Mish's Global Economic Trend Analysis

Bond Massacre Hits Treasuries, TIPs, Munis, Mortgages; PIMCO Among Biggest Losers; Is the Bond Bull Finally Over?
Investors Hold Biggest Commodity Positions On Record; Viral Nonsense About Silver
What does the "Take this Job and Shove-It Indicator" say about the Economy?

Bond Massacre Hits Treasuries, TIPs, Munis, Mortgages; PIMCO Among Biggest Losers; Is the Bond Bull Finally Over?

Posted: 10 Dec 2010 04:45 PM PST

The treasury market has slapped Bernanke silly. Yields have soared ever since QE II was finalized in November. Mortgage rates are up a half-percent in a month and Bankrate shows they are about at the same level as a year ago. Treasuries, TIPS, and municipal bond funds have all been hit hard in the past few weeks. Matters took a turn for the worse when President Obama agreed to a tax compromise that will cost close to $900 billion.

With that backdrop, please consider Pimco Total Return Among Biggest Losers as Bond Rally Fizzles

Bill Gross's Pimco Total Return Fund, the world's largest mutual fund, was the second-biggest decliner among the largest U.S. bond managers in the past month as clients pulled money for the first time in two years amid a selloff in Treasuries.

The $250 billion Pimco Total Return fell 3 percent in the 30 days through Dec. 8, trailing all but one of the 10 largest bond mutual funds, which lost an average of 2 percent, according to data compiled by Bloomberg. Only the $33 billion Vanguard Inflation-Protected Securities Fund declined more, falling 3.9 percent in the period.

Benchmark 10-year Treasuries had their biggest two-day slump since September 2008 this week after tax cuts, signs of an economic recovery and asset purchases by the Federal Reserve fueled expectations inflation will accelerate. The losses may surprise investors who poured $267 billion into fixed income funds this year through October, ignoring warnings by Gross that the 30-year bond rally may have run its course.

"This is a very violent move we had this week," said Richard Saperstein, managing director at Treasury Partners in New York, which oversees $10 billion in assets. "I think we're going to have a very volatile bond cycle here over the next two years."

"Check writing in the trillions is not a bondholder's friend," Gross wrote in monthly investment outlook on Pimco's website on Oct. 27. "It is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead end where those prices can no longer go up."

Tax-exempt bonds had their worst monthly returns of 2010 in November as rising U.S. Treasury yields and record state and local fixed-rate debt sales sparked withdrawals from mutual funds investing in municipal securities. Taxable bond funds have continued to draw money, ICI data show.

Yield Curve As of 2010-12-10

click on any chart in this post for sharper image

Note the bearish flattening of the yield curve. Rates are generally rising but they are rising faster in the middle part of the curve than the long end of the curve. The Fed has pinned the extreme short end if the curve to zero.

Mortgage Rates

Chart courtesy of Bloomberg.

TIPZ - PIMCO Broad US TIPS

TIPZ is down 6.3% since the peak about a month ago, nearly all of its gains for the entire year.

SXMTX - Smith Barney Municipal Fund

SXMTX is down 4.9% since the peak about a month ago, over half of its gains for the entire year. I do not like municipal bonds here at all, for multiple reasons. There is enormous supply coming on, rates in general are going up, I expect bankruptcies to rock the sector next year, and the Build America Bond (BAB) program will likely not be extended, nor should it be. I will have more on BABs early next week.

IEF - Barclays 7-10 Year Treasury Fund

IEF is down 6.5% from the highs but it is still up 8.7% since beginning of the year. For IEF and TLT (the Barclays 20+ Year Treasury Fund) we have to watch to see if reflation continues or withers on the vine.

I do not have strong feelings on IEF one way or another. Much depends on the timeframe in which you are trading. However, if yields break substantially North from here, the 30-year bond bull may have breathed its last gasp in October when 3- and 5-year treasury yields hit record lows.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Investors Hold Biggest Commodity Positions On Record; Viral Nonsense About Silver

Posted: 10 Dec 2010 10:30 AM PST

The Commodity Futures Trading Commission says futures positions in commodities are 17% higher now than when the commodity index peaked in June 2008. The Wall Street Journal picks up the story in Investors Pile Into Commodities

Investors are holding their biggest positions on record in the commodities markets as prices surge and debate intensifies among U.S. regulators about whether to limit the amount that any one trader can bet in markets for energy, metals and agricultural products.

Hedge funds, pension funds and mutual funds dramatically ramped up their holdings in everything from oil and natural gas to silver, corn and wheat this year. In many cases, the number of contracts held for individual commodities now far exceeds the amount outstanding in mid-2008, the last time commodity markets were soaring to records and debate raged about whether excessive speculation was driving up prices.

Contracts held by investors have risen 12% this year through October and are 17% higher than June 2008, according to data from the Commodity Futures Trading Commission, the market regulator.

In several commodities, including the $200 billion crude oil market, so-called speculative investors now make up a significantly larger proportion of the market than they did in 2008. Investors increased their bullish bets on crude oil by 24% since June 2008 and now represent 16% of the market, up from 13% just over two years ago. Bets in the copper market are up 58% and for silver they are up 52%, according to the CFTC data.

Debate within the CFTC is adding to the tension. Bart Chilton, a CFTC commissioner, has been pushing fellow commissioners to crack down on excessive speculation.

"Speculative money from the likes of hedge funds, index funds and pension funds is coming into the commodity markets at a blistering pace," Mr. Chilton said in prepared remarks for a speech he plans to make on Wednesday at a conference in New York. He said that while speculation may not drive up prices, it can distort them. "If prices are skewed in a manner that is not fair by speculators, consumers can pay more than they should," he said.

Anti-Fiat Sentiment

The rise in the number of futures contracts is not based on anti-dollar sentiment alone, but rather a distrust of fiat currencies in general.

$CRB Reuters/Jefferies Commodity Index

Commodity prices peaked in June 2008.

$USD - US Dollar Index

The US$ index was 72-74 in June of 2008. The US$ index is 80 now yet the number of futures contracts keeps going up.

The Journal reports ...

The CFTC is under increasing pressure to meet a January deadline set by the Dodd-Frank Wall Street reform law, which requires the regulator to set limits on how many commodity futures contracts in energy and metals a speculator can own. An agriculture proposal is to be implemented by mid April. So far, the agency hasn't developed a formal proposal on position limits; it says it is still collecting data on the over-the-counter market in order to come up with a comprehensive regulatory framework.

Dangerous Position for Commodity Players

The CFTC setups makes for a dangerous situation for commodity investors.

All those screaming about JP Morgan manipulation silver prices should think twice about their screaming. Whatever ruling the CFTC comes up with, if any, that ruling is highly unlikely to be unfavorable to JPM.

Moreover, if the CTFC limits contracts, it will lead to equal long and short liquidations. Mathematically it has to. For every long there is a short.

Guess who will have advance notice?

Viral Nonsense About Silver

Emails and videos regarding silver are going viral. There is no evidence to support the theory that JPM will be forced to cover silver futures no matter how high the price of silver goes.

JPM did not have to cover shorts at $7, at $10, at $15, at $25, or at $30. JPM has been short silver futures for something like forever. If JPM has not been forced to cover yet, perhaps the reasonable conclusion is no price would force JPM to cover shorts. Yet these "force JPM to cover" theories have gone viral with everyone plowing into the buy silver meme.

JPM can easily be hedged. To hedge, all JPM would need to do is offset its short positions with an offsetting position in SLV or some other mechanism.

The ultimate irony would be if JPM gets a small benefit out of rising silver prices. It would not surprise me in the least were that to be the case.

I am a fan of physical gold and silver, but I certainly do not advise buying silver because of some alleged short squeeze that is unlikely at any price.

Thoughts on Controlling Speculation

Speculation in commodities is a measure of distrust in fiat currencies in general. China, Great Britain, Europe, and the US are all engaged in various beggar-thy-neighbor competitive currency debasement policies.

The proper way to stop commodity speculation (and a vast number of other problems far more important than commodity speculation) is to fix the root cause of speculation (currency debasement), not to place limits (long or short) on the number of futures.

Addendum:

Shortly after writing the above I received an email from "KD" regarding JP Morgan and the Massive Silver Short - The Greatest Story Ever Told

In his post that I had not yet seen, KD came to the same conclusions as I did above. We arrived at our conclusions independently. Moreover, he put the numbers together to show JPM cannot possibly be short the amount of silver that Max Keiser says.

KD concludes "If the long contract holders think there is a massive shortage of physical silver, why don't they just force the sellers to deliver the physical and create their own squeeze?"

I have made similar comments myself many times. However, were that to happen, the CTFC probably would step in.

Finally, Max Keiser is a friend. I just happen to think he is wrong on this issue.

Addendum 2:

My friend "HB" at the Acting Man blog chimes in with these thoughts:

This stuff people are putting out about JPM's silver short is really a pile of crap.

The biggest problem JPM might have could relate to the term structure of their shorts and offsetting longs. The OTC longs where they are counterparties to miner forwards have delivery schedules stretching out to up to 10 years, while they can only hedge at COMEX in the front month contract (due to other contracts not having enough liquidity) and have to roll that over.

So if someone were to ask for huge deliveries like the Hunts did, then there could really be a problem - alas, absent the Hunts, it just doesn't happen.

Note also, no one has as of yet reported any big losses in silver, which would have happened some time ago if the commercial shorts were 'naked'. I find it far more likely that there will one day be a problem involving unallocated gold accounts.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

What does the "Take this Job and Shove-It Indicator" say about the Economy?

Posted: 10 Dec 2010 12:35 AM PST

With a salute to Johnny Paycheck, inquiring minds are investigating the CNBC claim 'Shove It' Indicator Turns Positive: More People Quitting

Call it the "Take This Job and Shove It" indicator. The latest report from the Bureau of Labor Statistics shows that an increasing number of people are quitting their jobs, a sign of an upturn in consumer confidence and the economy, according to one economist.

"There is one area where there does appear to be some additional risk taking, and that is seen in the number of people leaving their jobs," said Don Rissmiller, economist for Strategas Research Partners. "The last time we saw an inflection point of this sort in the number of people quitting their jobs, we were at the end of the last 'jobless recovery' in 2003."

In October 2 million individuals quit their jobs, up from 1.7 million during the same month a year ago, according to the Bureau of Labor Statistics. On its web site, the BLS states, "Quits tend to rise when there is a perception that another job is available and tend to fall when there is a perception that jobs are scarce."

The rise in quitting is accompanied by an increase in the job outlook in the latest survey by staffing firm Manpower and an ISM survey of managers indicating bigger capital expenditures planned for next year, Rissmiller points out in his note.

Job Openings and Labor Turnover Survey

With that lead-in let's turn our focus on the BLS Job Openings and Labor Turnover Survey for October 2010.

Number of Unemployed Per Job Opening

click on any chart in this post for a sharper image

While admitting the trend looks very favorable, please note the ratio was 2.0 at the end of the 2001 recession. It is roughly 4.5 now. Furthermore, at the end of the last recession, the indicator rose for another 2 years.

Here is the alleged Take This Job and Shove It" indicator.

Quits vs. Layoffs and Discharges

While this indicator did indeed turn up (making a higher low in December 2009), the indicator has done little but flatline since April 2010, a full 6 months. Maybe it continues and maybe it doesn't. Moreover, it has to rise by another 500,000 just to get to the August 2003 low.

Note that layoffs and discharges did revert to the mean plus an overshoot which should be expected. The number of quits is nowhere near its trendline.

Weekly Unemployment Claims

Today's weekly unemployment claims number remains headed in the right direction, but +421,00 is hardly anything to crow about except in relative terms.

The 4-week moving average of weekly claims shows that things are definitely getting better. However, the number of weekly claims is still at mid-recession levels of the past 5 recessions. Worse yet, claims are falling much slower than any previous recession to get to this 420,000 level.

Population Changes

For more discrepancies please consider the BLS November Jobs Report

The unemployment rate is based off the BLS household survey. The November numbers follow.

Last year the civilian population rose by 1,972,000. However, the labor force rose by a mere 287,000. Those not in the labor force rose by 1,686,000. Had it not been for the drop in participation rate, the unemployment rate would have been 10.8%. Here is the math ((15,119+1,686)/(154,007+1,686) ) * 100 = 10.8%

US Population vs. Employment, vs. Labor Force, vs. Continued Unemployed

The recent spike in continued unemployed is especially aggravating given the flat growth in employment.

6 Million Benefits Paying Jobs Vanish

Please consider 6 Million Benefits-Paying Jobs Vanish and Unemployment Rate Drops!

Analysis of weekly unemployment data and covered employees shows that 5,977,844 benefit-paying jobs have been lost in the last year.

click on chart for sharper image

The above chart is from reader Tim Wallace. I added the date and numeric annotations. Thanks Tim!

Covered Employment Stats of Merit

Covered employment is back to 2004 levels.
Close to 6 million benefits paying jobs have vanished in a year.
Over 8 million benefits paying jobs have vanished since the 2008 peak.

What is a Covered Employee?

The exact meaning of "covered employee" varies slightly state to state, but not by much. In simple terms it means one is eligible for unemployment insurance benefits.

Most states exclude the self-employed, commission based employment such as real estate agents, those in student training programs, academic and hospital internships, employment by churches or religious organizations, and rehabilitation programs.

Self-employed individuals must pay into unemployment insurance programs, however, the self-employed are not eligible for benefits anywhere.

Nearly 6 Million Jobs Vanish

By the above interpretation, it is safe to conclude that 5,977,844 jobs totally vanished (not just benefit paying jobs).

The only way that cannot be true is if there was a sudden shocking increase in the number of real estate agents, church hiring, or close to 6 million people all of a sudden decided to go into business for themselves.

Although employment is not in the depths of hell like it was in late 2008, and while the "Shove-It Indicator" is a positive divergence (assuming it continues up), it is one hell of a stretch to parlay this into the idea that employment approaches a self-sustaining inflection point.

There is far more going on than the "Shove-It Indicator" allegedly indicates, especially since it is flatlining.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Friday, December 10, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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