Archive for the ‘Economy and Financial Markets’ Category


August 17, 2009







Market Statistics                  52 week
            Low High
Dow Jones (48.67 points) (0.52%) to 9,321.40   6,547.05 13,058.20                                             
Nasdaq (7.91   points) (0.49%) to 1,611.58   1,268.64 2,549.94
S&P 500 (6.39   points) (0.63%) to  1,004.09      676.53 1,426.63
Crude Oil ($3.42/barrel) (4.82 %) to  $67.51   $33.87 $145.29
Gold ($10.30/oz) (0.80%) to  $947.00   $704.90 $1,001.80
10 Year Tsy (0.294%) to 3.558%   2.04% 4.32%














We heard the same rhetoric this week  that we have been hearing for some while now, that the economy is no longer in a tailspin, that it appears to be leveling out rather than declining at a slower rate and that we appear to be moving into the recovery stage, albeit at a slow rate with continued high unemployment.

Our previous weekly blogs have been emphasizing our belief that without effectively addressing some fundamental issues, far from seeing an economic recovery, however tepid, we can see the economy falling back into a recession sooner rather than later.

Weakness in the banking sector, (another of our concerns ),particularly at the regional level , was highlighted last Friday with the closure by the FDIC of Colonial BancGroup, AL, the sixth largest bank failure in US history and by far the largest this year. With $25 billion in assets ,the closure is estimated to cost the FDIC trust fund $2.8 billion.

We do not envy the Administrations task, because there is a fine line between managing a sustainable recovery without overshooting and creating high inflation and taking action to stop another freefall into a recession.

Why do we continue to be the ‘downers’ in what has been a clear recovery away from the near collapse of the financial system last year? It is because, it is not enough to have enacted a stimulus plan (which in any event, we consider too slow to trickle down to spur growth and have too little emphasis on job creation at the expense of entitlements) without addressing the core issues we keep listing in our weekly blog.

Bill Clinton’s famous phrase that was effectively used in the  1992 Presidential campaign against George H.W. Bush  “It’s the Economy, Stupid”, may come  back to haunt the Democrats in the 2010 mid term elections where there are 36 of 100 Senate seats being contested, as well as the next Presidential election in 2012.

At the moment we can say “It’s the Consumer, Stupid” and there will be no recovery without the consumer feeling better about daily issues such as housing, employment ,taxes, stock market stability which need to improve and be sustainable for consumer spending to recover.



 The declines, albeit modest in all the major indexes, reflected the concern we referred to above, namely about consumers. The latest index of consumer sentiment, from Reuters/University of Michigan last Friday showed a drop from 66 in July to 63.2 in August (consensus was 68.5). This followed weaker than expected retail sales for July (down 0.1%) after rising 0.8% in June (consensus was 0.7% gain).



 As confidence in any meaningful economic recovery waned this past week, so did investor appetite for commodities, which typically they have been turning to as a hedge against inflation and as their appetite for more riskier assets increased. With nothing to change this past weeks scenario, at least in the short term, we should expect to see further declines in prices of oil/gold as investors move back to less riskier assets such as Treasuries.



 As the markets absorbed the auctions this past week, prices rose modestly (yields inversely declining ). To the extent we continue to see a weaker economic picture continuing ,with equities and commodities declining, we should see continued movement into the ‘safe haven’ assets with the US Dollar rising; Bond demand rising and it’s  yields continuing to fall.


John Jacobs 




August 10, 2009





Market Statistics                  52 week
            Low High
Dow Jones +198.46 points +2.16% to 9,370.07   6,547.05 13,058.20                                             
Nasdaq +16.13   points +1.01% to 1,619.49   1,268.64 2,549.94
S&P 500 +23.00   points +2.33% to  1,010.48      676.53 1,426.63
Crude Oil +$1.48/barrel +2.13 % to  $70.93   $33.87 $145.29
Gold +$3.60/oz +0.38% to  $957.30   $704.90 $1,001.80
10 Year Tsy +0.10% to 3.852%   2.04% 4.32%












 What  an amazing ride this has been these past weeks! Despite our continued skepticism in our previous blogs about what we see as weak market fundamentals

not justifying the surge in prices ,the markets continue to defy what we thought was a logical analysis of the economy. In our June 5 blog we opened with a quote attributed to John Maynard Keynes which deserves repeating here:

“The market can stay irrational longer than you can stay solvent”.

Like everyone else, we too have read all the prognostications from respected market observers effectively signaling the end of the recession by years end, pointing to all the economic data as justification. We produced a list of issues we have been greatly concerned about and despite the big market moves,none of them have been effectively addressed. At the risk of repetition they are from our July 17 blog:

  • Serious damage to consumer equity which will take time to repair.
  • Unemployment which will continue to rise.
  • Toxic assets on Bank’s balance sheets which have not been effectively addressed.
  • Deterioration in the Commercial mortgage sector.
  • Stress on States with large Budget Deficits.
  • Rising National Budget Deficit due to the Stimulus Package, funding for Afghanistan and Iraq and declining tax revenues tied to the recession.
  • Economic impact of proposed legislation on Health Care and Climate Control .

We’ll keep pointing them out, even as the market continues to rise!



A myriad of positive news propelled the broad based market increases this past week, whether it was the success of the ‘Cash for Clunkers Program’, better than expected factory orders, fewer jobs cuts in July than June, drop in new claims for jobless benefits etc, etc. Goldman Sachs, on top of all the news, declared U.S stocks as having entered a new bull market with the S&P in a range of 1,050-1,100 toward year end. We have no idea how high this new up phase in the markets will go, we do believe that, while it is on the upward part of an apparent ‘V’ shape, there will be a significant retreat below that which would represent even the downward leg of the ‘W’.

We are now still in the “relief rally” and far from any positive growth/earnings news as opposed to “less bad”, we still have the issues bullet pointed above that are going to hit and create a return to reality, perhaps not challenging the  52 week lows ,but nevertheless a significant retracement.



Just as the confidence levels have returned to the stock market, so the move away from risk averse assets such as Treasuries  into commodities has accelerated. Whenever economic optimism grows, so do prices ,particularly of industrial metals such as Copper, Palladium, Platinum and Silver. Gold continued to increase although oil fell of it’s six week highs.



We have talked in the past about the importance of the 10 year Treasury on mortgage rates. The rise in this rate over the past weeks has been because of the brightening economic outlook as well as the increased supply of debt coming to market. It could well test the 4% level soon and have a significant impact on any housing market recovery due to rising mortgage costs.

John Jacobs












June 1, 2009
Market Statistics 52 week


Dow Jones +223.01points




6,547.05 13,058.20
Nasdaq + 82.32 points




1,268.64 2,549.94
S&P 500 + 32.14 points




676.53 1,426.63
Crude Oil +$4.64/barrel




$33.87 $145.29
Gold +$19.90/oz




$704.90 $1,001.80
10 Year Tsy +0.012% to


2.04% 4.32%




There are contradictory views about when we are likely to come out of the recession, how long the recovery might last and whether we will end up with big inflation problems down the road. These issues played themselves out in the past week (the market was closed for Memorial Day on Monday) as economic data that came out showed mixed results. Consumer sentiment rose; durable goods orders rose; new home sales rose less than expected ;home prices continued to decline more than 10% from a year earlier in 15 of 20 major metropolitan areas ; crude oil rose to its highest level since November and gold approached $1000/oz. Treasuries were particularly volatile during the week causing concerns about steep rises hurting mortgage rates(we shall focus on this more in the Credit  Market section.).

The end of the recession is in sight according to a panel of economists in  the National Association for Business Economics Outlook, expecting economic growth to rebound in the second half of 2009.We believe there is a difference between the consumer ‘s increasing confidence in the economy and this translating into the consumer going out and purchasing in meaningful numbers to move the economy out of the recession anytime soon. We have maintained repeatedly that with the consumer (who represents 70% of GNP) under such stress from depleted investment accounts, job loss, mortgage delinquencies, restricted credit card borrowings, declining home prices etc, the only economic expansion will come this year from Government spending.

Nevertheless, the stock markets this past week reflected the prevailing sentiment that there is light at the end of the tunnel. The major concern, shared by us, is that the light might be a fast moving train in the form of hyperinflation. You cannot pump that amount of money into financial systems globally without high inflation and interest rates, according to a hedge fund that made a lot of money last year betting against the market. The hedge fund, Universa Investments LP, in anticipation of such a scenario, is reported in the Wall St Journal as planning to invest in options tied to commodities and to also bet against Treasury Bonds .The fund is, according to the Journal, known for it’s ties to investor Nassim Nichols Taleb, author of “The Black Swan,” which describes a rare event of large impact, hard to predict and outside of normal expectations.


After reacting positively to the rise in the Consumer Confidence Index on Tuesday, the market gave back most of the gains the next day as long term Treasury rates rose to levels which led to serious concerns that persistent higher rates would further depress economic activity and drain consumer confidence, just as it started to improve. However the market concerns only lasted a day or so as Treasury prices soared on Friday, as bargain hunters moved in to buy back Treasuries, pushing yields down to about where they were earlier in the week.

May’s gains for the indexes were impressive with the Dow up 4.1% and S&P 5.3%.Why doesn’t it feel better? Well, there are many concerns going forward as we have seen above and as we will see below.


Commodity prices continued to rise  with oil up over 7% for the week and almost 30% for the month. Why ? A belief that the global economy is improving. But this ,if it continues is in effect a tax on all consumers of gasoline and becomes a further drag on the economy. Gold continued it’s strong advance from the previous week and is up 9.9% in May, as investors have moved into it and out of the dollar, as fears of inflation increase in the context of large domestic funding requirements.


After such a volatile week, the market is looking to the Government for guidance in terms of  Bond purchases to offset the large supply coming onto the market  to fund the economic stimulus package, social programs and bank bailouts. It will need to be more proactive.Without these  Bond purchases, prices will be depressed and yields rise, affecting mortgages and corporate borrowing rates. So far, this past week the Government has left the market to it’s own devices while the Government studies the reasons for this weeks spike in yields to as high as 3.76% on the 10 year Treasury. This worked so far as yields reversed course ending only marginally higher for the week. The yield curve (charting the difference between 2 year and 10 year Treasury yields) reached a historic high of 2.75% this week.