Bernanke's Testimony On Economy, Monetary And Fiscal Policy (Senate Hearing)

Bernanke's testimony before the Senate Budget Committee on the Fed's economic outlook, quantitative easing, monetary and fiscal policy. The hearing is live at CSPAN 2. Also read the December FOMC Minutes.

Chairman Ben S. Bernanke
The Economic Outlook and Monetary and Fiscal Policy
Before the Committee on the Budget, U.S. Senate, Washington, D.C.
January 7, 2011

Chairman Conrad, Senator Sessions, and other members of the Committee, thank you for this opportunity to offer my views on current economic conditions, recent monetary policy actions, and issues related to the federal budget.

The Economic Outlook
The economic recovery that began a year and a half ago is continuing, although, to date, at a pace that has been insufficient to reduce the rate of unemployment significantly.1 The initial stages of the recovery, in the second half of 2009 and in early 2010, were largely attributable to the stabilization of the financial system, expansionary monetary and fiscal policies, and a powerful inventory cycle. Growth slowed somewhat this past spring as the impetus from fiscal policy and inventory building waned and as European sovereign debt problems led to increased volatility in financial markets.

VIX 1X2 Call Spreads Trading (VIX Chart, Futures Curve and Put/Call Ratio)

Below is information from the CBOE VIX options pit on 1/4/2010 and 1/5/2010 courtesy of Jamie Tyrrell of optionMONSTER TV. VIX 1X2 call spreads were in play, moving from January to March and February to March. They were protecting March upside in volatility. Here's the VIX futures curve using data from InsideStocks.com on 1/6/2010. See the videos and more after the break.


Howard Davidowitz's Retail Outlook, Real Estate Revolution, XRT Put Spread and Chart Levels To Watch

Like I said on 12/15/2010, keep an eye on $XRT, the retail stock ETF. It broke below a rising wedge and could test the ultimate $45.74 support level (2007/2010 highs). A January put spread that expires on January 22 is trying to capitalize on this (or hedge).

From the Xpound Blog:

"Put volume is picking up in the SPDR Retail Trust (XRT), as shares sink on disappointing December same store sales numbers. XRT is now off 63 cents to $47.12 and options volume includes 29,000 puts and 3,200 calls through midday. The top trade was part of a spread, in which an investor apparently paid 40 cents per contract for 5,400 January 46 puts and collected 10,800 January 45 puts at 20 cents. This 2X1 put ratio spread, at even money, is a bearish play. It makes its best profits if shares fall to $45 by the January expiration, in 15 days."

December retail sales disappointed according to Retail Metrics Inc. From BusinessWeek:

"Sales at stores open more than a year rose 3.2 percent in December, according to Retail Metrics Inc. That compared with the 3.5 percent average of estimates compiled by the firm and a 5.5 percent increase in November. Retail stocks fell, led by Gap Inc. and Target Corp. as both missed estimates and dropped more than six percent."

Here is the grand finale. Howard Davidowitz, who's been consulting on the retail industry since 1981, thinks the overall consumer is still in "terrible shape" with "17.5% UNDERemployment, 46 million people on food stamps and housing continuing to go down (another 10% would bring a double dip recession). He said the rise in capital markets drove holiday spending mainly in the luxury space (Coach, Tiffany, Saks, jewelry). Sears, Wal-Mart, Toys R' Us, Best Buy, AJ Wright, A&P, Loehmann's, Charming Shoppes are a different story. He also talked about Edward Lampert's strategy on Sears and thinks Wal-Mart is "scared stiff" of Amazon.

Davidowitz ultimately believes that the explosion in online sales (Amazon) will put major pressure on retail commercial real estate going forward (*this is interesting though: Malls Bet on MindSmack's FastMall App to Draw Shoppers Back*).I embedded the video below and provided quotes. Here's what he said:

"We're only at the beginning of this online sales and that has to lead you to question the whole retail real estate strategy. We've got 21 square feet of  selling space for every man, woman and child in this country. We already have double of what we need. With the explosion of online sales, what happens to all these retail malls and tons of shopping centers that are marginal. I think there are huge questions going forward about size of stores, locations of stores, distribution facilities. Huge changes are going to be taking place in the next 5-years as people continue to shop online."


Baltic Dry Index Makes New Low, Huge BDI/Copper Divergence (Chart)

The Baltic Dry Index ($BDI), or dry bulk freight rate index, just broke through the 2010 low of 1700. It closed at 1,621 today (1/5/2011). When the financial system froze up in late 2008, the BDI hit a low of 663 before the reflationary jolt by the Fed. It was pretty much a done deal for reflationary assets to rally hard, and look where we're at today with the addition of QE2. What's interesting now is dry bulk commodities and the Baltic Dry Index have been diverging for 7 months now. For example, the BDI peaked in May 2010 while Copper kept making new highs. Look at the huge gap on the second chart. You'd think commodities would follow freight rates. So how does this gap close? Are dry bulk commodities overpriced? China demand waning due to rate hikes to curb inflation? Or is this simply a supply/demand imbalance on the shipping front? Related articles: Queensland Flooding to Cut Freight Rates as Coal Transporters Lie Idle (coal ships lie idle) and China Stocks' Best Forecaster Predicts Slump in 2011, Defying CICC, Mobius. Check out the $BDI 3-year chart and $BDI/$COPPER chart after the jump.

'Off With Our Heads', PIMCO's Bill Gross January 2011 Investment Outlook

Important highlights from Bill Gross's January Investment Outlook "Off With Our Heads" (pimco.com).

"The problem is that politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion dollar annual deficit. As long as the stock market pulsates upward and job growth continues, there is an abiding conviction that all is well and that “old normal” norms have returned. Not likely. There will be pain aplenty and it’s imperative that we recognize now what the ultimate cost of blueberries will mean for American citizens of tomorrow. Four major factors come to mind:"
"American wages will lag behind CPI and commodity price gains." [...]

"Dollar depreciation will sap the purchasing power of U.S. consumers, as well as the global valuation of dollar denominated assets."

"One of the consequences of perpetual trillion dollar deficits is the need to finance them, and at attractively low interest rates for as long as possible." 

"Trillion dollar annual deficits add up, and eventually produce a stock of debt that can become unmanageable:"

"Investment Implications

Birinyi's 2,854 SP Target Vs. Rosenberg's Bear Market Rally Call (Links)

Birinyi's Projected 322% S&P 500 Advance Beats '90s Tech Rally (Bloomberg)
S&P on Steroids: Index To Hit 2,854 on Sept. 4, 2013, Birinyi Predicts (NetNet)

vs.

David Rosenberg Goes On Offensive, Mocks Birinyi, Tells Koolaid Guzzlers To "Put It In Their Pipe And Smoke It" (Zero Hedge)

Mark Cuban Interviewed By Howard Lindzon (StockTwits TV)

Watch Howard Lindzon interview Mark Cuban on StockTwits TV. Financial hackers are running the market.

ADP: December Private Sector Employment Up 297,000 (100K Expected)

Private sector employment increased by 297,000 in December (2010) according to ADP. An increase of 100,000 was expected at Reuters. Here's a quote and chart from the December press release:
"Private-sector employment increased by 297,000 from November to December on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from October to November was revised down but only slightly, from the previously reported increase of 93,000 to an increase of 92,000.


This month’s ADP National Employment Report suggests nonfarm private employment grew very strongly in December, at a pace well above what is usually associated with a declining unemployment rate. After a mid-year pause, employment seems to have accelerated as indicated by September’s employment gain of 29,000, October’s gain of 79,000, November’s gain of 92,000 and December’s gain of 297,000. Strength was also evident within all major industries and every size business tracked in the ADP Report. [read full release]"
 Is this already priced in?

SP Future Large Specs Vs. ES Future Large Specs (COT Charts 12/28/2010)

Here are COT charts as of 12/28/2010 for the E-Mini S&P Future (ES) and S&P 500 Index Future (SP) (courtesy of cotpricecharts.com). I'm not sure if this means much, but look how large speculators net long SP and net short ES closed out open interest recently. Charts after the jump.

  • ES COT on 12/7/2010: 37% of large speculators were bullish with 2,979,326 contracts open. ES COT on 12/28/2010: 47% of large speculators were bullish with 2,479,708 contracts open.
  • SP COT on 12/7/2010: 74% of large speculators were bullish with 384,778 contracts open. SP COT on 12/28/2010: 52% of large speculators were bullish with 273,812 contracts open.

December FOMC Minutes Text, QE2 Through Second Quarter 2011 (12/14/2010)

Text from the 12/14/2010 FOMC Minutes release on the financial situation, economy, federal funds rate and QE2 ($600 billion Treasury purchase program). I quoted the beginning and end (Developments in Financial Markets and the Federal Reserve's Balance Sheet and Committee Policy Action). I embedded the full PDF below or read the text at federalreserve.gov.

Minutes of the Federal Open Market Committee (December 14, 2010)

"Developments in Financial Markets and the Federal Reserve's Balance Sheet
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets since the Federal Open Market Committee (FOMC) met on November 2-3, 2010. He also reported on System open market operations, including the continuing reinvestment into longer-term Treasury securities of principal payments received on the SOMA's holdings of agency debt and agency-guaranteed mortgage-backed securities (MBS) as well as the ongoing purchases of additional Treasury securities authorized at the November 2-3 FOMC meeting. Since the last meeting, the Open Market Desk at the Federal Reserve Bank of New York purchased a total of about $105 billion of Treasury securities, reflecting about $30 billion of purchases with the proceeds of principal payments and about $75 billion as part of the authorized expansion of the Federal Reserve's securities holdings. Purchases were concentrated in nominal Treasury securities with maturities of 2 to 10 years, though some longer-term securities were purchased along with some Treasury inflation-protected securities (TIPS). The Manager also discussed the Desk's intention to place additional limits on its purchases of individual securities, as the Federal Reserve's holdings of such securities increased beyond 35 percent of the total outstanding; these limits were intended to help ensure that Federal Reserve purchases do not impair the liquidity in Treasury markets. In addition, the Manager updated the Committee on the SOMA's holdings of foreign-currency instruments. There were no open market operations in foreign currencies for the System's account over the intermeeting period. By unanimous vote, the Committee ratified the Desk's transactions over the intermeeting period."

Google's Marissa Mayer On Location, Social, Groupon (Interview Videos)

Marissa Mayer, VP of Consumer Products at Google, was interviewed by Media Beat (MediaBistro.com). She talked about contextual discovery, Google Places (location), the Groupon bid, their own technology, startups inside of Google and their social push. With Facebook stealing the spotlight (worth $50 Billion now) and Groupon recently declining Google's $6 billion bid (worth 7.8 billion now?), you haven't seen the end of Google. They just haven't "gotten social media right yet". Marissa Mayer regarding Google Buzz.

"One of the things that we’ve learned is that Google hasn’t gotten social right yet. That said, social is really important; it’s something that we’re working very hard on."

"I think that we will get it right. I think that if you look at some of the main platforms of the Web, it’s search, video, mobile and social. We’ve done really well in three out of those four, and we’re working very hard on the fourth." (via mediabistro)

I bet Google makes social and location-based marketing/coupons more interesting and smarter on mobile devices going forward. The Microsoft/Facebook collabo and Groupon could be a decent fight. What side does Twitter take? Below I was able to embed video #2 on social. Here's a link to video #1 on the failed Groupon bid.

2010 Year End Macro Note To Read

GregorWeekly Year End Macro Note: 2010 Wrap Up and Closing Letter

Borders' General Counsel, CIO Resigned, Delayed Vendor Payments, Will It Merge With Barnes And Noble? (BGP, BKS)

What is going to happen with Borders? From Barron's Tech Trader Daily this morning.

"Late yesterday, beleaguered bookseller Borders Group (BGP) announced two executives resigned, Thomas D. Carney, the firm’s general counsel, and Scott Laverty, its chief information officer." (1/4/2010, Barron's)

And this comes after Borders delayed payments to vendors.

"The book chain Borders entered 2011 on an unsteady note, telling major publishers last week that it would delay payments owed to them, and stoking fears that it would not be able to recover from declining sales." (1-3-2010, NYT)

"PW has learned that at least one of the “big six” New York houses has suspended shipping books to Borders, a troubling sign for the company as it attempts to find lenders to refinance its debt and provide enough liquidity to get the national book retail chain through to early 2012." (12-31-2010, Publishers Weekly)

Bill Ackman's Pershing Square Capital Management owns 37% of Borders and on 12/6/2010 he offered to help finance a bid for Barnes and Noble.

"Hedge fund manager William Ackman is raising his wager on bookseller Borders Group Inc (BGP.N), offering to help it buy larger rival Barnes & Noble Inc (BKS.N) for $963.7 million." (12/6/2010, Reuters)

$BGP is trading at 96 cents, right around the 1-year low (chart 2). It hit an intra-day low of .87 before closing at .96 (chart 1). Get ready for something interesting to happen!

Charts courtesy of Yahoo Finance (click for larger view)

Niall Ferguson: Empires on the Edge of Chaos (ABC/ForaTV)

Harvard Professor and Historian, Niall Ferguson, gave an hour long speech titled "Empires on the Edge of Chaos" in Australia on 7/28/2010 (h/t Zero Hedge). Niall also did the must see documentary "The Ascent of Money" on PBS. Here's the summary of his speech and watch the full program at Fora.tv.
"Throughout history the rise and fall of empires isn't slow or cyclical, as we like to think, but arrhythmic...it mostly happens very, very suddenly. America is a superpower on the edge of chaos, according to economic historian and author Niall Ferguson. U.S. debt levels, he says, and its unwillingness to address the problem, has put it in the same category as other great empires which have collapsed throughout the ages.

Ferguson argues the world is changing. There's the rise of authoritarian China as a super-power; a Keynesian president leading a weakened United States; the re-emergence of democratic India as a great power; the continued decline of Japan; and the probability of continued global economic instability ahead.

Is the rise and fall of empires cyclical or arrhythmic? How does economic profligacy -- whether the result of arrogance or naivety -- contribute to the downfall of civilizations? Not to be missed, the address will offer a timely review of primacy, leadership, and the complex factors behind the rise and fall of great powers and civilizations."

Recent Posts with Niall Ferguson:

*Niall Ferguson On The Pitfalls of Keynesian Economics [Daily Beast Innovators Conference, 10/24/2010] (Zero Hedge)

*Niall Ferguson: Treasury Bond Vigilantes Coming, Default Or Inflation Choice For US at [Aspen Ideas Festival 7/7/2010] (Distressed Volatility)

Explore Hidden New York City Infrastructure (Undercity Video)

This is an amazing video and it's related to the "municipal" channel of the blog. So what do taxes and revenue bonds finance? Check out New York City's hidden infrastructure through the eyes of Urban Historian/Photographer Steve Duncan and Director/Cinematographer Andrew Wonder. They look at hidden NYC subway areas, sewer tunnels, tops of bridges, the hidden Amtrak tunnel etc. The website to visit is undercity.org. I embedded the "Undercity" video after the jump.

Robert Shiller Sees S&P 500 At 1,430 In Year 2020! (CAPE Ratio)

Yale Economics Professor, Robert Shiller, who recently gave his view on November's S&P/Case-Shiller Home Price Index, was on CNBC last week explaining how a CAPE (Cyclically-Adjusted Price/Earnings) ratio of 15, projected real S&P earnings of 78.2 and 2% inflation, was forecasting 1,430 on the S&P 500 in year 2020! That is 13.7% upside from Friday's close. Shiller quote via CNBC.com:

"We're talking ten years out. So I'm going to go back to 100 years. The growth of real inflation directed earnings is surprisingly low. From 1890 to 1990 it was only 1.5 percent a year," he said.

"I take earnings and I extrapolate them out at 1.5 percent from where they—S&P earnings—are now and then I apply a price earnings ratio of 15, which is the historical average for 1890 to 1990," Shiller said.

The 1,430 level actually makes sense if you look at the 50 year chart extended out to 2020 (click for larger view).

I'll do a new post with a chart analyzing Shiller's data at econ.yale.edu (S&P, EPS, CPI, Bond Yields and CAPE). I asked David Einhorn in a post on 12/12/2010 if he thought the CAPE would test the lows around 6, which is where the market bottomed in 1932 and 1982. I believe we're around 22 now, up from 13 when the market bottomed in March of 2009 (still double the low). Watch the CNBC video after the jump.

George Soros 2009 Interview On Bubbles, China, Currencies, Fed (WSJ)

I came across this George Soros interview from June 2009 and thought I'd post it (hat tip Howard Lindzon). When he sees a bubble (gold?) he buys it, but admitted to shorting Amazon early during the tech bubble. Timing still needs to be right in a bubble. The gold balloon will be interesting to watch from here. Soros also talked about the Federal Reserve, currencies, US Dollar, commodities, China, Graham and Dodd valuation models vs. market perceptions of price (traders guessing), risk management and probably more. This video will be something to look back on. I also embedded a bunch of videos with Soros talking about the theory of reflexivity. Click the labels or search on the blog.

Goldman Sachs Invests $450 Million In Facebook, $50 Billion Valuation (FBOOK, GOOG, TWIT, GS, GRPN)

According to DealBook, Goldman Sachs invested $450 million and Digital Sky Technologies invested $50 million in Facebook. This is going to be a crazy IPO. How high can they get $FBOOK's valuation? Read the article at Dealbook (NYT).

"Facebook, the popular social networking site, has raised $500 million from Goldman Sachs and a Russian investor in a deal that values the company at $50 billion, according to people involved in the transaction. The deal makes Facebook now worth more than companies like eBay, Yahoo and Time Warner." (continue reading)

DealBook also covered Groupon's ($GRPN) recent capital raise.

"The 30-year-old founder and chief executive of Groupon, Andrew Mason, could raise as much as $950 million from investors in the next few weeks, laying the groundwork for a multibillion-dollar initial public offering in 2011." (continue reading) 

Social media is bubbling up! Amazing times for this space. Will Google buy Twitter ($TWIT)? Here's what Howard Lindzon, CEO and Co-Founder of StockTwits, had to say.

"I think that Google has to buy Twitter and that will start to be a meme soon. It’s a chess game and nuclear war now in the social space." (continue reading)

Gerald Celente's Top Trends for 2011 (Trend Research Institute)

Gerald Celente, who runs the Trends Research Institute (since 1980), released a preview of his "Top 11 Trends of 2011" report (pdf) and hit the media scene. He sees Gold at $2,000/oz, people switching to "quality" foods, social unrest (unemployment, housing) and a huge alternative energy breakthrough. His list, Fox Video interview and links are after the jump.

Long-Term Bonds: The Best Possible Investment? Think Again (Elliott Wave International)

Note: This is an interesting post on bonds by Elliott Wave International. It includes charts of 'Moody's Corporate Bond Yields (Aaa, Aa, A, Baa)' from 1929-1932 and the Dow Jones 40-Bond Average from 1915-1933.

Long-Term Bonds: The Best Possible Investment? Think Again
A free Club EWI report reveals why bonds do not provide shelter from the storm
December 23, 2010

By Elliott Wave International

TREASURIES -- the very name conveys a thing that is secure, protected, and will appreciate over time. Otherwise, it'd be called something like "TRASHeries" or "Mattress Stuffers." Then, there's the official seal of the US Department of Treasury: its image of a scale and a key symbolize "balance" and "trust."

And, finally, there's the mainstream economic experts who have it on good authority that long-term bonds increase in value during financial instability and uncertainty.

On this, the following news items from November-December 2010 reflect the enduring faith in fixed-income assets as the ultimate safe-havens:

Market and Economic Forecasts For 2011 (Oil, Housing, Stocks, Rates)

More 2011 forecasts for your enjoyment. Continued from my previous post on 12/19 (2011 S&P Forecasts 1250 to 1450, 10y Yield, EPS and GDP) and 12/31 (Biggs, Gerson, Levkovich, SocGen).

*Marc Faber’s January 2011 Outlook, Correction Imminent - Wall Street Pit

*Goldman's Key Charts To Kick Off 2011 - Zero Hedge

*2011 and an arbitrary point of reflection - Stone Street Advisors (Dutch_Book)

*2010 Intermarket Relationship Charts with the SP500 - Afraid to Trade (Corey Rosenbloom)

*A Fed-Induced Speculative Blowoff - John Hussman (HussmanFunds)

*Top 11 Trends of 2011 by Gerald Celente - Trends Journal

Albert Edwards, SocGen bear, takes a bite out of China - Guardian.co.uk

*Keep Ahead of the Herd in 2011 - Elliott Wave International

*Oil Predictions for 2011 - Chris Jarvis ($120 doable) vs John Kilduff (bearish) - CNBC Video

*Happy New Year from The North Sea. Or, Secrecy By Complexity (Oil) - Gregor.us

*UBS: Short-Term Picture Intact but Clouds Gathering (Hindenburg Omen) - Hedge Analyst (12/21)

*Gary Shilling: And Now House Prices Will Now Drop Another 20% - Business Insider

*Peter Schiff: Home Prices Are Still Too High (looks at historical trend line) - WSJ

*The Long View by Decision Point (technical analysis) - PragCap

*A New Year brings new economic headwinds by Hedgeye - Fortune Magazine

More 2011 trends to watch by Doug Kass (Seabreeze Partners) and Josh Brown (Fusion Analytics) and see reader submitted charts on 2010 energy data at TheOilDrum. If there are more forecasts please put a title and link to the report or blog post in the comment section. Good luck!

Peter Schiff: Federal Reserve Could Bail Out Municipal Bond Market (MUB)

Peter Schiff (Euro Pacific Capital) thinks the Federal Reserve will bail out the municipal bond market. He argued with Don Luskin on the Kudlow Report on 12/23/2010 (video after the jump). Before the debate they showed a clip with Warren Buffett giving his view on munis in June 2009: "How would I rate the States and major municipalities. I mean if the Government will step in to help them they're triple A. If the Federal Government won't step in to help them, who knows what they are. I don't know how I would rate those myself now, in other words because it's a bet on how the Government will act over time". I embedded the full CSPAN video here.

Schiff thinks Meredith Whitney is sugar coating the upcoming muni-geddon. I could see the Fed backstopping muni obligations. If so, gold will probably like that no? And $TYX. PIMCO's Bill Gross actually sees a few muni-bond bargains based on yield spreads. So, what are the chances that $MUB tests the 2008 low?