Ben Bernanke's U.S. Economic Outlook, Sees Growth Picking Up In Second Half (6/7/2011)

Source: Wikimedia Commons
Here it is via FederalReserve.gov. Apparently no mention of QE3 tanked the market yesterday.

Chairman Ben S. Bernanke
At the International Monetary Conference, Atlanta, Georgia

June 7, 2011

The U.S. Economic Outlook


I would like to thank the organizers for inviting me to participate once again in the International Monetary Conference. I will begin with a brief update on the outlook for the U.S. economy, then discuss recent developments in global commodity markets that are significantly affecting both the U.S. and world economies, and conclude with some thoughts on the prospects for monetary policy.

The Outlook for Growth
U.S. economic growth so far this year looks to have been somewhat slower than expected. Aggregate output increased at only 1.8 percent at an annual rate in the first quarter, and supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity this quarter. A number of indicators also suggest some loss of momentum in the labor market in recent weeks. We are, of course, monitoring these developments. That said, with the effects of the Japanese disaster on manufacturing output likely to dissipate in coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up somewhat in the second half of the year. Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.

As is often the case, the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters. A range of positive and negative forces is currently influencing both household finances and attitudes. On the positive side, household incomes have been boosted by the net improvement in job market conditions since earlier this year as well as from the reduction in payroll taxes that the Congress passed in December. Increases in household wealth--largely reflecting gains in equity values--and lower debt burdens have also increased consumers' willingness to spend. On the negative side, households are facing some significant headwinds, including increases in food and energy prices, declining home values, continued tightness in some credit markets, and still-high unemployment, all of which have taken a toll on consumer confidence.

CMA Launches Intraday CDS Data Services For Front and Middle Office Professionals

Source: Wikimedia Commons
If you are interested in credit default swaps (aka credit insurance, or credit ratings that trade in real-time), CMA has a new product out that monitors intraday CDS data. I'm waiting for the day when discount online brokerages allow retail investors (twitter hedge funds) to trade corporate credit default swaps, sovereign CDS, CDS indexes and tranches alongside institutional investors. Even just to hedge risk like equity and index options. Cut the notional amounts?
"CMA launches intraday CDS data services for front and middle office professionals

CMA today announced the launch of two new Intraday CDS data services, which deliver independent, intraday credit pricing data to front and middle office professionals on a near live basis. Accurate bid-offer prices are based on actual quotes observed in the market and unique liquidity metrics provide valuable information on the breadth and depth of the market.

Gurbinder Bansal, Head of Product Marketing at CMA, explains: “There is a definite trend towards more flexible risk management practises, with investors expecting more transparency and requiring their books to be marked same day and intraday. At the same time, credit quality is now widely recognised as a key driver of risk and therefore up-to-the minute CDS data is now critical even for investors who are not credit specialists. As far as we are aware, our intraday CDS data pricing services are the most comprehensive currently available in terms of coverage, quality and depth of data.”

The new service for the middle office, CMA Datavision Intraday CDS represents an expansion of our existing end-of-day service to help meet the growing demand for more timely and flexible risk management practices. Clients can receive full credit curves on the hour, every hour from 08:00 - 22:00 London time, spanning the London open through to the New York trading close. In addition, the data contains unique liquidity metrics, such as quote frequency and average bid-offer spreads, bringing much sought after transparency to the market. This means that clients can verify prices, create flash profit and loss and value books on-demand with the confidence that they have the most reliable and current pricing data.

The new front office service, CMA Quotevision Creditpulse serves as an entry point for traders and investment managers wanting to follow the global OTC credit market as it evolves. A close to real-time tick-by-tick feed from the institutional CDS market provides a clear, structured view of indicative quotes observed in the market. Access to such high quality, timely data gives the ability to track market sentiment and understand its impact on positions throughout the trading day.

CMA Intraday CDS data services are available directly from CMA and key channel partners."

Source: CMA Datavision

Biofuels About to Take Off - Just Not Yet (Guest Post)

Guest post submitted by OilPrice.com (photo added separately)

Camelina and Algae Fuel
(Source: U.S Navy/Wikimedia)
Biofuels About to Take Off - Just Not Yet

Investors looking for the next big thing after a hydrocarbon economy have a panoply of options, from solar to wind, as well as biofuels.

In terms of quickly ramping up production biofuels clearly win the race, but navigating the PR fluff and reality is not a simple thing.

The three main contenders for investor dollars are algae, jatropha and camelina. All have strengths and weaknesses, leaving investors to choose amongst them. Stripped of PR flummery, the only issue is where and when production can begin on a viable commercial scale. Investors who unravel the complexities of biofuel production and have cast-iron stomachs stand to profit, but biofuel production in the U.S, while having major players like Goldman Sachs and the Carlyle Group, are moving their chess pieces around a board already gamed by the major players.

While everyone agrees that biofuels are the future, investment is lagging.

But the interest is there. Fuel and oil comprise 25 percent of civilian airlines' operating costs. When the price of jet fuel rises one cent, it increases the global cost of aviation $195 million.

Camelina as an additive is a "drop in" fuel - engines need no modification, and a series of Pentagon tests over the last two years have proven its feasibility as something to add to a 50 percent JP-8 blend. The Pentagon

So why, no U.S. production?

The answers are both complex and simple.

Asset Valuation Ratios, Credit Spreads and Leveraged Loan Charts via Janet Yellen (6/2/2011)

Below are charts from Federal Reserve Vice Chair Janet Yellen's speech ("Assessing Potential Financial Imbalances in an Era of Accommodative Monetary Policy") at the 2011 International Conference: Real and Financial Linkage and Monetary Policy at the Bank of Japan on 6/2/2011.

Asset Valuation Indicators (price-to-earnings ratio, price-to-rent ratio)



Corporate Bond Market (credit spreads, far-term forward spreads)



Syndicated Leveraged Loan Market (inflows into bank loan funds, secondary-market prices)



Syndicated Leveraged Loan Market (by lender type, by use)



Source: http://www.federalreserve.gov/newsevents/speech/yellen20110601a.pdf

DoubleLine's Gundlach Sees Repricing Lower in Risk Assets; ABX Dropped 20%; BAC Testing $11 Support

Source: CNBC
Jeffrey Gundlach, founder and CEO of DoubleLine Capital with $11 billion+ under management (+17% in 1-year), was on CNBC's Strategy Session on May 24 sharing his views on the market. With home prices making new lows, Gundlach said the "underlying metrics" (recovery rates) of legacy debt issued at the peak of the housing bubble (2006-2007) seem to be deteriorating, and non-performing loans in the whole loan market are not being marked-to-market or "fully reserved for." Watch CNBC video #2 for more details. In addition, Gundlach said the "many multiples of derivatives attached" to the debt is an unknown risk.
ABX.HE.AAA.07-01 via Markit

He pointed out that the market was already pricing in this risk. The ABX Index (subprime mortgage-backed securities credit default swap index) was down 20% in the last three months and Bank of America (which he says is a proxy for the ABX Index at the Ira Sohn conference) was down 26% ($15 to $11). $11 is an important support level to hold on the chart. If $BAC breaks $11 it will visit levels not seen since April and May of 2009.
$BAC - StockCharts.com

In the first video Gundlach mentioned that he wasn't a buyer or seller of 10-year Treasurys at 3.25%. He is waiting for the market to make a move as QE2 ends and uncertainties continue with the debt ceiling and potential fiscal constraint. Oh and he is bullish on natural gas and would rather hold gemstones in his sock than carry gold (via Ira Sohn Conference). Lastly, Gundlach mentioned that he "sees a repricing lower in risk assets". He has 10% of assets in cash.


Linkfest EXTRA (Ritholtz, John Paulson, Janet Tavakoli, Hugh Hendry)

"Ritholtz Hedges His Bets" ("Prompted by last week's selloff, the well-known portfolio manager and author is using ETFs to gain a little more insurance") - Barron's

"Euro Endgame" by Janet Tavakoli  - Tavakoli Structured Finance (pdf)

"Janet Tavakoli: "Greater Global Risk Now Than At Time Of LTCM" - Zero Hedge via FT

"Hugh Hendry Letter! Why He's Super-Bearish On Europe, And A Specific Commodity Company" - Cluster Stock

"Paulson's Flagship Fund Down 6% In May, Down Over 13% For The Year Following Latest Sino-Forest Debacle" - Zero Hedge

Added: "Here's What Happens When US Energy Spending Passes 9% Of GDP" - Business Insider via Gregor.us

Offshore Oil Dispute in South China Sea Has Enormous Global Implications - Guest Post

South China Sea (Wikimedia)
Guest post by OilPrice.com

Offshore Oil Dispute in South China Sea Has Enormous Global Implications

The world's unceasing quest for new oil deposits has combined with offshore technology to impel many countries to investigate their offshore resources in their "exclusive economic zone," (EEZ) defined by the 1982 United Nations Convention on the Law of the Sea Part V, Article 55 as extending 200 nautical miles from a nation's coastline.

Difficulties arise in congested maritime areas where overlapping claims create friction, and one of the most contested areas in the world today are the waters surrounding the Spratly islands of the South China Sea.

The Spratly islands consist of more than 750 islands, islets, atolls and cays and their EEZ real estate is variously claimed by China, the Philippines, Taiwan, Vietnam, Malaysia and Brunei. While there are no native islanders, about 45 islands of the archipelago are now occupied by Vietnamese, Chinese, Taiwanese, Malaysian and Filipino forces, all determined to assert their nations' claims of sovereignty. Given the potential resources, the possibility of confrontation is significant and is already occurring.

Linkfest: Mobius, Janet Yellen, Jeff Gundlach, John Taylor, David Rosenberg, Gregor Macdonald....

Linkfest (5/25/2011 - 6/3/2011)

Assessing Potential Financial Imbalances in an Era of Accommodative Monetary Policy by Janet Yellen, Vice Chair of the Federal Reserve (she gave a speech at the "2011 International Conference: Real and Financial Linkage and Monetary Policy" at the Bank of Japan) (Federal Reserve via Zero Hedge).

John Taylor: "Next Year Is Going To Be Truly Miserable" And QE 3 Will Come. Taylor runs the currency hedge fund FX Concepts (CNBC at Zero Hedge).

Treasury Yields to Keep Falling as Growth Slows, David Rosenberg Says: Tom Keene (Bloomberg).

Housing Market Echoes Credit Crisis (ABX Index): DoubleLine CEO Jeffrey Gundlach (CNBC).

DoubleLine Capital's Jeffrey Gundlach was interviewed by Joe Weisenthal on 5/25/2011 (Business Insider).

Randall Wray (Prof. of Economics at University of Missouri - Kansas City): The Crisis Is Not Over (PragCap).

Phantom Efficiencies: US Economy Still Running Very Slow by Gregor Macdonald (Gregor.us)

Another financial crisis brewing: Mark Mobius (Economic Times) *Executive Chairman of Templeton Asset Management

Mobius Says Another Financial Crisis 'Around The Corner' (SF Gate/Bloomberg)


*Moody's downgrades Greece and warns the U.S. Government and U.S. banks of possible downgrades.
"London, 01 June 2011 -- Moody's Investors Service has today downgraded Greece's local and foreign currency bond ratings to Caa1 from B1, and assigned a negative outlook to the ratings. The rating action concludes the review for possible downgrade that the rating agency initiated on 9 May 2011." (Moody's)

"Greece has 50:50 chance of defaulting, says ratings agency Moody's: Greek government understood to have agreed to €6.4bn in austerity measures in return for next tranche of aid" (Guardian)

"New York, June 02, 2011 -- Moody's Investors Service said today that if there is no progress on increasing the statutory debt limit in coming weeks, it expects to place the US government's rating under review for possible downgrade, due to the very small but rising risk of a short-lived default. If the debt limit is raised and default avoided, the Aaa rating will be maintained. However, the rating outlook will depend on the outcome of negotiations on deficit reduction. A credible agreement on substantial deficit reduction would support a continued stable outlook; lack of such an agreement could prompt Moody's to change its outlook to negative on the Aaa rating." (Moody's)

"New York, June 02, 2011 -- Moody's Investors Service has placed the deposit, senior debt, and senior subordinated debt ratings of Bank of America Corporation (A2 senior), Citigroup Inc. (A3 senior), Wells Fargo & Company (A1 senior), and their subsidiaries on review for possible downgrade." (Moody's)

And here is some link bait.

Chinese Economic Slowdown May Lead to 75% Plunge in Commodities, S&P Says (Bloomberg)

The Fukushima cloud's (green, not silver) lining; China's JA Solar (JASO) - Guest Post

Guest post courtesy of OilPrice.com (I'll be watching $JASO)

Img source: GreenTechMedia
The Fukushima cloud's (green, not silver) lining

The ongoing tragedy of Japan's Daichi Fukshima nuclear complex will prove to be a boon for renewable energy in Japan, and astute investors should begin carefully to follow Tokyo's new priorities.

Before the March 11 twin disasters of a massive earthquake followed by a devastating tsunami, about 30 percent of Japan's electricity was generated by nuclear power, and Tokyo had ambitious plans to raise its market share to 50 percent over the next two decades, with renewable accounting for 20 percent, Japanese Prime Minister Naoto Kan told journalists earlier last month.

That optimistic policy is now in tatters, and Kan added, "However (following Fukushima), we now have to go back to the drawing board and conduct a fundamental review of the nation's basic energy policy."

Kan is now touting the government's "Sunrise Project," which has been moribund for the last seven years. The goal of the Sunrise Project is to reduce the cost of solar power over the decade to a third of current levels and to one-sixth by 2030 as an incentive for more people to install it.

Howard Marks On High Yield Bond Risk ("How Quickly They Forget"), U.S. High Yield Option-Adjusted Spread

Howard Marks, chairman of $85 billion private equity firm Oaktree Capital, released a memo to clients on 5/25/2011 titled "How Quickly They Forget (pdf)". Historical data from the memo:

High Yield Bond Spread vs. Treasurys (the risk free rate, supposedly) in basis points

"Normal" - December 31, 2003 - 443 bps
Bubble peak - June 30, 2007 - 242 bps
Panic trough - December 31, 2008 - 1,773 bps

Recovered - March 31, 2010 - 666 bps
Shrinking again - April 30, 2011 - 492 bps"

Are high yield bonds starting to underprice risk? Marks thinks they have become flowers again (Warren Buffett invests in weeds).

"High yield bonds and many other investment media have once again gone from being weeds to flowers – from pariahs to market darlings – and it happened in a startlingly short period of time."

But does the credit market overshoot again like it did in 2007? Will the 10-year Treasury yield 0.76%? Or does a new recession widen credit spreads from here. If bond vigilantes cause a "thundering conflagration" in the Treasury bond market, that could force yields higher as well. That isn't happening yet. Marks made sure to note that he doesn't "believe security prices have returned to the 2006-07 peaks."

Check out the US High Yield CCC or Below Option-Adjusted Spread chart since 1997 (via St. Louis Fed FRED database). Watch for a turn. Description: "The Bank of America Merrill Lynch OASs are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve."


John Hussman on the Cyclical Bull and Secular Bear Market (5/30/2011)

John Hussman's recent weekly market comment titled Small Windows in an Unfavorable Long-Term Picture analyzes structural and cyclical bull and bear markets. Earlier in the comment Hussman mentioned "it is clear that stocks are not in a secular bull market (in the 1950-1965, or 1982-2000 sense)" and showed historical Shiller Cyclically Adjusted P/E (price/earnings) ratios. The S&P has been in a strong cyclical bull market since the March 2009 low (666), up 105% at the recent high (1370) over 2.16 years or 26 months. In early May, Thomas Lee, Chief U.S. Equity Strategist at JP Morgan, said in a Bloomberg interview that we are in a structural bull market and increased his target on the S&P to 1,475. So what are we in, a secular bull or bear market? I think the S&P pierced the 2 year uptrend today; I will chart it out in my next post. Below are quotations from John Hussman's note. Read the previous paragraph on secular bull markets.

"The algebra of returns in secular bears, in contrast, is predictably hostile. As long as one allows for valuation levels to vary over the long-term, as they have historically, it is very difficult to escape very extended bouts of poor overall returns for stocks once valuations become as elevated as they are today. The canonical 18-year secular bear, again assuming long-term earnings growth is unaffected, produces overall annual capital gains of about (1.06)*(7/24)^(1/18)-1 = roughly zero. In general, dividend income (again, somewhere in the range of 4% over the full course of time) is the primary source of return for passive investors in a secular bear market period. Since the long contraction of valuations offsets the benefits of long-term earnings growth during secular bear periods, the cyclical bull markets tend to be shorter than average, and cyclical bear markets tend to be extended and often brutal.

Despite the "lost decade" since the extreme valuations of 2000, valuations are now presently at about the same level from which prior secular bear markets have just started. There is no basis to expect a secular bull until we observe the valuations from which they have invariably started. Meanwhile, the recent cyclical bull market from the 2009 low has already run the same duration and slightly further than the typical cyclical bull in a secular bear."

Source: http://www.hussmanfunds.com/wmc/wmc110530.htm