• Japan’s economy is once again growing, with its gross domestic product (GDP) rising 3.7% in the second quarter. A rebound in exports to China and a large stimulus program helped Japan bounce back from contraction that, at an annualized rate of 11.7%, was more than double that of the United States’ in the first quarter. Officials at Japanese companies think the nation’s worst recession since World War II is nearly over, according to a survey released last weekend.

• The National Association of Home Builders/Wells Fargo confidence index rose to 18 this month, a one-year high, Bloomberg Newsreported. Still, a reading below 50 means most respondents view conditions as poor. “Inventory is being cleared and that is starting to benefit the new-home market,” Julia Coronado, a senior economist at BNP Paribas SA in New York told Bloomberg. “With a few months’ lag, that will lead to a turnaround in construction activity.”

• The Federal Reserve Bank of New York’s general economic indexrose to 12.1, higher than forecast and the first increase since April 2008. Any reading above zero indicates that manufacturing is growing. “Inventories were drawn down to such amazingly low levels that companies need to start bringing them back,” said Tom Porcelli, a senior economist at RBC Capital Markets Corp. in aBloomberg News interview. “We are coming out of the recession.It’s probably over at this point.“

• Credit card default rates showed signs of stabilization in July,Reuters reported, citing regulatory filings by multiple large U.S. banks. Bank of America Corp. (NYSE: BAC), the bank with the highest default and delinquency rates saw its charge-off rate shrink slightly to 13.81% in July from 13.86%. “It just seems to bear out what we heard in the second-quarter calls, that things seem to be getting marginally better — and I would stress marginally — on the consumer side,” Nancy Bush, founder of NAB Research, said of Bank of America.

• Microsoft Corp. (Nasdaq: MSFT) and General Electric Co. (NYSE: GE) joint venture MSNBC.com has acquired “hyperlocal” news and information Web site EveryBlock. Terms were not disclosed, but in June Time Warner Inc.’s (NYSE: TWX) AOL acquired a similar Web site, Patch for $7 million, The Washington Post reported. EveryBlock offers news in 15 cities. “Joining with MSNBC.com gives us the resources to turn EveryBlock from a cool, useful service into something much bigger,” said Adrian Holovaty, founder of EveryBlock. Holovaty and the company’s staff of five will remain based in Chicago.

• Reader’s Digest Association Inc., whose namesake magazine says it is the bestselling magazine in the world, has filed for Chapter 11 bankruptcy protection as a part of a prearranged plan with lenders to cut debt by 75%. If the court approves the deal, Reader’s Digest’s debt would be reduced to $550 million from its current $2.2 billion. “Our deal has already been negotiated and hammered out with a majority of our creditors,” said Chief Executive Officer Mary Berner in an interview with Reuters. The announcement “doesn’t affect our employees, it doesn’t affect the vast majority of vendors, it doesn’t mean we’ll do mass layoffs, it doesn’t mean we’re going to be selling off assets. It’s business as usual.”

• Continuing weak demand, bad weather and charges related to the halting of its expansion contributed to a 19% drop in Lowe’s Cos.’(NYSE: LOW) second quarter earnings. The world’s second-largest home improvement retailer after Home Depot Inc. (NYSE: HD) saw its profit fall to $759 million, or 51 cents a share for the quarter ended July 31. That compares to a net income of $938 million, or 63 cents a share in the same period last year. Sales fell 4.6% to $13.84 billion and same-store sales dropped 9.5%.

Source: Investment News Briefs Tuesday, August 18, 2009

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.

In a small ray of hope, the National Association of Realtors said the number of new sales contracts on existing homes jumped a seasonally adjusted 6.3% in December as buyers took advantage of lower mortgage rates and falling prices.

“Euro/dollar bulls were quick to capitalize on positive U.S. data following a lackluster performance during the European session,” wrote Matthew Strauss, senior currency strategist at RBC Capital Markets.

The euro was up despite data showing producer prices across the euro zone experienced their fifth consecutive monthly drop in December, bringing the annualized pace down to 1.8% from 3.3% in November.

The European Central Bank meets tomorrow, with most analysts expecting policy makers to keep the region’s key lending rate at 2%, after dampening remarks by ECB President Jean-Claude Trichet.

The Bank of England’s rate-setting Monetary Policy Committee also meets this week, and is expected to further cut key interest rates tomorrow, with no clear consensus on the outcome after BoE slashed the benchmark to an all-time low of 1.5% in January.

Source:Dollar Slips

Well, the litany of bad news continued yesterday, and in fact may be picking up speed.

First, the Labor Department said jobless claims rose by 159,000 in the week ending January 17, to a seasonally adjusted 4.78 million, the most since the government began keeping records in 1967.

Then the Commerce Department reported that orders for U.S.-made durable goods slumped 2.6% in December, with weaker demand shown for almost all products except defense-related items. (I.e., without government spending, who knows how much worse it would’ve been?)

And separately, Commerce said that new home sales fell 14.7% in December, to a seasonally adjusted annual rate of 331,000. That far exceeded economists’ expectations to the downside, and marked the lowest level since the series began in 1963.

All told, “The fear is that the slowdown spills over well into 2009 putting expectations of a second half rebound into question,” wrote David Watt, senior currency strategist at RBC Capital Markets.

Nevertheless, over in Davos, Switzerland, where the World Economic Forum is meeting, Indian commerce minister Kamal Nath said Thursday, “There is no sense of doom here,” although he allowed that, “There is a sense of gloom.”

Source: Dollar Slipped Against The Euro

The buck declined after the release of minutes of the Federal Open Market Committee’s mid-December meeting, which showed members seeing an increasing risk of depression and deflation..

The text of the minutes revealed that some participants envisioned “the distinct possibility of a prolonged contraction, although that was not judged to be the most likely outcome.” However, with inflationary pressures likely to dissipate, “some members saw significant risks that inflation could decline and persist for a time at uncomfortably low levels.”

David Watt, senior currency strategist at RBC Capital Markets, noted that the minutes “did not indicate any optimism on either the FOMC or the Board of Governors that better times were at hand.”

In hard data, the Commerce Department reported that U.S. factory shipments plunged a record 5.3% in November, with orders for U.S. factory-made goods falling 4.6% in the month. That was twice the 2.3% decline expected by economists.

And the National Association of Realtors said its pending home resale index fell off 4% in November, to 82.3, from 85.7 in October. It’s now at its lowest level since inception in 2001.

Source: Buck Finishes Higher Against Euro

“[The] dollar was boosted in part by ongoing talk of a big fiscal package from the incoming Obama administration, and we think gains will be sustained in 2009,” wrote currency strategists at Brown Brothers Harriman.

That government handout is looking as if it might be huge. According to MarketWatch.com, “Obama plans to spend about $775 billion over two years, putting people to work on infrastructure projects and giving aid to states. In all, the tax cuts or breaks would account for about 40% of the value of the stimulus.”

Though the buck put a smackdown on the euro, it lost ground, nearly 1%, vs. the British pound.

“Although the [Bank of England] is expected to cut rates this week, there is more chatter, particularly following last week’s sobering credit conditions survey, about other policy measures by the BoE and the U.K. government to attempt to spur bank lending,” said David Watt, of RBC Capital Markets.

The day’s hard data came from the Commerce Department, which reported that outlays for construction projects in the US fell by a seasonally adjusted annual rate of 0.6% in November. That drop was “surprisingly small,” wrote Mike Englund, chief economist for Action Economics.

Source: Dollar Whacks The Euro

Nickel declined in a similar manner, but it fought back more strongly, bouncing off the $4 mark to shoot back upward and close at its intraday high of $4.2161/lb., up nearly 8 cents. Zinc had a sharply down and up day, ending little changed at $0.5022/lb., up just over a third of a cent. Aluminum ditto, but wound up shedding a tenth of a cent, to $0.6594/lb., while lead was unable to hold in the green, dropping a penny and two-thirds, to $0.4274/lb.

Copper’s nice Monday optimism proved to be very short lived, as the metal resumed its losing ways yesterday, falling for the seventh time out of the past eight sessions, as worldwide government economic stimuli are viewed as being of questionable value.

The latest data showed U.K. housing sales for October declining to their lowest level in three decades.

That had Alex Heath, of RBC Capital Markets in London, writing that, “It is clear that rescue packages, stimulus and interest- rate cuts will be slow to work their support through the system, and short-term indicators will continue to be poor.” For now, Heath added, copper is “crumbling under the weight of the world’s economic problems.”

The World Bank concurs, writing that, “The global financial crisis is set to sharply slow economic growth in emerging and developing countries next year, ending a five-year global commodity price boom.”

Also factoring in, stockpiles continue their relentless march higher. Copper inventories monitored by the LME advanced by another 1,850 metric tons, to 302,575 tons yesterday, keeping them at their highest level since January 2004.

And in the latest round of production cuts, Swiss-based miner Xstrata Plc has reduced ore production by 20% at its McArthur River lead/zinc mine in northern Australia, dropping output from 2.5-million tons per year to 2.0-million tons.

Source: Base Metals Little Changed

Nickel peaked for the day near the New York open, dropped from there to mid-morning, but then rallied to close just off its intraday high at $4.6561/lb., up more than 10½ cents. Zinc also came off its highs near the open, but turned in a strong day nevertheless, ending at $0.5519/lb., up more than 2½ cents. Aluminum shot up from its pre-dawn lows, then held steady through the day, winding up with a gain of more than 2 cents at $0.797/lb., while lead moved modestly higher, tacking on a penny and two-thirds, to $0.5425/lb.

Copper was on the mend after the government’s decision to bail out Citigroup provided the market with a (possibly fleeting) shot of optimism.

The industrial metals tended to follow stock markets, which rose in the U.S. and Europe, and were a part of a general commodities rally. The MSCI World Index of equities jumped as much as 6.4%, and the Reuters/Jefferies CRB Index of 19 raw materials climbed as much as 4.1%.

“The rescue deal has provided the confidence factor,” wrote Alex Heath, of London-based RBC Capital Markets.

The RBC report added that, “We would not be surprised to see this rally run a little further given how short the market is at the moment, but we think there is much to be done before confidence is completely restored to the market and that rallies will continue to be used as a selling opportunity.”

Also factoring in yesterday were strong import trade statistics from China, the world’s leading metals consumer. That country’s monthly refined copper imports rose 15% in October to an eight-month high, boosted by attractive profit margins.

In the latest mining domino to fall, Norilsk Nickel Australia, a subsidiary of Russia’s Norilsk Nickel, announced the suspension of work at the Waterloo and Silver Swan mines in western Australia, saying that, “These mines have recently been operating in conditions of growing operational outlays, and considerable growth in production costs against a backdrop of a sharp fall in nickel prices, which has led us to suspend their operations.”

Source: Base Metals Rally

The government’s bailout of Citigroup (NYSE:C), with a plan that includes a $20 billion capital infusion, and guarantees for as much as $306 billion of Citi’s troubled assets, clearly didn’t sit well with buck boosters.

David Watt, senior currency strategist at RBC Capital Markets, was unconvinced, writing that, “[Yesterday’s] sell-off in [the] U.S. dollar and the equity bounce are welcome reprieves, but do nothing to undermine an overall bullish U.S. dollar stance.”

The euro’s charge against the greenback came, a bit surprisingly, after the closely-watched, Munich-based Ifo Institute’s November business-climate index showed a steeper-than-expected drop to a 15-year low of 85.8.

Economists took that as a clear signal that Europe’s largest economy is deteriorating. Also likely is that the euro zone’s hitherto resilient labor market will begin to suffer significantly in coming months.

“The upshot is that the recession is becoming increasingly entrenched, with more pain to consumers lying ahead,” said Tulia Bucco, an economist with UniCredit MIB in Milan.

Source: Dollar Slammed Against Euro

In the wake of Obama’s election, “What started as a moderately negative trading session overnight, ended with risk aversion firmly back in the driver seat,” said Matthew Strauss, of RBC Capital Markets.

Looking ahead, Kathy Lien, director of currency research at GFT, said that, “In the long run….the dollar could rally as a new president takes the helm. If history is a reliable leading indicator, over the next six months, the U.S. dollar should appreciate against the euro and the Japanese yen. We saw this in 6 out of the last 7 elections.”

But Lien added a caveat: “However this economic environment, the possibility of protectionist policies by Obama and the likely increase in the U.S. budget could also hurt the dollar.”

Meanwhile, the day’s hard data was grim. Companies in the U.S. private sector shed 157,000 jobs in October, according to the ADP employment report. The ADP report often presages the Labor Department’s jobs report, due tomorrow.

Separately, the Institute for Supply Management said its nonmanufacturing index fell to a record low of 44.4% in October, from 50.2% in September. Readings below 50% indicate more firms are contracting than growing.

Source: Dollar Posts Slight Gain on Euro