10s today, 30s tomorrow, and we're at major support

This is the week that helps predict the future for long-term interest rates.

The auction by the US Treasury of 10-year notes today, and 30-year bonds tomorrow provides the first data point in the new Fed-less bond market regime.

At the close of business yesterday, April 6, their respective yields were 3.98 and 4.84.

We will certainly revisit this data often in the months and years to come. Make a note.

The bond futures contract closed yesterday at 114.11. Make another note.

As the US Treasury sells more and more debt to refinance existing debt, and create new obligations to fund the expansion of government programs, rates are certain to rise.

Combined with the Treasury's added supply, the US Federal Reserve will be selling both mortgage-backed securities and treasuries to reduce the amount of inflationary fuel in the banking system before the banks can use it to make loans to credit-worthy borrowers.

As banks make loans, and the economic expansion takes hold, inflation grows. Further pressure on bond holders will come from the deteriorating value of the currency. Inflation kills bonds.

The combined pressure from these three sources will be too great for bond yields to hold, and they will certainly continue the rise that began more than a year ago, when 30-year bond yields bottomed at 2.58 in late December of 2008.

Our trader is shorting bonds at every resistance level, and will soon be aggressively selling when support breaks - like today and tomorrow.

Paterson's analysis suggests that the bond contract has a long way to fall, and will probably break par, with yields above 6%.

Get short and get rich.

* * * * * J B K * * * * *

San Francisco

James B. Klein
Paterson Financial Services

WEBSITE: paterson.com
WEBLOG: paterson-financial-services.blogspot.com
NEWS WEBLOG: paterson-financial-services-news.blogspot.com

Fed says extended period may last a long time | Reuters

Bank lending is too weak to allow the Fed to push up the funds rate.

Until bank lending increases, the Fed seems happy to leave things as they are, and to focus on the long end of the curve.

Instead of bank lending, we see banks securitizing their loans and keeping their balance sheets flush with cash.

* * * * * J B K * * * * *

San Francisco

The Federal Reserve could keep interest rates ultra-low for even longer than investors expect if the economic outlook worsens or inflation drops, minutes from the central bank's last meeting suggested.

The minutes of the Fed's March 16 gathering, released on Tuesday showed lingering concern about the economy's prospects, with policymakers indicating they were in no hurry to raise interest rates.

"The duration of the extended period prior to policy firming might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further," the minutes said.

"Such forward guidance would not limit the committee's ability to commence monetary policy tightening promptly," they said.

http://www.reuters.com/article/idUSTRE6354CM20100406

Welfare recipients now eligible to receive cell phones | The Foundry: Conservative Policy News.

Another welfare program.

* * * * * J B K * * * * *

San Francisco

Welfare recipients in approximately 20 states–with more to follow– are currently eligible to receive a free cell phone with a limited number of monthly minutes. All individuals that qualify for state or federal welfare–food stamps, Medicaid, etc.–and have an income at or below 135% of the poverty level, are eligible. According to a Fox News report, the cell phone service is currently the fastest growing welfare program in the country.

In 2008, the fund that foots the bill for this program contributed $819 million to subsidize low-income telephone services. The fund is projected to grow to over $1 billion this year. That's $1 billion of over $800 billion the United States will spend on welfare in 2010.

http://blog.heritage.org/2010/01/18/government-welfare-cell-phones-for-the-poor/

L.A. financial crisis causes Wall Street firm to reassess utility's bond rating | L.A. NOW | Los Angeles Times

One aspect of a financial collapse that's ignored by most economists is the damage done to tax revenues.

In this case, the collapse in economic activity caused a collapse in revenue to an LA utility.

Notice that publicly traded utilities are doing just fine.

* * * * * J B K * * * * *

San Francisco

One of the nation's top bond rating agencies Monday announced it would reassess its bond rating of the Los Angeles Department of Water and Power, a move that Mayor Antonio Villaraigosa blamed on the City Council's failure to approve electricity rate hikes last week.

Fitch Ratings withdrew a "AA-" rating it had given on two DWP bonds worth $720 million. That action can lead to a rating downgrade which, if that occurs, could make it more expensive for the DWP to borrow money.

"Today we are facing the consequences of the city's failure to enact the necessary rate increases with Fitch Ratings, a major credit rating agency, withdrawing the DWP's AA- bond rating, thereby costing the ratepayers more in the long run,'' Villaraigosa said in a statement released Monday evening.

http://latimesblogs.latimes.com/lanow/2010/04/la-financial-crisis-causes-wall-street-firm-to-reasses-utilitys-bond-rating.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+lanowblog+%28L.A.+Now%29

Archaeologists Uncover Land Before Wheel; Site Untouched for 6,000 Years - US National Science Foundation (NSF)

"Social inequality" is the term used to hide the fact that some people are more productive than others.

It is a fact of life that most social scientists - economists included - refuse to recognize.

* * * * * J B K * * * * *

San Francisco

Thus far, archaeologists have unearthed evidence of this society's trade in obsidian and production and development of copper processing, as well as the existence of a social elite that used stone seals to mark ownership of goods and culturally significant items.

"The project addresses questions not only of how such societies emerged but how they were sustained and flourished," said John Yellen, program director for archaeology in the National Science Foundation's (NSF) Social, Behavioral & Economic Sciences directorate. NSF supports the University of Chicago's research.

Covering about 31 acres, Tell Zeidan was situated where the Balikh River joins the Euphrates River in modern-day Syria. The location was at the crossroads of major, ancient trade routes in Mesopotamia that followed the course of the Euphrates River valley. The Ubaid period lasted from about 5300 to 4000 B.C.

"This enigmatic period saw the first development of widespread irrigation, agriculture, centralized temples, powerful political leaders and the first emergence of social inequality as communities became divided into wealthy elites and poorer commoners," said Gil Stein, director of the Oriental Institute and a leader of the expedition.

http://www.nsf.gov/news/news_summ.jsp?cntn_id=116636&org=NSF&from=news

How Texas Escaped the Housing Crisis - ABC News

I'll be damned.

It's written in the state constitution: no cash-out refis.

I'd prefer to change Fannie and Freddie's underwriting guidelines.

* * * * * J B K * * * * *

San Francisco

But there is a broader secret to Texas's success, and Washington reformers ought to be paying very close attention. If there's one single thing that Congress can do now to help protect borrowers from the worst lending excesses that fueled the mortgage and financial crises, it's to follow the Lone Star State's lead and put the brakes on "cash-out" refinancing and home-equity lending.

http://abcnews.go.com/Business/TheBigMoney/texas-escaped-housing-crisis/story?id=10243782

Construction Spending in the U.S. Decreases to Seven-Year Low - Bloomberg.com

It will be a long time before commercial real estate recovers.

The world has changed, and the use of commercial space is changing.

Stay away.

Residential will do just fine.

Everybody needs a home, whether they rent or buy.

Maybe it's time to buy an S&L - again.

* * * * * J B K * * * * *

San Francisco

April 1 (Bloomberg) -- Construction spending in the U.S. fell in February to the lowest level in more than seven years, signaling this part of the economy remains in a recession.

The 1.3 percent decrease to $846.2 billion, the lowest since November 2002, followed a revised 1.4 percent drop in January that was more than twice as large as previously estimated, Commerce Department figures showed today in Washington.

Housing will be slow to rebound as foreclosures climb and Americans are uncertain about job prospects. At the same time, commercial and government building are also slumping, restrained by a lack of credit and swelling budget deficits.

http://www.bloomberg.com/apps/news?pid=20601068&sid=aK4orcqqi590

Payrolls in U.S. Rose 162,000 in March; Unemployment at 9.7% - Bloomberg.com

Wow.

It's not a big number, but it's earlier than even we thought.

Non-farm payrolls started increasing in QI 2010. Make a note.

The bonds are taking this hard, and are breaking minor support.

* * * * * J B K * * * * *

San Francisco

April 2 (Bloomberg) -- Employment in the U.S. increased in March by the most in three years and the unemployment rate held at 9.7 percent as companies gained confidence the economic recovery will be sustained.

Payrolls rose by 162,000 last month, less than anticipated, figures from the Labor Department in Washington showed today. The March increase included 48,000 temporary workers hired by the government to conduct the 2010 census, as well as job gains in manufacturing and health services.

The government revised January and February payroll figures up by a combined 62,000, putting the March gain at 224,000 after including the updated data. Caterpillar Inc. is among companies adding staff, indicating the recovery that began in the second half of 2009 is starting to foster the jobs needed to lift consumer spending and sustain the expansion.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aehAkiag49Hc

U.S. Economy: Factories Drive Growth as Orders Rise (Update1) - Bloomberg.com

Factory orders are an important leading indicator.

* * * * * J B K * * * * *

San Francisco

Manufacturers are driving the U.S. economic recovery as the real estate industry struggles to recover from recession, hurting employment, reports today showed.

Factory orders rose 0.6 percent in February after surging 2.5 percent, the Commerce Department said in Washington, while businesses responding to a survey by the Institute for Supply Management-Chicago Inc. grew for a sixth straight month in March. Figures from ADP Employer Services showed an unexpected 23,000 drop in company payrolls this month, led by a slump in construction jobs.

http://www.bloomberg.com/apps/news?pid=20601068&sid=aX8QHc29VHhY

Fed Reveals Bear Stearns Assets It Swallowed in Firm’s Rescue - Bloomberg.com

You'll want to read all of this article.

It shows the types of assets in the Fed's portfolio, and for which they paid hard cash.

Interestingly, they own some CDSs that made them some money.

* * * * * J B K * * * * *

San Francisco

April 1 (Bloomberg) -- After months of litigation and political scrutiny, the Federal Reserve yesterday ended a policy of secrecy over its Bear Stearns Cos. bailout.

In a 4:30 p.m. announcement in a week of congressional recess and religious holidays, the central bank released details of securities bought to aid Bear Stearns's takeover by JPMorgan Chase & Co. Bloomberg News sued the Fed for that information.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZA_RWY3IJ2I&pos=3

Chevron Wins $700 Million Oil Case Against Ecuador (Update2) - BusinessWeek

How rare is this?

Now they've got to collect.

* * * * * J B K * * * * *

San Francisco

March 30 (Bloomberg) -- Chevron Corp. has been awarded about $700 million by an international arbitration court that ruled in favor of its claim against Ecuador over past operations at its Texaco unit, the company said.

The tribunal found that Ecuador's courts delayed rulings on a contract dispute between Texaco and the Ecuadorian government, violating international law, Chevron said in a statement. The Hague-based Permanent Court of Arbitration awarded Chevron principal damages and interest as of Dec. 22, 2006, pending further proceedings to determine taxes, interest and costs, the San Ramon, California-based company said.

http://www.businessweek.com/news/2010-03-30/chevron-says-it-won-arbitration-claim-in-ecuador-update1-.html

Europe Inflation Jumps More Than Economists Forecast (Update2) - Bloomberg.com

And this is from a currency that did not increase the monetary base.

How can the US avoid inflation?

* * * * * J B K * * * * *

San Francisco

European inflation accelerated more than economists forecast on higher oil prices, while the unemployment rate reached double-digits for the first time since 1998.

Consumer prices in the 16-nation euro region increased 1.5 percent in March from a year earlier, after a 0.9 percent gain in February, the European Union statistics office in Luxembourg said today. That is the fastest inflation since December 2008 and topped the median forecast of 1.1 percent in a Bloomberg survey of 36 economists. Unemployment rose to 10 percent in February, the highest rate since August 1998, a separate report showed.

http://www.bloomberg.com/apps/news?pid=20601068&sid=arrsXM4KpmGs

Reform in Congress Lacking Cash Clause to Stop Lehman-Like Runs - Bloomberg.com

The problem is not liquidity, but rather government incompetence and corruption.

These problems would not exist if the Congress had not lowered Fannie and Freddie's standards.

There's where the reform must begin.

* * * * * J B K * * * * *

San Francisco

March 29 (Bloomberg) -- In 2,615 pages of financial reform legislation introduced in the U.S. Congress, there are no rules to ensure that banks keep enough cash-like assets when credit disappears.

Guidelines on liquidity risk management, which were published March 17 by the Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corp., also avoided spelling out how much banks need to hold, and in what form, to make sure they don't collapse if short-term lending dries up. International efforts to do that for the global banking system could take years to implement.

Citigroup Inc., which came close to a funding shortfall in 2008 and received a $45 billion government infusion, is among U.S. lenders that have hoarded cash since credit markets seized up two years ago. Even so, the banks continue to rely on overnight borrowing for their funding needs. While down from its peak in 2007, the U.S. repo market, which provides banks with short-term lending backed by collateral, is still $2 trillion.

"The temptation always is to lower liquidity levels when times are good," said Baylor Lancaster, an analyst at CreditSights Inc. in Miami. "That's why we need rules. In three years' time, are people really going to care about liquidity as much as they do now?"

http://www.bloomberg.com/apps/news?pid=20601109&sid=aN8ApDdiCwcA&pos=12

Supply fears start to hit Treasuries

I have two problems with this scenario.

1. When everybody knows about a problem, it doesn't happen.
2. When everybody understands a problem, it gets solved fast.

I'm betting on 2.

* * * * * J B K * * * * *

San Francisco

The bond vigilantes are finally flexing their muscles. A long period of stability for the US government bond market showed signs of cracking this week as a lack of investor appetite for new debt sent the benchmark 10-year yield to its highest level since last June.

For more than a year, analysts have been warning that record sized debt sales by the US Treasury were at odds with a 10-year yield sitting comfortably below 4 per cent. This week, the yield on 10-year notes jumped from 3.65 per cent to a peak of 3.92 per cent on Thursday. On Friday it was 3.87 per cent.

Chart: TreasuriesFalling inflation, rising unemployment, the housing market slump, the Federal Reserve's policies of a near zero overnight borrowing rate and its purchase of up to $1,700bn in bonds have all helped keep Treasury yields near historic lows.

But this week the mood shifted as yields for $118bn of new US debt were much higher than forecast, sparking overall selling of Treasuries. Sentiment also deteriorated in the UK bond market after the government's budget ahead of a general election expected in May failed to resolve doubts over future spending and debt reduction.

http://www.ft.com/cms/s/0/c51fbbce-3908-11df-8970-00144feabdc0.html

Economy in U.S. Preserves Biggest Gain in Six Years (Update1) - Bloomberg.com

Only a minor adjustment in GDP.

But look at the earnings report.

Is there any doubt why the stock market roared ahead last year?

Now we have to deal with rising interest rates.

* * * * * J B K * * * * *

San Francisco

March 26 (Bloomberg) -- The U.S. economy expanded at a 5.6 percent annual rate in the fourth quarter of 2009, and corporate profits climbed, setting the stage for gains in employment that may broaden and preserve the expansion.

The rise in gross domestic product, while smaller than the government's previous estimate issued last month, marked the best performance in six years, figures from the Commerce Department showed today in Washington. Company earnings increased 8 percent, capping the biggest year-over-year gain in a quarter century.

"Profits are a leading indicator of the economy and suggest continued growth and likely job gains in the second quarter of this year," John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said in a note to clients after the report.

http://www.bloomberg.com/apps/news?pid=20601068&sid=a8CxLvnMYlY4

Ackman’s Greatest Short - MBIA - Bloomberg.com

The mortgage insurance companies were the canaries in this coal mine. MBIA, MGIC, and PMI.

To anyone who was watching, it was obvious that there were too many adjustable rate loans made to people with insufficient down payments, bad credit, and low income.

All that was necessary for the cave-in was a sustained increase in short-term interest rates. The idiot Greenspan provided the impetus when in 2004 he started raising Fed Funds from 1% to 5.25%.

By the time it was over, all the mortgage insurance companies were destroyed, as were Fannie and Freddie, the mortgage market was in ruins, CDS issuers were bankrupt, and the economy was collapsing.

* * * * * J B K * * * * *

San Francisco

"Our newest and largest [short] investment is on an extremely highly levered, yet AAA-rated financial institution, which we believe has inadequate reserves, undisclosed credit- quality problems, aggressive accounting and substantial unconsolidated indebtedness contained in off-balance-sheet special-purpose vehicles," he wrote. The position had the potential to generate a return of about five times the fund's total assets if it was successful.

Though little known outside of Wall Street circles in 2002, MBIA ranked as one of the five biggest financial institutions in the country in terms of outstanding credit exposure. It shared that distinction with Bank of America Corp., Citigroup Inc. and government-sponsored mortgage lenders Fannie Mae and Freddie Mac.

http://www.bloomberg.com/apps/news?pid=20601108&sid=aLmOb9zzVZ9A

Using Psychology To Save You From Yourself : NPR

The city of Greensboro, N.C., has experimented with a program designed for teenage mothers. To prevent these teens from having another child, the city offered each of them $1 a day for every day they were not pregnant. It turns out that the psychological power of that small daily payment is huge. A single dollar a day was enough to push the rate of teen pregnancy down, saving all the incredible costs — human and financial — that go with teen parenting.

Cass Sunstein, President Obama's pick to head the Office of Information and Regulatory Affairs, was a vocal supporter of the program, because it was an economic policy that shaped itself around human psychology. Sunstein is just one of a number of high-level appointees now working in the Obama administration who favors this kind of approach.

All are devotees of behavioral economics — a school of economic thought greatly influenced by psychological research — which argues that the human animal is hard-wired to make errors when it comes to decision-making, and therefore people need a little "nudge" to make decisions that are in their own best interests.

http://www.npr.org/templates/story/story.php?storyId=104803094

* * * * * J B K * * * * *

San Francisco

James B. Klein
Paterson Financial Services

WEBSITE: paterson.com
WEBLOG: paterson-financial-services.blogspot.com
NEWS WEBLOG: paterson-financial-services-news.blogspot.com

Odds Are, It's Wrong - Science News

Odds Are, It's Wrong
Science fails to face the shortcomings of statistics
By Tom Siegfried
March 27th, 2010; Vol.177 #7 (p. 26)

For better or for worse, science has long been married to mathematics. Generally it has been for the better. Especially since the days of Galileo and Newton, math has nurtured science. Rigorous mathematical methods have secured science's fidelity to fact and conferred a timeless reliability to its findings.

During the past century, though, a mutant form of math has deflected science's heart from the modes of calculation that had long served so faithfully. Science was seduced by statistics, the math rooted in the same principles that guarantee profits for Las Vegas casinos. Supposedly, the proper use of statistics makes relying on scientific results a safe bet. But in practice, widespread misuse of statistical methods makes science more like a crapshoot.

http://www.sciencenews.org/view/feature/id/57091/title/Odds_Are,_Its_Wrong

* * * * * J B K * * * * *

San Francisco

James B. Klein
Paterson Financial Services

WEBSITE: paterson.com
WEBLOG: paterson-financial-services.blogspot.com
NEWS WEBLOG: paterson-financial-services-news.blogspot.com

Fed Gets Credit for Rescue - WSJ.com

Lesson one.

Money rules.

Lesson two.

Most economists are clueless.

* * * * * J B K * * * * *

San Francisco

But the Fed's interventions likely played a bigger role in pulling the economy out of its tailspin, economists said. In their paper, Messrs. Sinai and Edelstein estimated that the Fed's actions boosted GDP growth by 1.9 percentage points in 2009 and would add 3.3 points this year.

The survey respondents broadly agreed. When asked which government policies played the biggest role in resuscitating the U.S. economy, 25 respondents chose low interest rates and 13 said it was the central bank's purchases of Treasurys and mortgages. Eight cited the bank stress tests and related capital-raising by banks. Just three said the stimulus played the biggest role.

http://online.wsj.com/article/SB10001424052748703625304575115674057260664.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

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