Weak bond auction causes market sell-off

Dow dropped 102, decliners over advancers 2-1 & NAZ was down a big 42 (2.4%). Banks were generally weak. But the main one getting attention, Bank of America (BAC), rose 82¢.

S&P 500 FINANCIALS INDEX

Value 162.34

Change -5.80

% Change -3.4%

The Treasury sold $14B in 30 year bonds at a yield of 4.29% (6 month high yield), 10 basis points above the 4.19% expected. The auction’s bid-to-cover ratio was 2.14X, compared with an average of 2.24X at the last 10 sales of the maturity. At the last sale on Mar 12, this bond yielded 3.64%. The 10 year Treasury bond yield rose 14 basis points to 4.30%, giving yesterday's bond buyers at auction an immediate loss. This yield is especially important, it's the basis for many mortgage rates which have been ticking up recently (from record low rates). Goldman Sachs estimates the gov will have to borrow an additional $3¼T (in numbers, that's:
$3,250,000,000,000) this year.

The Federal Reserve could resume buying Treasury bonds. This week it completed two buyback operations, bringing the total U.S. debt it has acquired to $92.2B through 16 purchases. The FED said in March it will buy as much as $300B in Treasury bonds to lower consumer borrowing costs.

Treasury Yields Touch 5-Month Highs Before Stress Tests


There is caution in the air about the junk bond rally. Junk bonds are up 39% in the last 2 months, but they haven't hit the rough patch yet & it's coming. Moody's is forecasting the default rate could be 15%, up from an estimate of 8% last month. Junk bond funds were mixed today, but the Barclay's index was down 50¢ to yield 15%. That yield had been 17% a couple of weeks ago.

•`Premature' Junk-Bond Rally Prompts Strategists to Warn of Rising Defaults


The Alerian MLP Index lost 2.85, taking it below 212, but still in yearly high territory. The REIT index fell 9, hurt by Simon's loss (discussed below). Meanwhile VIX popped 2 to the 34s, but near low levels for this year. Oil pulled back from earlier gains, influenced by the market sell-off, up only pennies in the 56s.


Simon Property (SPG) increased the size of its stock offering, down 2.79 to 52.05. Yesterday it announced it would sell 14M shares, today the stock sale was increased to 20M at 50 for $1B. This is their version of satisfying their own stress test standards. More than 20 REITs have sold stock in the last 2 months, raising $8½B to prepare themselves for tougher times ahad & for possible buying opportunities.

Simon Boosts Size of Offering, May Raise $1 Billion


Everybody is waiting for stress results to be released. Much of the news has already been leaked, so there should be no great surprises. But sometimes just announcing what is expected can have a significant effect on markets.

Profit taking after gains this week

Dow began the day higher, but sank quickly. Maybe this is a case of buy on the rumor & sell on the news (stress tests). Dow is down 60, decliners over advancers 3-2 & NAZ fell 30. Banks were mixed, although Bank of America (BAC) was up 1½ ahead of the gov stress test report telling them to raise another $34B.


S&P 500 FINANCIALS INDEX

Value 165.21

Change -2.93

% Change -1.7%

The Alerian MLP Index dropped 1½ to 213 (& down from 216 on this morning's opening). The Dow Jones REIT Index was down 5 but junk bonds were up while the yield on the 10 year Treasury rose to 3.24% (maybe a delayed reaction to yesterday's sales of Treasury debt) on lower bonds prices.

Oil continues its winning ways. Just a few months ago it was sub 40. Last night an oil trader said the next technical level oil is shooting for is 62.

CLM09.NYM

...Crude Oil Jun 09

...57.66

... 1.32 .......(2.3%)

New applications for jobless benefits dropped to the a 14 week low, another sign that the wave of layoffs has peaked.The number of laid off workers applying for benefits fell to 601K last week, better than a rise of 635K expected. The 4 week moving average of jobless claims totaled 624K, a decrease of more than 30K from the high in early Apr (Goldman Sachs economists have said a decline of 30-40K in the 4 week average is needed to signal a peak). However, the total number receiving jobless benefits climbed to 6.35 million, the 14th straight record.

•U.S. Unemployment Claims Unexpectedly Fall to Lowest Level in Three Months


Below are 2 different views of what to expect after the stress tests results are announced. The Treasury Sec thinks they will be a "reassuring" picture of a U.S. banking system able to withstand whatever stresses the recession may inflict on it once a handful of institutions add to their capital base." I'm worried that the same regulators who were being paid with tax dollars are now the ones who well tell us how to fix the credit mess, not reassuring to me.

•Fed's Stress Test Results for Banks `Reassuring,' Show No Insolvency Risk

• Are the bank stress tests a fiasco?- CNBC

Bank stocks rise on stress tests leaks

Dow was in the black all day while NAZ was mostly in the red. The main difference is the Dow is finance (bank) stock heavy & banks had another outstanding day. Dow was up 101, advancers 2-1 ahead of decliners while NAZ gained 5.

Banks were on fire prior to stress tests results which will be released after tomorrow's close. Of course, signals for many of the banks have been leaked already, so there should be no great surprises. Today caution was thrown to the wind with bank stocks. Those being asked to raise new capital (like Bank of America & Wells Fargo) & those not needing any (JPMorgan) fared the same, straight up. A 10 point gain for the index is significant, today the gain was 12. The index has almost doubled from the oversold low in early Mar & up almost 40% in the last month. Go figga.

S&P 500 FINANCIALS INDEX

Value 168.14

Change 12.62

% Change 8.1%

•Bank of America, Citigroup, GMAC Need More Capital After U.S. Stress Tests


The following stress test results for the 10 biggest banks were supplied by (leaked to) Bloomberg:
===========================================
Company Capital Requirement
===========================================
Total $65.5 Billion
Bank of America Judged to need roughly $34.0 Billion in additional capital
Wells Fargo Judged to need roughly $15.0 Billion in additional capital
GMAC Judged to need roughly $11.5 Billion in additional capital
Citigroup Judged to need roughly $5.0 Billion in additional capital
Morgan Stanley Judged not to need to raise additional capital
Goldman Judged not to need to raise additional capital
MetLife Judged not to need to raise additional capital
JPMorgan Chase Judged not to need to raise additional capital
Bank of NY Mellon Judged not to need to raise additional capital
American Express Judged not to need to raise additional capital
===========================================
Company Government Capital Injections by Firm
===========================================
Bank of America Targeted Investment Program $20 Billion on 01/16/09
Capital Purchase Program $10 Billion on 01/09/09*
Capital Purchase Program $15 Billion on 10/28/08
-------------------------------------------
Wells Fargo Capital Purchase Program $25 Billion on 10/28/08
-------------------------------------------
GMAC Automotive Industry Financing Program $5 Billion 12/29/08
GMAC has also received other financial assistance
-------------------------------------------
Citigroup Targeted Investment Program $20 Billion on 12/31/08
Asset Guarantee Program $5 Billion on 01/16/09
Capital Purchase Program $25 Billion on 10/28/08
-------------------------------------------
Morgan Stanley Capital Purchase Program $10 Billion on 10/28/08
-------------------------------------------
Goldman Sachs Capital Purchase Program $10 Billion on 10/28/08
-------------------------------------------

===========================================
Company Government Capital Injections by Firm
===========================================
MetLife None
-------------------------------------------
JPMorgan Chase Capital Purchase Program $25 Billion on 10/28/08
-------------------------------------------
Bank of NY Mellon Capital Purchase Program $3 Billion on 10/28/08
===========================================
Note: Dollar figures in billions
*This transaction was included in previous Transaction Report with Merrill Lynch listed as the qualifying institution and a 10/28/2008 transaction date. The purchase of Merrill Lynch by Bank of America was completed on Jan. 1, 2009 and this transaction under the CPP wasfunded on Jan. 9, 2009.

High yield markets were mixed. MLPs slipped pennies (in spite of higher oil prices) while the REIT was up 5 & junk bond funds were also higher. The VIX closed below 33, another low for 2009. High yield securities have been strong in the last couple of months while Treasuries have been sold off, sending their yields higher. The spread of MLP index yield over Treasuries (3.15%) has narrowed to about 625 basis points, down from 1200 basis points at the market low. Of course, the traditional spread has been only 200 basis points. Spreads for REITs & junk bonds tell a similar story, investors are accepting more risk for high yields.

Oil rose to another 2009 high. The weekly inventory report showed that crude inventories rose .6M barrels last week vs estimates of 2.2M, gaving a signal that more oil was being consumed after a period when surplus oil has gone into storage.

CLM09.NYM
..Crude Oil Jun 09
..56.22 
.. 2.38
......(4.4%)

Treasury bonds were strong as the Treasury sold $22B (RECORD AMOUNT) of 10-year bonds at a rate of 3.19% compared with an expected rate of 3.23%. The bid-to-cover ratio of 2.47X was stronger than expected. The bond's current yields is 3.15%, nice gain for the buyers at the today's auction. Buyers included foreigners & others, possibly banks & financial institutions trying to make their balance sheets look prettier. This week, the Treasury will raise an eye popping $71B in bond & note sales. Not too long ago, $1B (i.e. 1,000,000,000) was considered a lot of money.

Treasuries Rise as Record 10-Year Auction Draws Yield of 3.19% 

Bloomberg TV had a report (can't find it at their website) that last year the 2 times banks raised more capital, stock markets followed with their 2 big slides. They suggested that pattern will be repeated. It's hard to justify the sharp run up for bank stocks in the face of enormous problems in a very troubled economy.

Markets meander, awaiting stress tests results

Dow spent most of the day in the red, but only slightly. It closed down 16, decliners were 20% ahead of advancers & NAZ dropped 9. Bank stocks needed a day of rest (maybe 2 when tomorrow is included) after the big day on Mon.

S&P 500 FINANCIALS INDEX

Value 155.52

Change -1.92

% Change -1.2%

The S&P 500 has been getting a lot of attention after breaking into the black for 2009. Today it slipped, but is still up a couple of pennies YTD. Below is a chart for SPDR S&P 500 ETF (SPY) which is purchased by those wanting to tie an investment directly to the S&P 500. Recovering money lost in 2009 is helpful but for those who bought during the last 10 years hoping to make money, they may still have a long way to go just to reach break even.

• Investors face long road ahead to break even- MarketWatch

S&P 500 (SPY) ---- 1 decade





The Alerian MLP Index fell change after reaching almost a 6 month high yesterday. REITs were hit harder, dropping 5 to 132 while junk bond funds were generally weak. Oil continued soft, down about 50¢.

Chrysler bankruptcy is beginning by droning on for a second day. If this is any indication, emerging from bankruptcy may be a drawn out affair in which nobody wins. This may also serve as a warm up for GM next month.

• Chrysler lender group opposes sale process- Reuters

The last 5 months have been good to MLPs. Kinder Morgan, the KMR stock equivalent is shown below, had been tracking the index until Apr. The index (line) had has been doing quite well, even better than the stock market averages. KMR, however, has been stuck in the mud staying near the 41s during the last 6 weeks. Today KMR fell 52¢ to 40.57. Kinder Morgan is the largest MLP with an excellent long term record (13 years is a long run for this group) of growth.

TheStreet.com raised their rating for KMP (the units) from hold to buy last month after reviewing the Q1 report. Their reasoning was, "We've upgraded energy transportation and storage company Kinder Morgan Energy Partners (KMP) from hold to buy, driven by its expanding profit margins over time. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself." But I'm nervous about their weak performance in Q1 & worry that it may be signal more problems for them (& the industry) going forward.

• TSC Rating's Updates: Kinder Morganat TheStreet.com(Fri, Apr 17)
• Kinder Morgan Misses Earnings Estimatesat TheStreet.com(Thu, Apr 16)

Kinder Morgan (KMR) --- 6 months




Markets are growing nervous about the outcome of the bank stress tests, it looks like most of the 19 banks will need more capital. More nervousness should dominate trading tonight in Asia & in tomorrow's markets.

Markets pause

Stocks are taking a breather after gains in the last few days. The 2 week chart shows Dow going from the low end of its trading range to a new high, about 600 points :


Dow Jones Industrials --- 2 weeks





Today, Dow is down 38, decliners over advancers 2-1 & NAZ dropped a bigger 24. The S&P 500 slipped below 900, bringing it back into the red YTD. High yielders (with their bigger risks) also slipped. The Alerian MLP Index is down 1½, the REIT index is down 4 & junk bond funds are weak. Oil, in sympathy, pulled back from its 5 month recent highs by 50¢.

Yesterday banks had their biggest one day gain in the last month, but nervousness about the stress tests brought profit taking today. The thinking behind yesterday's rally was that the need for more capital will be less painful than prior expectations.

S&P 500 FINANCIALS INDEX

Value 155.10

Change -2.34

% Change -1.5%

Federal Reserve Chairman Ben Bernanke told Congress that the economy should start growing again later in 2009. He also warned that even after a recovery gets under way, economic activity is likely to be subpar. Businesses will remain cautious about hiring, driving up the nation's unemployment rate, causing "further sizable job losses." The recession, which began 17 months ago, already has cost the economy 5.1M jobs. But he added, "We continue to expect economic activity to bottom out, then to turn up later this year."

Recent data suggests the recession is loosening its firm grip on the economy, as the pace of contraction may be slowing. The housing market has shown signs of bottoming. He added that the FED does not intend to retreat from its policy of keeping the main interest rate close to zero & boosting credit through emergency-loan programs & asset purchases.

•Bernanke Warns `Relapse' in Banking System Would Stall Economic Recovery


More thoughts about stress tests. It is expected that Citigroup (C) & Bank of America (BAC), both Dow stocks, are among 10 banks which may be told they need more capital.

•Fed Stress Test Results May Show 10 Banks Need Capital to Withstand Slump


There have been enormous gains from the market lows just 2 months ago. I selected 2 for comparison. 3M (MMM) is a Dow stock & Dividend Aristocrat which has moved up about 40%. Not bad. Masco (MAS), a former Dividend Aristocrat which had a 50 year streak of higher divs come to an end this year, is up 150%. Regular stocks did well while risky stocks had phenomenal gains. The disparity between the 2 highlights an increased appetite for risk. That's worrisome in the face of more months with dreary economic data.


3M ---- 3 months




Masco ---- 3 months

Risk averse markets take off

Markets started strong & held those gains for the rest of the day. Dow gained 214, advancers over decliners 5-1 & NAS climbed 44. S&P 500's almost 30 point gain put it in the black for the year.

The FINANCIALS INDEX had an exceptional day, closing above the Apr 13 interim high of 150.18. The previous time it was this high was in early Jan 09. Typical big name banks were up 10-20%. However, Citi remains a $3 stock.

S&P 500 FINANCIALS INDEX

Value 157.44

Change 14.48

% Change 10.1%

Helped by a strong oil market, the Alerian MLP Index rose 2.92 to 215½ (highest since early Nov). Dow Jones REIT Index was up 11 to its best level since Jan. Junk bond funds were generally strong. Their yields have fallen to around 15% or around 1200 basis points above the yield (3.16%) on the 10 year Treasury. The concept of safe haven investing is withering, at least for the time being as the VIX, volatility index, closed down .77 to 34.53 (low for 2009).


Oil gained, traders were encouraged by strong stock markets & signs that big fuel customers, China & India, showed growth in their manufacturing sectors in April, reversing months of declines.

CLM09.NYM

..Crude Oil Jun 09

..54.37

.. 1.17 ......(2.2%)

Citigroup (C) is trying to wriggle out of having the gov convert preferred stock into common which could take their stock ownership over 50% (Citi doesn't want to work for Barney Frank). Citi is hoping to attract capital from private investors to meet stress test standards. This drama plays on.

Citigroup May Seek Capital That Averts US Control

JPMorgan (JPM) may be tapped to buy more distressed banks. They already bought Washington Mutual & the remains of Bear Stearns. Jamie Dimon, CEO, said, "There are still too many banks in the United States." Wells Fargo (WFC) is being told that it will have to raise more capital.

JPMorgan CEO sees more bank consolidation ahead- Reuters

• Wells Fargo asked to raise money after stress test- AP

Chrysler's fate is plodding along. Lenders are arguing about what assets can be sold. The gov loans are viewed as a lost cause, the only question is how much money can be retrieved. Chrysler was hoping to emerge from bankruptcy in 1-2 months so the new company could resume as a going concern. Bickering will not help matters. Chrysler is forecasting losing almost $5B this year plus another $1+B in the next 2 years. Their suppliers are also sweating out Chrysler's (or whatever the new company is called) future.

• Judge delays decision on Chrysler asset transfer- AP
• Chrysler forecasts loss of $4.7 billion in 2009

The closely watched S&P 500 started the year at 903.25. Today it closed at 907. That is called a "new yearly high." Dow needs another 350 points to return to its starting point for 2009. Averages are reaching new highs because risky investments are no longer considered unwanted.


S&P 500 ---- YTD