News That Moves: Clarity on the Jobs Report, Integrity of the US$ In Question, Rule of Law vs "Shared Sacrifice"

RCM Comment: A little clarity on the Friday Jobs report...

Fleckenstein Capital:

Unfortunately for the economy, the headline job-loss number is somewhat bogus. It was helped by a birth/death model that assumed 220,000 jobs had been created last month. Even more suspect is the fact that this 220,000 plug factor was boosted 27% year-over-year. The BLS assumed new jobs were being created in financial services and construction, even as it reported actual job losses for those two sectors combined of 89,000 last month -- which makes no sense whatsoever.

RCM Comment: This story continues to gain momentum. US$ dominance on the world stage is coming under heavy fire. This trend is having - and will continue to have - serious influence over the equity, bond and commodity markets.

MOSCOW(Reuters) - Russia and China should consider switching to domestic currencies in bilateral trade without going to the dollar, Russia's president Dmitry Medvedev said in an interview with Kommersant daily published on Friday.” http://in.reuters.com/article/economicNews/idINIndia-40109820090605

Japan's shadow finance minister wants single Asian currency

Nakagawa said people must "take into account the possibility that the dollar might not function as the key currency any more in the medium and long term" as the world seeks a new order in the post-Cold War era.Until an Asian common currency emerges, he said, "the Japanese government should make efforts to have the "Asia zone" use the yen, not the dollar, for trade settlements. It's time for Japan to launch this plan."Japan's government could extend lending to the International Monetary Fund on condition that it is in yen while guaranteeing bonds by Asian countries if they are denominated in the Japanese currency, he said.

RCM Comment: Add the above stories to the following breakdown of the TIC report and you begin to see the enormity of the problem weighing on the integrity of the US$.

The Astounding Reversal Continues: Bernanke’s Nightmare April 16, 2009
Yesterday, the U.S. Treasury released the Treasury International Capital (TIC) report for February 2009. It shows another outflow of capital. “Monthly net TIC flows were negative $97.0 billion. Of this, net foreign private flows were negative $106.3 billion, and net foreign official flows were positive $9.3 billion.”

The figure for January was updated to minus $147b from the previously reported minus $149b.http://www.ustreas.gov/This is a huge reversal. That is almost a quarter of a trillion dollars in just two months. Foreigners are not bailing out the Treasury any longer. They are pulling out. They are net sellers.This means that domestic buyers must be found — not just for the gigantic wave of debt already on the books but also for the foreigners who are saying sayonara.The FED has not budgeted for this. It has pretended that the much-heralded glut of international savings would continue. It’s over. It’s not just over; it’s imploding. We are now seeing a glut of selling. This will create havoc for the government. The bailouts from outside the country have gone into reverse.

RCM Comment: To those of you who voted for Obama based on the belief he would bring change to the political system and expunge the influence of special interests as he repeatedly promised on the campaign trail, I have one question. Are you prepared to admit the naivete of that decision? If not, please read the following story and focus on the red highlight. I would welcome any comment that would explain to me how this government manipulation of the bankruptcy process is anything other than a giant pandering to the special interest of the UAW. What a brilliant way to increase your approval rating and gather future votes: Stick it to the bondholders (the small group without whom you wouldn't have a company) and gift it to the bigger group whose behavior is arguably one of the major causes of the bankruptcy.

June 3 (Bloomberg) -- Bondholders have a new risk to contend with -- the Obama administration’s policy of “shared sacrifice.”...The big threat is that this policy will extend to all bonds, including Treasury and municipal debt, not just corporate obligations....The president, Einhorn said, had introduced a “quixotic idea” into credit markets: “that creditor recoveries in troubled situations can be determined by an arbitrary sense of shared sacrifice rather than legal agreements and long- established prior practice.”...“When teachers and firefighters are losing jobs and benefits, will municipal bondholders be asked to share in the collective sacrifice?” he asked. “Might the shared-sacrifice theory eventually extend into the U.S. Treasury market during a crisis?”...“The UAW gets a recovery of five times the bondholders’ under reasonably upbeat scenarios,” CreditSights Inc. analyst Glenn Reynolds wrote in a research note. “This is just the fact.”

News that Moves: Specious Jobs Report, Yellen Concerns, Carnage in State Budgets

ECONX Jobs Report Surprises

The market got a kick out of the May employment report, as it cheered the news that "only" 345K nonfarm payroll jobs were lost during the month. That was indeed much better than the consensus estimate of -520K. Moreover, the April nonfarm payrolls data was revised up to show a decline of -504K positions versus an originally reported -539K...

The other headline that jumps out is the unemployment rate, which spiked to 9.4% from 8.9% and is at its highest level since 1983. The big uptick is owed in part to an increase in the civilian labor force, meaning there were more people looking for jobs. That is being read in counter-intuitive fashion, though, as a sign that it reflects increasing confidence in the economic recovery...

RCM Comment: The markets are fluctuating wildly as all try to digest the payroll numbers. My take - trying to make decisions today using this payroll information is an exercise in futility. Why the disdain you ask? Well here are a few reasons:

The payroll numbers are notoriously volatile

The numbers will be revised in the months to come, which is a nice way of saying they were wrong to begin with

The government creates the numbers and, to say the least, we have a healthy skepticism for government creations

And perhaps most important, as an experienced trader I can testify that the direction markets take on payroll announcement days often has no followthrough.

Instead of wasting our time dissecting specious numbers, let's analyze something a little more important to the health of the economy and perhaps a little more concrete. Take a close look at the following graph and meet me at the bottom....





















The key to this graph is the red line. The 'New Notice of Defaults' was surging even before mortgage rates spiked. In the last 30 days mortgage rates have spiked roughly 20% from low to high. I'm loath to see how this increase will effect notice of defaults in the coming months. Fed governor Yellen voiced her concern today when she said the, "rise in Treasury, mortgage yields is "disconcerting".

RCM Comment: I mentioned in the June 1st post that other states were going to follow California into the budget abyss. Well....

Carnage in state budgets is getting worse - NY Times
NY Times reports the carnage in state budgets is getting worse, a report said, with places like Arizona being hurt by falling revenue on multiple fronts, like personal income and sales taxes. Other states are having mixed experiences, with some tax categories stable, or even rising, even as others fall off the map.

The report, by the National Conference of State Legislatures, also provided a scorecard for how well drafters of state budgets read the recession's economic tea-leaves — and the short answer is, not very well. Thirty-one states said estimates about personal income taxes had been overly optimistic, and 25 said that all three major tax categories — sales taxes, personal income taxes and corporate taxes — were not keeping up with projections. Even gloomy-Gus states that saw the recession coming and low-balled their tax estimates had little room for celebration, the report said. "The handful of states that have weathered the economic decline reasonably well are starting to report adverse revenue developments," it said. "The news is alarming."

News that Moves: GM Bankruptcy & Obama Comments, Fed Mortgage Efforts, California's 'A' rating in question

Securitization is like fertilizer. You can grow tomatoes or blow up buildings.

-Simon Mikhailovich

RCM Comment: The government sponsored bankruptcy of GM goes into effect today. President Obama tried to give an encouraging speech this morning from the White House stressing his desire not to run a car company. He tried to make it clear that government ownership of corporations was not the goal. As Shakespeare would say, "The lady doth protest too much, me thinks." - Hamlet (III, ii, 239)

US treasury bond prices plummet (yields rise), the US$ continues to sell off vs. a basket of currencies, oil up another 3%; the markets are speaking and they don't like this fiscal irresponsibility.

Food for thought that may have salmonella: The government sponsored programs' total cost to date equal more than 18% of GDP. This is a gargantuan number. To put it into perspective, during the entire depression of the 1930s the government programs' cost totaled just 7% of GDP. Gold rallied $100 in the month of May, oil up 25% -- that roar you hear is the wave of hyperinflation headed our way.

RCM Comment: When governments interfere with business this is usually the result...
Fed mortgage efforts prove costly - WSJ
WSJ reports the U.S. Federal Reserve's program to keep mortgage rates low by buying securities and Treasury bonds so far has been costly and seems to be having a fleeting impact. An analysis of the timing of the Fed's purchases of mortgage-backed securities by J.P. Morgan Chase shows the Fed is "under water" on its portfolio by about 10%, and it would have to take about $5 billion in losses if it were to mark its portfolio to the market. The Fed has spent about $2,500 per borrower, by J.P. Morgan's analysis -- more than it costs a typical mortgage borrower to refinance their debt. Higher fees and adjustments based on a borrower's credit score or home's value have been an impediment to borrowers looking to refinance a mortgage, damping the refinancing wave the Fed hoped for, analysts say.

RCM Comment: This is just the beginning, other states to surely follow...
Fitch revises to negative the outlook of the state of California's 'A' rating
Fitch Ratings affirms the 'A' long-term general obligation (GO) bond rating on the State of California and revises the Rating Outlook to Negative from Stable. The revision in the Outlook to Negative also applies to the state's GO Veterans, economic recovery, and other bonds tied to the general credit of the state. The state's long-term 'A' rating is based on its broad economy and a moderate, though growing, debt burden. However, California's 'A' rating is the lowest among U.S. states, due to its revenue volatility and the fiscal inflexibility posed by voter initiatives. The revision of the Outlook to Negative reflects growing concerns with the state's widening budget and cash flow deficits....