Che Cosa Ora? What Now?

The bond market and the precious metals market over the past few days have experienced a pretty big price correction.  In fact, the tone of financial media reporting about the action in the bond market has reflected a high degree of shock and fear.  Interestingly, the free-fall in the bond market was triggered after Bernanke was on 60 Minutes stating that he had mo problem expanding the size of the recent $600 billion QE2 program.

Rather than analyze the technicals in the Treasury market ad nauseum, on top of every other market Einstein who has offered their 2 cents, I'd first like to serve up one of the primary and basic reasons the Treasury market is selling off. Reuters released this report yesterday in which an academic member of China's central bank monetary policy committee stated that "America's fiscal health is worse than Europe's...[and] that U.S. bond prices and the dollar would fall when the European economic situation stabilized."  Here's the LINK

Well, there you have it.  China, after the Fed, is the largest holder of Treasury bonds. I don't care what anyone out there in the land of financial analysis has to say, the Chinese are either directly selling, or indirectly hedging, their massive position in the U.S. dollar/Treasury bonds.  That statment confirms this.  Let's see, he says the dollar and T-bonds will be stable/rally for a year. ROFLMAO. This guy clearly has borrowed a page from Bill Gross' script in which he expresses a view via CNBC to the world on the bond market while at the same time selling into the bid his comments create.  I've witnessed this first-hand as a bond trader in the 1990's. The indirect hedging would be via China's well-known aggressive purchasing of basic commodities, especially industrial metals, and its now well-understood aggressive accumulation of gold and silver.

I'd like to end this segment with a quote from a well-informed trader in London about the game going on in the Treasury bond market with the Fed and JP Morgan:

“It’s all about the bond auctions, the bond fell off a cliff. In the derivatives market you’ve got JP Morgan playing the bond market at the behest of the Fed, going long 30 years versus selling short-term paper. They buy 30 year paper and then immediately hedge themselves by selling the 30, 60 and 90 day paper. It’s how they keep interest rates down, it’s how you do it. The only reason interest rates are not in double digits in the US is because of this game. These guys are short front month paper. If this (the bond market) actually fell much longer, JP Morgan could be wiped out, I mean they would be liquidated. The Fed cannot allow them to do that. We’re witnessing history here.

Here's the link to this from the King World News daily blog:  Buy Gold, Dump Bonds

This reinforces my view that nominal interest rates in the U.S. are completely under the manipulation of the Fed/Wall Street in order to try and stimulate an economic recovery.  Unfortunately this will fail badly. Real interest rates (nominal rates minus true inflation) are extraordinarily negative.  That fact is the fuel powering the precious metals inexorably higher.  As the rate of real price inflation accelerates (NOTE: true inflation vs. Government reported/manipulated CPI price measures), this rally in precious metals will also accelerate and leave many behind.

Update on Munis

In brief, if you respect the value of your investment portfolio, get the hell out of your muni bonds.  The only munis I would even think about owning are defeased munis (munis which have their call-date or maturity pre-funded with cash in trust).  Here's the latest chart as of yesterday's close:

(click on chart to enlarge)

I have to be honest - just between us girls - I don't know too many traders who would look at that chart and declare it to be a table-pounding buy.  We may get a bounce in the muni market once the Democrats strong-arm an extension of the Build America Bond program.  In fact, I have to believe that there are many wealthy investors loaded up on munis who are on the phone with their Republican reps aggressively lobbying for that extension as well.  If I am correct and the BAB program is extended, I urge you to sell into the ensuing rally.  If it is not extended, then may that portion of your muni portfolio R.I.P...

Housing Market Update

I actually want to do an somewhat in-depth analysis of the housing market.  I will get to that this week if I can find the time.  However, I want to quickly refute comments made by the CEO of Toll Brothers this week that the housing market would stabilize and rebound over the next year and into 2012.  No way.  He first needs to explain two things before I will even think about his logic: 1) where is the job growth and credit going to come from in order to create real housing demand?  2) why has he been one of the most aggressive homebuilding CEO's in terms of dumping his stock holdings in TOL?

The fact of the matter is that housing inventories are rapidly rising again, especially actual bank-owned REO and the "shadow" inventory of potential foreclosures and people who would like to sell but want to wait until the mythical "spring/summer" bounce.  Inventory alone will smother any possibility of price stabilization.  I expect housing prices to drop another 5% at least this year.  Mortgage rates are rapidly climbing and, despite the ridiculously manipulated Government employment reports, the real unemployment rate continues to rise.

With that I would like to link a news item from today's Denver Post which reports that existing home sales for November in Denver fell 26% vs. last year and 6.2% from October.  Here's the LINK.  Denver has one of the healthier regional economies and lower unemployment rates.  In fact, the decline in home values in Denver has substantially lagged that of several other large cities.  This is not good news for the overall demographic trend for housing for the whole country...

Note:  ex post facto this post, the Dems rejected the tax extension bill.  As expected, the rumor is that they are going to fight to have the BAB program included and the muni market spiked:  LINK.  I would be selling into this.