Monday, July 26, 2010

Market Data: Week Ending 7/23/2010

Market Index 2009 Close 7/23 Close Week Change Simple YTD %
Dow Industrials Avg 10428.05 10,424.62 3.24% -0.03%
S&P 500 1115.1 1,102.66 3.55% -1.13%
Fed Funds Rate 0.25% 0.25% 0% 0%
10 yr T-bond Yld 3.85% 2.99% 0.07% -0.86%
5 yr T-note Yld
1.73% 0.06%
5 yr infl adj Note
0.30% 0.04%
Implied 5 yr Inflation %
1.43% 0.02%
2 yr T-note Yld 1.14% 0.58% 0.00% -0.56%
2-10 Yr Slope 2.70% 2.41% 0.07% -0.29%
90 day T-bill Yld
0.15% 0.00%
Gold ($/oz) $1,096.95 $1,187.80 -0.03% 8.28%
WTI Oil ($/brl) $79.36 $78.98 3.91% -0.48%
VIX "Worry Index" 21.68 23.47 -10.59% 8.26%

Credit Spreads
7/23 Close Week Change
Inv Grade Credit Idx
4.58% -0.16%
Low Grade Credit Idx
8.60% -0.35%
Markit CDX Inv Grd Idx
108 -4.42%
Markit CDX Mid Grd Idx
154 -6.10%

Wednesday, July 21, 2010

Obsolete, or Modern Portfolio Theory?

Deciding what asset allocation to recommend is a challenging undertaking. The majority of my peers rely completely on modern portfolio theory (MPT), the credibility factor is high with this approach. I am certainly not going to disagree with MPT. Never-the-less, I decided a couple of years ago that it was time to step back and review the tool and my results with MPT. The outcome was to realize that the buck stops with me. Not someone's excellent theory or someone's excellent software. Just me, right or wrong. My training on the other hand is to employ a tool, based on MPT theory, that has the credibility my name does not. After all, the brand matters in a world that values form over substance.

Tuesday, July 20, 2010

Economic Condition Review Q2 2010

The following is my macro economic review. It is work that I will update at least semi annually. I have not included a review of the size of government debt. The default is that it is too great and is a gigantic concern. There is no doubt. How the concern will be manifested is a more urgent question. Most observers are certain it will  be high inflation. That is logical. However, the force or forces that bring the change on are not known. It could be a bond market crisis or more simply a loss of tolerance of low rates and interest rates forced to rise in order to attract buyers (the so-called bond vigilante's). It could be a populist movement creating an opportunity for a free market action or several other possibilities. The point is, inflation is going to be an unwanted guest in our world, and we don't know when it will arrive or how long it will stay. Economist, Mark Thoma, is optimistic that the Fed has the tools and the skill to pilot us through either inflation or deflation. We'll see. All we can do is keep our eyes open to warning signs like bond market spreads and currency exchange rates for starters. That is what I do in my weekly Market Data post's and the daily currency graph's on the left column.

Monday, July 19, 2010

Market Data: Week Ending 7/16/2010

Market Index 2009 Close 7/16   Close Week Change Simple YTD %
Dow Industrials Avg 10428.05 10,097.90 -0.98% -3.17%
S&P 500 1115.1 1,064.88 -1.21% -4.72%
Fed Funds Rate 0.25% 0.25% 0% 0%
10 yr T-bond Yld 3.85% 2.92% -0.13% -0.93%
5 yr T-note Yld
1.67% -0.17%
5 yr infl adj Note
0.26% -0.06%
Implied 5 yr Inflation %
1.41% -0.11%
2 yr T-note Yld 1.14% 0.58% -0.04% -0.56%
2-10 Yr Slope 2.70% 2.34% -0.09% -0.36%
90 day T-bill Yld
0.15% 0.00%
Gold ($/oz) $1,096.95 $1,188.20 -1.82% 8.32%
WTI Oil ($/brl) $79.36 $76.01 -0.11% -4.22%
VIX "Worry Index" 21.68 26.25 5.08% 21.08%

Credit Spreads
7/16   Close Week Change
Inv Grade Credit Idx
4.61% -0.13%
Low Grade Credit Idx
8.74% -0.21%
Markit CDX Inv Grd Idx
108 -4.42%
Markit CDX Mid Grd Idx
155 -5.49%

Friday, July 16, 2010

June 2010 Consumer Price Index

On a seasonally adjusted basis, the CPI-U declined 0.1 percent in June after falling 0.2 percent in May. The index for all items less food and energy increased 0.2 percent in June after increasing 0.1 percent in May.

By components, energy component dropped 2.9 percent, equaling the May decrease. Gasoline fell 4.5 percent after a 5.2 percent decrease the previous month. Food prices overall were flat for the last two months.

Bumping up the core rate was a number of components. Apparel jumped 0.8 percent after a string of weak months. Medical care gained 0.3 percent. Used cars and tobacco both were up significantly for June.

Year-on-year, overall CPI inflation eased to 1.1 percent (seasonally adjusted) from 2.0 percent in May. The core rate in June remained at 1.0 percent. On an unadjusted year-ago basis, the headline number was up 1.1 percent in June while the core was up 0.9 percent.

Tuesday, July 13, 2010

10 Year Treasury is Still in Demand

Good news continues for the US Treasury, and the broader bond market, following today's ten year note auction. The 3.50% coupon is getting a premium in the auction, helping the fiscal crisis in the US. This information is found on Bloomberg today following the auction:

Coverage for the $21 billion reopening of the 10-year June issue is on the low side at 3.09. The auction, stopping out at 3.119 percent, shows a 1-1/2 basis point tail. Buyside demand is no more than moderate with direct and indirect bidders taking down 52 percent of the auction, in line with the long term trend but down from the recent trend. Demand for Treasuries is easing following the results.

Stephen Roach, Global Economic Outlook, July 2010

Stephen Roach is not saying anything he has not said before, but this is a reminder of the economic conditions within China. It's an 18 minute interview. The interview covers the global debt crisis, the condition of China's economy, the condition of the US consumer and the chances for low, but positive, US economic growth to be sustained.

Monday, July 12, 2010

Market Data: Week Ending 7/9/2010

Market Index 2009 Close 7/09   Close Week Change Simple YTD %
Dow Industrials Avg 10428.05 10,198.03 5.28% -2.21%
S&P 500 1115.1 1,077.96 5.42% -3.45%
Fed Funds Rate 0.25% 0.25% 0% 0%
10 yr T-bond Yld 3.85% 3.05% 0.07% -0.80%
5 yr T-note Yld
1.84% 0.02%
5 yr infl adj Note
0.32% 0.04%
Implied 5 yr Inflation %
1.52% -0.02%
2 yr T-note Yld 1.14% 0.62% 0.00% -0.52%
2-10 Yr Slope 2.70% 2.43% 0.07% -0.27%
90 day T-bill Yld
0.15% -0.01%
Gold ($/oz) $1,096.95 $1,209.80 0.17% 10.29%
WTI Oil ($/brl) $79.36 $76.09 5.48% -4.12%
VIX "Worry Index" 21.68 24.98 -17.07% 15.22%

Credit Spreads
7/09   Close Week Change
Inv Grade Credit Idx
4.74% -0.01%
Low Grade Credit Idx
8.95% -0.11%
Markit CDX Inv Grd Idx
113 -8.13%
Markit CDX Mid Grd Idx
164 -6.82%

Tuesday, July 6, 2010

King County, WA Real Estate Data

Seattle Times business reporter
Was June a good month for King County home sales? That depends on which numbers you pay attention to.
The good: Buyers closed on 1,879 houses last month, according to statistics released Tuesday by the Northwest Multiple Listing Service. It was the largest monthly total since August 2007, and 13.5 percent more closings than the number recorded last June.
The not-so-good: Pending sales — offers accepted by sellers that haven't yet closed — fell 26 percent in June from the same month last year. It was the second month of year-over-year declines after 12 straight monthly gains.
Both sets of numbers were strongly influenced by the expiration of federal tax credits two months ago. Buyers and sellers had to sign contracts by April 30 to qualify for the savings, and many of those deals closed in May and June.

ISM Non-Manufacturing Index Report for May 2010

From Bloomberg today:
Peak growth may have already come and gone, a worry of the global markets and indicated by the ISM's June report on non-manufacturing. The headline composite index slipped back 1.6 points to 53.8 for its lowest reading since February. Nearly all details indicate a slower rate of growth in June than in May. New orders fell nearly three points to 54.4 for its lowest reading of the year and joining the ISM's manufacturing index for new orders which, in data released last week, is also at its lowest of the year.

Business activity, at 58.1, is at its lowest level since February. Employment edged back to 49.7 ending its one-month visit over breakeven 50. Backlogs slowed slightly, export orders contracted, imports contracted, inventory gains slowed, and even prices slowed.

Today's report is not good news for the stock market which may continue to discount economic slowing for the months ahead. Today's report will also increase talk that new rounds of government stimulus may be in order.

Monday, July 5, 2010

Market Data: Week Ending 7/2/2010

Market Index 2009 Close 7/02   Close Week Change Simple YTD %
Dow Industrials Avg 10428.05 9,686.48 -4.51% -7.11%
S&P 500 1115.1 1,022.58 -5.03% -9.05%
Fed Funds Rate 0.25% 0.25% 0% 0%
10 yr T-bond Yld 3.85% 2.98% -0.13% -0.87%
5 yr T-note Yld
1.82% -0.08%
5 yr infl adj Note
0.28% 0.05%
Implied 5 yr Inflation %
1.54% -0.13%
2 yr T-note Yld 1.14% 0.62% -0.03% -0.52%
2-10 Yr Slope 2.70% 2.36% -0.10% -0.34%
90 day T-bill Yld
0.16% 0.03%
Gold ($/oz) $1,096.95 $1,207.70 -4.02% 10.10%
WTI Oil ($/brl) $79.36 $72.14 -8.52% -9.10%
VIX "Worry Index" 21.68 30.12 5.57% 38.93%

Credit Spreads
7/02   Close Week Change
Inv Grade Credit Idx
4.75% -0.11%
Low Grade Credit Idx
9.06% 0.17%
Markit CDX Inv Grd Idx
123 2.50%
Markit CDX Mid Grd Idx
176 1.15%

Friday, July 2, 2010

Technical Observations

It will be a matter of time before the confirmation of the suspected head and shoulders formation is decided. Here is another perspective of what might be brewing, instead of an assertive move to the upside or downside. Pretend that history rhymes. Here is a chart from Chart of the Day showing the history of the DJIA over select periods, immediately following two "massive bear markets", defined as a decline of 50% or more. The third line shows the DJIA following the less than massive bear market that ended in 2002.

Thursday, July 1, 2010

One Eye on China: High Inflation or No?

Reading an article published on May 20 in the Caixin, an english language newspaper in China. The article is authored by the chief economist of China Capital Corp., One of the largest investment banks in the country.

Inflation is officially not a problem in China, though unofficially it is. Officially, May inflation is measured at an annual rate of 3.1%, year over year. That is the 'obvious inflation', mostly reflected in consumer prices. But there is 'hidden inflation' to recognize too. He says "in economies where prices are entirely or partially controlled by the government, inflation may not be perceivable by simply looking at consumer prices. Instead, inflation may become evident when there is a shortage of goods, or after enterprises chalk up losses because their product prices are controlled by the government. This so-called hidden inflation leads to imbalances in resource allocations. And when hidden inflation is superimposed on dominant inflation, the result is so-called true inflation."