1/22/13…Barron’s goes barren

(Sorry this is so late but website had problem so couldn’t upload. TB)

From the Friars Club Encyclopedia of Jokes: “A builder, an electrician, and a lawyer were arguing about which profession was the oldest. The builder pointed out proudly that the first thing God had done was to build the earth. “True,” said the electrician, “but before that, He said, ‘Let there be light.’” “You’re both right,” said the lawyer agreeably, “but before the light there was chaos-and who do you think created the chaos?”

Quotes from an old friend:

"Money has no motherland; financiers are without patriotism and without decency:

 their sole object is gain".  -- Napoleon Bonaparte

"Let me issue and control a nation's money and I care not who writes the laws".

-- Mayer Amshel Rothschild

Bloomberg Quote of the Day: “Be kind to nerds. You may end up working for them. We all could.”  – Charles J. Sykes  

Bloomberg Top Stories:

*Yen Strengthens After BOJ’s Purchase Decision While U.S. Stocks Fluctuate

*German Investor Confidence Rises More Than Expected to 2-1/2 Year High

*Investors Most Optimistic on Stocks in 3-1/2 Years on Eve of Davos Poll – ???

*Japan’s Five-Year Yield Declines to Lowest Level Since 2000 on BOJ Easing

*Freeport-McMoRan’s Earnings Exceed Estimates on Higher-Than-Expected Sales

*Travelers Rallies as Profit Beats Estimates on Investments, Rate Increases

*Swiss Banks Vie for $40 Billion of American Assets Amid Tax-Evasion Probe

*Armstrong Becomes ‘Bernie Madoff on a Bike’ as His Cheating Shatters Lives

*Obama Channels Eisenhower With Slowest Government Spending Growth Since 1956

*Israelis Voting With Netanyahu Set for Coalition Choice After Re-Election

*Schroeders Employee Arrested as Part of U.K. Insider-Trading Investigation    


Friday was not only options expiration but a second straight ‘up’ session. Well, except for the two Nasdaq indices which would have also been positive ex-Apple. Straangley it was Dow Utilities that took honors with a 0.9% gain, following a 0.3% gain Thursday. Meanwhile volatility plunged to the lowest level since 5/25/07. Oh joy!!!…or is it? Consider that the peak in stocks was just after this period of complacency…while the high was hit on October 11/ 2007, it was the financials that peaked in May…keep that in mind! Friday morning TB warned of the three Congressional battles to be fought but after the GOP ‘retreat’ they declared that they would push through a 90-day fix on the debt ceiling. Of course they did as they are at historic lows on their approval rating. Still, their promises have gone unfulfilled before but with Pelosi guiding the Dems Boehner may have enough support to defeat the extremists. NYSE Financials rose just 0.1% but it was Brokers that shone +1.5%, while KBW Banks fell 0.3% and Nasdaq Banks 0.2% BofA was most active stock as usual – -1.2% vs -4.2% vs +2% vs 0.7% vs -1.4% vs -1.3%, closing at $11.14. MS gained 7.9% while GE rose 3.5%. Total NYSE volume rose slightly to 3.76B shares vs 3.68B vs 3.16B vs 3.13B vs 2.96B – recent range 2.96B-4.2B. Trades executed on the floor of the NYSE however soared to 1.07B shares, highest since 12/21, the 12 month high of 1.88B shares, from 710M vs 499M (lowest since 12/2/), vs 598M vs 590M. Recent range 590M-1.88B. Advance/declines and Breadth were all moderately positive. New 52 week highs hit 713 a week ago and after bottoming at 308 a week ago Friday, ran 518 on the expiry vs 552 vs 270 vs 304. Recent range 270-713. New lows rose slightly to a weak 16 vs 12. After closing at 22.70 on 12/28, the S&P VIX volatility measurement has drifted down and then plunged Friday to 12.46, lowest since 5/25/07 – worth repeating as it is one heck of a sign of complacency…bullishness? See below though for a summary of Barron’s Roundtable and ask if this is a headfake?

Global stocks mixed: with Korea +0.5% and China +0.3%. Losers are Germany and India -0.6%, Japan -0.4%. U.S. stock futures traded in a narrow range overnight and market is now opening with DOW -4; SPX flat; NDQ +3.

The bond market continues to try to gain back its recent losses but is off overnight after a lackluster day Friday. The 10 yr note is 1.87% -1/4 vs 1.86%, and the 30 yr 3.06% -1/2 vs 3.06% – the old 3% high set on 12/18! Long TIPS also weaker at 0.44% -1/2 vs 0.43% and way off the 0.22% record low set on 12/6! Reverse Repo rate at 0.11% vs 0.15%!!! Libor 0.302%, 3 months, and 0.484% six months. Foreign bond rates are lower across the board by 1-19 basis points led by Portugal (5.74% -19!) and Spain (5.01% -13), with Greece (10.21% -1 but after plunging from 11.57% Friday).

Gold closed slightly lower Friday and remains just below the 40 day and after reaching the 50 day Thursday at $1697.80, closing at 1687.00 -$2.20, safely above the 200 day m/a ($1668). Can it take out $1700? the 40/50 day are key sup/res. The $1636 low on 12/21 – lowest since 8/21 is key support. It is up slightly overnight at $1688.50 +$1.50. Crude rose just 7 cents Friday to close at $95.56 (highest since 9/17) despite Thursday’s intraday high of $96.04 – wow! Overnight it is $95.70 +.14. Pump prices rising again!

…the latest edition of Barron’s includes their semi-annual Roundtable. I believe, and an insightful friend agree that this is the most argumentative and disjointed discussion we have ever seen in one of these sessions. Very little agreement and the only bull was Abby Joseph Cohen of Goldman Sachs (does this mean they are short?). Not only is she always bullish she remained so in the 2000 tech bust riding stocks all the way down. She is looking for stocks to rise 10-15% in 2013…about equal to the combined forecasts of the other panelists. She says stocks are cheap on valuation yet ignores the fact that neither that or the economy is a good predictor of stock performance. SOME stocks could do well but the problems tech is already encountering make one wonder if cheap cannot get cheaper…and it always can! Even the other bulls don’t see an easy year with at least one seeing a horrible February looming…this panel was held prior to the GOP propaganda move to pass the debt ceiling increase with a three month extension as the party’s approval rating sank to a new low. This is a party without a consensus and its leaders have their hands tied. Mark Shields and David Brooks referred to Nancy Pelosi as the acting House Speaker since it is she who controls which bills pass due to a lack of control over the far right.

TB has long heard of the dividend discount model and valuation of stocks relative to the yield on ten year treasuries. In times of deep concern however, it is meaningless. Is it prudent to buy a ten year maturity that yields less than 2%? It is if you consider the alternatives and are concerned about the economy, safety of your money, and the lack of any decent returns short of that. At some point, however you will rue the fact if you stay too long and this is where Pimco’s Bill Gross chimed in.

Duration, the number of years required to receive the present value of future payments, both of interest and principle, of a bond, often used as an indicator of a bond’s price volatility resulting from changes in interest rates, is the second derivative of risk…like that? Well, don’t get glassy-eyed about it as it is just a measurement of the total risk  Some of you will recall that if you invest money at 7% it will double in ten years…conversely, at 10% it takes just seven years.

Therefore if you own a ten year bond, the duration determines the amount of risk (keep in mind that interest rates are never constant so the duration is constantly changing so that if interest rates rise the duration moves in and if they go down it moves further out. The duration of a bond…or bond portfolio…tells us what the impact of a rise or fall of 100 basis points (1%) will be on the price of a bond. Before the crisis the duration of a 10 year maturity was about seven years…so if interest rates rose by 100bp’s the value of the bond would fall by 7%. But as rates have plunged and reinvestment is thus at a sharply lower rate that number has risen to over eight years…so the same move would change the value by 8%.

The figure that is the duration though also moves, rising as rates fall and declining as they rise and reinvestment of coupons speeds up payment. Thus the duration (risk) is not static thus will increase if and when rates rise.

To show how much risk is out there (those of you who use bond mutual funds heed as they use ‘current yield’ and do not amortize premiums), let’s look at the 30-year treasury issued in May 2007 just before the crisis (5% due 5/15/37). It rose from par on the auction date (a reopening of a prior issue), the traded in a range of 106 to 113-1/2 until the fall of  Lehman when is exploded to nearly 150 in Dec. 2008. It then plunged to about 122 and from there to just under 104 in June 2009…stocks should be so volatile. It then rose again in August 2010 to almost 128, back down to 104-1/2 in Feb. ’11 before rallying again and has since traded in a broad range of 128-143!!! Is that investing? It is luck and luck runs out…eventually. At the current price of 138-3/8 the yield is just 2.82%!

At issuance the risk factor (which is more or less the duration plus accrued interest) was 13.82 years, it has risen to 21.68 years. In other words a buyer is taking on 50% more risk on a bond that is now nearly six years closer to maturity. Now THAT is risk!

Note that had you jumped in after Lehman though you could still be down significantly. TB mentions this for those of you who think buying bonds versus stocks was a ‘layup.’

TB was shocked last night when he heard the cost of the inaugural last night on the news: nearly $100

million which excludes the balls which are paid for privately. Did we get our money’s worth? Did anyone

ask if we wanted to spend that much, or object to the cost? Politicians have no trouble spending money

if it is on themselves – meaning both parties who were basking in the sunlight…and moonlight.

Tomorrow: what do we do about the banks?

Enjoy the shortened work week…have a great day!


. . .  – – –  . . . (SOS!)  . . .   – – –  . . .  (SOS!) . . .   – – –  . . .  (SOS!)


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