The Yield Curve Flattened More This Week As Bond Vigilantes Called US Interest Rates Higher On Both Deficit Spending And The Fed’s Ongoing Monetization Of Debt

Financial Market Report for December 12, 2010

I … The 30 10 US Government Bond Yield Curve, $TYX:$TNX, continued to flatten comunicating derisking from bonds.

The Yahoo Finance chart of the 30 Year Bond, EDV, and the 10 to 20 Year Bond TLT along with the European Shares, VGK, the S&P, SPY, the Emerging Markets, EEM, the Nasdaq, QQQQ, and the Small Cap Pure Value, RZV … for the last three months …  EDV, TLT, VGK, SPY, QQQQ, RZV … shows that investors knowing of QE 2 started to sell out out bonds beginning on October 1, 2010 on the conviction of QE 2, and its destructive characteristic of monetization of debt. And then sold out bonds even more on November 4, 2010 with the announcement of QE 2 sending the Interest rate on the 30 Year Bond, $TYX, above 4%.

EconoPic Data in article The Impact of QEII shows much the same hit taken by Long Treasuries, while gold continued on up in price documenting that investors had been riding the yield curve up, on a rising Euro, but had to call off their ride. But an investment demand for gold continued on up as it became apparent that the Fed would monetize debt.

The MSN Finance chart of the Longer Duration Tips, LTPZ, The Tips, TIP, and the Short Durations Tips, STPZ, together with the 10 to 20 Year US Government Bonds, TLT, … LTPZ, TIP, STPZ and TLT …. shows deleveraging and disinvestment.  Analyst Larry Swedroe relates in MoneyWatch: “One last point to remember is that one of the advantages of TIPS over nominal bonds is that you can take maturity risk with TIPS and earn the term premium without taking inflation risk. Thus, while longer-term TIPS have more interim price risk, there’s no risk of loss if you hold to maturity.” The chart shows shows that since November 4, investors have been derisking, that is they have been fleeing the longer out Tips, LTPZ, due to its price risk.

November 4, 2010 was a historic inflection point.   This was when the bond vigilantes took command of the whole range of bond maturities when Ben Bernanke announced Quantative Easing Two, QE2, and called interest rates higher as his plan to buy debt constitutes monetization of debt. Yes, it was a tipping point  …. as the world passed from the age of  leveraging and economic expansion that came by Milton Friedman neoliberalism, Free To Choose, carry trades, and Alan Greenspan credit liquidity economic policies,  …. and into the age of deleveraging, and economic contraction.    

Economist Mike Mish Shedlock says of the Bond Massacre: “ I do not have strong feelings on IEF one way or another. Much depends on the time-frame in which you are trading. However, if yields break substantially North from here, the 30-year bond bull may have breathed its last gasp in October when 3- and 5-year treasury yields hit record lows.”

Chart of IEF

Chart of EDV Daily

Chart of EDV Weekly; The 30 Year US Treasuries entered an Elliott Wave 3 Down on September 28, 2010

The above chart of the 30 Year US Government bond shows the rush into US Treasuries, a last hoorah, as more and more became aware that QE 2 was coming, and as investment liquidity remained strong from a rising Euro, FXE, which came from the announcement of the EFSF monetary authority.

Economist James Hamilton writes in Mr. Swing article Evaluating QE 2 relates: “The effects of the combined actions by the Treasury and the Fed would be to increase rather than decrease long-term interest rates. President Obama’s new proposal on taxes suggests that future new issues of Treasury debt will also be large. News of this proposal was another factor that likely contributed to the rise in interest rates over the last week.”

Cordell Eddings and Daniel Kruger of Bloomberg repor:  “Treasuries tumbled, pushing the two year note yield up the most since March, $UST2Y, after President Barack Obama agreed to extend tax cuts for two years and the three-year note sale drew the lowest demand since February … The compromise will add $148 billion to the shortfall, pushing it to $1.34 trillion for fiscal 2011, Credit Suisse strategists Scott Sherman, Ira Jersey and Jay Feldman wrote: The forecast is near the $1.42 trillion and $1.29 trillion deficits in the 2009 and 2010 fiscal years.”

II … As the longer out matruity US Treasuries fell lower, investors have plowed into the supposed, “safe haven” of a number of US stock sectors including US Small Cap Stocks, such as the Russell 2000, IWM, the Nasdaq Internet, PNQI, Nanotechnology, PXN, US Business Services, KELYA,  TBI, and distressed global investments such as shipping, SFL, consumer discretionary toy manufacturers, HAS, consumer discretionary recreational vehicle manufactures, PII, airlines, FAA, consumer services restaurant point of sale vendor, MCRS, consumer discretionary cruise line, RCL, advertising Clear Channel Outdoor Holdings, CCO, Gaming, BJK, Dogs Of The Dow, DOD,  Hotels, IHG, HOT, Small Cap Industrial Shares, XLIS, Nuclear Energy, NLR, Small Cap Consumer Discretionary, XLYS, Disk Drives, QTM, STX, WDC, Networking, PXQ, Small Cap Information Technology, XLKS, Steel, SLX, Biotechnology, PBE,  

And as monies fled out of bonds this month, it has gushed strongly into Environmental Services, EVX, Mortgage REIT, SFI, Software, SWH, Telecom, TTH, VZ, Wind Energy, FAN,  Israel, EIS, Vietnam, VNM, Austria, EWA, Emerging Europe, ESR, US Financial Shares, IYF, such as American Capital, ACAS, American Express, AXP,  Bank of America, BAC, Banks, KBE, Investment Bankers, KCE, CME Group, CME, Discover Financial Services, DFS, Revenue Shares Small Caps, RWJ, Small Cap Pure Value, RZV, such as EZPW, and RWJ, Fortune Investment Group, FIG,  Gladstone Investment, GLAD, Insurance, KCE, Lazard, LAZ, Mastercard, MA, NewStar Financial, NEWS, Pennant Park Investment, PNNT,  Solar Capital, SLRC, Triangle Capital, TCAP, Nelnet, NNI, Leverage Buyouts, PSP,  Biotechnolgoy, PBE, Health Care Small Caps, XLVS, Homebuilders, ITB, Software Holders, SWH, Small Cap Energy Shares, XLES, Wind Energy FAN, US Health Care Provider, IHF, Leveraged S&P, BXUB

Chart of Nasdaq Community Banks, QABA, shows investors drove by flocks into small US banks.

III … A number of commodities have become “paper currencies”. The commodity copper JJC, rose strong, sustaining copper miners, COPX, and FCH. Mike Mish Shedlock in article Investors Hold Biggest Commodity Positions On Record writes: “The rise in the number of futures contracts is not based on anti-dollar sentiment alone, but rather a distrust of fiat currencies in general. The US$ index was 72-74 in June of 2008. The US$ index is 80 now yet the number of futures contracts keeps going up.”

The Carolyn Cui and Susan Pullila in Wall Street Journal article Investors Pile Into Commodities reports that the CFTC is under increasing pressure to meet a January deadline set by the Dodd-Frank Wall Street reform law, which requires the regulator to set limits on how many commodity futures contracts in energy and metals a speculator can own. An agriculture proposal is to be implemented by mid April. So far, the agency hasn’t developed a formal proposal on position limits; it says it is still collecting data on the over-the-counter market in order to come up with a comprehensive regulatory framework.

Investors are holding their biggest positions on record in the commodities markets as prices surge and debate intensifies among U.S. regulators about whether to limit the amount that any one trader can bet in markets for energy, metals and agricultural products.

Hedge funds, pension funds and mutual funds dramatically ramped up their holdings in everything from oil and natural gas to silver, corn and wheat this year. In many cases, the number of contracts held for individual commodities now far exceeds the amount outstanding in mid-2008, the last time commodity markets were soaring to records and debate raged about whether excessive speculation was driving up prices.

Contracts held by investors have risen 12% this year through October and are 17% higher than June 2008, according to data from the Commodity Futures Trading Commission, the market regulator.

In several commodities, including the $200 billion crude oil market, so-called speculative investors now make up a significantly larger proportion of the market than they did in 2008. Investors increased their bullish bets on crude oil by 24% since June 2008 and now represent 16% of the market, up from 13% just over two years ago. Bets in the copper market are up 58% and for silver they are up 52%, according to the CFTC data.

Debate within the CFTC is adding to the tension. Bart Chilton, a CFTC commissioner, has been pushing fellow commissioners to crack down on excessive speculation.

“Speculative money from the likes of hedge funds, index funds and pension funds is coming into the commodity markets at a blistering pace,” Mr. Chilton said in prepared remarks for a speech he plans to make on Wednesday at a conference in New York. He said that while speculation may not drive up prices, it can distort them. “If prices are skewed in a manner that is not fair by speculators, consumers can pay more than they should,” he said.”

The article relates: “Bets in the copper market are up 58%.”  Copper, JJC, rose parabolically this week, sustaining Copper Miners, COPX, and Morgan Stanley Cyclical Index, leading component, Freeport McMoRan Copper and Gold, FCX,

I note that the article reports: “The CFTC is under increasing pressure to meet a January deadline set by the Dodd-Frank Wall Street reform law, which requires the regulator to set limits on how many commodity futures contracts in energy and metals a speculator can own.”

Do you thing there will be a downdraft in commodities? Which commodity do you think might give first notice?

IV … The “currency yield curve”, that is, the ratio of the small cap pure value shares, RZV, relative to the small cap pure growth shares, RZG, communicates that there was a US Dollar, $USD, carry trade provided funding for this week’s US Stocks, VTI, gains.

The New York Composite, NYC, the S&P, SPY, Russell 2000, IWM, and the Nasdaq 100, QTEC, all rose. It’s rise to strong resistance at 0.798 suggests that, like a fully loaded spring, any upset, will unleash a massive amount of disinvestment from stocks globally, ACWI.   

The peak in the Shanghai, SSEC, came in on November 8, 2010 at 3,159. It is traded approximately by the Morgan Stanly A Shares, CAF, and bearishly so. These shares.and the ones listed below, fell on the fatal November 4, 2010 announcement of QE 2, at which time the bond vigilantes seized control of the bond markets, and sustained the interest rate on the 30 Year US Government Bond, $TYX, above 4.0%.

Then the currency traders followed and sold the world currencies, DBV, and the emerging market currencies, CEW, causing the US Dollar, $USD, to rise; the currencies which have been sold off most heavily are as follows

1. BNZ, New Zealand Dollar  -9.81 (has sold off strongly on rating agency downgrade)

2. FXE, Euro,  -4.92 …

3. FXS, Swedish Krona,  -4.40% … (it trades volatily)

4. FXY, Japanese Yen,  -3.17%

5. FXA, Australian Dollar, -2.84%  …

6. FXB, British Pound Sterling, -2.37%  

7. CEW, Emerging Currency, -2.21%

Debt deflation came to stocks as a number of countries traded lower:

India, INP,-12.5% (Has had the greatest loss on a telecommunications scandal)

FXI, China, -9.1%

Michelle Lodge of CNBC: China Overbuilding to ‘Hit a Wall’: Chanos. The overdependence on new real estate in China, when the demand isn’t there, will cause the nation to eventually “hit a wall,” hedge fund manager James Chanos told CNBC Friday. “Construction is 60-plus percent of GDP, compared to exports of 5,” said Chanos, who is the founder and president of Kynikos Associates. “The problem is that consumption as a percentage of Chinese economy has declined in the last 10 years, from 40 to 35 percent. It’s all real estate,” he said. Chanos said that steel, iron ore, cement and other materials needed for construction will be “under pressure.” China has built new cities that are now essentially empty, he added. Despite the overbuilding, said Chanos, construction continues at a good clip, with 12 million to 15 million residential units this year. The units, priced similar to those for US residents, are intended for Chinese who earn about $3,500 annually and are in the bottom 20 percent of wage earners. Ironically, many of the Chinese who’ve moved to cities from the country are construction workers, he noted. “When construction is 60 percent of your economy, and you are building lots of things that people don’t need, the state may let this get out of control,” he said. “It’s hard to manage this type of bubble.” Chanos predicted that America would fare better, should the China bubble burst, because the US doesn’t export as heavily to China as do Europe, other countries in Asia and Latin America.

Brazil, EWZ, -6.8%

Australia, EWA, -4.0%

Emerging markets EEM, -3.9%

Europe VGK, -3.7%

India Earnings, EPI, -12.6%

Emerging Market Financials EMFN, -7.1%

European Financial, EUFN, -7.2%

When the currency traders start selling the major currencies, DBV, and the emerging market currencies, CEW, strongly again, just like then did on November 5, 2010 then the Emerging Markets, EEM, will fall again, and commodities which have a lot of currency trade investment will unwind. Timber, CUT, will be a very fast faller as it is a very volatile commodity.

The Euro, FXE, fell this week, that is the week ending December 10, 2010, 1.3% to close at 131.79. Might the European sovereign debt and bank debt symbiotic crisis reemerge this next week and start a global sell off of currencies?

Gold, $GOLD,  has “sold off” some. As the world’s debt woes increase it will become even more valuable. I recommend that one purchase and take possession of physical gold.

V …  Strong stock fallers this week were in some of the emerging market countries and the BRICs; these included Turkey, TUR,  Brazil, EWZ, Brazil Financials, BRAF, India Earnings, EPI.     

VI … In today’s news.

In reminiscent of many trajedies of 1929 to 1932, Colleen Long, of the Associated Press reports Madoff’s Son, Mark Madoff Found Dead In NYC Apartment On One Year’s Anniversary Of Father’s Arrest.

Irvine Renter in Irvine Housing Blog writes Spain managed to inflate a nastier housing bubble than the US did. Now Spain is showing US banks how to keep a housing bubble inflated … For now.

Daniel Cancel of Bloomberg reports:  “Venezuelan President Hugo Chavez threatened to nationalize any bank should they fail to provide housing loans, including a unit of Spain’s Banco Bilbao Vizcaya Argentaria SA, BBVA,  and Banesco Banco Universal, the country’s largest lender.  BBVA Provincial and Banesco are among banks that could be taken over if they fail to comply with government-set lending requirements for homebuyers, Chavez said. ‘Any bank that slips will be expropriated, whether it´s called Banesco, Provincial or whichever,’ Chavez said yesterday on state television.”

Larry Neumeister of the Associate Press NY Trustee Sues 56 defendants, seeking nearly $20 Billion For Madoff Investors In Alleged Global Ponzi Scheme: The trustee recovering money for investors who lost billions of dollars in jailed financier Bernard Madoff’s fraud on Friday filed civil racketeering charges against an Austrian banker and 55 other defendants, demanding they give up nearly $20 billion and accusing the banker of being Madoff’s “criminal soul mate.”

Court-appointed trustee Irving Picard used tough language to portray a 23-year relationship between banker Sonja Kohn and Madoff, saying she “masterminded a vast illegal scheme” as she and others engaged in money laundering, mail and wire fraud, and financial institution fraud in support of the Madoff’s scheme. He also accused her of accepting at least $62 million in secret kickbacks from Madoff for soliciting investors for the fraud.

Picard also announced Friday that he reached settlements with a number of charities and nonprofit organizations to recover more than $80 million and resolve civil claims against charities that withdrew more money than they deposited in accounts with Madoff.

Picard filed a lawsuit in U.S. Bankruptcy Court in Manhattan against members of what he labeled the “Medici Enterprise,” which he said included the largest banks in Austria and Italy. A message for comment sent to a Kohn spokeswoman was not immediately returned.

OnlineForexKing asks Are We At The Beginnings Of Another Black Swan Moment Or Is Another Turkey?: Black Swan event has to have the following three characteristics: 1) it was not predicted, meaning it came as a surprise (to the observer), 2) the event has a huge, widely-felt impact, and 3) even though the event was not expected or predicted, human nature causes the observer to believe that the event was perfectly predictable and foreseen.

Keywords: yield curve, debt monetization, monetization of debt , QE 2 QE II, age of deleveraging, bond massacre, paper currencies, sovereign crisis, sovereign debt and band debt symbiosis crisis, European sovereign debt crisis,


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