Monday, April 7, 2014

Markets continue to sell off led by Nazdaq

Dow sank 166 closing at the lows, decliners over advancers 5-2 & NAZ continued weak dropping 47.  The MLP index fell 4+ to the 469s & the REIT index went up a fraction to the 287s.  Junk bond funds gained & Treasuries were in demand.  Oil slid lower but remained above 100 while gold is back below 1300.

AMJ (Alerian MLP Index tracking fund

Treasury yields:

U.S. 3-month


U.S. 2-year


U.S. 10-year


CLK14.NYM....Crude Oil May 14....100.47 Down ...0.67  (0.7%)

Live 24 hours gold chart [Kitco Inc.]

America’s improving fiscal health is starting to be reflected in the market for Treasuries.  As the Federal Reserve (FED) scales back its bond buying this year, the ability of the country to attract investors underscores the strides the US has made to strengthen its creditworthiness after the financial crisis.  With the budget deficit at a 7-year low & household wealth rising to a record, investors from mutual funds to foreign central banks are buying a greater share of Treasuries at gov auctions than ever compared with bond dealers that are obligated to bid.  Investors submitted bids for $1.73T of gov notes & bonds at auctions held in Q1, or 3.07X the $564B sold.  The bid-to-cover ratio rebounded from last year’s 2.87X, which was the lowest annual level in 4 years.  The last time the ratio was higher on a quarterly basis was in 2012, when demand peaked at a record 3.1X.  Investors also bought a 58.7% of Treasury debt issued in Q1, with the rest purchased by the 22 primary dealers that trade with the (FED).  Increased demand has helped curb US borrowing costs, confounding forecasters who said yields would rise as the FED started to cut back on its $85B of monthly purchases to support the economy.  After yields on the 10-year note reached a 29-month high of 3.05% at the start of the year, they have since declined to 2.69% presently.  Economists are cutting yield estimates every month this year, saying yields on 10-year Treasuries (a benchmark for everything from mortgages to car loans & corp bonds) will end the year at 3.34% (versus 3.44% in Jan).

America’s Fiscal Health Affirmed as Treasuries Demand Rises

Consumer borrowing in the US rose more than forecast in Feb, reflecting the biggest gain in automobile, education & other non-revolving loans in a year.  The $16.5B advance in credit exceeded all estimates & followed a revised $13.8B gain in the previous month, according to the FED.  The forecast called for a $14B increase.  Gains in the labor market, home values & stock portfolios are contributing to healthier balance sheets & bolstering confidence.  Income growth, along with improved credit scores, is giving consumers the wherewithal to take out loans for big-ticket purchases such as new cars, helping sustain spending.  Non-revolving credit, such as that for college tuition & the purchase of vehicles & mobile homes, increased $19B after a $14B gain in Jan.  Revolving debt, which includes credit-card spending, decreased $2.4B after a $241M decline the month before.  Lending to consumers by the federal gov, mainly for student loans, rose $6.2B before adjusting for seasonal variations after jumping $28B in Jan.  Banks have been loosening the reins of credit ranging from commercial real estate & commercial & industrial loan lending to credit cards & auto loans, according to the FED quarterly survey of senior loan officers published in Feb.  About 20-40% of banks said they expect delinquencies on most types of business loans to decline this year.  About 40% expect mortgage delinquencies & write-offs to fall, & 15-20% expect credit-card loans & other consumer loans to improve.  The banking business has improved since the depth of the recession.

Consumer Credit in U.S. Increased More Than Forecast in February

Wind Turbine Blades
Photo:   Bloomberg

The $14B wind power industry in the US is reeling from a double blow, cheap natural gas unleashed by the hydraulic fracturing revolution & the death last year of federal subsidies that made wind the most competitive of all renewable energy sources in the US.  Without restoration of subsidies, worth $23 per megawatt hour to turbine owners, the industry may not recover, & the US may lose ground in its race to reduce dependence on the fossil fuels driving global warming.  Meanwhile, the gas industry is aided by the ability to form master limited partnerships that allow pipeline operators to avoid paying income tax which helps drive down the cost of natural gas.  Gas averaged $8.90 a million British thermal units in 2008 & plunged to $3.73 last year, making the fuel a cheaper source of electricity for utilities.  Congress allowed the wind Production Tax Credit to expire last year, & wind farm construction plunged 92%.  The shift in fortunes for the 2 fuels arrives at the moment when wind was beginning to rival gas on price alone, according to Bloomberg.  The industry’s future will be shaped by the debate over what counts as support from the gov & when, or if, Congress moves to rethink the credit.  Both wind & gas cost about $84 a megawatt hour to install worldwide, excluding subsidies, 3% higher than a coal-fired power plant costs & about half that of nuclear reactors.

Shale Gas Boom Leaves Wind Companies Seeking More Subsidy

NAZ has been having a tough time in the last month & that selling is bleeding thru to the overall market.  In the last 3 trading sessions, NAZ fell 200 & is within 100 of its low in 2014.  Much of the selling has been in pharmaceuticals, less in technology.  Apple (AAPL) is the biggest component of NAZ & it has been flattish near 530 for almost 2 months.  Markets are under pressure, not a good sign going into earnings season.  Dow is down more than 300 YTD.


Dow Jones Industrials

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