Insiders Sell Shares at Record Pace

June 24, 2009 · Posted in General Economics · Comment

As markets have headed down south again the Financial Times reports Pessimistic executives cash out of shares:

Growing pessimism about the prospects for a global economic recovery sent stock and commodity prices tumbling on Monday while new data showed that leading US corporate executives were cashing out of their share holdings at a rapid pace.

And it is certainly likely that commodity and stock prices are headed lower while gold will outstrip them all – the deflation trade as Mish calls it.

US government bond yields followed equity prices lower, confounding analysts who had expected that Treasury rates would rise this week as the federal government auctioned off a record $104bn of debt.

I should point out that I was not among those who expected Treasury rates to rise, in fact I said that I expect them to go lower in Inflation Fears vs. Reality. How people can think that $104 billion alone will create a flight out of treasuries in a $10+ trillion market remains to be explained. Does anyone look at the demand side of things?

On another note, what I said in that article about silver applies to all other commodities to a much larger degree, in fact I think silver will recover once those who bought in for the wrong reason, namely inflation fears, are washed out.

Analysts said the market mood was captured by a World Bank report that said the global economy would contract 2.9 per cent this year, compared with a previous estimate of a 1.7 per cent fall. A White House spokesman said later in the day that the US unemployment rate was likely to rise to 10 per cent in the next couple of months.

The downbeat commentary reinforced the view that investors should be more worried about the impact of economic weakness on corporate profits than the possibility of higher inflation and interest rates.

Yes, inflation expectations where out of whack with reality as I pointed out already.

“We have had a great run in equities, emerging market currencies, credit and other risky assets, now people are struggling to justify lofty valuations,” said Alan Ruskin, strategist at RBS Securities. He added: “The ‘green shoots’ argument for the economy was very tentative to start with.”

Executives in charge of the largest US companies sent a signal of their concerns by selling far more shares than they bought this month, according to data based on Securities and Exchange Commission filings.

Share sales by so-called company insiders are outstripping purchases so far this month by more than 22 times. TrimTabs, the investment research company, said insiders of S&P 500 listed companies have unloaded $2.6bn in shares in June, compared with $120m in purchases.

“The smartest players in the US stock market – the top insiders who run public companies – are not betting their own money on an economic recovery,” said Charles Biderman, chief executive of TrimTabs.

The S&P 500 index fell 3.06 per cent to 893.04 – its first close below 900 this month. Analysts noted that the index closed below its 50-day and 200-day moving averages. “This is evidence that the rally since March has been a correction and not necessarily the start of a meaningful multi-year rally,” said Jack Ablin, chief investment officer at Harris Private Bank.

The yield on the 10-year Treasury fell 10 basis points to 3.68 per cent. Crude oil prices fell $2.62, or 3.77 per cent, to $66.93 a barrel.

Earlier, the FTSE Eurofirst 300 index slid 2.6 per cent while London’s FTSE 100 index fell 2.3 per cent. Emerging market equities also fell sharply, with Russia leading the retreat.

Even if for some reason we see another temporary bounce up in the stock and commodities markets, for the mid term it may make sense to look out and be prepared for a continuing implosion of consumer credit, declining production and sales of consumer goods, falling home prices, falling consumer prices, falling interest rates, a stronger dollar and, after a minor initial sell off, a solid and possibly rising gold price.

Tags: commodities, insider sales, insider trades, market, stock market, treasury yields

Time for Treasurys

May 16, 2009 · Posted in Business, General Economics · Comment

In November 2008 we started seeing Treasury Yields at Record Lows:

The way toward the 2-2.5% yield is wide open. I expect to see yields at those levels sometime in 2009/2010. The yield curve will flatten out further since there is little room left for Treasury Bill Yields to drop.

Then in mid January, with Treasury Yields in free fall, we saw yields below 2.5%. I wrote then:

It is certainly likely that yields will snap back into the corridor and have a significant short term movement upwards toward the upper end of the range over the next weeks.

This chart summarizes my recent short term predictions:

So what’s next? Well, now we are about to hit that upper end. From a technical point of view, treasury yields could hit it at around 3.3% and then resume its move toward 2%. Fundamentally, there has been a lot of talk recently about an economic recovery. This has helped boost the stock markets up for a while and sparked a sell off in safe Treasury investments.

When it becomes obvious that these hopes have been premature, the flight to safety will surely resume. An ongoing decline on the stock market will then be accompanied by falling Treasury yields from now on toward the end of the year.

A business cycle caused by credit expansion policy needs to go through the recovery phase and this recovery has to come full circle. So far this has not yet happened. There are more inflated sectors ready to implode, in particular consumer credit and commercial real estate. This will continue to affect banks all over the country. Americans, sick and tired of debt, will continue to abstain from consumption and consolidate their finances.

For anyone looking for a safe place to park their cash right now, Treasury Notes are looking pretty attractive at this point.

Tags: treasuries, treasury yields

Treasury Yields in Free Fall

January 18, 2009 · Posted in General Economics · Comment

Treasury yields are continuing their decline. The treasury rally is in full swing, regardless of how ridiculously inflated this bubble is. As expected, yields are now below 2.5%. The chart below shows that they have even dropped faster than the recent mid term trend would have indicated. There is absolutely no sign of a bottom, neither fundamentally nor technically.

It is certainly likely that yields will snap back into the corridor and have a significant short term movement upwards toward the upper end of the range over the next weeks. But the mid term trend remains unchanged.

Tags: treasury yields

Mortgage Rates at Record Low

January 16, 2009 · Posted in General Economics · Comment

Businessweek writes:

Mortgage giant Freddie Mac (FRE) said on Jan. 15 that rates on 30-year fixed-rate mortgages fell below 5% this week — the lowest level since it began surveying lenders in 1971.

The average rate on a 30-year fixed-rate mortgage was 4.96%, with a fee equal to 0.7% of the mortgage, for the week ending Jan. 15, 2009. It was down from last week when it averaged 5.01 percent and has been falling for 11 straight weeks.

Treasury yields have developed as expected over the past few months. I expect the same direction for mortgage rates: They will continue to drop much much lower than where they are now. As Treasury yields move toward zero, mortgage rates will drop to between 2% and3%. Whoever thinks of getting in now to get a “great bargain” should think again and wait. Please consider phase 8 of the business cycle.

Tags: mortgage rates, treasury yields

China Schools US on Capitalism

December 4, 2008 · Posted in Global Economics · Comment

Moneymorning.com writes China Blasts U.S. Economic Policy, Expresses Doubt in Financial System:

China blasted U.S. economic policy yesterday (Thursday) at the Strategic Economic Dialogue, a two-day summit engineered to address long-term issues between the two countries. Chinese authorities have grown more fervent, and more explicit, with their criticism of the U.S. financial system over the past year, evidence of a shift in the balance of power between the nations.

“Over-consumption and a high reliance on credit is the cause of the U.S. financial crisis,” said Zhou Xiaochuan, governor of the Chinese central bank. “As the largest and most important economy in the world, the U.S. should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits.”

China schools the United States government about savings, trade balance, and fiscal responsibility, the essentials of sound capitalistic policy. They are stating exactly what needs to happen in order for the US to get out of its demise. Not once have we heard Bush, Paulson, or Bernanke suggest reducing fiscal deficits, saving more, borrowing less as a solution to this crisis. They are, in fact, encouraging the exact opposite! It takes the Chinese government to tell Paulson in his face. This truly marks a historical shift in global economic relations.

This kind of lecture was a deviation from past meetings, which were dominated by U.S. calls for China to better manage its fiscal policies. However, the global financial turmoil that has emanated from the collapsing U.S. housing market has left the United States without a pulpit on which to stand.

“One result of the crisis is that the U.S. no longer holds the high ground to lecture China on financial or macroeconomic policies,” Eswar Prasad, a senior fellow at the Brookings Institution, told the Financial Times. “This may actually help turn their relationship into a more equal partnership with less posturing on both sides.”

Indeed, U.S. Treasury Secretary Henry Paulson, who in the past used summits like these to press Beijing to open its financial system and appreciate its currency, was noticeably more humble in representing the United States yesterday.

“International cooperation and coordination have been robust and we appreciate the responsible role China has played in the crisis,” he said.

Paulson needs China’s money badly. That’s what’s behind this humble tone.

Meanwhile, Wang Qishan, vice premier and leader of the Chinese delegation called on the United States to “take the necessary measures to stabilize the economy and financial markets as well as guarantee the safety of China’s assets and investments in the U.S.”

Wang’s remarks followed those of Lou Jiwei, chairman of China’s $200 billion sovereign wealth fund, China Investment Corp. (CIC), who said Wednesday that his firm lacks the confidence to invest in the United States, particularly U.S. financial institutions.

“Right now we don’t have the courage to invest in financial institutions because we don’t know what problems we will put ourselves into,” Lou said at a conference in Hong Kong. “My confidence should come from government policies. But if they are changing every week, how can you expect that to make me confident?”

CIC has lost about $6 billion of the $8 billion it invested in Morgan Stanley (MS) and The Blackstone Group LP (BX) last year. More importantly, however, China last month overtook Japan as the largest holder of U.S. government debt. And according to the Financial Times, officials have privately admitted that they are concerned about the value of the holdings.

Hopefully this teaches international investors a lesson: Don’t invest in US Banks. Leave it to Warren Buffet to burn his money on failing banks. The Chinese government will without a doubt have to get a lot more cautious about their holdings in US securities. The US central bank is in the process of creating a major Treasury bubble. This bubble will collapse. It may take 1-2 years, but it will happen eventually.

Concerned with China’s overexposure to the United States, central bank governor Zhou said policymakers should no only address the country’s slowing economy, but “restructure the development model” and prepare “for a worst-case scenario,” the FT reported.

However, Chinese officials also say that any large-scale unwinding of U.S. holdings would be counterproductive, as the value of U.S. bonds and the dollar would subsequently plummet.

If US fiscal policy doesn’t change significantly, once the next inflation picks up steam from the current money supply growth, the Chinese government will not have a choice but to dump its holdings of worthless US Treasuries.

Tags: china us dependency, treasury yields

Treasury Yields at Record Lows

November 26, 2008 · Posted in General Economics, Monetary Economics · Comment

The yield for the 10 Year Treasury note (the interest that the government pays on loans) closed at 3.09% today. This is an all time low as far as my data goes. The way toward the 2-2.5% yield is wide open. I expect to see yields at those levels sometime in 2009/2010. The yield curve will flatten out further since there is little room left for Treasury Bill Yields to drop.

Please see the chart below

Click on image to enlarge.