expect to see the broad stock indices move sideways to lower in the coming weeks, but expect a stock rally to begin shortly after the debt sales are complete…at least the big caps in the Dow should rally led by energy and commodity producing companies. Last week the IMF said they expect 5% global economic growth in 2007 and the labor market in the U.S. is considered strong; both of those factors should lead to increasing global consumption of energy and commodities of all kinds. In recent months the cost of money as expressed by interest rates has moved slightly higher, but the bigger story is about the supply of money being expanded with reckless abandon! Have a Great Evening! Mike Hartman Copyright © 2007 All rights reserved. Contact
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