Partly cloudy or partly sunny?

March 22, 2011

Monday was another step in the direction of lowering volatility as markets seemed to focus a little more on economic fundamentals and less on the Middle East problems and Japanese nuclear problems. Although the S&P rose 1.49% and breadth was outstanding volume was unusually light and shows how the retail investor remains skeptical and on the sidelines. The 10 year Treasury rose 6bp as some of the fast money that fled equities last week returned from the safety of government bonds. The inflation component was unchanged at 2.46% but remains far too close to the 2.58% high for the year seen on March 8. For the most part changes in Treasury rates have come from moves in the real rate (anticipated growth rate of the US economy) and this has historically been a very poor leading indicator for nominal rates. Gold rose almost $10 ($1426) on insurance bets coming from the Middle East but remains almost unchanged for the year.

Treasury to sell mortgages

The US treasury announced Monday they will begin to sell approximately $10 billion per month from their current holdings of $142 billion of mortgages (mostly 30 year MBS with 4.5-5.0% coupons). I have to wonder if the Treasury remembered the Fed holds $950 billion of mortgages and could have easily exchanged some of its Treasury holdings for the mortgages. The motivation of the move is probably related to the upcoming debt ceiling issue as the sale of the mortgages allows the Treasury to reduce future sales of new bills, notes and bonds but could have been done at much less cost to the taxpayer and not taken a year to accomplish. $10 billion each month is a relatively small part of the trading flows and shouldn’t affect market prices more than 1-2bp.

Gold buying from Iran

The Financial Times of London quoted a senior Bank of England official that Iran has recently bought large amounts of gold in the international market. The article also mentioned Tehran has been one of the biggest buyers of bullion over the past decade and is among the 20 largest holders of gold reserves. None of this information is surprising BUT what is more than a little interesting comes from the World Gold Council’s official list of holdings as of January 2011. The list of 113 countries shows the United States at the top with Kenya at the bottom but Iran is NOT on the list. Obviously they have been buying through a third party and having it delivered to a very secret location. As we have learned with Libya and other Middle East countries when an uprising begins the fastest way to make your enemies your allies is to pay them handsomely and quickly and gold is usually the best way to obtain large amounts of cash. With Iraq’s large oil reserves it wouldn’t surprise me to find Iran entering the country with massive amounts of money after the US has left for other world hot spots. Gold continues to shine as investors buy as a hedge against inflation, deflation and other calamities not yet witnessed in this ever changing world.

Japan

Monday’s Japanese holiday helped bring calm to the currency market with the yen remaining in a tight range centered around the 81 level. While the G-7′s intervention Thursday night helped bring the yen back above 80 currency traders will soon begin probing the market on the downside to see if world central banks remain ready to take action again. The advantages of a low yen are important to Japanese exporters but since Japan will be importing more than it exports in the next year due to a massive need for materials to rebuild a higher yen might be in their best interest for the next few months.

The ultimate contrary indicator

Every investor dreams of having the ultimate system that works 90%+ of the time generates a lifetime of profits enabling retirement and an easy life. Nothing is ever guaranteed but the following chart is a MUST see for every reader and comes from the monthly Bloomberg survey of bank/Wall Street economists with forecasts for the Treasury 10 year interest rate for the next six months. Since December 2002 these highly paid “experts” have been WRONG 93% of the time with their predictions and almost all have been for higher interest rates. In their last survey completed a couple of weeks ago 97% believe higher rates are a sure bet by September and if they continue their incredible track record we will see lower rates. History is on the side of declining rates as the following chart shows 35 of the last 45 years (since 1965) rates have declined in the 2nd half of the year and the last five in a row.  The next time you read or hear of an interest rate forecast in the financial media make sure you remember the results of the above survey and ask why this time will be different than those from the last 8 years.

Before entering any investment, everyone should consult with their own investment professional and discuss the risk of possible loss of capital.