Daily Digest - Dec 11

Thursday, December 11, 2008, 1:03 PM

"F-Bills" - the Fed weighs issuing its own debt, Treasuries fall (finally), trouble in Greece equals trouble in the Eurozone,  The Clapper (humor), foreclosures by state, Tobin's Q, Fannie and Freddie waive appraisals, freight haulers slam on the brakes, and unemployment claims surge. 


"F BILLS" Fed Weighs Debt Sales of Its Own

Fed officials have approached Congress about the concept, which could include issuing bills or some other form of debt, according to people familiar with the matter.

Treasuries Fall as U.S. Says Borrowing May Reach $2 Trillion

Dec. 10 (Bloomberg) -- Treasuries fell as the government said it may need to introduce new methods to sell a record amount of debt, fueling concern the government will flood the market with securities to pay for financial rescue programs.

Yields climbed after Treasury Assistant Secretary Karthik Ramanathan, in a speech in New York, cited private analysts' estimates of borrowing needs that may reach as much as $2 trillion in the financial year that ends in September 2009. An auction of $28 billion in three-year notes drew less demand than the last sale.

Greek fighting: the eurozone's weakest link starts to crack 

In the case of Greece, of course, Athens was found guilty
by Eurostat of committing "statistical achemy" to get into the system -
ie, they lied about their deficits.

Be that as it may.

Greece's euro membership has now led to a
warped economy. The current account deficit is 15pc of GDP, the
eurozone's highest by far. Indeed, the deficit ($53bn) is the sixth
biggest in the world in absolute terms -- quite a feat for a country of
11m people.

Year after year of high inflation has eroded the competitive base
of the economy. This is an insidious and slow effect, and very hard to
reverse. Tourists are slipping away to Turkey, or Croatia. It will take
a long time to lure them back. 

Humor (Video Clap On Clap Off - Mark Fiore)

Why gold should recover significantly in 2009


Currencies next


Once markets realize this, speculators are going to start attacking currencies. They already are in some cases, such as the Ruble, Won, etc. Even the Swiss Franc is under pressure, as the Swiss don't have quite a lot of foreign reserves, and the UBS debacle alone is wiping out their reserves with the bailouts, for example.

Korea and Russia both have problems coming due this month. Both of them have to roll over hundreds of $billions worth of short term corporate credit. And the trouble is, that market is collapsing too. So, the only solution so far has been using mainly their foreign reserves, and both their currencies are getting killed.

Foreclosures By State (Rates Per 100 Homes)

Chart, GDP to Debt (Not including 53+ Trillion of "Off Balance Sheet Debt")

the Tobin's q bottom

A global stock slump may have further to go, according to Tobin's Q ratio, which compares the market value of companies to the cost of their constituent parts, CLSA Ltd. strategist Russell Napier said.

The ratio, developed in 1969 by Nobel Prize-winning economist James Tobin, shows the Standard & Poor's 500 Index is still too expensive relative to the cost of replacing assets, said Napier. While the 39 percent drop in the index this year pushed equity prices below replacement cost, history suggests the ratio must sink further as deflation sets in, he said. The S&P may plunge another 55 percent to 400 by 2014, Napier said.

"The Q has come down to its average, however it's not always stopped at the average," said Napier, Institutional Investor's top-ranked Asia strategist from 1997-1999. "It has tended to go significantly below that in long bear markets."

Napier, who teaches at Edinburgh Business School and advised clients to buy oil in 2002 before it tripled, based his S&P 500 forecast on the Q ratio for U.S. equities as well as the 10-year cyclically adjusted price-to-earnings ratio, another measure of long-term value.

Before the trough in 2014, investors are likely to see a so- called bear market rally for the next two years as central bank actions delay the onset of deflation, Napier said.

"In the long run, stocks will become even cheaper," said Brian Shepardson, who helps manage $1.9 billion at Xenia, Ohio- based James Investment Research. The firm's James Balanced Golden Rainbow Fund beat 98 percent of similar funds this year. "There's a likelihood of some type of rally and further pullback surpassing the lows we've already set."

The Q ratio on U.S. equities has dropped to 0.7 from a peak of 2.9 in 1999, and reaching 0.3 has always signaled the end of a bear market, said Napier, 44, the author of "Anatomy of the Bear," a study of how business cycles change course. The Q ratio for U.S. equities has fluctuated between 0.3 and 3 in the past 130 years.

At the end of the four largest U.S. bear markets in 1921, 1932, 1949 and 1982, the Q ratio fell to 0.3 or lower, and history is likely to repeat, said Napier. From the 1982 trough, the S&P 500 grew more than 14-fold to the middle of 2000, when Napier says the last bull market ended.

"For those who are worried about losing much of their investment almost overnight, very clearly you'd want to wait for those signals to give a much stronger case," he said. The bear market will have "a painful resolution, it's just a question of how painful, over what period of time and for what parties."

Federal Reserve Chairman Ben S. Bernanke's indication that he will use "quantitative easing" to prevent deflation points to a stock market rally that may last for the next two years, Napier said. With quantitative easing, a tool pioneered by the Bank of Japan, central banks can stimulate inflation by printing money and flooding the market with cash in order to encourage consumers to spend.

The government's efforts will eventually fail as ballooning government debt devalues the dollar, causes investors to flee U.S. assets and takes the S&P 500 to its eventual bottom in 2014, Napier said.

"Bear markets always end for exactly the same reason, and that is the market begins to price in deflation," he said. "Equities will be incredibly cheap."

Fannie, Freddie May Waive Appraisals for Refinancings

Dec. 10 (Bloomberg) -- Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the U.S. government, are considering forgoing new appraisals on refinanced loans to help struggling homeowners, their regulator said.

Freight Haulers Slam on the Brakes

In a normal year, Gordon Trucking Inc. might replace 20% of its fleet of 1,500 big rigs with new trucks. But given the bleak outlook for the freight business, the Pacific, Wash., hauler doesn't intend to buy a single new truck next year.

"We're settling in for nuclear winter in the first half of 2009," says Steve Gordon, operating chief for the company, which hauls everything from paper products to electronics.

He's not alone. Some industry executives and analysts predict that 2009 could be the worst year for freight-transportation volume in three decades or more.

Credit Card Companies Add to Economic Woes

Millions of Americans are being sandbagged yet again by consequences arising from the banking crisis.

For the last six months or so, lenders have been wrecking havoc on many of their customers by reducing credit limits, increasing prevailing interest rates, or both. These unilateral moves have been made by credit card companies, which are virtually unregulated, and by lenders who have extended other revolving credit such as home equity lines (HELOCs.)

New unemployment claims surge (unexpectedly??????)

WASHINGTON (AP) -- New claims for jobless benefits rose more than expected last week, exceeding even gloomy expectations for an economy stuck in a recession that seems to be deepening.

Four Bucks

McDonald's has erected a billboard in sight of Starbucks headquarters declaring, "four bucks is dumb."

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Woodman's picture
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Re: Daily Digest - Dec 11


Chris wrote in the end of October one sign to keep a very close watch for is a decline in the dollar PLUS an increase in Treasury debt interest rates (yield).  Are we there now and what does that mean?!?!?


Davos's picture
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Re: Daily Digest - Dec 11


I saw the dollar was off about 5 cents to the Euro, but with 9? Central Banks and us not the only one printing I personally see them all dropping - but I'm no expert. I think it would be safe to say that sticking 10k in and geting 9.8k back would have investors flee the buck, this happened when the BOJ did QE, then of course there were other markets for Japanese investors to go to. Now? Gold? Dont know. Just my 2cents

dcary's picture
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unemployment numbers

The unemployment numbers are a joke.  How many small businesses and self-employed are working at full capacity?  A lot of self-employed people are not working and can not apply for unemployment...and therefore do not show up on radar screen.  Also for others man hours are down hours not being billed equate to a large uncounted number of bodies.

TechGuy's picture
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Re: Daily Digest - Dec 11


"lot of self-employed people are not working and can not apply for unemployment."

That is incorrect. A self-employed person needs to file a form that terminates their business (Company\LLC, etc). Upon closure. they can file for unemployment.


"Also for others man hours are down considerably"

 I Believe the BLS also has figures that estimate the under-employed. IIRC, in Oct or Sept it was about 672K. It is certainly much higher today.

 [SARCASM]: Look on the bright side: Millions of illegal workers are leaving the US and heading back home, now that construction and other labor jobs are disappearing. Didn't the gov't want to solve the illegal worker problem? Both Parties can now claim they have solved the illegal worker problem!  Remember that nasty inflation problem early this year? Gone! How about the issue that the US and the rest of globe was emitting too much greenhouse gases. Fixed: The US, as well as much of the world has dramatically reduced carbon emissions and we are headed for pre 1990 emission in a matter of months. Its good to see our leaders working together to solve tough problems!

[MORE SARCASM]:Cheer up all you doom and gloomers! Go rent the movie "Polyanna". In no time you can join the ranks of politicans and the TV bubbleheads that for years declared America was going to be a perma-bull market, and that home prices only go up! Soon our elected and non-elected officials will solve this crisis with a shock-and-awe spending programs. Ignore those pundits that say we can't afford it, and that the US in endanger of defaulting. These silly folks don't have a clue. As one Bloomberg TV bubblehead said "There is no way the US will ever, ever default on its debt! The US federal gov't can simply print as much currency as it needs to meet all of its debt obligations."






mcafeejs's picture
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Re: Daily Digest - Dec 11

Davos, what would be really interesting to see is the Chart, GDP to Debt (Not including 53+ Trillion of "Off Balance Sheet Debt") for Iceland, Zimbabwe, and Greece on the same scale so we can compare them with the US.  Greece has been fudging its economic numbers for years but not even close to the $53T the US has been and they are having riots.

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