Archive for April, 2009

Raising Debt.

Thursday, April 30th, 2009

The U.S. Treasury is expected to auction about $101 billion in various maturities this week.  To judge the pace of borrowing, I looked back at some past data.  In 2006 the government sold $17.1 billion in 3-month T-bills.  Consider that a baseline of sorts.  In 2007 they sold $17.9 billion.  The current financial mess had its beginning in September of that year with the forced merger of Bear Sterns.  In 2008 they sold $24.5 billion, a substantial increase, as the Lehman collapse brought financial markets to a standstill.  In the first quarter of this year they sold $29.5 billion.  That’s no typo, they sold more in the first
three months of this year than in all if last year.  The week ending
April 27  saw total sales of this particular maturity of $29.0 billion,
or about as much in one week as was sold in the prior 13 weeks.  This
is no fluke either; they have auctioned off about that same amount each week this month!  And the numbers are quite similar for the other maturities as well.  How long buyers will keep coming to the auctions and accepting such meager returns remains an open question, but the yield curve is steepening.  Perhaps the rest of the world is wanting higher rates regardless of the Fed’s desires.  Will they stop participating if we don’t give them what they want?

Interest and the Price of Pork

Wednesday, April 29th, 2009

So this lady goes into a butcher shop and asks how much the pork chops cost.  The butcher replies, “$2.50 a pound.”  Outraged, the lady protests, “But the butcher shop across the street advertises them at $1.50 per pound!”  The butcher says, “When we’re out of pork chops, we sell them for $1.50 per pound too.”  This tale illustrates Adam Smith’s “invisible hand” and shows how the market forces of supply and demand affect prices.  Today both the Federal Reserve and U.S. Treasury want to keep interest rates low; they want to keep the price of money down to promote spending and lending.  But they are also being forced to increase the amount of bonds offered for sale because we’re broke and must borrow to meet our promised obligations.  This increase in supply drives bond prices down as the market demands cheaper prices for more and more of the same.  That drives interest rates up.  I know treasury bonds aren’t the same as pork chops, but pursuing this policy doesn’t make it kosher.

Hard Landings

Tuesday, April 28th, 2009

Any skydiver will tell you the speed at which one falls is exhilarating.  At least equal attention should be paid to the speed at which one lands.  If the decline is precipitous and from a great height, a sudden stop can prove disastrous.  So it’s not the fall but the landing we must watch.  That’s why parachutes are handy.  But they must be of the right size and properly designed or the results when landing can still be bad.  A lot of recent talk has centered around the slowing rate at which global economies are falling.  Good, that means some parachutes are finally being deployed.  Whether or not they will be big enough and properly designed is another question that only time can answer.  But even if the landing proves less than calamitous, no parachute exists to help us jump back up.  The climb we must make before our next free fall will require a powerful engine but are we running out of gas?

Wilted Lettuce Salad

Monday, April 27th, 2009

I have been hearing a lot of talk lately about “green shoots” or signs that life might be starting to appear on the scorched plains of our economy.  I saw stirrings as home sales seemed to firm, durable goods orders took a healthy jump, and equity markets marched upward.  Unfortunately, many of these indicators have recently reversed course and resumed their downward march.  Commentary now centers on the rate of decline, optimistically pointing out that things aren’t deteriorating as fast as they once were.  Small comfort.  It looks to me like the tossed salad of data we use at Atlas is starting to wilt.  The brightest spot currently remaining might be the ECRI report which, in its current configuration, has presaged an economic recovery 16 out of 17 times.  In fact, 1930 was the only exception.  One out of 17; what are the chances of that happening again?

Insider Trailing

Friday, April 24th, 2009

Before investing in a company wouldn’t you like to know how they’re really doing?  How is the order flow looking?  Are the raw materials being delivered in time and at a reasonable cost?  Are orders for goods produced staying strong and getting filled without any delays?  Are the employees satisfied with their work environment and pay?  Are the banks happy with the company’s credit quality and ready to make loans if needed?  Who has all the answers to these questions?  Generically they’re called insiders, a group comprised of the officers, board of directors, and major shareholders of the company.  Wouldn’t you consider it a good sign when they are buying company stock at an unusually high rate?  How about if they are selling it at a faster pace than normal instead?  Would that send up a red flag?  Recent data suggests insiders are selling at the fastest clip since the 2007 market peak.  While not always spot on, they seemed to know something then.  I wonder what they know now?

Chickens and Pigs.

Thursday, April 23rd, 2009

I’m told of a place in North Dakota where the wind is so consistent that when it stops, a very rare event, all the chickens fall over.  And so it is with trends, especially long ones.  For half a century or more, real estate prices had been in a long trend upward.  When they stopped rising and actually reversed directions in dramatic fashion, the world banking system seems to have emulated North Dakota’s chickens.  What, if anything, will help them get back on their feet again?  The Fed is trying to force mortgage rates down to lure new home buyers back.  It may work, although it hasn’t done so for over a decade in Japan.  Potential buyers aren’t sure just where they stand as recession keeps taking more jobs away.  In winter, when the ponds in Dakota freeze, nothing is more pitiful than seeing someone’s hog get loose and struggle to walk on the ice.  We may wait a long time before the Fed’s efforts to reheat the economy allows Spring to blossom again here.

Climbing Evere’st’s

Wednesday, April 22nd, 2009

Records, they say, are meant to be broken.  Looking at the Guinness Book of Records, we might think, for the majority at least, “who cares?”  But unlike the maximum number of drunk college freshmen in a telephone booth (ok, I know they don’t exist any more), some records are viewed as significant.  When they are broken, a new benchmark of substance is established.  Some such levels seem so far beyond the norm that we rarely even consider them, preferring instead to refer to more recent performance as a standard.  Thus we may say the current drop in equity markets is worse than the one in 2002.  We now hear comparisons that some things are worse than the 1930s.  But records are made by substituting a t for the e, thereby changing worse to worst.  E’s and T’s matter when dealing with ever.  That’s what makes a true benchmark.  Everest is the highest point in the world.  Some of today’s benchmarks, interest rates for example, are setting new standards for lowest ever.  History is being made; too bad that at present it seems to be for the worse(t).