Tuesday, December 14, 2010

Best of the web

Lots of interesting stuff happening in the markets away from the Dow (which is still pushing 2 year highs):

* The markets have sold off in a flurry of volume 2 days in row after 3pm. This seems to be fitting with market data that indicates major players have set up substantial short positions for the first qtr of 2011. It's worth watching if this is a blip in the radar or the beginning of something.

* The treasury market and municipal bond markets have been getting slaughtered over the past couple of weeks. You might be saying - so what? Well, here's why it matters - there has been an unprecedented rally in treasuries in the past few years and it's become the "safe" investment for many investors. A decline in treasuries would hurt many risk averse investors. The bigger problem might be for all of us. The US has been financing it's spending splurge of the past decade by issuing a pretty steady stream of debt to refinance existing debt. This works great when rates are falling. However, when rates start rising that means the Federal budget is going to start jumping up due to interest rate costs which we have no control over. This could be a huge story in 2011.

The municipal market is in complete disarray right now because the Build America Bonds program appears to be in jeopardy. In concept, this was a way to lower the cost of financing for states and municipal governments because the Federal government said they would fund 35% of the cost of the muni's interest expense. The Federal government decided they'd tax this interest at 35% and it would be a wash to the government. Unfortunately, it took Wall Street about 12.9 milliseconds to see a loophole in this plan. "What if we sold these bonds to overseas investors that aren't subject to US Taxes? They'd get the Federal kicker and they don't have to pay the tax!!!"

I've seen reports that suggest up to 30%-40% of the $250 billion of Build American Bonds were purchased by overseas investors. This makes a potential wash, suddenly a costly new government plan. Grrr, foiled again by those meddling kids (on Wall St)!!! The bigger concern from my perspective is that it appears the investing community has taken the Federal government's interest kicker as an implied backing. The thinking seems to be "well, they didn't let Fannie and Freddie go under so they won't let NY, CA, or IL file for bankruptcy." That's a slippery slope.

* On a related subject as treasury bonds have fallen in price and their interest rates have risen, this has effectively pushed mortgage rates back over 5%. This isn't a huge move yet, but many people liked the idea of having 4.5% mortgage rates and that seems to have frozen many potential homebuyers.

* Some great satellite imagery of the ghost cities in China.

*Former Reagan budget director offered up the quote of the day: "We have had a Fed engineered serial bubble, that has created the appearance of wealth, that has caused people to consume beyond their means through borrowing, and that has flushed the income and wealth of our society up to the top, as a result of the Fed turning the financial markets into a casino. These are pure casinos, they are not capital markets, they are not adding to the productive capacity of our economy, they simply are a bunch of robots trading with each other by the millisecond as a result of the Fed giving them zero cost overnight money, and giving them all kinds of hand signals on what to front-run."

* According to American Express - 84% of Americans haven't finished their shopping yet. Wow, if that's even close to being true you won't catch me within 20 miles of a mall over the next 2 weeks.

Thanks for all of the tips on Primary Care doctors in NNY. Keep them coming - so far, I've got a couple of good leads, but I'm always open to more options.


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