RTN: Return to Normal

June 24, 2011

Yesterday was a crazy day in the markets as the market opened down hard, then reversed course as the Greek situation gained some clarity and the oil market fell on reports the IEA would be releasing 60 million barrels of oil from emergency reserves. The release, coordinated with 27 countries but led by the US, who is contributing half the supply, is a token amount in the overall oil market, accounting for eight hours of global consumption, but sent a message to market participants. This is only the third release from the reserve since it was created, the other two being during the 1991 Gulf War and in 2005 after Katrina. The release more than likely will only have a temporary impact on oil prices, however, it does help offset the loss of 115 million barrels per year of production from Libya.




Futures are up slightly this morning, following through on yesterday afternoon’s short covering as well as some better than expected economic data. Durable goods orders (see chart below courtesy briefing.com) for May rose by 1.9%, better than the 1.5% survey and -2.7% in April. The strength came from transportation as the measure ex-transportation rose 0.6% vs. expectations of 0.9%. As expected, first quarter GDP was revised up from 1.8% to 1.9%. Personal consumption for the first quarter rose by 2.2%, in line with consensus.



RTN (Return to Normal) is the new acronym to describe the post QE-2 environment. Chairman Bernanke spoke on Wednesday after the FOMC meeting, and while he didn’t say anything noteworthy, what he didn’t say rang loud to the markets. While the chairman insisted he had “more arrows in his quiver”, it is apparent that he only has the same arrow he has been wielding over the past year-printing money and buying securities. With an indication that the Fed would let QE-2 conclude and run its course while the economy continues to slow, the market had a quick decline yesterday morning towards the “risk off” trade-sell cyclical and buy defensive issues. The Federal Reserve lowered its 2011 and 2012 forecast for gross domestic product growth, acknowledging that the U.S. economic slowdown is not temporary. The central bank offered no indication that it is considering further action to stimulate the economy. Chairman Bernanke said he does not know the reason growth remains so weak after two years of tepid recovery. The yield on the 10 year treasury has dropped to a 2011 low of 2.9%.

Add Russia to the list of country’s having severe financial problems. The Russians are very reliant upon energy and wheat exports to fuel their economy. The price of what has declined by about 25% this year, natural gas continues to hold in the $4.20 range, and oil is trading below Russia’s breakeven price of $115 per barrel. The country has a huge debt burden, surprising given their default just 13 years ago.

I hate to keep bashing the Fed, but they make it so easy. In a repeat of his comments of 2007 that the sub-prime mortgage collapse would have minimal impact, Chairman Bernanke said that a Greek debt default would have little impact on the US banking system. He said the banks had conducted stress tests to gauge the impact of default on their capital. I can guarantee that none of these stress tests considered the fallout of derivative contracts on their counterparties and the potential for default. Meanwhile, Jean-Claude Trichet, the president of the ECB, said the sovereign debt crisis could hit the banking system and financial. There are "potential contagion effects across the union and beyond,” he said.

Typically a dissenter to official Fed policy, Dallas Fed President Richard Fisher said he sees economic growth picking up in the 2nd half of 2011, while remaining slow, essentially agreeing with the official Fed statement.

According to the Congressional Budget Office, the U.S. government's debt will climb to about 70% of the nation's gross domestic product this year, the most since right after World War II. If major policy changes aren't made, debt will exceed 100% of GDP by 2021 and approach 190% by 2035.

Mail those letters!!!! The U.S. Postal Service said it would suspend payment of its contribution to the Federal Employees Retirement System, to avoid running out of cash. The USPS said it may not be able to pay its debts by September.

Demonstrating the declining barrier to entry to becoming a Knight, Mervyn King, UK central bank governor, was recently knighted. During his tenure the British pound has lost 66% of its value.

The NAR announced that for the 5th straight month home buyers paying all cash represented 30% of the market. In Las Vegas cash buyers represented 49% of the market. The median price of an existing single-family home fell 4.5% to $166,700 in May as volume dropped by 15%. Thanks Steve.


Final Four! I mentioned the College World Series last week, and now we are down to four schools. #1 ranked Virginia, defending champion South Carolina, Florida and Vanderbilt. Florida and South Carolina each need a single victory either tonight or tomorrow to advance to the best of three finals which run Monday-Wednesday next week. Virginia and Vanderbilt must each win twice to advance. Vandy has faced Florida six times this season, losing five of them, including a 3-1 loss on Tuesday. The tournament hasn’t been as entertaining as 2010, but there has still been some great games.

Have a great weekend.

Ned