Monday, November 28, 2011

More Signs of Accelerating EU Sovereign Debt Trouble/ Another Romney Misrepresentation/Links To Quotes European Government 10 Year Bonds/

This talking dog video has had over 70 million views:  YouTube

This week's cover story in Barrons, written by the True Believer Jim McTague, is possibly the worst article that I have ever read in any financial publication.  McTague apparently believes his analysis is profound, even though he offers nothing but a string of recycled trite cliches worthy of a mediocre Rush Limbaugh want-to-be.  It is consistent with the Foxification of both the WSJ and Barrons, a devaluation of thoughtful and factual analysis while emphasizing the parroting of ideological slogans.

The U.S. sold $29 billion in seven years notes last Thursday at a 1.415% yield. treasurydirect.gov.pdf At that rate money will double before inflation and taxes in about 50 years. Estimate Compound Interest

I have mentioned in several posts that Europe was running out of time, and that a failure to address the sovereign debt and bank funding issues could have a catastrophic outcome for the world's financial system. (e.g. The EU is Running Out of Time (9/28/11 Post).

The NYT reported last week that European banks are increasingly relying on the ECB for short term funding needs. (see also article at CNBC) The natural buyers of those short term debt instruments have been fleeing for months now.  Possibly, the only way out of this downward spiral would be for the ECB to create money and to use those funds to buy sovereign debt and to provide liquidity to the European banking system.  But the ECB shows no inclination to go down that path. CNBC

Another NYT article pointed out that Italy's central bank borrowed €109 billion during the third quarter from the ECB. Prior to then, then Italian Central Bank had a surplus of €6 billion on deposit with the ECB.  

In an ominous development, Germany had a failed 10 year auction. Germany was able to sell €3.644 billion out of a planned €6 billion.  MarketWatch WSJ Reuters CNBC   

I am starting to check the yields on European sovereign debt every day: 
Belgium 10 Yr: BE 10Y Govt Bond  
France 10 Yr: FR 10Y Govt Bond 
Germany 10 Yr: 10YR_GER Bond 
Great Britain 10 Yr: GB 10Y Govt Bond 
Greece 10 Yr: GR 10Y Govt Bond 
Italy 10 Yr: IT 10Y Govt Bond 
Netherlands 10 Yr: NL 10Y Govt Bond 
Spain 10 Yr.: 10YR_ESP Bond

The EU reported that industrial new orders declined 6.4% in September. eurostat.ec.europa.eu.PDF

Fitch downgraded Portugal's sovereign debt to junk status. The new rating is BB+.  Workers in Portugal launched a general strike last Thursday, protesting austerity measures, shutting down public services including airports and trains.  CNBC

Moody's downgraded Hungary's debt one notch to Ba1 last Thursday.

Last Friday, S & P cut Belgium's sovereign debt by one notch to AA+.

This article in the WSJ has the credit ratings of European sovereign debt.

Italy sold €8 billion in three month bills at 6.504% last Friday, a new Euro period high. One month ago, Italy sold 3 month bills to yield 3.535%.

Several European bond auctions are scheduled for this week.  MarketWatch If does auctions go poorly, then stocks may have another rough week.

Markets were rising overnight based on the hope that France and Germany would offer some kind of fix.   Reuters There was also a report that the EU leaders were preparing to sign off on the leveraging of the European Financial Stability Facility. MarketWatch

Although my triple short stock ETFs reached very quickly my upside goal for them, I elected to keep these securities as a hedge, at least until today or early this week. The European debt crisis certainly became more acute last week. Possibly the latest rumors about progress in Europe will stop the market's slide, at least until there is more concrete news of a negative nature. The DJIA fell 4.8% last week. The S & P 500 declined 4.7%. The Russell 2000 skidded 7.4%. RVX, the volatility index for the Russell 2000, closed at 43.16.  A triple short for the Russell 2000 closed up 24.825% last week.

Personal income in the U.S. increased .4% in October. Both real income and disposable personal income increased .3%. News Release: Personal Income and Outlays, October 2011 The personal savings rate was 3.5%. The price index for Personal  Consumption Expenditures (PCE) decreased .1% according to the government. Consumer spending rose a less than expected .1% last month. The forecast was for a .3% rise. 

In my opinion, the average U.S. consumer has too much debt. Zulauf/Faber and Financial Armageddon Redux/Debt Burden of the American Household The savings rate is too low to make much of a dent in the necessary deleveraging of consumer balance sheets. The consumer is not in a position to sustain an economic recovery except by reducing their savings and increasing their borrowing. While borrowing more and saving less would provide temporary jolts to the economy, it would also make a long term recovery unlikely.

This is a chart of the savings rate:


This is a chart of the household debt to disposable income ratio: 

                                      



Graph: 100*Household Sector: Liabilites: Household Credit Market Debt Outstanding (CMDEBT)/Disposable Personal Income (DPI) - FRED - St. Louis Fed

Romney's first campaign advertisement contains a misrepresentation. The ad contains Obama's voice saying "if we keep talking about the economy, we're going to lose".  NYT   Obama actually said the following in context during the 2008 campaign: "Senator McCain's campaign actually said, and I quote, if we keep talking about the economy, we're going to lose"  FactCheck.org

Gingrich says that he can stop the Iranian nuclear program within a year after becoming President. Apparently, while he is short on all of the details, his plan involves bombing an Iranian oil refinery and pipelines carrying gasoline into Iran. If that does not stop Iran, then he will attack the nuclear installations.  WSJ.com Will this make the U.S. more or less safe?  Would it be conceivable that Iran could retaliate by launching terrorists acts against the U.S. homeland, including possible dirty bombs since Iran unquestionably has nuclear material?

Gingrich called the non-partisan Congressional Budget Office "a reactionary socialist institution which does not believe in economic growth, does not believe in innovation and does not believe in data that it has not internally generated". Bloomberg  One of Newt's more novel ideas to reduce government expenditures is to fire school janitors and to have the kids perform that work. The Atlantic  NYT

Frequently, when I hear what passes for intelligent discussion by politicians, the discourse is simply a rehash of tired ideology phrased as incontestable facts. Many pundits routinely pass of trite cliches as profound analysis, or as statements of unchallengeable fact. Politicians from both tribes routinely commit this legerdemain. The listener is supposed to accept an opinion as a fact and many do.

These statements of opinion masquerading as accurate facts are scattered throughout the news media everyday. I picked out a statement from Minnesota's John Kline from a NYT article to illustrate.

By way of background, the GOP is currently threatening to deny the National Labor Relations Board a quorum necessary to render a decision. The two Democrat members want to issue a ruling allowing unionization elections within 21 days after the workers petition for a union. The current period is 35 days. The one remaining GOP member is threatening to boycott the meeting, thereby denying a quorum (3 votes) necessary to rendering a decision. Normally, there would be five members of this Board, but partisan bickering has stopped the appointment of two commissioners to fill vacancies over the past 26 months. NYT  Each party is refusing to approve the other's appointment. That is just another example, among many, of political dysfunction. Historically, there would be a quorum of three from the same party as the President.

And this brings me to what I would characterize as political hyperbole masquerading as factual statements. In response to the rule change shortening the time period for an election by two weeks, a GOP Congressmen, John Kline from Minnesota, made the following statement: "The Obama N.L.R.B. is determined to impose a flawed rule that will cripple American workers' free choice. It is disturbingly clear that the board's only concern is advancing an extreme agenda, regardless of the damage it does to workplaces." Frequently, these opinions are outrageous hyperbole and devoid of any rational factual basis. The true agenda of the speaker is masked by the hyperbole.



I am coasting for the remainder of 2011. I am already at my minimum stock allocation.  I will continue to use cash flow to buy stock CEFs or individual stocks. I will discuss tomorrow one purchase made with cash flow last week.  Since I am not doing much, I may not have a post every business day. 

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