Investment News Briefs Wednesday, September 9, 2009

The U.S. dollar gained, retracing the week’s losses, as the durables goods report for July eroded risk appetite and prompted investors to seek shelter in the safe-haven greenback.

Orders for long-lasting manufactured goods registered the biggest advance since July 2007, but excluding transportation goods, orders for durables were slightly below expectations.

Slippage among global stocks that climbed to 10-month highs this week boosted money flows into less risky assets, such as European government bonds, which also gained from some modest month-end buying, traders said.

Economic data in Europe showed further signs of recovery, as did a report showing U.S. new home sales jumped in July to their fastest pace in 10 months.

But a key measure of U.S. business demand — nondefense capital goods, excluding aircraft — fell, reminding investors that the U.S. economy still faces huge challenges as it tries to emerge from deep recession.

Investors in equity markets took profits on a recent run-up in prices, and key commodity prices, such as copper, fell as the U.S. data cast doubt over the speed of economic recovery.

For example, the MSCI all-country world index rose for six straight session through Tuesday, gaining 5.3 percent over the stretch. The index was down 0.5 percent on Wednesday, but still up about 4 percent in August.

“The market has come a long way, and the economics are still supportive,” said Georgina Taylor, an equity strategist at Legal & General Investment Management.

“We’re just seeing a little profit taking. Nothing has been derailed. Housing data is improving. The only area of concern is consumer spending.”

In Britain, retreating mining and oil stocks outweighed modest gains from defensive pharmaceuticals, while energy shares were the biggest drag on a leading European index.

The pan-European FTSEurofirst 300 <.FTEU3> index of top shares fell 0.5 percent to close at 973.92. The index is still up more than 50 percent from its lifetime low of March 9.

U.S. stocks seesawed after market sell-offs on Monday and Tuesday led investors to turn skittish.

“Given how extended we are, and relatively overbought, sentiment is going to drive the market’s direction much more than any economic news, at least in the short term,” said Michael James, senior trader at Wedbush Morgan in Los Angeles.

Shortly after 1 p.m., the Dow Jones industrial average <.DJI> was down 4.24 points, or 0.04 percent, at 9,535.05. The Standard & Poor’s 500 Index <.SPX> was down 1.74 points, or 0.17 percent, at 1,026.26. The Nasdaq Composite Index <.IXIC> was down 6.60 points, or 0.33 percent, at 2,017.63.

Oil pared early gains to drop to almost $71 a barrel, extending losses from the previous session, on the rise in U.S. stockpiles of crude.

The U.S. Energy Information Administration (EIA), the statistical arm of the Department of Energy, reported on Wednesday that crude stocks in the world’s largest energy consumer rose by 200,000 barrels last week.

U.S. crude for October was down $1.00 at $71.05 a barrel, after falling $2.32 on Tuesday.

Brent crude fell 61 cents to $71.21 a barrel after losing $2.44 the previous day.

U.S. government debt prices fell. The benchmark 10-year note was down 4/32 in price to yield 3.45 percent.

Gold eased as the dollar recovered losses against the euro.

U.S. gold futures for December delivery in New York were down $1.00 at $945 an ounce.

The ICE Futures’ dollar index <.DXY> rose 0.6 percent to 78.723. The euro fell about 0.4 percent to $1.4235 .

Japan’s Nikkei share average closed up 1.4 percent <.N225> to a fresh 10-month high, while the MSCI index of Asia Pacific stocks traded outside Japan rose 0.3 percent.

Aug 26 (Reuters)

Oil hovered around $61 a barrel as worry about the strength of global fuel demand was offset by news of strong economic growth in China.

The U.S. dollar initially fell to a six-week low against major currencies after JPMorgan’s reported record investment banking and trading results, providing further evidence of recovery in the financial system, but weak U.S. manufacturing data and concern about the impact of the possible failure of U.S. lender CIT re-introduced a bid for safer-assets.

CIT’s talks about aid with the U.S. Treasury ended Wednesday night, leaving the lender to its own devices, and endangering the future of some of the one million customers of the lender to small businesses. U.S. Treasury debt prices rallied after three days of falls partly on a resulting flight-to-safety bid

A fall in a reading of the Federal Reserve Bank of Philadelphia’s index of business conditions in the U.S. Mid-Atlantic region to minus 7.5 in July from minus 2.2 the month before also helped push up bond prices.

The benchmark 10-year U.S. Treasury note was up 20/32 in price to yield 3.53 percent. The 2-year U.S. Treasury note was up 4/32 in price to yield 0.96 percent.

“We are in a difficult position at the moment because we are caught on the cusp between is this a sense of sustainable recovery or a possibility of a relapse?” said Richard McGuire, fixed income strategist at RBC Capital Markets in London.

“There’s no real convincing evidence yet on either side,” he said.

European shares hit a one-month closing high on improved sentiment following JPMorgan’s results and data that showed the number of U.S. workers claiming new jobless benefits fell last week.

But U.S. stocks faltered after a run-up this week that pushed the benchmark Standard & Poor’s 500 Index up 6.1 percent, the best three-day rally following a surge after U.S. equities hit a decade low in March.

Shortly after 1 p.m. (1700 GMT), the Dow Jones industrial average was up 3.18 points, or 0.04 percent, at 8,619.39. The Standard & Poor’s 500 Index was down 1.30 points, or 0.14 percent, at 931.38. The Nasdaq Composite Index was up 3.41 points, or 0.18 percent, at 1,866.31.

The FTSEurofirst 300 index of top European shares ended 0.4 percent higher at 866.81 points, fourth straight advancing session.

The number of U.S. workers filing new claims for jobless benefits fell last week to their lowest since January, but the seasonally adjusted government data was again distorted by earlier layoffs in the automotive industry.

“There’s a lot of conflicting data here, and I think that the market is reflecting that,” said Kim Caughey, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

Asian shares across the region outside of Japan rose 1.3 percent to their highest since mid-June, while Japan’s benchmark Nikkei underperformed with a rise of 0.8 percent.

China reported economic growth quickened to 7.9 pct in the second quarter, beating forecasts.

The U.S. dollar was down against a basket of major currencies, with the U.S. Dollar Index off 0.02 percent at 79.299.

The euro was up 0.14 percent at $1.4124, while against the yen, the dollar was down 0.74 percent at 93.56.

Crude oil prices fell as investors tried to decide how high oil prices can rise given a still fragile global economy, said Mike Fitzpatrick, vice president at MF Global in New York.

U.S. light sweet crude oil fell 49 cents to $61.05 a barrel.

“$60 is the fulcrum balancing the price lever that tips whenever one contention or another is bolstered by news or economic data,” Fitzpatrick said.

Gold slipped as the dollar pared losses against the euro, with lacklustre demand for physical stocks of the metal also pressuring prices. Spot gold prices fell $1.20 to $937.25 an ounce.

NEW YORK, July 16 (Reuters)

Euro zone economic sentiment improved more than expected in June, data showed on Monday, as the European Commission predicted the worst could be over for the 16-country currency area.

“The ECB will find themselves affirmed that the economy is bottoming out and that the worst is over,” said Joerg Angele, analyst at Bayerische Landesbank.

“It’s bad, but it’s not getting worse.”

The FTSEurofirst 300 index rose 1 percent, led by energy companies and financials.

The MSCI world equity index edged up 0.12 percent towards 12-day highs hit on Friday. However, the index is down over 4 percent from the year’s highs set earlier this month.

U.S. stock index futures indicated a slightly higher open on Wall Street.

World stocks have shuffled sideways in the past few weeks as investors have questioned how quickly the global economy will return to growth, giving a boost to battered government bonds and pushing yields lower.

U.S. employment data are due on Thursday ahead of a U.S. holiday on Friday, and the European Central Bank and Sweden’s Riksbank issue policy statements this week.

“With the payrolls coming up, and the ECB and Riksbank, I don’t think there’s a great appetite to take on big risk this week,” said Maurice Pomery, managing director of Strategic Alpha.

Many investors are also sticking to the sidelines as the second quarter winds down and ahead of U.S. and European summer holidays.

CHINA WATCH

The dollar index, a gauge of its performance against six major currencies, dipped 0.05 percent to 79.833, but held off a two-week low struck on Friday.

The euro inched up 0.07 percent to $1.4059 , recouping losses earlier in the session, and the dollar was up 0.16 percent against the yen at 95.35 .

The dollar fell last week after China, which holds nearly $2 trillion of reserves believed to be concentrated in dollars, repeated its calls for an end to the dominance of a single currency in global finance.

China and Brazil said on the sidelines of a weekend meeting of central bankers in Basel they were discussing a currency arrangement to allow exports and importers to settle deals in local currencies, thereby avoiding the dollar.

Pressure from emerging market countries to seek an alternative to the dollar as reserve currency has contributed to weakness in the U.S. currency in recent weeks.

Crude oil rose 0.74 percent to $69.89 a barrel on supply concerns after Nigeria’s main militant group said it attacked a Royal Dutch Shell oil platform.

Euro zone government bond futures rose 20 ticks , helped by strong gains in UK gilts on month-end buying and weak UK data.

LONDON, June 29 (Reuters)

Cool Beans, eh? OK… Well… If yesterday was Turn Around Tuesday as the writer said, I sure didn’t see it! We had a “stop the dollar at the 1.38 border” Tuesday… But a complete turn around from Monday’s sell off, after Russian Finance Minister, Kudrin, threw a cat among the pigeons? Not that I saw!

We do seem to be stuck in a trading range of 1.37 to 1.40… With probes below 1.37 and above 1.40 short-lived. That’s OK with me, at this point, but it had better not last too long, or traders will grow tired of the boring range… And, I will be yelling at the walls for some price action!

Well… The BRIC (Brazil, Russia, India and China) meeting didn’t really bring about the Thunder and lightening as I thought it would… The leaders of these countries did discuss the need for a “more diversified monetary system to reduce dependency on the world’s reserve currency.” (read the dollar!) They also discussed selling bonds and swapping currency among the group. Now if we rewind back to Monday, I said that I thought this could be what they would do… The crystal ball was bang on that day! HA!

I can’t believe the markets have allowed this to be swept under the rug… This could be colossal if it’s carried through… And this way, all of them can smile and say they believe in the dollar and U.S. Treasuries while not dealing with them! Personally, I think the reason the markets aren’t paying attention to these goings on, is that the media isn’t covering it… The grip that the administration has on the media is really beginning to show just how tight it is…

One other thing from the meeting… The BRIC nations announced that they wanted to take a more active role in the world’s financing system… And with $2.8 Trillion in currency reserves among the 4 of them… That would be more than a “kind gesture”…

Speaking of the media… I have to wonder what the media is thinking on this one… Here’s the skinny… First of all, this story came to me a week ago… But at first, I thought, I had better make certain this is not a hoax before talking about it… What am I talking about? I’m talking about the report that two Japanese men were caught at the Swiss-Italian border with $130 Billion in U.S. Treasuries!!!!!!! Now, Chris and I were talking about this yesterday, and Chris said, “But I thought all Treasuries were book entry for some time now”… Yes, since 1982 (a great year, with the Cardinals winning the World Series!) Treasuries have been book entry only… So… The question I had from the beginning is “are they real or fake?” Because I didn’t want to waste your time and mine if they were fake bonds… But apparently the someone believes them to be real…

Hmmm… $130 Billion in bearer bonds… Does this intrigue anyone? It sure does for yours truly. Does this mean that the U.S. Treasury has been printing bearer bonds and selling them under the cover of a dark night? That’s the only explanation I can come up, IF THEY ARE FOR SURE REAL!

I don’t know what to make of this except it has my attention, and I can’t believe I don’t see one story on cable news… But it’s all over the news in Europe and Asia… More later, as additional news comes to light on this…

OK… Yesterday, I talked about the Current Account Deficit, which is expected to be $85 Billion for the 1st QTR… What I didn’t talk about is that this would be the lowest level for the Current Account in a decade! And would represent just 1.5% of GDP. Now… I used to go out and talk about how the dollar entered the weak dollar trend in Feb. of 2002, after the Current Account Deficit reached 4% of GDP, which historically had been the line in the sand for currency issues…

But let’s put this in perspective, eh? Back in 2001 and 2002, our GDP was running at 4-5%… It’s now negative… So, maybe this won’t be the harbinger to reversing the weak dollar trend, that it looks like on the outside… Besides, as I’ve said over and over again lately, the whole deficit talk used to center on the Trade Deficit (which account for the majority of the Current Account), and with the global recession going on, the Trade Deficit, while still having issues, is no longer the focal point… Instead, the Budget Deficit (the 2nd of the Twin Deficits) has taken the reins of the focal point… If it’s not one thing it’s another, my mother used to tell me! (the you-know-what disturber in me just has to make this comment… “no wonder the Current Account is lower, we don’t report debts or the bonds that represent the debts!”… That’s in reaction to the $130 Billion in bearer bonds!)

I came across a news story yesterday morning that caught my attention… It seems that the Gov’t of Australia, has decided to put Government backing on state issued bonds like the QTC’s (Queensland Treasury). This is HUGE for these issues, especially since the states in Australia were seeing downgrades in ratings! Now, the country of Australia has a higher rating, and these bonds will carry that rating, since they are now backed by the Gov.! The one thing it will do though, is tighten up the yield on these bonds… Probably by about 10-15 Basis points…

Why am I talking about this? Because… If the QTC bonds now have a higher rating, more institutions will be able to buy them, and the more investment in Australia, the more flows into Aussie dollars! The news brought the A$ back to 80-cents yesterday briefly… But this is going to take some time to work through. The thing here is that in the long run, this is good for the A$!

In China overnight, we had an announcement that could really become a problem with protectionism… China has introduced an explicit “Buy Chinese” policy as part of its economic stimulus program in a move that will amplify tensions with trade partners and increase the likelihood of protectionism around the world.

Now, long time readers know that I’ve always banged on 1. the Bush administration when they placed tariffs on Japanese Steel about 8 years ago, 2. Schumer and Graham for introducing a bill to place tariffs on Chinese exports to the U.S. Because… Both represent protectionism… And a currency will normally get taken to the woodshed for being associated with a country that takes protectionism measures…

So… Will this hurt the Chinese renminbi? Ahhh grasshopper, remember, the Chinese renminbi is a “manipulated currency”. The Chinese Gov. decides what value the renminbi will be… So… In a regular floating currency scenario, yes, this would hurt the currency… But in China’s situation, it’s all different.

However, the reason I make a big deal out of this is that this announcement could lead to other countries placing their own protectionism measures to offset China… One protectionism measure, begets another, and another, and another… Oh boy! NOT!

Talk about smashing a bug! This would be just like doing that to the promises of a global recovery… Somebody stop them for they know not what they are doing! Or maybe the Chinese do…

Yesterday, Housing Starts in the U.S. surprised on the upside, and so did Building Permits… I don’t like this for the simple reason that we already have an “inventory” issue with houses that have been built and not bought or occupied. But, the media was all over this new, because… It’s the opposite from what I told you the day before that economists, Shiller, Roubini and Whitney had to say about housing! And the Housing Starts and Building Permits data flies opposite of the report this morning that mortgage applications fell 15.8% this month!

We also saw that Industrial Production fell -1.1% in May… So output was off sharply at factories, utilities and mines, in May, which is completely opposite of those that are saying the recession is over…

Today, in addition to the Current Account data, we’ll also see the stupid CPI data for May… You never know what that data has in store for us, because the Gov’t doesn’t know what they want it to show for us yet! HAHAHAHAHAHAHA! Of course that’s my feeling toward CPI, and I’ve explained it all many times over the years… But, in a nutshell, CPI is kept artificially low by the Gov’t by re-weighting things that get too expensive, or substituting things that get too expensive… We all know why CPI is kept artificially low too, don’t we? Yes… We do…

Now… I spent more time on CPI this month than I care to! It’s just a dumb report that the media will be all over like a cheap suit!

I heard a great old song on the radio this morning that pretty much puts my feelings toward the direction of the country into words… “but you tell me over and over and over again my friend, ah, you don’t believe we’re on the eve of destruction.” – Barry McGuire

And then, I see where the President is going to announce his sweeping regulatory changes today… Hmmm… Do you see what I see? This is a shift from markets driven regulation to Political regulation… Markets to politics… Somebody stop the madness! Serenity now!

Currencies today 6/17/09: A$ .7925, kiwi .6295, C$ .8805, euro 1.3865, sterling 1.6260, Swiss .9190, rand 8.0530, krone 6.4115, SEK 7.8350, forint 204, zloty 3.2580, koruna 19.2570, yen 96.40, sing 1.4580, HKD 7.7505, INR 48.08, China 6.8370, pesos 13.45, BRL 1.9735, dollar index 80.72, Oil $69.69, 10-year 3.67%, Silver $14.10, and Gold… $932

That’s it for today… A pretty busy day for yours truly yesterday, with the monthly Review & Focus due, and the regular daily stuff all rolled into one day… Thank goodness, Chris and Mike help me with the Review & Focus these days! Speaking of the Review & Focus, I did a story on whether inflation or deflation is worse for an economy… You’ll want to check that out, when it shows up in your mailbox! Hey! My beloved Cardinals scored more than 2 runs in a game last night… YAHOO! It’s been a tough month for the redbirds, a June Swoon, if you will. Last night’s game VS the Tigers reminded me of the 2006 World Series match-up, and we all know the outcome of that series! 10th World Championship for the Cardinals! OK, enough of that, time is a wastin’! I hope your Wednesday is Wonderful!

Source: Stuck In A Range

We spent the morning musing on the Maginot Line. The French built this elaborate line of fortifications along its border with Germany in the 1930s to thwart an invasion by its Great War enemy. When Germany invaded France in May 1940, Adolf Hitler’s armies simply bypassed the line and invaded France through neighbouring Belgium. The Maginot Line proved to be an elaborate dud.

As Nassim Taleb points out in his book The Black Swan: The Impact of the Highly Improbable:

The story of the Maginot Line shows how we are conditioned to be specific. The French, after the Great War, build a wall along the previous German invasion route to prevent reinvasion – Hitler just (almost) effortlessly went around it. The French had been excellent students of history; they just learned with too much precision. They were too practical and exceedingly focused for their own safety.

What does this have to do with investing? It’s a fair question. To our humble minds, the story of the Maginot Line illustrates that we humans tend to base our vision of the future on past events and have trouble imagining a future radically different from what has happened before. We are, if you like, sitting ducks: we build our defensive walls and then guard them jealously only to be blindsided at the crucial moment.

One of our central aims in Notes is to imagine futures unpalatable to the mainstream – futures that often seem impossible because of their lack of precedent in the past. It’s niche work. Most people don’t have the time or the inclination to wonder about what will come next. But to be a successful investor, you must first peer into distance and imagine the world that’s coming.

Today, we offer up a vision of a diminished America – an America weakened by decades of living beyond its means and almost entirely reliant on its foreign creditors. Some might say this future has already arrived. But here at Notes, we believe the country has further to fall. We’re short, if you like, on US hegemony.

Bond king Bill Gross is also concerned. He calls this diminished America “the new normal.”

Gross is better qualified than most to prognosticate on America’s fate. He runs the world’s biggest bond fund. So it’s his job to know where the US economy is heading. He’s also an honorary underground investor: he puts his money where his mouth is and he doesn’t pander to mainstream opinion.

In his latest monthly missive, Gross argues that the tipping point for the end of US economic dominance is easy to spot and is a matter of simple mathematics.

Private sector deleveraging, reregulation and reduced consumption all argue for a real growth rate in the US that requires a government checkbook for years to come just to keep its head above the 1% required to stabilize unemployment. Five more years of those 10% of GDP deficits will quickly raise America’s debt to GDP level to over 100%, a level that the rating services – and more importantly the markets – recognize as a point of no return. At 100% debt to GDP, the interest on the debt might amount to 5% or 6% of annual output alone, and it quickly compounds as the interest upon interest becomes as heavy as those “sixteen tons” in Tennessee Ernie Ford’s famous song of a West Virginia coal miner. “You load sixteen tons and whattaya get? Another day older and deeper in debt.” Pretty soon you need 17, 18, 19 tons just to stay even and that describes the potential fate of the United States as the deficits string out into the Obama and other future Administrations.

It’s a slow motion car crash, dear reader, and all we can do is sit and gawp. As Gross also points out, the US is already producing less wealth in proportion to the rest of the world. And less of its citizens are getting into the Forbes rich list as a result.

This does not come at a good time. America’s ability to borrow cheaply is dependent on its debt-to-GDP ratio, which at 13% is already at highs not seen since World War II. One way of improving this ratio is to grow GDP. But as Gross points out, this is becoming more and more difficult thanks to “private sector deleveraging, reregulation and reduced consumption.”  And all of this does not begin to take into account what Gross describes as the “pig in the python” demographic squeeze on resources on the way.

Private think tanks such as The Blackstone Group and even studies by government agencies, such as the Congressional Budget Office, promise that Federal spending for Social Security, Medicare, and Medicaid will collectively increase by 6% of GDP over the next 20 years, leading to even larger deficits unless taxes are increased proportionately. Collectively these three programs represent an approximate $40 trillion liability that will have to be paid. If not, you can add that present value figure to the current $10 trillion deficit and reach a 300% of GDP figure – a number that resembles Latin American economies such as Argentina and Brazil over the past century.

What Gross understands better than most is that we do not live in a world without consequences. This is the beauty of the bond markets: they provide (welcome) limits to the “something for nothing” culture that has gripped the US for far too long.

The big question, of course, and the one Team Obama would like to dodge for as long as humanly possible, is who is going to buy America’s tsunami of debt?

Broadly speaking, the problem is twofold. On the supply side, the US Treasury is set to issue roughly four times last year’s amount of bonds – an estimated gross issuance of $3 trillion. On the demand side, America can no longer rely on the current account/trade deficit to fund borrowings. As Gross points out, with this figure down to about $500 billion this year, China and other surplus nations simply won’t have the spare cash to fund Washington’s spending requirements.

There are only two possible outcomes to this supply-demand dislocation. The first is that the yield curve steepens. As we argued in yesterday’s Notes, there is enormous pressure right now on long-dated US Treasury yields. Yields are rising fast. And if this trend continues unabated, any “green shoots” will be choked off by the weeds of rising mortgage rates and corporate rates.

The second possible outcome is that the Fed steps into the breach and continues to buy back US Treasurys. This is horribly inflationary, as the money the Fed uses to pay for US debt is of the freshly printed variety. The Chinese are already getting nervous at the swelling of the Fed’s balance sheet. Should this trend continue private and sovereign holders of dollar-denominated debt will increasingly look to diversify out of their dollar assets, selling US Treasurys in the process.

The picture is a grim one. But the illusion of something for nothing is strong, and Team Obama shows no signs of quailing in front of this precipitous debt pile.

We read with horror in USA Today that one in six dollars of Americans’ income comes in the form of a federal or state check or voucher. This is the highest level of state-funded personal income since records began in 1929.

“In all,” reports the paper, “government spending on benefits will top $2 trillion in 2009 — an average of $17,000 provided to each US household, federal data show. Benefits rose at a 19% annual rate in the first quarter compared to the last three months of 2008.”

We don’t expect a return to balanced budgets anytime soon.

What other ways are there to hold on to your wealth in this “new normal”? It’s another fair question, and one that has been preoccupying us here at Notes for some time.

According to Gross, “staying rich in this future world will require strategies that reflect this altered vision of global economic growth and delevered financial markets.” Here’s what he advises:

Bond investors should therefore confine maturities to the front end of yield curves where continuing low yields and downside price protection is more probable. Holders of dollars should diversify their own baskets before central banks and sovereign wealth funds ultimately do the same. All investors should expect considerably lower rates of return than what they grew accustomed to only a few years ago. ]]> http://www.contrarianprofits.com/articles/bong-king-gross-says-ditch-the-dollar-before-its-too-late/17569/feed 0 http://www.contrarianprofits.com/articles/could-ireland-go-bust-and-become-the-next-iceland/17374 http://www.contrarianprofits.com/articles/could-ireland-go-bust-and-become-the-next-iceland/17374#comments Mon, 01 Jun 2009 18:53:27 +0000 Contrarian Profits http://www.contrarianprofits.com/?p=17374 The brave new world has already arrived in Ireland, where your co-editor is currently based. Ireland exemplifies the boom-bust economics that has shattered the global economy.

When I left the country in 2006, the place was awash with excess – property developers ferried themselves around in helicopters, private bars served €20 cocktails, the roads were full of top-of-the-range BMWs, Mercedes and Aston Martins. Now the bubble has burst and the Irish are baying for blood.

Ireland’s fall from grace was nothing if not spectacular. According to The Economist, the economy probably shrank by 2.5% in 2008 and may contract by another 6.5% this year. Unemployment has jumped from 5% to 10.4%, faster than America’s decline. Meanwhile, Irish banks are blighted by souring property…

The 30-year Treasury is now at its highest level since last November. The rise in bond yields has raised questions about whether the Federal Reserve will step up efforts – which began in March – to keep yields down through direct purchases of government bonds.

Tom Porcelli, economist for RBC Capital Markets, described it as a “terrible auction.”

Why is this bad news? Because such poor demand in the face of America’s requirement for record amounts of public debt will make it very difficult for the Fed to keep interest rates low.

You see, politicians pretend that there are few adverse consequences to their worsening debt addiction. And since the collapse of the debt bubble in 2007, they have been putting Americans in hock like it was going out of fashion.

Of course, all of this borrowing has very real consequences for Americans. As investor confidence and risk appetite return and US equities rally, investors are turning their backs on the low-yielding US bond market. As investors shun US treasuries, interest rates move higher to lure investors back into the market. This rise in treasury rates puts pressure on interest rates everywhere – from homes to cars to the interest corporations must pay on any new bonds they issue. Mark our words, higher interest rates in this market will just wind up choking off any real recovery.

The very real consequence of the rising long-bond yields can be seen in the recent rise in mortgage rates. This, again, from the FT:

Mortgage rates have been following the government bond yields higher. A 30-year fixed-rate mortgage averaged 4.84 per cent last week, according to a Freddie Mac survey, compared with 4.78 per cent the week before.

As underground investor Tom Dyson (who edits the excellent 12% Letter ), a rise in the long bond’s interest rate can crush certain income investments.

If the long bond’s yield rises from 4% to 8%, the yield on all other income investments must also rise by 4%. A 12% junk bond would become a 16% junk bond. A 14% dividend payer would have to become an 18% dividend payer.

As Tom says, the long-bond market is “weaker than a wet paper bag” right now. He reckons the magic number for shorting long bonds is 124.07. And the long bond closed at 123.26 on April 28 and is now making new five-month lows.

Here at Notes we smell opportunity. We have our eye on the ProShares UltraShort 20+ Year Trea ETF (NYSE:TBT) . This ETF has risen over 6% in the last five weeks or so.

The extra spending is on top of the original 284.5 trillion won budget for 2009, and will be mostly funded by selling government bonds. The remaining 11.2 trillion won will be spent making up shortfalls in tax revenue, Korea’s Yonhap News Agency reported.

The government submitted the budget to the National Assembly parliament for approval, and a decision will be made next month.

“The global economic downturn is taking place at a faster pace than has been expected in terms of its depth and breadth,” Finance Minister Yoon Jeung-hyun told reporters. “Reflecting changed economic conditions at home and abroad, the government decided to draw up this extra budget to overcome the current crisis as quickly as possible.”

Yoon said he expects the additional measures – on top of deregulation and increased corporate investment – could create 550,000 new jobs in 2009 and add two percentage points to the country’s gross domestic product (GDP).

In the fourth quarter, Korea’s GDP shrank 5.6% from the previous three-month period. And for 2009, he expects about 200,000 job losses and a 2% GDP contraction.

“The key is how fast the government can get approval from the parliament and how efficiently the government will implement the plans,” Lim Jiwon, an economist at JPMorgan Chase & Co. (JPM) in Seoul, told Bloomberg.

South Korea, EU Free Trade Deal

Meanwhile, South Korea and European leaders are nearing the completion of what could be the largest free trade pact for both economic entities – and larger than South Korea’s current free trade arrangement with the United States.

Negotiators for both sides told Forbes that the “provisional” agreement will remove most tariffs on bilateral trade for the next five years.

Like the additional stimulus and budget, the sooner the pact is implemented, the better for export-heavy South Korea.

After China, the EU is South Korea’s second-largest trading partner, with bilateral trade eclipsing $98 billion last year. And European businesses are the biggest foreign investors in South Korea, The Wall Street Journal reported.

Both sides are expected to reach an agreement next week at the G20 Financial Summit, but a few issues could throw a stick in the spokes of a deal. Differences remain on auto and parts tariffs, rules of origin and duty drawbacks.

Source: South Korea Planning Additional $13 Billion Stimulus, Extra Spending to 2009 Budget

Reassurances over the health of the U.S. banking industry have sparked something of a recovery in investors’ appetite for risk and Wall Street looked set to join Asia and Europe with strong gains at the open.

Executives from Citigroup , Bank of America and JPMorgan Chase said last week their banks had been profitable for the first two months of the year.

Federal Reserve Chairman Ben Bernanke also said on Sunday that he sees the U.S. economic decline moderating and recovery beginning in 2010, though he said risks remain that politicians will lack the will to do everything needed to fix the fractured financial system.

Global stocks as measured by MSCI rose more than 1.3 percent, bringing gains to more than 11.5 percent since hitting a low a week ago.

“The eternal battle between the bulls and the bears will intensify this week,” said Chris Hossain, senior sales manager at ODL Securities.

“Whilst it is hard to say if we have seen the worst, we certainly haven’t seen a week like last week in a long time.”

European shares also rose for a fifth straight session, led higher by financial stocks.

The pan-European FTSEurofirst 300 and 14 percent this year after plunging 45 percent in 2008.

Earlier, Japan’s Nikkei average gained 1.8 percent to post its highest close in a month, with banks such as Mitsubishi UFJ Financial Group  jumping amid the easing fears about the health of U.S. lenders.

The benchmark rose 134.87 points to 7,704.15, its highest finish since Feb. 16. The broader Topix  climbed 2.4 percent to 741.69.

BONDS FOR SALE

The equity charge undermined demand for government bonds with June Bond futures down 73 ticks, two-year Schatz yields rising 5 basis points to 1.381 percent, and 10-year Bond yielding 3.127 percent, up 8 basis points.

“At least risk aversion is decreasing and there was no disappointment on the back of the G20,” said Patrick Jacq, interest rate strategist at BNP Paribas in Paris.

“Clearly, as financial stocks still remain the driving force, this is helping stock markets to rebound further.”

Over the weekend, finance ministers and central bankers from Group of 20 countries pledged to use their full fiscal and monetary firepower to combat the economic crisis, but the decisions taken focused more on funds for the IMF and regulating hedge funds.

The dollar fell broadly, reversing earlier gains made in the Asian session, as stock markets rallied.

The currency market was also looking ahead to policy meetings by the Federal Reserve and the Bank of Japan later in the week.

The dollar fell 0.65 percent against a basket of currencies to 86.687, while the euro rose 0.8 percent from U.S. trade on Friday to $1.3022 .

The U.S. currency, however, gained 0.49 percent to 98.43 yen .

March 16 (Reuters)