DJ30 – 11,577   up 180
US Treasury 10 Year Bond – 2.15%    down 0.01%
USDEUR  -  1.3756
Gold – $1663  down $13
Oil – $88.23    up  $1.81

Stocks jumped today on news out of Europe – that I reported to you yesterday – but it took until 3PM EST to move the market as European newspapers reported it today.

US Treasury Interest Rates UP……..

I mentioned last week that I observed that the 10 Year Treasury Bond interest rate was rising, and I couldn’t explain it.  It bothered me.  I follow that particular measure of our economy, and when it couldn’t be explained easily, I believe something is going on “under the surface.”  I also believe it is my job to ferret it out.

So, here are my findings for your absorption.

It appears (as seen in the following graph) that foreigners are indeed selling our Treasuries.  The data shown is from the US Federal Reserve, so it should be fairly accurate.  I hypothesized that the Chinese could be selling our Treasuries as a “shot across the bow” warning the US that we shouldn’t mess with their internal affairs – like how they fix their exchange rate – as our Senate just did with a bill they passed.

You can see by this graph that foreign central banks are net sellers of our Treasuries – and they just set a record for that selling.  If this selling continues, it will be a true disaster for America.  It would be the equivalent of the “bond vigilantes” saying that it is time America paid higher interest rates because the “risk” involved in holding these IOUs is just too high.

It really doesn’t matter what central bank(s) is selling the Treasuries – the effect is the same.  Rising interest rates.  If it’s the Chinese, it means it is politically motivated, rather than “risk” motivated.  But, the effect is the same.

What are the takeaways from this graph?

1. We just set an ALL TIME RECORD for sales of US Treasuries held by foreign central banks.
2. $1 TRILLION in redemption is greater than the entire QE2 FED purchase plan of $600B – the FED can’t keep up with this type of redemption.
3. The selloff in September 2007 started the credit crisis of 2008.
4. As of the last quarter, foreign central banks are now holding LESS US Treasuries – FOR THE FIRST TIME.  (Is this a lack of faith in America?)

The FED QE2 actions are clearly associated with rising interest rates, even though those actions are supposed to keep the rates down.  The 10 Year Treasury has risen 1% since the announcement of QE2.

All this is pointing to higher interest rates – and that means lower US Treasury bond values.  (If you own Treasuries, you should consider selling the longer term bonds now.)

I think the bond market should speak for itself.  The next graph shows the historic actual percentage yields of bonds – both long term (30 year) and inflation (CPI).  The interpretation is fairly easy.  Current bond rates are saying that inflation will be 2% for the next 30 years.  Do you believe that???

Yes, that is what today’s market is saying with its current percentage yields.  However, you can see that things change.  Back in 1983, the yield was 14% and inflation was priced in for the next 30 years.  That is when I personally made a killing in the markets.  I didn’t believe it.  I believed Volker would bring down inflation, and he did.

Today, I don’t believe that inflation will stay at 2% for 30 years.

Who owns the bonds????

Who owns the most US Treasuries?  Did you say China or Japan?  Well, you are wrong.  It is the Federal Reserve.  The FED is buying all new bond issues with its $600B QE2 actions.

Russia holds the 4th largest amount of US Treasuries, but is selling them and now holds 25% less than when Lehman Bros. fell.  China is buying anything but US Dollar denominated Treasuries.

What is going on with Commodity Prices???

I have been talking a lot about commodity prices, and their role in the world today.  You are probably reading and hearing that commodity prices have been rising rapidly (true) and will have a correction (maybe).  You will hear this is just a temporary phenomenon and everything will go back to normal in the future (never.)

Here is a graph that shows the historic rise of commodities over the past 10 years.  Commodities are not a short term phenomenon when their price rises.

Alongside the CRB index (an average of all commodities) is the price of gold (another commodity).  As I have been recommending gold over the past years, I thought it would be interesting for you to see its rise in value too, and how it fares against the basket of all commodities.

Bonds gained dramatically (decreased interest rates) – a nice move for us.

The Dollar strengthened one cent against the Euro.

Oil and gasoline were hit again, and have come well of their recent highs.  Sanity appears to be coming back into the oil price.  My personal belief is that oil should be around $50/barrel, and everything above that number is caused by speculators.

Gold fell again, and is now a time to consider buying gold again.  If gold falls below $900/ounce, it will definitely be time to buy.

Today’s News……

Nothing much happening in the financial news.  The real news is in Iran, and N. Korea.

Here are the last numbers for today:
Dow Jones 30 Industrial – 8339 (down 201 points)
10 Year Treasury Bond – 3.69% (down 0.10%)
Euro – $1.3861
Gold – $922 (down $15)
Oil – $66.93 (down $2.62)
Gasoline $1.86 (down $0.06)

Bonds were the only market which ended significantly higher (lower interest rates) as people worried about the economy (see articles below.)  Remember that the bond market is much more sober and realistic as a market compared to the stock market, or commodities.

In the news today…..

The Treasury has decided it should give our TARP money to Insurance Companies too.  I guess the insurance companies must be in trouble.  Remember the psychology of TARP – it was forced on the banks, and they couldn’t say “no.”  I wonder if the insurance companies will be in for the same treatment?  The rationale is that if the “market” doesn’t know which insurance companies are “bad” and which ones are “good”, the market won’t be able to drive down the value of the bad companies and cause them to become “bankrupt” because their share value is so low – as happened with the banks.

But, that was the reason the Treasury has never told us which banks took the TARP, and how much they took.  But, someone (insider knowledge??) found out and drove the value of these crummy banks down.  I guess the Treasury isn’t as smart as it thinks it is.

Some insurance companies are also BANKS today.  The ones that are banks, and therefore automatically qualified to receive TARP money, are Prudential, Met Life, Hartford and Lincoln.  That’s all.  Maybe more insurance companies are planning to become banks – just like the financial companies ALL become banks at the end of last year.  By the way, I smell a conspiracy about that change in status as all those “new banks” got billions of our tax dollars after they swapped over.

FEDs March Meeting Minutes…..

The FED minutes from March’s FOMC meeting were released today, and the FED decision to “stimulate” the economy with $1.2TRILLION was based on the following:

1. deteriorating economic outlook – falling production, higher layoffs than previously anticipated
2. poor export orders – the US economy can’t count on exports helping keep production up
3. thwart the continued deflationary pressures
4. not worried about inflation, but was worried about depression.
5. put long term bond prices up (decrease long term interest rates) by purchasing long term treasuries

The FED reduced its GDP predictions for 2009 and 2010.  They previously stated the 3rd and 4th Q would have recovery growth.  They now say both these quarters will be ZERO growth.  That’s an amazing turnaround.  They previously stated that 2010 will have growth between 2.5% and 3.3%, but now predict 2010 will have very weak growth – and that means less than 1%.  The FED is finally getting its arms around the seriousness of the current economy.  The lesson here is that the FED (with its infinite wisdom) DIDN’T have its hands around the the economy as late as January.  Okay, they’re human too.

Here is my personal opinion:  The FED acted one week after the Chinese threatened to “pull the plug” on buying more US Treasuries.  The Chinese understand that higher interest rates means lower values of their bonds.  They also understand the future inflation produces higher interest rates, and they publicly stated that the Obama Administration’s spending plans would produce inflation.  The FED (coincidentally???) announced its US Treasury Bond purchase plans to keep interest rates low.  This mollified the Chinese to purchase more Treasuries in the near term as they are being “protected” by the FEDs use of taxpayer money.  (Please remember that when the FED buys Treasuries, they can lose money on those purchases just like any investor.)  The FED and the Treasury can’t fund the Obama spending without foreign nations purchasing dollar denominated US Treasuries, and if the Chinese stopped buying, everyone else would probably stop too.

Stock Market Psychology…..

Here is something for you to think about.  The subject being debated, hot and heavy, today is whether or not stocks are in a new bull market, or is this just a bear market rally?

Market psychology says that a major turn in the market upward occurs when EVERYONE thinks the market will continue to go down FOREVER.  Also, when the first person says it is at a bottom, that person is publicly stoned to death (verbally speaking) with cynicism and criticism.  

That never happened when we hit the bottom last month and the market rallied over 20%.  In fact, there were lots of pundits saying we were “at the bottom” as the market dropped like a stone.

Just using “market psychology” this says that the bottom was NOT reached last month, but a lower bottom will be hit sometime in the future.  You can’t predict timing (i.e. when the bottom will be reached) using market psychology, but you can (usually) predict the trend – up or down.

Stock market psychology says that the recent rise in stocks is a Sucker’s Rally.

Herein ends today’s lesson.

Here are the last numbers for today:
Dow Jones 30 Industrial – 7838 (up 48 points)
10 Year Treasury Bond – 2.85% (down 0.08%)
Euro – $1.3260
Gold – $886 (up $3)
Oil – $49.38 (up $0.23)
Gasoline – $1.44 (down $0.02)                   

Bonds got killed today as a Treasury auction didn’t go as well as it could.

The Dollar, oil and gasoline went sideways.  Oil supply appears to be at a high point right now.

Gold rallied and ended up again today.

In the news today….

Good News?? – Durable Goods – rose 3.4% over the previous month.  Is this a change in trend or just a blip?  I think it’s a blip.  Most of the gain was in military orders.  But, it nice to see something going up.

Mortgage Applications – rose 3.2%.  This is caused by the new LOW mortgage rates.  3/4 of the applications were for REFIs.

30 Year Mortgage Rate – is 4.63%.  This is a RECORD LOW (only since records are being kept since 1990.)

Not so good news – 5 Year Treasury Auction – of $24B didn’t go well.  It was not subscribed as much as people hoped, and caused the initial stock market rally to fade, and then go way down.  (Stocks rallied at the end of the day.)  Shows how much influence bonds have on stocks.  If you remember the FED said it was going to start purchasing longer dated Treasuries.  This auction wasn’t one of them, but the folks with money are voting with their money.  What’s the problem?  Inflation caused by massive spending, bailouts, etc – just the printing of money worries people with money.
 

 
Here are the last numbers for today:
Dow Jones 30 Industrial – 7750 (up 90 points)
10 Year Treasury Bond – 2.77% (up 0.12%)
Euro – $1.3593
Gold – $938 (up $12)
Oil – $52.77 (down $1.21)
Gasoline – $1.50 (down $0.01)  

Bonds, on the other hand, are extremely nervous about the high volume of US Treasury sales this week.  It should be a very bad week for bonds.  Today, the 10 Year Treasury moved over 3% – a massive move in interest rates in 6 weeks.

Gold fell back below $900/ounce, so it is testing the range once more. Wait to buy more gold until it closes above $920+.

In the news today…..

Just lots of talk about the Stimulus Package.  Did you know that the CBO (the Congressional Budget Office) said that the House bill would have a NEGATIVE stimulus on the US economy????  Who says there isn’t a lot of politics in this process.

The Treasury Secretary postponed his announcement on TARP 2 spending until tomorrow, so nothing to report today.
 

Here are the last numbers:
Dow Jones 30 Industrial – 8271 (down 10 points)
10 Year Treasury Bond – 3.03% (up 0.05%)
Euro – $1.3007
Gold – $893 (down $22)
Oil – $39.56 (down $0.61)
Gasoline – $1.25 (no change)                                                                             

Bonds went sideways, and many are saying that there is a “Bond Bubble” happening right now.  I tend to agree, but it could last longer and go deeper (in interest rates) than anyone thinks – as all bubbles do.  Another thing pointing to unusual movement on the bond market is its apparent “breaking” from moving in sympathy with the stock market – I’ve been noticing this over the past few months, and see a new pattern for bonds emerging – one that is driven by government bond actions.

Gold fell significantly, and is now a “buy”, as it is below $850/ounce.  The Dollar went sideways today.

Oil and gasoline fell today as worries about a “wild card” event in the oil markets is lessening, and supplies/storage appear high compared to demand.  This fortunately has lessened the chances of a gasoline price increase – at least a significant one.

In the news today…..

Unemployment increases to be announced tomorrow moved the market downward today.  ADP (a payroll company with excellent data on employment – better than the US Government’s data) is showing a major increase to be announced tomorrow.  Today’s market has discounted that announcement – so that news by itself shouldn’t be a big deal tomorrow.

Consumer loan repayments are at their POOREST since 1980, and are expected to get worse.  This trend will only get worse by the increase in unemployment expected.

Commercial rents are down 1.2% last month – the largest decrease since 2003.  I think this trend will only get worse.


Here are Today’s numbers:
Dow Jones 30 Industrial – 8770 (down 245 points)
10 Year Treasury Bond – 2.49% (down 0.01%)
Euro – $1.3634
Gold – $842 (down $24) – now gold is a buy.
Oil – $42.63 (down $5.95)
Gasoline – $1.08 (down $0.11)

Bonds had plenty of action with interest rates shooting upward – see article below.

The Dollar strengthened as oil is thinking that the US economy will be coming back fast – kind of illogical, but that’s the market.

Gold lost some of its luster, falling $22.

Oil and gasoline powered ahead as the Russia/Ukraine gas situation, and Israeli/Gaza incursion is causing oil to command higher prices.  Gasoline is now at a level where pump prices should start to go UP!!!!!!  This is bad news for all the optimists in America who were enjoying the cheep gasoline.  Let’s hope oil prices fall soon.

In the news today….

Bonds were acting quite normally, and I want to take this opportunity to show you one way that interest rates can go UP.  This is happening right now. Why??  There is a big supply of bonds coming on the market right now.  Why???  Because the US Government has been spending so much money (and doesn’t have the money) that it must finance its spending by writing bonds, and selling them to whoever will purchase them.   The supply is truly astounding with new terms (like 3 year bonds) and rumors of 40 year bonds.  This level of supply is spooking bond traders, and interest rates are rising accordingly.

Consider the idea of a 40 year bond.  Why would the US Government want to sell 40 year bonds?  Simple in my mind.  Interest rates are at historic lows.  If they can get someone to buy these bonds – knowing fully that interest rates will be rising in the future – they will sell them at low interest rates now, and be able to pay those low interest rates for the next 40 years.  A neat trick if there are buyers – and there are buyers.

International Trouble???

The Italian Government is (rumored) to be considering suing JP Morgan, Deutsche Bank and UBS for $47.5B of bad swaps they sold the Italians in the 90’s.  When things get bad, the people who lost their money go hunting for the guilty.  This unraveling of the financial problems will continue, and will continue to have downward pressure on the financial institutions and banks.  The size of this particular problem got my attention.

Here are Today’s numbers:
Dow Jones 30 Industrial – 8953 (down 82 points)
10 Year Treasury Bond – 2.49% (up 0.07%)
Euro – $1.3617
Gold – $858 (down $22)
Oil – $48.81 (up $2.47)
Gasoline – $1.18 (up $0.07)