Daily Investment Interpretations

June 29, 2010

2010-6-29:  The markets crashed again today, hitting their their support levels.  The NASDAQ Composite lost 85.47 points (-3.85%) to close at 2,135.18, less than ½ % above its February 4th low. The Dow dove 268.42 points -2.65%) to close at 9,870.30, and the S&P 500 fell 33.33 points (-3.1%) to end at 1,041.24. Oil ended down at $75.74 a barrel, while Gold closed at $1,242. The VIX rose 5.13 to 34.13.  
    Yields on 2-year U. S. Treasury bonds  fell to their lowest yield on record today  (0.59%) in a flight-to-quality as investors fled "safe" European bonds and bought "risky" U. S. Treasuries. Yields on 10-year Treasuries broke the 3% barrier, hitting 2.96%, the lowest in two years. (It should be noted that the past two years include the autumn of 2008, the March low of 2009, and last month's "mini-crash".) Yields on 30-year Treasuries broke 4% today (see below).
    This article, The three biggest lies about the U.S. economy, by Marketwatch' Brett Arends, lists three myths of which the general public is probably unaware.
(1)  Myth #1:  U. S unemployment is under 10%. The author concludes that about 25% of the men in the U. S. who "are of prime working age" are either unemployed or underemployed.
(2)  Myth #2:  The markets are panicking about the deficit. "To hear the G-20 tell it, the U.S. and other top countries had better slash those budget deficits before the world comes to an end." In fact, the rates on 30-year Treasuries closed at 3.96% this afternoon. "They aren't seeing inflation either. On the contrary, they're saying it will average just 2.3% a year over the next three decades. That's the gap between the interest rates on inflation-protected Treasury bonds and the rates on the regular bonds. By any modern standard the forecast is low. Instead of worrying about inflation, some are starting to worry about something even more dangerous: deflation, or falling prices."
(3)  Myth #3:  The U. S. is sliding into 'socialism'. "Numbers published by the Federal Reserve a few weeks ago show that corporate profit margins have just hit record levels. Indeed. Andrew Smithers, the well-regarded financial consultant and author of "Wall Street Revalued," calculates from the Fed's latest Flow of Funds report that corporate profit margins rocketed to 36% in the first quarter. Since records began in 1947 they have never been this high. The highest they got under Ronald Reagan was 30%.      
    "Meanwhile, federal spending, about 25% of the economy this year, is expected to fall to about 23% by 2013. In 1983, under Ronald Reagan, it hit 23.5%. In the early 1990s it was around 22%. Some socialism.  
    "So much for a revolution. But here comes the counter-revolution just the same."  
    Some people never learn, including G-20  
    Dr. Irwin Kellner, Marketwatch' Chief Economist, makes the same statements as Brent Arend and Paul Krugman: Europe is replicating Herbert Hoover's mistakes of the 1930's: "Talk about déjà vu all over again. Language and actions like this are what turned the mild recession of 1929 into the Great Depression of the 1930s."
    He continues, "Because of the G-20, we may well be heading in the same direction. Our recovery is clearly losing steam. After a 5.6% surge in 2009's fourth quarter, the gross domestic product expanded at only a 2.7% pace in the first, and it may well have slowed even further in the second quarter. Yet the U.K., Germany and even Canada are prepared to tighten. Should they do so, it would depress their appetite for imports from the U.S. and elsewhere."
    Double dip: Best be nimble and quick  
    Mark Hulbert also writes, Key technical levels at risk  This article points out that a close below 9,884 on the Dow would constitute a breakdown of this year's "head-and-shoulders" pattern
    Mark Hulbert writes Top adviser since 1980 mostly in cash. The top advisor" is Charles Allmon, who's been mostly in cash for most of the past 30 years.   
    S&P testing 2010 low for 4th time: Michael Ashbaugh   
    I'm repeating this article from last night because it plays into what I'm getting ready to say:
    "The RBS tells clients to prepare for 'monster' money-printing by the Federal Reserve.      In this article in Telegraph, Ambrose Evans-Pritchard advances many of the points brought out by Paul Krugman, arguing the moves at fiscal stimulation last year were highly effective during that time frame, but observes, 'As the Bank for International Settlements warns, sovereign debt crises are nearing "boiling point" in half the world economy.' He also states, 'The Krugman doctrine of perma-deficits is ruinous - and has in fact ruined Japan. The only plausible escape route for the West is a decade of fiscal austerity offset by helicopter drops of printed money, for as long as it takes.'"
    Huh? A decade of austerity (starting now), offset by the Federal Reserve printing buckets of money to avoid deflation? This is fiscal austerity? I note that Ambrose Evans-Pritchard is speaking ex cathedra as an Authority Figure, with nothing to support his case except ipse dixit. Paul Krugman, by contrast, provided a baker's dozen formulae and charts to estimate the magnitude of the required stimulus, and warned repeatedly that (1) the Administration's stimulus package was too small to fill the hole, and (2) that the Adminisstration would have a tough time going back to the well if the economy began to flag in 2010. (I'll have to hunt for the links tomorrow., but here are two tonight: .) 
    Here's one of his blogs from March 17, 2009: A Continent Adrift.
    From March 13, 2009: "White House economic advisor Lawrence Summers gave a speech today in which he said, US would need more borrowing if deflation sets in: Summers  "If deflation sets in, if the GDP (gross domestic product) collapses further, if the consequences of that collapse for the financial system and even just the insured parts of the financial system, if that happens, the magnitude of the federal borrowing as large as it is today will be dwarfed, will be far, far larger," he said at the Brookings Institution."
    This addresses the effects of deflation upon the federal budget.