Wednesday, August 10, 2011

Stock markets tumble as Treasuries and gold rally

Dow sank another 519, decliners ahead of advancers a relatively mild 5-2 & NAZ fell 101 after yesterday's 124 gain. Banks stocks had another terrible day, the chart for the Financial Index is not a pretty sight.

S&P 500 Financials Sector Index

Value	163.58
Change	-12.52 (-7.1%)

The MLP index had another robust gain today, gaining 6¼ to the 348s (between the low of 338 & high of 358). It's difficult to remember that this is a low beta index!! The REIT index fell 6 to 208. Junk bond funds were mixed, torn between worries about a recession forcing more defaults versus the enormous rally in Treasuries, taking yields to record lows. Treasuries rallied as a $24B 10-year securities auction drew higher-than-average demand & a record low yield in the first offering of the maturity following S&P downgrade last week. Oil extended gains after the Energy Dept reported an unexpected decline in inventories. Gold passed $1800 an ounce for the first time as investors pulled their money out of stocks & snapped up precious metals contracts. Gold is fast becoming a favorite port in a storm of uncertainty, investors are clinging to what they see as a hedge against volatile stock & currency markets.

ALERIAN MLP Index (^AMZ)

Treasury yields:

U.S. 3-month	0.015%
U.S. 2-year	0.180%
U.S. 10-year	2.146%

CLU11.NYM

...Crude Oil Sep 11

...82.51

...

3.21

(4.1%)

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Even with the US running a budget deficit of over $1T & after S&P removed the AAA rating, investors are lending the gov money at record low rates. 5 days after the downgrade, the Treasury sold $24B of 10-year notes to yield 2.14%. When the US was running surpluses from 1998-2001, Treasuries of similar maturity yielded an average of 5.48%! Bond investors are influenced by interest rates, the economy & inflation. Because of the dollar’s preeminent place as the world’s reserve currency, the US enjoys a “funding advantage,” S&P said last week. Bernanke boosted debt markets yesterday when the Federal Reserve pledged to keep its target rate for between banks at a record low of zero to 0.25% at least thru mid-2013 to revive growth that it described as “considerably slower” than anticipated. Yields on 10-year Treasuries, a benchmark for everything from mortgages to corporate bonds, fell to a record low 2.03% yesterday, a week after the US came within days of running out of money. The yield was 3.22% at the start of Jul. US bonds remain in demand at a time when Europe's sovereign debt crisis threatens to spread to Italy & Spain from Greece, Ireland & Portugal, & the global economy is slowing, damping the appeal of stocks.

Downgrade Doesn’t Matter as Bond Investors Show Faith in Fed After S&P Cut

The US budget deficit topped $1T for a 3rd straight year, adding pressure to make more progress on a long-term plan to shrink the growing imbalance. The Treasury Dept said that the deficit thru Jul totaled $1.1T. 3 years ago, that would have been a record high for the full year! This year's deficit is on pace to exceed last year's imbalance of $1.29T, but it is likely to fall short of the record $1.41T set in 2009. For the first 10 months of the budget year, spending has risen 2.4% while revenue has climbed 8%, a sign that more people are working & paying taxes even though unemployment remains high at 9.1%.

Federal Deficit Tops $1 Trillion for 3rd Straight Year- AP

Photo: Bloomberg

Disney, a Dow stock, reported that net income in its Q3 rose 11% as growth at ESPN, its theme parks & consumer products businesses outweighed lackluster performance at its movie studio & interactive unit. Results beat expectations, but the surprise boost to fiscal Q3 came mostly because of the early booking of revenue at ESPN, which will result in an offsetting negative in fiscal Q4. DIS said $228M in fees from ESPN's distributors was booked in Q3, after the company said in May that the fees would likely be booked in Q4. CFO Jay Rasulo said that resulted in a boost to EPS of 6¢, pushing adjusted EPS to 78¢, above the 73¢ expected. Without the early ESPN fee recognition, EPS would have fallen short of estimates by a penny. Revenue grew 7% to $10.7B, topping the $10.4B expected. CEO Bob Iger said visitors to its theme parks didn't appear to be changing their upbeat spending habits. "During the past few days we have not seen any change in the pace of activity at our parks and resorts, advertising or consumer products businesses," Iger said. "With Disney, ESPN, Pixar, Marvel and ABC, we remain well-positioned for whatever economic conditions we face in the future." The fall of DIS in the last 2 weeks is dramatic, today it fell $3.16 (9%).

Disney Falls Most Since 2001 on Spending

Walt Disney Company (The) (DIS)

There is a growing awareness by execs that demand needs to be stimulated to achieve growth. Growing gov regulations & taxes are not the way to go. Weak consumer demand is probably the most significant reason behind recent selling in stocks & nobody has an answer to correct the problem. The budget deficit going over $1T is another ugly reminder about how bad excess gov borrowing has become. The only consolation is that borrowing problems are worse elsewhere. If you add the 3 price swings for the Dow this week (ignoring the + & - signs), the Dow has had a total swing of almost 1500. The VIX, volatility index, shot to 43, near its high of 44 on Mon. With gold pushing $1800, fears are running high!!