Financial Sense Blog

You are out at a family function and forced to miss the big game, so you record the game and will watch it well after the game has been decided. You spend the next few hours trying not to get updates of heaven forbid, learn of the final score. Ultimately, the charade lasts for much of the afternoon, but you are inadvertently told of the final score – blowing your enjoyment of the game as you now know the final score. The analogy being drawn today is that of earnings season. The game being played is the number of “beats” or how many companies are able to beat estimates providing investors a reason to buy the stock under the impression that things are getting better. However, the “game” has already been rigged in many cases as companies talk down guidance throughout the quarter to a point they know can be beat at quarter end. Just look at the percentage of companies beating estimates (from Bloomberg)

It has been a very interesting week thus far. Monday kick started traders with a heart pounding equities sell off which sent money into the US Dollar, precious metals and bonds as the safe havens of choice.

Silver continues its powerful and relentless move higher. From August 2010 until now this is the biggest rally during this silver bull market that started early last decade. Silver has also been the star performer of the financial world over the past year.

The ratings agency Standard & Poor's recently sent shocks through global markets by downgrading its long-term outlook on US debt.

Much like housing starts, existing home sales also posted a small gain in March. But, the bottom line is that housing starts and existing home sales are hovering close to cycle lows and sustained gains to push readings noticeably above cycle lows have not occurred, as yet. New home sales numbers for March will be published on April 25, 2011.

"The BDI is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players."

Of course, as we all know, for most people the stool now has only two legs, making it a rather wobbly support. Over the past few decades, private pensions have essentially disappeared. They may still be available for government and some union employees, but pensions in the world of private business are generally available only to a shrinking number of older workers who were grandfathered into a now closed system.

How high must oil prices go before they start killing the very demand that feeds them? Everybody from the International Monetary Fund to the International Energy Agency (IEA) are warning of dire economic consequences if today’s triple digit oil prices persist.

There are a few possible outcomes as we move forward. One is that the economy weakens, and the Fed decides to leave interest rates unchanged, or even to initiate an additional round of quantitative easing. In this event, it's quite possible that we still would not observe much inflation, provided that interest rates are held down far enough. Unfortunately, the larger the monetary base, the lower the interest rate required for a non-inflationary outcome. T-bills are already at less than 4 basis points. In the event of even another $200 billion in quantitative easing, the liquidity preference curve suggests that Treasury bill yields would have to be held at literally a single basis point in order to avoid inflationary pressures.

Two months ago, I noted that the surprise resignation of Wells Fargo's Chief Financial Officer had caught the eye of a number of shareholders, who noted my comment several quarters ago that we could observe a wave of fresh risk aversion "at the point where the first bank CFO resigns out of refusal to sharpen his pencil any further." My impression is that the underlying state of mortgage debt is no better than it was quarters ago, and indeed may be worse in the sense that there has been no meaningful decline in the backlog of delinquent and unforeclosed homes. While foreclosure filings certainly fell significantly in the first quarter, the decline was driven by record-keeping problems and legal moratoriums.