3s, 10s, and 30s: Treasury Auctions Announcement Tomorrow

Pay attention to the market as these are announced tomorrow, April 1.

No fooling.

* * * * * J B K * * * * *

San Francisco

http://www.treasurydirect.gov/RI/OFAnnce

3-YEAR NOTE 04-06-2010
9-YEAR 9-MONTH TIPS 04-05-2010
9-YEAR 10-MONTH NOTE 04-07-2010
29-YEAR 10-MONTH BOND 04-08-2010

Euro hits bottom?

We've tried to be bullish on the Euro since this debacle started, and the markets are telling us that now might be the time.

Look at that volume.

Time to buy the Euro.

Cheap Mortgages May Last as Investors Replace Fed (Update1) - Bloomberg.com

Maybe not.

But, will the spreads tighten?

I doubt it.

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San Francisco

The Federal Reserve's completion this week of its program to buy $1.25 trillion in mortgage bonds probably won't mean significantly higher U.S. home loan rates as investors return to the market, replacing the Fed.

Fixed mortgage rates likely will rise less than a quarter of a percentage point in the next three months, the smallest increase for the second quarter since a drop in 2005, according to estimates by Fannie Mae and Freddie Mac. The gain would add about $30 to the monthly payment for a $250,000 mortgage.

"What we are seeing is an effective handoff occurring between the Fed and industry buyers such as banks and pension funds," said Christopher Sebald, chief investment officer for Advantus Capital Management in St. Paul, Minnesota, which oversees $18.5 billion, including about $5.6 billion in mortgage bonds. "I thought the Fed's exit would leave a bigger void."

http://www.bloomberg.com/apps/news?pid=20601068&sid=aqM6cAXBnmfc

Europe Inflation Jumps More Than Economists Forecast (Update2) - Bloomberg.com

And this is from a currency that did not increase the monetary base.

How can the US avoid inflation?

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San Francisco

European inflation accelerated more than economists forecast on higher oil prices, while the unemployment rate reached double-digits for the first time since 1998.

Consumer prices in the 16-nation euro region increased 1.5 percent in March from a year earlier, after a 0.9 percent gain in February, the European Union statistics office in Luxembourg said today. That is the fastest inflation since December 2008 and topped the median forecast of 1.1 percent in a Bloomberg survey of 36 economists. Unemployment rose to 10 percent in February, the highest rate since August 1998, a separate report showed.

http://www.bloomberg.com/apps/news?pid=20601068&sid=arrsXM4KpmGs

Greece Plans to Sell Global Dollar Bond by Early May (Update1) - Bloomberg.com

This is what happens when a bankrupt nation sells bonds.

Remember these numbers. 10 year notes at 6.58.

We'll revisit this issue in 6 months.

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San Francisco

Greek bonds fell for a third day, pushing the yield on the two-year note up 17 basis points to 5.22 percent as of 10:26 a.m. in London. The 10-year yield increased 7 basis points to 6.58 percent. The seven-year notes sold on March 29 have fallen 2.3 percent since issue.

The extra yield, or spread, that investors demand to hold Greek 10-year bonds instead of benchmark German bunds climbed 12 basis points to 345 basis points, the most since Feb. 25.

http://www.bloomberg.com/apps/news?pid=20601087&sid=apLIYrttdcLc&pos=1

FT.com / Commodities - Steelmakers agree new iron ore contracts

Inflation is coming, and there's nothing we can do to stop it.

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San Francisco

Steelmakers agree to new iron ore contracts

Global miners and key Asian steelmakers have agreed to a record increase in iron ore prices after they signed deals to replace the 40-year-old pricing system based on annual contracts with new short-term deals linked to the spot market.

The landmark move by Vale of Brazil and Anglo-Australian BHP Billiton ends the so-called benchmark system which has been in place since the early 1960s. Rio Tinto has yet to sign any new contract, but executives expect it to follow soon.

Iron ore is the main ingredient used to make steel. The new agreements meant that steelmakers would pay about $110-$120 a tonne next quarter for their iron ore, a 90-100 per cent increase from the $60 level at which the 2009-10 annual contracts were settled, industry executives said. Prices are likely to rise again later in the year.

http://www.ft.com/cms/s/0/d15d7758-3bad-11df-a4c0-00144feabdc0.html

Consumer spending up, supports recovery picture | Reuters

Standard business cycle report.

One important point.

Still consuming savings.

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San Francisco

Consumers tapped their savings in February to keep spending on an upward path for a fifth straight month, implying that consumption may be strong enough in coming months to keep a recovery going.

The rise in spending despite flat incomes in February suggests households were becoming positioned to pick up the baton from the government and a spate of inventory-rebuilding as the prime drivers of growth.

"Consumers are getting more comfortable, which is an essential ingredient for a sustainable recovery. The Federal Reserve should be pleased to see steady spending growth, but will not raise rates until the job picture improves," said Chris Low, chief economist at FTN Financial in New York.

Spending increased 0.3 percent last month after rising 0.4 percent in January, the Commerce Department said on Monday. The gain was in line with market expectations. Spending normally accounts for about 70 percent of U.S. economic activity.

http://www.reuters.com/article/idUSTRE62S2G320100329

Fed's Evans: Monetary policy not effective for pricking bubbles | Reuters

What an idiot.

All bubbles are caused and ended by monetary policy.

Go look at the last four cycles.

Each one was ended by the Fed raising short-term rates above long rates.

Each one was caused by the Fed manipulating short rates, keeping them too low for too long.

The Fed should get out of the business of managing short-term interest rates.

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San Francisco

Monetary policy is not an effective tool for pricking asset bubbles, but central banks without authority to supervise banks may have no alternative, Chicago Federal Reserve President Charles Evans said Tuesday.

Evans made the comments as reform proposals move forward in Washington to strip the Fed -- the U.S. central bank -- of supervisory authority over small banks. The reforms would add to the Fed's role in supervising large financial institutions.

Regulatory reforms designed to prevent a repeat of the financial crisis, which was fueled by asset bubbles, should give central banks a supervisory and regulatory role so they have additional tools to promote financial stability, he said, according to the prepared text of a speech in Hong Kong.

A central bank, because it is the lender of last resort, should have a role in promoting financial stability, he said.

http://www.reuters.com/article/idUSTRE62T0UM20100330

Subprime Debt Rallies as U.S. Enhances Loan Aid: Credit Markets - Bloomberg.com

Is the disaster over?

Maybe, just maybe.

Now, all we have to worry about is the commercial mortgage market.

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San Francisco

March 30 (Bloomberg) -- Subprime-mortgage securities are rising at an accelerating pace as the U.S. begins to encourage reductions to homeowners' balances, which may lead to fewer foreclosures and a quicker end to the housing slump.

A Markit ABX index of credit-default swaps tied to 20 subprime-loan bonds rated AAA when created in the first half of 2006 climbed 3.2 percent last week to 49.1, the highest since January 2009, according to Markit Group Ltd.

Senior-ranked bonds tied to borrowers with poor credit will mostly benefit after the Treasury Department said for the first time it would seek to cut the size of mortgages, reducing the likelihood that loan modifications will fail, according to JPMorgan Chase & Co., Morgan Stanley and Barclays Plc. The revised plan also supports the housing market by helping avert more foreclosures, Amherst Securities Group LP analyst Laurie Goodman said.

http://www.bloomberg.com/apps/news?pid=20601087&sid=avSJnnOE4pQQ&pos=5

Scrutiny rises of failed bank purchases FT.com / Companies / Banks -

Another sign the financial system is healing.

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San Francisco

US regulators are stepping up their scrutiny of rules that enable buyers of failed banks to take an accounting gain – dubbed "Christmas capital" – by acquiring assets at a discount, according to people familiar with the discussions.

Regulators are discussing guidelines to limit how much of a bank's capital can be comprised of such gains. The talks involve leading bank regulators, including the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.

"The FDIC wants to make sure the acquirer has capital beyond the gain generated from the transaction," said one person with knowledge of these deals. The FDIC hopes to prevent acquirers of troubled banks from facing problems down the road if assets deteriorate.

http://www.ft.com/cms/s/0/5fed2092-3a94-11df-b6d5-00144feabdc0.html

Policy makers were complacent, Fed's Kohn says | Reuters

Another example of the ignorance of our monetary authorities.

Kohn is an idiot.

The problem was not securitization, the problem was government incompetence.

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San Francisco

Reuters) - Federal Reserve Vice Chairman Donald Kohn said on Wednesday that top policy makers had been "a little complacent" about complex financial instruments that contributed to the global financial crisis.

The banking meltdown, which resulted in emergency measures by the central bank totaling well over $1 trillion, helped push the world economy into its first recession since World War Two.

"The reality is that we didn't understand the economy as well as we thought we did," Kohn said in a speech at Davidson College in Davidson, North Carolina.

"Serious deficiencies with these securitizations -- the associated derivative instruments, and the structures that evolved to hold securitized debt -- were at the heart of the financial crisis."

http://www.reuters.com/article/idUSTRE62O02C20100325

Fed's balance sheet rises to record in latest week | Reuters

Wow.

When the Fed stops buying, and starts selling, we're on a roller coaster.

Traders, start your selling...

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San Francisco

Reuters) - The U.S. Federal Reserve's balance sheet rose to a record high in the latest week, surpassing the previous week's record level, Fed data released on Thursday showed.

The Fed's balance sheet -- a broad gauge of its lending to the financial system -- rose to $2.296 trillion in the week ended March 24 from $2.290 trillion in the previous week.

The Fed's holdings of mortgage-backed securities backed by U.S. housing finance agencies Fannie Mae (FNM.N) and Freddie Mac (FRE.N) rose to $1.074 trillion from $1.066 trillion a week earlier.

The central bank's ownership of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank System was unchanged from a week ago at $167.49 billion.

At the end of March, the Fed will complete its program of buying mortgage securities, the pillar of its quantitative easing program that was adopted to hold down home borrowing costs in a bid to revive the battered housing sector.

The Fed has committed to buy about $175 billion of agency debt and $1.25 trillion of agency MBS.

http://www.reuters.com/article/idUSTRE62O4X520100325

Reform in Congress Lacking Cash Clause to Stop Lehman-Like Runs - Bloomberg.com

The problem is not liquidity, but rather government incompetence and corruption.

These problems would not exist if the Congress had not lowered Fannie and Freddie's standards.

There's where the reform must begin.

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San Francisco

March 29 (Bloomberg) -- In 2,615 pages of financial reform legislation introduced in the U.S. Congress, there are no rules to ensure that banks keep enough cash-like assets when credit disappears.

Guidelines on liquidity risk management, which were published March 17 by the Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corp., also avoided spelling out how much banks need to hold, and in what form, to make sure they don't collapse if short-term lending dries up. International efforts to do that for the global banking system could take years to implement.

Citigroup Inc., which came close to a funding shortfall in 2008 and received a $45 billion government infusion, is among U.S. lenders that have hoarded cash since credit markets seized up two years ago. Even so, the banks continue to rely on overnight borrowing for their funding needs. While down from its peak in 2007, the U.S. repo market, which provides banks with short-term lending backed by collateral, is still $2 trillion.

"The temptation always is to lower liquidity levels when times are good," said Baylor Lancaster, an analyst at CreditSights Inc. in Miami. "That's why we need rules. In three years' time, are people really going to care about liquidity as much as they do now?"

http://www.bloomberg.com/apps/news?pid=20601109&sid=aN8ApDdiCwcA&pos=12

U.S.-Bound Boxes Pile Up in Asia as Lines Avoid Adding Ships - Bloomberg.com

If there was any doubt about the power of a trillion dollars of high-powered money, this ought to remove them.

A year ago, the world was staring into an economic abyss, looking at the worst contraction since the 1930s.

Today, the US and world economies are roaring, thanks to the prompt, resolute, and aggressive of the US Federal Reserve system.

This story shows how fast economic activity can rebound.

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San Francisco

March 29 (Bloomberg) -- South Korea's biggest port, overwhelmed with empty containers a year ago, is now dealing with shipping lines that have more cargo than they can carry.

Surging shipments of furniture, electronics and clothes to the U.S. and Europe, coupled with capacity cuts by shipping lines, has caused as much as 15 percent of containers to be delayed in Busan this year, often by more than a week, according to Park Jong Ho, assistant general manager at Busan International Container Terminal Co.

"With the economy recovering, we have been seeing a lot of containers that didn't make it out on time because there wasn't enough space on ships," he said.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aH.ytIOQhEgA&pos=11

Goldman Capitulation on Dollar Shows Reversal on U.S. (Update2) - Bloomberg.com

This story makes no sense.

The facts are clear enough, but the conclusions are gibberish.

There are 4 reasons to buy a currency.

1. Lower inflation
2. Higher short rates
3. Better trade balance
4. Stronger stock market.

In the analysis below, these reasons are jumbled together.

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San Francisco

March 29 (Bloomberg) -- The strengthening U.S. economy, subdued inflation and rising stock prices are propelling the dollar rally into its fifth month as traders seek refuge from Europe's fiscal crisis and Japanese deflation.

Goldman Sachs Group Inc. and Citigroup Inc. ended bets on a falling dollar last week after the trades lost 2.8 percent. Strategists are raising greenback forecasts at the fastest pace since last March, just before U.S. stimulus efforts that poured as much as $12.8 trillion into the economy ended the currency's strongest rally in 28 years. Median predictions for the dollar against 47 currencies tracked in Bloomberg surveys rose an average of 1.4 percentage points in the month to March 24.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aszUACQ1f9hU&pos=4

Supply fears start to hit Treasuries

I have two problems with this scenario.

1. When everybody knows about a problem, it doesn't happen.
2. When everybody understands a problem, it gets solved fast.

I'm betting on 2.

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San Francisco

The bond vigilantes are finally flexing their muscles. A long period of stability for the US government bond market showed signs of cracking this week as a lack of investor appetite for new debt sent the benchmark 10-year yield to its highest level since last June.

For more than a year, analysts have been warning that record sized debt sales by the US Treasury were at odds with a 10-year yield sitting comfortably below 4 per cent. This week, the yield on 10-year notes jumped from 3.65 per cent to a peak of 3.92 per cent on Thursday. On Friday it was 3.87 per cent.

Chart: TreasuriesFalling inflation, rising unemployment, the housing market slump, the Federal Reserve's policies of a near zero overnight borrowing rate and its purchase of up to $1,700bn in bonds have all helped keep Treasury yields near historic lows.

But this week the mood shifted as yields for $118bn of new US debt were much higher than forecast, sparking overall selling of Treasuries. Sentiment also deteriorated in the UK bond market after the government's budget ahead of a general election expected in May failed to resolve doubts over future spending and debt reduction.

http://www.ft.com/cms/s/0/c51fbbce-3908-11df-8970-00144feabdc0.html

Money numbers look ugly

Recent data from the fed show little growth in M1, M2, and MZM.

No danger of increasing short-term rates

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San Francisco

Economy in U.S. Preserves Biggest Gain in Six Years (Update1) - Bloomberg.com

Only a minor adjustment in GDP.

But look at the earnings report.

Is there any doubt why the stock market roared ahead last year?

Now we have to deal with rising interest rates.

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San Francisco

March 26 (Bloomberg) -- The U.S. economy expanded at a 5.6 percent annual rate in the fourth quarter of 2009, and corporate profits climbed, setting the stage for gains in employment that may broaden and preserve the expansion.

The rise in gross domestic product, while smaller than the government's previous estimate issued last month, marked the best performance in six years, figures from the Commerce Department showed today in Washington. Company earnings increased 8 percent, capping the biggest year-over-year gain in a quarter century.

"Profits are a leading indicator of the economy and suggest continued growth and likely job gains in the second quarter of this year," John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said in a note to clients after the report.

http://www.bloomberg.com/apps/news?pid=20601068&sid=a8CxLvnMYlY4

Pimco Buys Bonds Wishing ‘Next Life’ as Bank: Credit Markets - Bloomberg.com

The next bubble is building.

Kiesel is describing a lending tactic that borrows short-term money and makes longer term loans.

As interest rates rise, and short rates rise faster than long rates, this tactic is doomed.

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San Francisco

March 26 (Bloomberg) -- Pacific Investment Management Co., manager of the world's biggest bond fund, says bank securities are the best investments in credit markets.

JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. are benefiting from a combination of slowing consumer loan losses and the Federal Reserve's zero interest-rate policy, according to Mark Kiesel, global head of corporate bond portfolio management at Pimco. Bondholders also will gain from banks raising capital to bolster their balance sheets, he said.

"If I could come back as any corporate entity in my next life it would be as a money-center bank," said Kiesel, who oversees $300 billion of credit investments from Newport Beach, California. "You can borrow money at virtually zero, you make prudent loans and you basically earn that spread."

http://www.bloomberg.com/apps/news?pid=20601010&sid=aURsZyAjYweE

Half of U.S. Home Loan Modifications Default Again (Update1) - Bloomberg.com

Oh, when will we ever learn?

The government can't do anything right.

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San Francisco

March 25 (Bloomberg) -- More than half of U.S. borrowers who received loan modifications on delinquent mortgages defaulted again after nine months, according to a federal report.

The re-default rate of loans modified in the first quarter of 2009 was 51.5 percent by the end of the year, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a joint report today. The figure, which measures payments at least 30 days late, climbed to 57.9 percent for changes made in the prior 12 months.

http://www.bloomberg.com/apps/news?pid=20601010&sid=aVYxPZ56vjys

Fed Officials Signal Asset Sales Will Play Bigger Role in Exit - Bloomberg.com

There was never a doubt the Fed would be selling assets.

The story below only confirms the fact.

The only questions are when and how much.

Suppose the Fed sells $1.2 trillion in securities.

That's $100 million a month in new money for one year.

Or, $50 million a month for two years.

Or, $25 million a month for four years.

All of this is new money, as they say over at the Treasury. Not just a refinancing of old debt.

These are huge numbers.

The longer the money stays in the system, the higher the probability that banks will use it as reserves to make new loans.

And new loans will increase the money supply.

And, as Friedman said, Inflation is always and everywhere a monetary phenomenon.

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San Francisco

March 26 (Bloomberg) -- Federal Reserve officials are moving toward a consensus that asset sales will play a more prominent role in their exit from the most expansive monetary policy in the central bank's history.

Chairman Ben S. Bernanke told legislators yesterday that "restoring the size and composition" of the Fed's record $2.32 trillion balance sheet to a "more normal configuration" is a long-term policy goal. St. Louis Fed President James Bullard said in an interview the central bank must start making plans now for future asset sales.

"There does seem to be agreement that you want to get back to a normal-looking balance sheet at some point in the future," Bullard said. "We want to someday get back to a pre-crisis balance sheet -- both the size of it and the fact that it would be an all-Treasuries balance sheet."

http://www.bloomberg.com/apps/news?pid=20601087&sid=aVMsKXGRZEbI&pos=4

Yellen Says She’ll Be Ready to Raise Rates When ‘Time Has Come’ - Bloomberg.com

Alan Greenspan in a skirt.

This is another San Francisco earthquake just waiting to happen.

Pray for the health and long life of Bernanke.

I am.

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San Francisco

March 24 (Bloomberg) -- Janet Yellen, president of the Federal Reserve Bank of San Francisco, said that while it's too soon to raise interest rates, she'll be ready to do so "when the time has come."

Yellen said the Fed's pledge to keep rates low for "an extended period" was "appropriate" and that it made "no particular time commitment." In a speech yesterday in Los Angeles, she discounted concerns record budget deficits might fuel inflation.

"The Fed has to be ready to take away the punch bowl when it's necessary," Yellen told reporters after the speech. "When the time has come, am I going to support raising interest rates? You bet. I don't want to see inflation pick up."

http://www.bloomberg.com/apps/news?pid=20601068&sid=askizRCWdj2Q

Ackman’s Greatest Short - MBIA - Bloomberg.com

The mortgage insurance companies were the canaries in this coal mine. MBIA, MGIC, and PMI.

To anyone who was watching, it was obvious that there were too many adjustable rate loans made to people with insufficient down payments, bad credit, and low income.

All that was necessary for the cave-in was a sustained increase in short-term interest rates. The idiot Greenspan provided the impetus when in 2004 he started raising Fed Funds from 1% to 5.25%.

By the time it was over, all the mortgage insurance companies were destroyed, as were Fannie and Freddie, the mortgage market was in ruins, CDS issuers were bankrupt, and the economy was collapsing.

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San Francisco

"Our newest and largest [short] investment is on an extremely highly levered, yet AAA-rated financial institution, which we believe has inadequate reserves, undisclosed credit- quality problems, aggressive accounting and substantial unconsolidated indebtedness contained in off-balance-sheet special-purpose vehicles," he wrote. The position had the potential to generate a return of about five times the fund's total assets if it was successful.

Though little known outside of Wall Street circles in 2002, MBIA ranked as one of the five biggest financial institutions in the country in terms of outstanding credit exposure. It shared that distinction with Bank of America Corp., Citigroup Inc. and government-sponsored mortgage lenders Fannie Mae and Freddie Mac.

http://www.bloomberg.com/apps/news?pid=20601108&sid=aLmOb9zzVZ9A

Gross Says Health Care Reform to Raise Liabilities (Update1) - Bloomberg.com

When Gross speaks, the bond market listens.

Paterson's clients have extended the maturity of their liabilities as much as they can, and are now sitting on cheap money.

Loans are on the way.

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San Francisco

"Long-term bond holders beware," Gross wrote in a monthly investment outlook posted on Newport Beach, California-based Pimco's Web site today. "No investment vigilante worth their salt or outrageous annual bonus would dare argue that current legislation is a deficit reducer. It will add $562 billion to the deficit over the next decade."

http://www.bloomberg.com/apps/news?pid=20601087&sid=aALDMVlTVn68&pos=6

Durable Goods Orders in U.S. Climb for Third Month (Update3) - Bloomberg.com

One of the most reliable leading indicators is the Durable Goods number.

As businesses feel better about sales prospects, they invest in plant and equipment.

The business cycle is stronger every day.

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San Francisco

March 24 (Bloomberg) -- Orders for long-lasting goods rose in February for a third month, while inventories and backlogs climbed by the most in more than a year, indicating the manufacturing rebound will keep propelling the U.S. recovery.

The 0.5 percent increase in bookings for durable goods was in line with the median forecast of economists surveyed by Bloomberg News and followed a 3.9 percent gain the prior month, the Commerce Department said today in Washington. Excluding transportation equipment, orders advanced 0.9 percent, more than anticipated.

Business spending on new equipment, inventory restocking and a pickup in global demand mean companies from Boeing Co. to Owens-Illinois Inc. can look forward to sustained sales gains. A pickup in employment is needed to broaden the expansion as the economy heals from the worst recession since the 1930s.

http://www.bloomberg.com/apps/news?pid=20601087&sid=auazGT_N.U.U&pos=3

February existing home prices drop 2 percent

This problem won't go away for a long time.

The housing market is so overbuilt that it will take years to recover.

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San Francisco

http://finance.yahoo.com/news/February-existing-home-sales-apf-78982446.html?x=0

WASHINGTON (AP) -- Sales of existing homes fell for a third straight month in February, pushing sales down to the lowest level since last July. There is concern the fragile housing rebound is faltering, making it harder for the overall economy to recover.

The National Association of Realtors said Tuesday that sales of previously occupied homes dropped 0.6 percent in February to a seasonally adjusted annual rate of 5.02 million.

The weakness in sales depressed prices with the median home price dropping almost 2 percent from a year ago to $165,100.

U.S. Insurers Purchase Corporate Bonds in Market ‘Raining Gold’ - Bloomberg.com

Credit spreads tightened.

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San Francisco

Returns on corporate debt including reinvested interest totaled 26 percent last year after an 11 percent loss in 2008, according to Merrill Lynch's U.S. Corporate & High Yield Master index. Life insurers may spend as much as $100 billion on corporate debt in the next 18 months, Barclays Capital credit strategists Matthew Mish and Alex Gennis wrote in a March 12 report.

Allstate, the biggest publicly traded U.S. home and auto insurer, cut back on commercial real estate and municipal bonds to buy corporate bonds. Of the $100 billion portfolio managed by Greffin, almost a third was corporate debt as of Dec. 31.

http://www.bloomberg.com/apps/news?pid=20601109&sid=anljLrBSc_D0&pos=12

Fed Ends Bank Exemption Aimed at Boosting Mortgage Liquidity - Bloomberg.com

The Fed sees the mortgage market collapsing, and fails to realize the cause.

Thinking there's not enough credit in the system, the Fed allows the use of low-quality MBSs at the discount window. The real problem is the default rate in the mortgage market.

This solution failed to realize that the real problem is the quality of the credit: low quality mortgages are doomed as short-term interest rates are pushed up by Fed tightening.

At this point in the cycle, private mortgage insurers are going under, as a flood of bad mortgages sweeps over them. See PMI and MGIC stock prices for evidence.

Another Greenspan blunder.

* * * * * J B K * * * * *

San Francisco

The decision in 2007 underscores how Fed officials defined the mortgage-market disruptions that year as partly driven by liquidity constraints. In hindsight, some analysts say that diagnosis turned out to be wrong.

"It was a way to prevent further deleveraging of the financial system, but that happened anyway," said Dino Kos, managing director at Portales Partners LLC and former head of the New York Fed's open market operations. "The underlying problem was solvency. The Fed was slow to recognize that."

http://www.bloomberg.com/apps/news?pid=20601068&sid=azN4JCUxN.8Y

Bernanke Says Public Shouldn’t Pay to Wind Down Financial Firms - Bloomberg.com

Sorry, Ben, but your colleagues caused this mess and the taxpayers are on the hook.

To put the blame on shareholders is typical for Washington. Their argument is that's not Congress's fault if these companies believed that the US would stand behind the promises they made.

If this rule passes, these companies will find it harder to remain profitable.

* * * * * J B K * * * * *

San Francisco

March 22 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said any mechanism to dismantle firms deemed too big to fail must avoid disruptions to the financial system while imposing costs on shareholders and creditors, not taxpayers.

"Market participants must be convinced that if one of these firms is unable to meet its obligations, its shareholders, creditors and counterparties will not be protected from losses by government action," he said two days ago in a speech in Orlando, Florida. "We need an alternative for resolving failing firms that is neither a disorderly bankruptcy nor a bailout."

Congress is considering a resolution mechanism for large, complex firms as part of the most sweeping overhaul of the financial regulatory system since the Great Depression. The changes are intended to prevent a repeat of the crisis that prompted bailouts such as the $182.3 billion rescue of insurer American International Group Inc., in which the Fed took part.

http://www.bloomberg.com/apps/news?pid=20601068&sid=aOok1960967g

Obama Pays More Than Buffett as U.S. Risks AAA Rating (Update1) - Bloomberg.com

So, it begins.

As the US Congress commits the taxpayer to a massive increase in government spending and debt, the first cracks appear in the US's credit rating.

There is so much US debt in the system - and more to come - that corporates yield less than US Treasuries.

* * * * * J B K * * * * *

San Francisco

March 22 (Bloomberg) -- The bond market is saying that it's safer to lend to Warren Buffett than Barack Obama.

Two-year notes sold by the billionaire's Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe's Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an "exceedingly rare" event in the history of the bond market.

The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ayK1N3ffXarY&pos=2

Bernanke Says Bailouts of Banks ‘Unconscionable’ (Update2) - Bloomberg.com

It is also "unconscionable" to cause banks to fail by promising to stand behind Fannie and Freddie, and then walking away when things go bad.

The villain here is the US Congress.

The victims are the taxpayers and the banks, for we are paying for Congress's blunders.

* * * * * J B K * * * * *

San Francisco

March 20 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said government bailouts of large financial firms are "unconscionable" and must be ended as part of a regulatory overhaul following the worst financial crisis since the 1930s.

"It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms," Bernanke said today in a speech in Orlando, Florida. "If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation."

http://www.bloomberg.com/apps/news?pid=20601087&sid=aSeRHawrO2qw

Federal Reserve Must Disclose Bank Bailout Records (Update5) - Bloomberg.com

The Fed is right, but the court is righter.

There must be some way to solve this problem, but it'll take some fresh legislating.

* * * * * J B K * * * * *

San Francisco

March 19 (Bloomberg) -- The Federal Reserve Board must disclose documents identifying financial firms that might have collapsed without the largest U.S. government bailout ever, a federal appeals court said.

The U.S. Court of Appeals in Manhattan ruled today that the Fed must release records of the unprecedented $2 trillion U.S. loan program launched primarily after the 2008 collapse of Lehman Brothers Holdings Inc. The ruling upholds a decision of a lower-court judge, who in August ordered that the information be released.

The Fed had argued that disclosure of the documents threatens to stigmatize borrowers and cause them "severe and irreparable competitive injury," discouraging banks in distress from seeking help. A three-judge panel of the appeals court rejected that argument in a unanimous decision.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a2rzjENZQV5k

Rival warned regulators over Lehman

Not surprising.

The only real issue is, why did Merrill fail if it saw this coming?

* * * * * J B K * * * * *

San Francisco

Securities and Exchange Commission and Federal Reserve officials were warned by a leading Wall Street rival that Lehman Brothers was incorrectly calculating a key measure of its financial health months before its collapse in 2008, people familiar with the matter say.

Former Merrill Lynch officials said they contacted regulators about the way Lehman measured its liquidity position for competitive reasons. The Merrill officials said they were coming under pressure from their trading partners and investors, who feared that Merrill was less liquid than Lehman.

The warnings take on a special significance after last week's report by Anton Valukas, the Lehman bankruptcy court examiner, who found that Lehman had used questionable financing tools to flatter its balance sheet before its September 2008 collapse.

http://www.ft.com/cms/s/0/cb971b38-32d6-11df-a767-00144feabdc0.html

Conference Board LEI Increases

Coincident Indicators suggest the expansion is strengthening.

The positive contributors to the index, beginning with the largest positive contributor:
- personal income,
- industrial production, and
- manufacturing and trade sales.

Employees on non-agricultural payrolls declined in February.

As bank lending strengthens in the months to come, the economic expansion will grow.

The only problem on the horizon is the Fed's unwinding of its massive balance sheet through the sale of the securities in its portfolio.

Lagging Indicators are now beginning to advance with three of the seven moving higher.

* * * * * J B K * * * * *

San Francisco


The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.1 percent in February, following a 0.3 percent gain in January, and a 1.2 percent rise in December.

Says Ataman Ozyildirim, Economist at The Conference Board: "The LEI for the U.S. has risen rapidly for almost a year now and it has reached its highest level. But, the sharp pick up in the LEI appears to be stabilizing. As the economy moves from recovery into early phases of an expansion, the leading economic index points to moderately improving economic conditions in the near term.

Correspondingly, the coincident economic index has been rising since July 2009, albeit slightly because of continued weakness in employment."

Adds Ken Goldstein, Economist at The Conference Board: "The indicators point to a slow recovery this summer. Going forward, the big question remains the strength of demand. Without increased consumer demand, job growth will likely be minimal over the next few months."

http://www.conference-board.org/economics/bci/pressRelease_output.cfm?cid=1

BoJ move is more than a smokescreen

Please read the whole article.

This is as ignorant as they can get.

Japanese deflation is caused by not enough money in the system.

* * * * * J B K * * * * *

San Francisco

In January, Masaaki Shirakawa, the bank's governor, explained why he thought prices in Japan were falling and why monetary policy was the wrong tool to end the decline.

Mr Shirakawa gave three reasons for a lack of demand that he said was the root cause of deflation. First, deregulation and low-priced imports have put downward pressure on prices. Second, wages have fallen as an alternative to job cuts. Third, and in Mr Shirakawa's view the most important factor, people expect less growth in the future because Japan's population is aging and shrinking.

For Mr Shirakawa and the BoJ it follows that monetary policy is not the main answer to deflation. "The important thing in order to apply the brakes to a moderate downward trend in prices is to raise trend growth expectations."

http://www.ft.com/cms/s/0/755b86d8-31bd-11df-9ef5-00144feabdc0.html

Fed Pledges to Keep Rate Low for ‘Extended Period’ (Update4) - Bloomberg.com

Bank lending is now stirring, as we forecast a few weeks ago.

One question now is, when will the Fed see enough bank lending to start tightening?

From a portfolio manager's perspective, interest rates are the least of our worries.

Bond sales from the Fed's portfolio are more important.

* * * * * J B K * * * * *

San Francisco

March 16 (Bloomberg) -- Federal Reserve officials repeated their pledge to keep the main interest rate near zero for an "extended period" and confirmed that emergency measures to prop up the housing market will end as planned this month.

While the economy has "continued to strengthen," policy makers noted that "housing starts have been flat at depressed levels" and "employers remain reluctant to add to payrolls."

http://www.bloomberg.com/apps/news?pid=20601068&sid=aNrE0tetrzXo

CLOs to End 12-Month Drought in Citigroup Deal: Credit Markets - Bloomberg.com

This is how it begins: the high-risk business starts first.

Bank lending won't be far behind.

* * * * * J B K * * * * *

San Francisco

March 16 (Bloomberg) -- The market for collateralized debt obligations backed by high-yield, high-risk loans is poised to open in the U.S. for the first time in a year after losses on mortgages prompted investors to flee bundled securities.

Citigroup Inc. is underwriting a $500 million fund managed by New York-based WCAS Fraser Sullivan Investment Management LLC, scheduled to price as soon as this week, according to people familiar with the offering who declined to be identified because terms are private. The deal refinances an existing collateralized loan obligation and increases its size by more than 50 percent.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aywTa0.RvuA4&pos=6

U.S. Import Prices Decreased More Than Anticipated (Update2) - Bloomberg.com

Import prices are affected by relative currency movements.

As the dollar drops, import prices will take off.

This is a classic blunder, and one which will make traders a lot of money.

* * * * * J B K * * * * *

San Francisco

The dollar has climbed 2.7 percent against a basket of currencies from its biggest trading partners after reaching a one-year low on Dec. 1, easing price pressures from overseas goods. At the same time, companies may be reluctant to raise prices following the worst recession since the 1930s, giving the Federal Reserve, meeting today, reason to keep interest rates near zero.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aiHwohIqB1dk&pos=3

U.S. junk bonds on pace for best rally in 6 months | Reuters

Credit spreads narrowing.

The banks won't be far behind.

Will banks securitize their deals, or put them on the balance sheet?

The need the fees, but they also need the yield.

As the money numbers turn up, watch for the bond market to sell off.

* * * * * J B K * * * * *

San Francisco

U.S. junk bonds are on pace for their best monthly performance in half a year as a surge in debt sales fans confidence that riskier companies will avoid default.

With March-to-date investment returns of 1.93 percent, junk bonds are poised for their best month since September, when they returned 5.98 percent for the full month, according to Bank of America Merrill Lynch indexes.

Moody's Investors Service has forecast that the U.S. junk bond default rate will fall to 3.3 percent by year end from a peak of 14.5 percent last November as a healing of the credit markets allows companies once frozen out of the bond markets to refinance debt.

http://www.reuters.com/article/idUSTRE62B3G420100312?type=GCA-Economy2010

How free markets sank the U.S. economy | Reuters

If you ever wondered how clueless and incompetent economists can be, this book will give you the answer.

There is not a word of truth or a particle of understanding in this book.

The answers are academic cant, the solutions are academic gibberish.

This problem - the collapse of the mortgage market - was caused by the government - pure and simple.

It's the government's job to fix it, and it's our job as taxpayers to pay for it.

Whether we like it or not, the government, not business, caused this mess.

The way to avoid this in the future is to take the power to set lending standards out of the hands of the government.

* * * * * J B K * * * * *

San Francisco

Reuters) - Two years ago, a poisonous brew of bad economics, lax regulation, and egregious behavior boiled over, scalding the financial system and pitching the United States into its steepest downturn since the Great Depression.

The antidotes to the crisis, concocted by many of the players who stirred the original toxic brew, have pulled the U.S. economy back from the brink.

But those remedies won't prevent future crises, Joseph Stiglitz, winner of the 2001 Nobel Prize for Economics, writes in "Freefall: America, Free Markets, and the Sinking of the World Economy" (Norton, $27.95).

In contrast to the regulations that emerged from the Great Depression, which promoted growth and stability, the response to this crisis has led to a less-competitive financial system dominated by banks that are too big to fail, he writes.

http://www.reuters.com/article/idUSTRE62A3N820100311?type=GCA-Economy2010

Fed Gets Credit for Rescue - WSJ.com

Well, maybe we economists are learning.

The explosion of the monetary base is mentioned prominently.

Notice only 13 of the 54 cited the Fed as the prime reason for avoiding disaster.

And no one speculates on what would have happened if the Fed did NOT buy securities.

As I told my students when this began,

"You won't get Summer jobs, your parents savings and home equity are gone, and your grandparents will die hungry in a cold, dark world."

If not for the Fed, this would have happened in 2009.

Thanks to the Fed, we have a roaring recovery.

If you see Bernanke, please make sure to thank him for me, too.

* * * * * J B K * * * * *

San Francisco

But the Fed's interventions likely played a bigger role in pulling the economy out of its tailspin, economists said. In their paper, Messrs. Sinai and Edelstein estimated that the Fed's actions boosted GDP growth by 1.9 percentage points in 2009 and would add 3.3 points this year.

The survey respondents broadly agreed. When asked which government policies played the biggest role in resuscitating the U.S. economy, 25 respondents chose low interest rates and 13 said it was the central bank's purchases of Treasurys and mortgages. Eight cited the bank stress tests and related capital-raising by banks. Just three said the stimulus played the biggest role.

http://online.wsj.com/article/SB10001424052748703625304575115674057260664.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

Larry Kudlow : Yellen is Spellin' Future Inflation

More on the Yellen disaster.

But, think of it from our perspective.

Her appointment guarantees more inflation, and more profits for traders like us.

I'm sorry for the economy, and for all the victims of inflation, but there's nothing we can do.

* * * * * J B K * * * * *

San Francisco

The new Obama Fed is going to be very dovish when it comes to fighting future inflation and defending the value of the dollar.

The president has nominated Janet Yellen to be vice chair of the Federal Reserve. Ms. Yellen is a distinguished economist who unfortunately subscribes to the Phillips-curve model that trades off unemployment and inflation. In other words, rather than excess money creation as the cause of rising prices, she focuses on the unemployment rate, the volume of new jobs being created, and the growth of the overall economy. For Ms. Yellen, inflation is caused by too many people working and too much economic prosperity.

And since we have the opposite problem today -- high unemployment and too few people working -- she will be the last Fed governor to turn out the lights on the central bank's zero interest rate.

Sean Hannity FREE

There is no evidence in Ms. Yellen's public opinions or speeches that she might use a market-price rule -- targeting commodities, gold, bond rates, or the dollar -- as a forward-looking inflation (or deflation) signal. So the absence of a commodity- or dollar-price rule will continue at the Fed. Ben Bernanke doesn't use a market-price rule, and Obama's additional Fed appointees -- whoever they are -- will undoubtedly come from the same Phillips-curve camp.

http://townhall.com/columnists/LarryKudlow/2010/03/12/yellen_is_spellin_future_inflation?page=full&comments=true

Apax, Private-Equity Firms Say Retail LBOs Return With Recovery - Bloomberg.com

More evidence of a roaring economy.

* * * * * J B K * * * * *

San Francisco

March 12 (Bloomberg) -- Private-equity firms looking to buy retail and consumer companies said they're now able to finance deals and pay reasonable prices after the credit crisis and global recession triggered a buyout slump.

"It feels like it's a little bit of Goldilocks now," Alex Pellegrini, a New York-based partner with Apax Partners LLP, said yesterday. "It feels just right."

Buyout managers are getting back to business after the global credit crisis that began in 2007 froze them out of buying companies or selling what they owned. About $12.9 billion worth of private-equity deals have been announced in the past three months, compared with $2.5 billion in the same period a year earlier, according to data compiled by Bloomberg.

http://www.bloomberg.com/apps/news?pid=20601109&sid=a1CarvonDlcU&pos=14

Loan Market Reaches 20-Month High, Interest Cost Dips (Update1) - Bloomberg.com

Banks watch this business go elsewhere and wonder 'why?"

Bank lending can't be far behind.

* * * * * J B K * * * * *

San Francisco

March 12 (Bloomberg) -- The high-yield, high-risk leveraged loan market reached a more than 20-month high as companies, such as Fresenius SE, reduced minimum interest-rate floors to ensure a minimum return on new deals.

Prices on the Standard & Poor's/LSTA U.S. Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, ended at 90.22 cents on the dollar yesterday, the highest since July 7, 2008, when it closed at 90.32 cents. The index's total return was 2.85 percent for the year as of yesterday.

The average minimum London interbank offered rate written into credit agreements, guaranteeing investors a certain interest rate, decreased as the loan market rebounded. These so- called Libor floors fell to an average of 232 basis points this year, down from an average of 279 basis points during 2009, according to data compiled by Bloomberg.

http://www.bloomberg.com/apps/news?pid=20601087&sid=anL_ZWqWpC1s&pos=6

U.S. Economy: Sales Rise as Buyers Overcome Snow, Job Concerns - Bloomberg.com

There's nothing like a trillion dollars of fresh cash to fire up the economy.

Jobs are coming.

* * * * * J B K * * * * *

March 12 (Bloomberg) -- Americans braved blizzards and overcame job concerns to propel retail sales in February, pointing to a broadening in growth that will help sustain the expansion.

Purchases unexpectedly climbed 0.3 percent, the fourth gain in the past five months, Commerce Department figures showed today in Washington. Another report showing consumer sentiment dropped in March for the second consecutive month represented a risk to the improvement in sales.

"The spending numbers look pretty impressive, especially considering they must have been held down a little at least by the snowstorms," said James O'Sullivan, global chief economist at MF Global Ltd. in New York. "It adds to evidence that the recovery is gathering pace."

http://www.bloomberg.com/apps/news?pid=20601087&sid=aL1NPx_ipT4I&pos=1

Obama to tap Yellen for Fed vice chair: source | Reuters

This is too depressing.

She doesn't know her business, and has the arrogance of the over-educated.

* * * * * J B K * * * * *

San Francisco

Reuters) - President Barack Obama plans to nominate San Francisco Federal Reserve Bank President Janet Yellen, a respected policy dove, to be vice chairman of the central bank, a source familiar with the process said on Thursday.

Yellen would replace Donald Kohn, a 40-year veteran of the Fed who announced earlier this month that he would retire on June 23. The nomination for the four-year term as the Fed's No. 2 would be subject to Senate approval.

She is considered one of the most "dovish" members of the central bank's policymakers, meaning she is seen to lean toward policies that will boost growth and promote employment rather than those aimed at keeping inflation at bay.

http://www.reuters.com/article/idUSTRE62B06320100312?type=GCA-Economy2010

Test

EU Considers Ban on Some Credit Default Swap Trades - WSJ.com

Of course they want to ban CDSs.

They reveal just how weak these countries are.

They'd rather keep investors in the dark, like the bad old days.

* * * * * J B K * * * * *

San Francisco

International momentum is building for stricter oversight of derivatives trading, as a top U.S. regulator recommended new limits on credit-default swaps and European leaders pushed for a ban on speculative bets against government debt following recent financial turmoil in Greece.

In the U.S., Commodity Futures Trading Commission Chairman Gary Gensler in a speech Tuesday offered his most-specific criticisms yet of credit-default swaps, the insurance-like contracts often blamed for the near-collapse of American International Group Inc. during the financial crisis.

http://online.wsj.com/article/SB10001424052748704784904575111191528470212.html?mod=WSJ_Markets_LeadStory

Barney Frank Asks Top Four Banks To Write Down Second-Lien Mortgages

I'm Barney Frank, and I'm here to help you.

It's not enough that Frank caused this mess by lowering Fannie and Freddie's standards.

Now he wants the banks to pay for his blundering.

This is astonishing. Read it and weep.

* * * * * J B K * * * * *

San Francisco

Dear Messrs. Moynihan, Pandit, Dimon and Stumpf:

The mortgage foreclosure crisis that began over two years ago, and which continues to be a prime contributor to our nation's current economic downturn, burdens millions of hard-working American families. Congress and the Obama Administration have worked hard to address foreclosures by enabling and encouraging loan modification s, but the private sector's response has fallen far short of the need. Many homeowners are eager to save their homes despite being "underwater," but find that lenders and servicers are unable or unwilling to make necessary modi fications. These homeowners are increasingly deciding to walk away and thus foreclosures continue to mount, deepening the crisis.

To save homes on a large scale, we must move past temporary modifications in interest rates or terms and focus on permanent principal reductions that result in truly sustainable mortgages. There is no more important priority for me in our efforts to restore stability to our mortgage market.

Many investors in first-lien mortgages have indicated that they are willing to accept the fact of significant losses on those investments in order to move on and use their money for other purposes, rather than having it locked in underwater mortgages with a high and growing likelihood of foreclosure. With the interests of homeowners and investors aligned in this way, it should follow that large numbers of principal-reduction modifications could be made relatively quickly. That is not happening. According to investors, Administration officials, and other experts I have consulted, holders of second-lien mortgages are now a principal obstacle to many modifications. The problem of second-lien mortgages standing in the way of successful principal reduction modifications has reached a critical stage and requires immediate
attention from your institutions.

Large numbers of these second liens have no real economic value - the first liens are well underwater, and the prospect for any real return on the seconds is negligible. Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans, which would allow willing first lien holders to reduce principal and keep
borrowers in their homes.

The four organizations you lead are major participants in the second-lien market. Failure to modify these debts has become a major and unnecessary obstacle to thousands of Americans being able to stay in their homes. I urge you in the strongest possible terms to take immediate steps to write down these second mortgages and allow principal reduction modifications of the underlying first liens to take place. If there are legal obstacles to your doing so, we will work with you to remove them.

I will be calling you within the week to discuss what your institutions plan to do to remove the second liens you own or control as impediments to principal reduction modifications.

http://www.zerohedge.com/article/barney-frank-asks-top-four-banks-write-down-second-lien-mortgages-claims-have-no-economic-va

Beijing studies severing peg to US dollar

Choice A: Continue to print money to buy dollars from your exporters and fuel inflation.
Choice B: Stop printing money and let the yuan appreciate.

Either way, Chinese export prices rise.

* * * * * J B K * * * * *

San Francisco

Mr Zhou's comments contrasted with recent Chinese comments on its currency policy in the face of international criticism that the renminbi was undervalued. In December, premier Wen Jiabao said: "We will not yield to any pressure of any form forcing us to appreciate." Chinese officials have repeatedly emphasised the need for a stable exchange rate.

However, while the recent increase in consumer prices in China has strengthened the hand of those officials who think the currency should now rise, it is not clear that this argument has yet won over the country's senior leaders.

http://www.ft.com/cms/s/0/6cd3a766-2925-11df-972b-00144feabdc0.html?nclick_check=1

Spence Says U.S. Recovery Will Take ‘Several Years’ (Update1) - Bloomberg.com

Spence is an idiot.

The economy is roaring, as all indicators show.

And the government had nothing to do with it. It was the Fed.

An economy with $2 trillion in new money will rocket upward, along with inflation and interest rates.

This is the classic blunder by an academic economist who's never spent a minute in the real world.

The only part of the economy that's reeling is housing, and that disaster was caused by academics and politicians. It'll soon be fixed by private enterprise.

I'll bet him lunch any place in town that he is wrong.

Professor Spence?

* * * * * J B K * * * * *

San Francisco

March 10 (Bloomberg) -- The U.S. faces an extended recovery from the recession even after the government infusion of cash into stimulus programs and the banking system, said Andrew Michael Spence, a Nobel laureate in economics.

"Right now the expectations are that somehow the government can magically restore the economy to balance," Spence said in an interview today on Bloomberg Radio. "A more realistic view is it's going to take several years."

http://www.bloomberg.com/apps/news?pid=20601068&sid=a_yKsEoR3464

Wholesale Inventories in U.S. Fell 0.2% in January (Update1) - Bloomberg.com

Inventories only fall in expanding times, when production can't keep pace with sales.

The economy is on a growth path.

* * * * * J B K * * * * *

San Francisco

March 10 (Bloomberg) -- Inventories at U.S. wholesalers unexpectedly fell in January for a second month, signaling companies had difficulty keeping pace with demand.

The 0.2 percent decline in the value of stockpiles followed a revised 1 percent decrease in the prior month, the Commerce Department said today in Washington. Sales jumped 1.3 percent, the most since November, after a 1.2 percent gain.

Rising orders at companies such as Texas Instruments Inc. indicate production will keep increasing in coming months to bring inventories more in line with sales. Efforts to replenish stockpiles helped the economy expand at a 5.9 percent annual pace in the fourth quarter, the fastest in more than six years.

"This indicates that inventories are broadly in balance at the wholesale level and that the period of massive inventory liquidation is over," said Steven Wood, president of Insight Economics LLC in Danville, California. It "should give way to a period of modest inventory accumulation."

http://www.bloomberg.com/apps/news?pid=20601068&sid=aPkzbGKmqco8

Citigroup Selling TruPS After Repaying Bailout: Credit Markets - Bloomberg.com

If Citi's issuing bonds, you should too.

Extend the maturity of those liabilities.

Clients who took Paterson's advice at the end of 2008 now have liabilities priced 200 basis points below the market.

Further increases in long rates are expected.

* * * * * J B K * * * * *

San Francisco

The bank plans to issue $2 billion of the securities, known as TruPS, as soon as today, according to a person familiar with the offering who declined to be identified because terms aren't set. The 30-year fixed-to-floating rate securities may initially yield about 8.5 percent, lower than the 8.875 percent expected yesterday, another person said.

Citigroup, 27 percent owned by the U.S. government, is issuing the debt after borrowers sold $13.9 billion of U.S. corporate bonds yesterday, the busiest day in more than a month. The New York-based bank's offering shows that liquidity is improving, which will help the economy, said Daniel Fuss, vice chairman at Loomis Sayles & Co. in Boston.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ab1l5s9AjN2U&pos=2

Sack Says Fast Sale of Fed Assets Risks Sudden Rise in Rates - Bloomberg.com

Well, at least they're acknowledging the problem.

Unfortunately, there's no solution but higher rates.

* * * * * J B K * * * * *

San Francisco

March 9 (Bloomberg) -- Brian Sack, the New York Federal Reserve Bank's markets chief, said reducing the central bank's $2.3 trillion balance sheet quickly through sales of assets would risk a sudden increase in long-term interest rates.

Instead, a "gradual and passive" decline in assets outlined last month by Fed Chairman Ben S. Bernanke would limit a reversal of the low borrowing costs fostered by $1.69 trillion of securities purchases, Sack said yesterday in a speech in Arlington, Virginia. Bernanke indicated the Fed wouldn't sell assets until the recovery from the worst recession since the 1930s is "more firmly established," Sack said.

http://www.bloomberg.com/apps/news?pid=20601068&sid=a8NfuD9tztSE

China May Raise Rates ‘Within Weeks’ as Prices, Exports Climb - Bloomberg.com

Inflation is caused by too much money in the system.

China has been pouring high-powered money into the economy for years now, buying dollars with newly created cash to keep the yuan from rising.

All that money is now in the banking system and the banks want to lend it.

Raising reserve requirements is a sledgehammer approach to the problem and will not be successful. Banks will find a way around this.

Securitization is a good technique for expanding leverage without putting assets on the bank's balance sheet.

Watch securitization in China.

The same thing is about to happen here in the US.

* * * * * J B K * * * * *

San Francisco

March 10 (Bloomberg) -- China's inflation probably accelerated and exports climbed in February, according to surveys of economists, increasing the likelihood of the central bank raising interest rates from a five-year low.

Consumer prices rose 2.5 percent from a year before, the most in 16 months, according to the median of 29 estimates in a Bloomberg News survey before tomorrow's report. While the gain was likely exaggerated by seasonal factors, economists project the momentum to continue, sending the rate to as high as 4.4 percent during the year, a separate survey showed last week.

Inflation, property speculation and risks for banks are among Premier Wen Jiabao's prime concerns after a record 9.59 trillion yuan ($1.4 trillion) of loans jumpstarted growth last year. Central bank Governor Zhou Xiaochuan said March 6 that while stimulus policies must end "sooner or later," China needs to be cautious in timing an exit because a global recovery "isn't solid."

http://www.bloomberg.com/apps/news?pid=20601087&sid=ajilmEKXv7fM&pos=3

Just when you thought it was safe to be a banker

This is not just a one-time shot.

Repurchasing loans will be an ongoing problem for banks as F&F try to shirk their responsibilities.

Resumption of lending by banks just got set back months, if not years. No bank can risk making a loan with scarce reserves when they might be needed to buy back loans.

* * * * * J B K * * * * *

San Francisco

March 5 (Bloomberg) -- Fannie Mae and Freddie Mac may force lenders including Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages.

That's the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says U.S. banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJcAMaiuifjc&pos=4

The Case for Bonds - Up and Down Wall Street Daily - R. Forsyth - Barrons.com

Hopelessly ill-informed.

* * * * * J B K * * * * *

San Francisco

Rising interest rates remain a forecast and not a certainty. Even if the Federal Reserve begins to push up its short-term policy rates from, that doesn't necessarily translate into significantly higher yields -- and therefore lower prices -- for intermediate- and long-term bonds.

The bear case for bonds would appear to be obvious. The Fed at some point will raise its target rate for overnight federal funds from the current rock-bottom range of 0-0.25%. Even though the central bank has said it intends to keep the fed-funds target at very low levels "for an extended period" -- which would extend well into the second half of the year -- some increase eventually is inevitable. Indeed, maintaining a near-zero policy rate already risks a rise in inflation.

Moreover, the Fed is due to wind down its purchases of $1.25 trillion in mortgage-backed securities issued by federal agencies Fannie Mae (FNM) and Freddie Mac (FRE) along with buys of $175 billion of direct agency obligations. Meantime, the massive federal deficit means the Treasury will be spewing out trillions of dollars of bills, notes and bonds annually for as far as the eye can see. The quantity of state and local debt is going up while its quality is deteriorating because of their well-advertised fiscal problems. And while corporations' balance sheets are in good shape, their bonds' margin of safety have shriveled as yields have plunged.

http://online.barrons.com/article/SB126756452820554659.html?mod=BOL_hpp_highlight

U.S. Treasuries Still Safe Haven Despite Deficits - Investors.com

The problem is not US Treasuries, it's long-dated Treasuries.

That's where the problem lies.

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San Francisco

Despite serious mid- to long-term concerns about U.S. debt, when there's trouble in the world, people still rush to the Treasury "safe haven." Recent troubles in Greece and elsewhere in Europe have intensified the focus on safety. "Investors still have a very high preference for default-free securities," said John Hussman, chairman of Hussman Funds.

Last week, even as the Treasury raised $126 billion, demand was so strong that yields actually fell sharply. The 10-year Treasury note's yield began the week at 3.78% but fell to 3.64% by week's end amid weak economic data, well-received auctions and overseas sovereign debt fears. It's now at 3.61%.

http://www.investors.com/NewsAndAnalysis/Article.aspx?id=522720

Fed officials at odds on how long to keep rates low | Reuters

The press is waking up.

They're beginning to understand the difference between buying securities and raising short-term rates.

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San Francisco

The Fed not only slashed interest rates to near zero to combat the worst financial crisis in generations, but also undertook a host of unorthodox steps such as outright debt purchases.

Outstanding credit to the banking system has more than doubled since the start of the crisis to over $2.3 trillion.

Minneapolis Fed President Narayana Kocherlakota, for his part, said the Fed's massive credit injections into the financial system made it all the more crucial to time the withdrawal of such stimulus just right.

http://www.reuters.com/article/idUSTRE6220B520100303?type=GCA-Economy2010

Service Industries in U.S. Grew More Than Forecast in February

A coincident indicators start their surge, the stock market is vindicated.

The problem now is long-term interest rates.

Both the Treasury and the Fed are selling long dated securities.

If foreign holders of this debt start selling in advance of these sales, this could get ugly.

I'm looking for a major position on the short side for bonds.

* * * * * J B K * * * * *

San Francisco

The Institute for Supply Management's index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 53 from 50.5 the prior month. The February figure exceeded the median forecast for a gain to 51, according to a Bloomberg News survey of economists. Readings higher than 50 signal growth.

The factory rebound that helped the economy emerge from the worst recession since the 1930s is starting to generate improvement in other industries, giving a boost to companies such as Macy's Inc. The group's measure of employment rose to the highest level since April 2008, signaling the economy may be on the cusp of creating the job growth necessary to encourage spending.

http://www.bloomberg.com/apps/news?pid=20601068&sid=arfxuMKNNmTw

Soros Signals Gold Bubble

I hate it when the big players announce their intentions.

It either means our forecasts are righter than we imagined.

Or, they're selling into the frenzy they create.

Be careful.

* * * * * J B K * * * * *

San Francisco

March 1 (Bloomberg) -- George Soros is helping drive up gold prices by doubling his bet in a market even he considers a "bubble" as Goldman Sachs Group Inc., Barclays Capital and HSBC Holdings Plc predict more gains before it bursts.

Soros Fund Management LLC, which manages about $25 billion, increased its investment in SPDR Gold Trust, the world's largest exchange-traded fund for the metal, by 152 percent in the fourth quarter, a Feb. 16 Securities and Exchange Commission filing shows. While prices have fallen 9.2 percent since reaching a record on Dec. 3, 15 of 22 analysts in a Bloomberg survey say gold will reach a new high, with the median forecast predicting a 17 percent advance to as much as $1,300 an ounce this year.

http://www.bloomberg.com/apps/news?pid=20601109&sid=avsz5zUl.3yo&pos=11

U.S. Consumer Spending Increases More Than Forecast (Update3) - Bloomberg.com

Economy's taking off.

As Coincident Indicators confirm economic growth, the stock market will head into the next phase.

Pressure on bonds will increase.

Standard business cycle, with one exception.

The massive increase in the Monetary Base now has to be withdrawn.

* * * * * J B K * * * * *

San Francisco

March 1 (Bloomberg) -- Spending by U.S. consumers increased in January for a fourth consecutive month, a sign that the biggest part of the economy may contribute more to growth in coming months.

The 0.5 percent increase in purchases was more than anticipated and followed a 0.3 percent gain in December that was larger than previously estimated, Commerce Department figures showed today in Washington. Incomes climbed 0.1 percent, short of expectations and reflecting declines in dividends and interest.

Retailers such as Home Depot Inc. and Macy's Inc. are forecasting rising sales this year, even as they don't foresee a robust economic recovery. An unemployment rate that's projected to average 9.8 percent this year may restrain household purchases, which account for about 70 percent of the economy.

http://www.bloomberg.com/apps/news?pid=20601068&sid=aH9O6gFU0qDQ

Cantor Fitzgerald to Expand Debt Business as Banks Curb Lending - BusinessWeek

Banks are so scared to lend that Cantor's new investment bank is taking business away from them.

Borrowers are paying hundreds of basis points higher for high-yield loans.

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San Francisco

March 1 (Bloomberg) -- Cantor Fitzgerald & Co., the bond broker that started an investment banking business last year, plans to hire at least nine staff for its debt advisory unit in London amid predictions bank lending will remain subdued.

Cantor is seeking at least five people for debt origination, and four for loan sales, trading, and research, said Michael Johnson, head of European leveraged capital markets in London. Cantor currently has nine people in the debt team.

New York-based Cantor is taking advantage of a slowdown in bank lending to win fees by arranging financing for high-yield, or leveraged, borrowers. Banks worldwide have curbed lending as they try to recover from $1.7 trillion of writedowns and losses from the credit crisis, and as global regulators tighten rules on lenders' capital requirements.

http://www.businessweek.com/news/2010-03-01/cantor-fitzgerald-to-expand-debt-business-as-banks-curb-lending.html