News about a planned U.S. stimulus package helped pull investors into the dollar on Monday but U.S. Treasury prices slumped on fears a price bubble is about to pop in the face of a massive wave of fresh debt.

European equities advanced for the fifth session in a row, spurred by gains in shares of oil companies on the back of rising crude prices. U.S. stocks were mostly lower as investors took profits on the rally that was racked up in thin trading last week.

Oil prices hit a three-week high as Israel’s deepening incursion into Gaza and a Russian gas dispute heightened fears about supplies.

Prospects for a swelling supply of government debt drove U.S. and euro-zone prices down. The U.S. Treasury said it would sell $16 billion of reopened 10-year notes and $30 billion in three-year notes this week.

While the issuance was broadly in line with market forecasts, it underscored this year’s looming surge of debt that will to fund government efforts to rescue the financial system.

U.S. President-elect Barack Obama plans $310 billion in tax cuts as part of a rescue package of up to $775 billion, senior Democratic aides said Sunday. German Chancellor Angela Merkel met her Social Democrat (SPD) coalition partners to discuss a second fiscal stimulus deal worth up to 50 billion euros ($68 billion).

The 30-year Treasury bond fell nearly three full points in price, pushing its yield up to 2.92 percent, up from a record low near 2.52 percent in December.

“The back-up in yields shows a growing sentiment toward questioning the lower rate environment we are in right now,” said George Goncalves, chief Treasury/TIPS and agency strategist with Morgan Stanley in New York.

The euro hit three-week lows versus the dollar, with weaker-than-expected Italian and Spanish inflation data and tax cuts in Germany expected to pressure the European Central Bank to soon cut rates further.

U.S. stocks fell as investors took profits following last week’s sharp gains.

“Right now we’re just watching and waiting to see if there is any news from the new administration and what type of news it will be,” said Frank Lesh, a futures analyst and broker at FuturePath Trading LLC in Chicago. “We got a little bit of profit taking here,” he added.

Shares of Apple Inc rose after chief executive Steve Jobs wrote a letter aimed at dispelling investor concerns about his recent weight loss. Shares of the iPod maker rose 4.4 percent to $94.75 in early afternoon trade.

Before 1 p.m., the Dow Jones industrial average was down 79.09 points, or 0.88 percent, at 8,955.60. The Standard & Poor’s 500 Index was down 3.27 points, or 0.35 percent, at 928.53. The Nasdaq Composite Index was down 8.52 points, or 0.52 percent, at 1,623.69.

European equity markets were buoyed by the anticipation of further fiscal stimulus, drawing flows away from the safer-haven of government bonds.

The FTSEurofirst 300 index of top European shares ended 1.9 percent higher at 873.01 points.

The telecommunications sector was one of the biggest gainers on the index on the first full day of 2009 trading for many, with Swisscom (SCMWY) rising 5.2 percent, Cable and Wireless adding 4.6 percent, Vodafone (VOD) up 4.3 percent and Portugal Telecom (PT) rising 4.6 percent.

Sharp losses for the euro, which was down 2.28 percent at $1.3559, also spread to euro/sterling, taking it to 0.9278, well away from record lows for the pound last week and easing momentum towards parity.

The dollar rose against a basket of major trading-partner currencies, with the U.S. Dollar Index up 1.74 percent at 82.923. Against the yen, the dollar rose 1.31 percent at 93.43 from a previous session close of 92.220.

Longer maturity government debt fell, but shorter-term debt was little changed to higher. The benchmark 10-year U.S. Treasury note fell 34/32 in price to yield 2.47 percent, and the 30-year U.S. Treasury bond fell 102/32 in price to yield 2.94 percent.

Oil rose, and has gained more than 35 percent since Israel launched its attack on Gaza on Dec. 27, increasing concerns about the supply of crude from the Middle East.

U.S. light sweet crude oil rose $1.11 to $47.45 a barrel.

U.S. gold futures dropped, breaking below $850 an ounce, as investors took profits on the back of a dollar rally and signs of slowing physical demand.

Spot gold prices fell $22.45 to $852.60 an ounce.

Asian stocks rose to a two-month high on hopes massive government spending programs will revive a global economic recovery later this year.

The MSCI index of Asia-Pacific stocks outside Japan climbed 1.6 percent to a two-month peak, while Japan’s Nikkei average gained 2.1 percent in a shortened session to reach a two-month high.

NEW YORK, Jan 5 (Reuters)

He said, ‘“Look, those are the bankers’ and brokers’ yachts.” ‘“Where are all the customers’ yachts?” asked the naive investor.’

This old Wall St joke spawned the title for your editor’s favourite investment book, from which this extract comes – Where are all the Customers Yachts by Fred Schwed Jnr. It first appeared in 1940 and related to Schwed’s brief experience on Wall St as a broker in the early 1920s.

He was the son of a short seller who went bust in the ‘20s. Expelled from Princeton for having a girl in his room he lasted only two years on Wall St but long enough to understand how it works. In defiance of the Puritanical work ethic often associated with America, he preferred golf and drink. Billionaire financial information entrepreneur and New York mayor, Michael Bloomberg called the book a “hilarious classic that proves the more things change the more they stay the same”. His other written credits are few save this and a children’s book – Wacky the Small Boy – who perhaps grew up to become Wacky the prop desk trader, or Wacky the hedge fund manager…

I was reminded of this thanks to a report in today’s Telegraph. As the economic climate deteriorates, the knives are out for the financiers and corporate elite. Brussels is gearing up for an all out attack on bonus culture. The short-term pay structure of such schemes has become “deformed” and encourages excessive risk taking with little thought for the interests of “stakeholders” or “society” according to a confidential document prepared for EU finance ministers. Well, most EU finance ministers… Britain’s Alistair Darling and free market allies from Eastern Europe have been excluded! Curbs on bonuses, stock options and golden parachutes are on the table for the interventionists. Angela Merkel wants a €1m cap on pay… No free marketeer the German Chancellor.

There is no “concrete legislation” on the table notes the Telegraph but the mood is clear enough. After the private sector lash the public sector backlash and unsurprisingly, the proposal is viewed with alarm in the City…and we suspect their yacht brokers too.

Back to the topic of oil for a moment…now $3 down from its $126 peak and never far from our thoughts. The US’s thirst for oil is matched by its increasing dependence on others to provide it. In 1973, the US imported 33% of its oil. Today the figure is nearer double at about 60%. By 2020 it could be importing 70% of its needs says Gideon Rachman in the FT.

Meanwhile, on the other side of the Pacific, the competition continues to intensify. Chinese oil consumption doubled between 1994 and 2003 and will double again by 2010 when the International Energy Agency expects it to be the world’s largest consumer of energy. Overall, the world will need 50% more energy needs by 2030 thinks the IEA. Mr Rachman notes:

“While western politicians routinely worry about globalisation, they have yet to focus on a more plausible threat. It is not the outsourcing of well-paid jobs; or the inflow of cheap goods: it is the globalisation of western patterns of consumption. If the Chinese and Indians eventually eat and drive like Americans and Europeans, the current inflation in fuel and food prices could be just the beginning. The environmental implications are also obvious – and alarming.”

But as China emerges, one stage of its economic development appears to be ending notes a Bloomberg report…

“The end of an era of China’s mighty export industry has begun,” says Tao Dong Asia chief economist for Credit Suisse. A third of the factories in China’s southern Guangdong province which produce 30% of China’s exports will be closed in three years time he reckons.

Vietnam (voted top emerging market destination for manufacturing business by PwC last year), India and other Asian nations are aggressively pursuing foreign investment. Chinese labour is now being undercut by Vietnam and India. Vietnamese labour is more than 40% cheaper and Indian labour cheaper still. This won’t weaken Chinese growth but rather change the shape of it as it moves into higher up the manufacturing food chain into value added businesses such as computer chips, cars and electronics.

An interesting feature of Chinese economic growth is its geographic concentration. Four provinces in the south-east of the country account for 60% of the country’s exports. As such average incomes in the richest regions coastal are ten times those in the poorest in Western China. In spite of money spent on infrastructure, the transportation and other costs make heading West an uncompetitive option for business in comparison to other options such as Vietnam. The spread of prosperity in this notionally Communist country to the 700m in the west of the country is a major issue thinks Morgan Stanley’s Stephen Roach:

“It is absolutely key that China pushes its development model westward. The jury’s out on whether they will pull it off.”

Regards,

Rob Mackrill
The Daily Reckoning

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