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. This information is found on Bloomberg today following the auction:

Highlights
Buyside interest in the monthly 10-year auction was strong. Direct and indirect bidders took down a combined 62 percent of the auction, nearly 10 percentage points above average. At 3.21, coverage for the $21 billion reopening of the August issue was the strongest since June. The auction stopped out at 2.670 percent, nearly two basis points below the 1:00 ET bid. Money is moving into Treasuries following the results. Tomorrow the Treasury auctions $30 billion in 30-year bonds.

Market Data: Week Ending Sept. 3, 2010

Market Index	2009 Close	9/03 Close	Week Change	Simple YTD %
Dow Industrials Avg	10428.05	10,447.93	2.93%	0.19%
S&P 500	1115.1	1,104.51	3.75%	-0.96%
Fed Funds Rate	0.25%	0.25%	0%	0%
10 yr T-bond Yld	3.85%	2.70%	0.06%	-1.15%
5 yr T-note Yld		1.48%	-0.01%
5 yr infl adj Note		0.14%	0.02%
Implied 5 yr Inflation %		1.34%	-0.03%
2 yr T-note Yld	1.14%	0.51%	-0.04%	-0.63%
2-10 Yr Slope	2.70%	2.19%	0.10%	-0.51%
90 day T-bill Yld		0.14%	0.00%
Gold ($/oz)	$1,096.95	$1,251.10	1.06%	14.05%
WTI Oil ($/brl)	$79.36	$74.60	-0.76%	-6.00%
VIX "Worry Index"	21.68	21.31	-12.84%	-1.71%
Credit Spreads		9/03 Close	Week Change
Inv Grade Credit Idx		4.47%	0.08%
Low Grade Credit Idx		8.63%	0.11%
Markit CDX Inv Grd Idx		106	-7.83%
Markit CDX Mid Grd Idx		157	-5.42%

And Now, From Olympia...

This news comes from the Seattle Times and Washington State's chief economist, Arun Raha, who gave lawmakers an update on the economy Friday and laid out his perspective.

"Economic activity has slowed to an agonizing crawl. May and June saw a pause in activity, and July brought little relief. Job growth remains anemic ... housing is looking for a new bottom and despite some easing in credit conditions, small businesses continue to face a challenging credit environment. There is considerable drag in the economy and increased uncertainty," Raha said, reading from his report.

That's not all. "We have cut our 2011 employment growth forecasts roughly in half, from 2.7 percent to 1.3 percent on an annual average basis. We do not expect to reach our pre-recession peak in overall employment until the second quarter of 2013." 

Bottom line of all that: "I do not believe that we will fall back into recession, it will just continue to feel like one," he said.

Washington has an economy weighted with export in airplanes, technology, and farm commodities. As a result, the economy was slow to enter recession and will be late to the other side, whatever that will be. What Raha did not say explicitly, based only on the quote "activity has slowed to an agonizing crawl", is that the revenue available for lawmakers is still shrinking. Like other governments, the coming session is going to require painful decisions because government, here and elsewhere, has steadily become a major employer in the economy it serves. That model is getting crushed by the reality that it does not sustain itself by creating new goods and services for sale. The jobs are expensive because they provide benefits that many private employers cannot afford to provide. Will lawmakers in Olympia have the strength of knowledge to make the decisions in Washington to change the pattern during the 2011 session, or are we going to watch foolish political gridlock guided by "the party" here too. This is a fascinating time.

One Eye on China: Moving on Commodity World Stage

This piece of news comes from Reuters and the Financial Post, a Canadian online newspaper. The context is that BHP Billiton, the huge mining company based in Australia that already supplies China with iron ore, is now bidding on fertilizer giant, Potash Co. This is an interesting story to watch. It is a small window to observe how assertive China's government wants to be in world markets.

Chinese officials have ordered state-owned companies to meet with investment bankers to explore potential options to block BHP Billiton’s US$39-billion bid for Canada’s Potash Corp, according to a source with direct knowledge of the matter.

In response to the directive, Sinochem is holding meetings with multiple banks, the source said, including Citigroup, HSBC and Morgan Stanley.

The order from Beijing underscores the seriousness with which China is taking the potential BHP-Potash tie up and its implications for the pricing and supply of the important crop nutrient, despite the obstacles to launching a successful counter-bid. Read more: here at the Financial Post

Sustainable Rally or Bear Trap?

On June 29 I made a decision to become market neutral as much as possible. In my post titled Sitting on A Signal: No More Waiting, I referenced a number of high profile blogger's and people whose fundamental and technical opinion I respect simply due to their objectivity. There was no shortage of concern for the potential loss of capital. Since then, the S&P 500 Index has tumbled and jumped through July and August. It's been a bumpy period. The bears have been formidable players making the biggest weekly moves, as shown by the red candlesticks in the chart below. The bulls have answered in their way, making a game of it. On June 29, the index closed on 1041 and on August 31 it closed on 1049.