TGIF

Initial Jobless Claims came in at 448K versus a street consensus of 445K and a prior revised 459K (up from 456K). Continuing Claims came in at 4.645K versus a street consensus of 4,618K and a prior revised 4,663K (up from 4,646K). Chicago Fed came in at -0.7 versus a street consensus of -0.2 and a prior revised -0.44 (from -0.64).

Headlines report that initial jobless claims fell to their lowest levels in a month. If the numbers are so good, why are long-dated treasuries unchanged? Because the prior numbers were all revised higher and initial claims over 400K and continuing claims over 4,500K depict a very impaired employment situation.

Market bulls have been increasingly calling for a more hawkish tone by the Fed. Kansas City Fed president, Thomas Hoenig has been calling for the elimination of the words: "extended period" from the Feds statement on rates. TV pundit, Larry Kudlow expressed frustration over the Fed's insistence on extremely low rates in the midst of a V-shaped recovery. Mr. Kudlow ignores certain facts. Much of the recovery has been from inventory replenishment, significant stimulus and commodity prices which, until recently, were very low. Consumers have come back, but honestly, did anyone really believed that consumers would not or could not spend again. Things wear out and need replacing and there is still a large portion of populace which is gainfully employed. What we are seeing is a rebound from the depths of despair. The Dow Jones Industrial average has not yet risen to levels seen in 2001, never mind the loft peak of 14,164 reached on 10/9/07.

The Fed's Mr. Hoenig is taking a more hawkish tone not because he believes the economy is poised to roar ahead, but because he is an inflation hawk. He knows right now that the U.S. debt levels and inflation are no worse than those of our major trading partners. However, he knows that the country which is late to the inflation fighting (rate raising) game could be the one experiencing stagflation. In this environment, interest rates and sovereign fiscal responsibility can be likened to hunting with your friend in bear country. You don't need to be faster than the bear, just faster than your friend. In other words: U.S. fiscal policy and debt levels do not have to be "good" in absolute terms, just relatively better than other nations. This is not to say Mr. Hoenig is wrong.

If it is important to be ahead of the curve when fighting inflation, why doesn't the Fed at least use more hawkish language? It goes back to the Great Depression. During the mid to late 1930s, the U.S. economy experienced a rebound. Fiscal policy was tightened and the economy experienced a double dip. Mr. Bernanke is a student of the Depression. He fears a repeat of the past. He knows that the economy is still not healthy. It is better, but not healed. Think about it. The government has poured in record economic stimulus, but the recovery has been typical at best. Sure there is a nice economic fire burning, but this is like fueling a comfy camp fire with the U.S. strategic oil reserve. One would usually expect a conflagration from such stimulus and market participants are all excited about making s'mores. The one thing we have going for us is that Europe and Japan are more dysfunctional than we and China is battling its own over-stimulation problem.

I am of the opinion that economic expansions like the last two (tech and housing) are fundamentally unsustainable, as are the 5.00% unemployment rates. Maybe the Fed should heed Mr.Hoenig's advice and at least harden its language.

The Fed is getting what it wants as far as investors are concerned. Today's 7-year auction was well received. In fact, it was better than expected. This follows mediocre 2-year and 5-year auctions earlier this week. The Fed is keeping short-term rated low in part to 1) Send people farther out on the curve. If the treasury is going to borrow, it may as well lock in long term at low rates and 2) to sen investors into riskier asset classes. Some of the strength observed in the equity and credit markets and on the long end of the treasury curve is due to investors taking more risk by investing in these arenas to enhance returns. This is why they tend to sell off when market participants become concerned that a Fed tightening bias may be on the horizon.


NYU Professor Nouriel Roubini is warning that the massive amounts of sovereign debt issued is going to lead to defaults and inflation across the globe. He may have a point with Europe, but unless everyone buys gold, I think the U.S. will be a destination fro bond vigilantes, not a target.

Have a great weekend.

Greece Lightning

Just a quick note on Greece. The other day I noted that Greece could be asked to restructure its debt as part of a rescue. This is not something many investors expected in this age of too big to fail. Now experts much more qualified than yours truly are concerned about a restructuring.

S&P downgraded Greek sovereign debt three notched from BBB+ to BB+ That is below investment grade. S&P expressed concern that a Greek restructuring could be on the way. An economist at a large U.S. bank opined that bondholders could receive a 20% to 30% haircut.

Greece could be the start of even bigger problems for the EU. Greek banks posted Greek sovereign debt as collateral for ECB financing. It is possible that otherwise healthy Greek banks will be shut out from short-term liquidity. With the crisis beginning to spread to other troubled and heavily indebted economies, such as Portugal and Spain, there could be a real banking crisis brewing in the Old World.

Even before this I, and most other fixed income experts (including those at the Fed) believed that long-term treasury rates would remain low. Now with Europe in turmoil, the 10-year treasury may be hard pressed to break over 4.00% during 2010. Morgan Stanley's forecast of 5.50% on the 10-year by December looks ridiculous at this point. I hope there weren't going short the 10-year. Oh, Mr. Levin!!!!!

Clueless in DC

I watched the last 90 minutes of testimony of Goldman Sachs CEO Lloyd Blankfein before a Congressional panel led by Michigan senator, Carl Levin. All I can say is: What a joke!. Either Mr. Levin and his Congressional cohorts have such disdain for all things Wall Street and capitalist or they are clueless and completely unqualified to sit on such a panel.

For three hours (according to reports - I only saw the last 90 minutes) the Congressional gadflies badgered, almost berated Mr. Blankfein for selling investments (bets) to clients while at the same time betting against those assets. Mr. Blankfein and Goldman Sachs were also bashed for betting against the U.S. housing market. Permit me to make a few points.

1) These so called "clients" were in fact other Wall Street professionals. Counterparties, such as Abacus buyer IKB of Germany, were all too eager to go long the subprime market. They did so both before and after Abacus. Also, Goldman made the collateral available for all to see. Abacus buyers have a sever case of sour grapes. They may have relied on quantitative models and may not have looked closely at the collateral.


2) Goldman's job is to make markets. At most Goldman was the middle man in this deal. It merely put buyer and seller together. It didn't even choose the collateral. Paulson and Co. did not make the final decision either. That responsibility fell to ACA, an INDEPENDENT deal structurer and considered one of the best in the business. Yes, Paulson wanted to have a say in what mortgages they wished to take a short position (who goes short or long securities or assets not of their choosing), but ACA has the right to kick out any collateral they deemed unsuitable. ACA did just that,

3) Lastly, Mr. Levin and his troupe of jesters condemned Goldman for going short housing. Hello! Housing was over priced and lending standards were non-existent by 2007. Why wouldn't they want to go short. Let's look at some firms who were long housing, especially subprime during and following 2007: Lehman, Wamu, Merrill and Citi. There is a gallery of fools for you. Goldman was not in the brink of failure on its own, but rather was exposed to a failing system. It was those ostensibly virtuous firms who went long subprime which nearly brought down the global financial system. I guess it would have been better if Goldman had gone long subprime? Ridiculous,

There are legitimate questions which should be asked

1) Should market participants be able to make naked bets (betting on securities or assets they do not own)?

2) Should such markets be so opaque as they are currently?

3) Should structures become so complicated that no own other than the astrophysicists (many of them are actual astrophysicists) who created these structures understand them?

I have an unabashed disdain for the use and even creation of synthetics and the use of models alone in the trading of assets and the forecasting of markets and economies. There needs to be an in depth understanding of market conditions, collateral specifics and how different structures react to different market conditions. Something my most recent employers and immediate supervisors haven't the slightest clue. Bashing Wall Street trading houses for making money is like being angry with GE for making light bulbs.

This is an election year. Mr. Levin and crew obviously care more about votes than fixing what is wrong with the financial industry and mortgage markets (Freddie and Fannie).

Although I don't like synthetic structures and the arrogant attitudes of many of the self-important people who play in that market, I cannot see where Goldman Sachs committed fraud. In fact, we should be glad that it was Mr. Blankfein rather than Stanley O'Neal. Dick Fuld, Kerry Killinger or Chuck (keep on dancin') Prince running Goldman.

Greece's Odyssey

The Greek government finally accepted reality and asked for help from both the EU and the IMF. Greece has requested a 45 billion euro aid package. 30 billion euro will come from the EU in the form of loans at an interest rate of 5.00%. Another 15 billion euro will come from the IMF at a "lower rate" The emergency funding was necessary because Greece's financial situation was much worse than first thought and it has 8.5 billion of government bonds coming due on May 19th. The knee-jerk reaction by many investors was one of relief. After all, Greece was just bailed out. Not so fast folks, the bailout could have strings attached. Strings that could choke bondholders.

Greece will undoubtedly be asked to engage in some kind of austerity plans. It's estimated debt to GDP ratio was raised to 13.6% form a prior estimate of 12.7%. This is far above the EU limit of 10%. Many countries would try to devalue its way out of such a situation, but Greece cannot do that as it has the Euro as its currency. What it can and may do is restructure its debt.

Restructuring debt is not unusual. Developing countries and troubled corporations have done so in the past. A restructuring usually entails exchanging existing debt for longer-term debt. This will put of debt repayment out to a time at which the issuer is hopefully in better shape to repay its debt. However, a restructuring often occurs at less than 100% cents on the dollar. This is no what many speculators bargained for.

Many investors have become accustomed to too-big-to-fail as being the rule of thumb. That has not always be the case and may not be the case going forward. Greece may not try to haircut investors, but it is definitely a possibility. Investors should keep the possibility in mind when considering investing in Greek bonds or other very distressed debt.

The Truth Will Set You Free

The SEC's civil case against Goldman Sachs may be hitting a few speed bumps. One of the main tenants of the SEC's case is that ACA was duped into believing that Paulson and Co, was making a long bet on the pool of toxic subprime asset CDS used to collateral the CDO known as Abacus. However according to the Wall Street Journal, a Goldman executive told ABA that Paulson was buy protection the Abacus.

The idea that the financial institutions naively assumed that if Goldman and ACA constructed the deal, the collateral was solid and no investigation and modeling of the collateral was needed is ridiculous. The market participants buying Abacus were betting long on subprime for a long time. They had their own modelers, etc. Either this is another example of models being incorrect or management at these firms went long any how.


The bottom line here is that the buyers of abacus were sophisticated and were betting long on subprime already. If Abacus was never created, the institutions in question would have continued to go long subprime any way as their flawed models or greed would have told them that home prices would trend ever higher.



We actually had economic data today. Jobless Claims came in lower than what we observed last week. This was true of both initial and continuing claims. The reduction of jobless claims was attributed to a recovering economy. Last weeks increase in jobless claims was blamed on Easter affecting the models which crunches the jobless claims number. Apparently, when jobless claims rise it is because of anomalies, but when they fall it is based on economic recovery. No matter how you slice it, job growth stinks and that will moderate growth,


PPI was tame, tamer even than PPI. Investors waiting for high inflation and higher long-term rates will be waiting for a while longer. A guest on CNBC made the brilliant observation that preferreds were trading at rich levels and there is little price increase potential. My only question is what took her so long to realize this. Price increases are about done, as is spread tightening. Own a preferred with a coupon below 7.00% and hoping to be called? Sorry folks, but this is not likely to happen. My grand kids will be trading low coupon preferreds, such as JPMprK.


Have a great weekend.

Goldman Eye

Since last Friday's surprising announcement by the SEC that it is bring a civil suit against Goldman Sachs over the misrepresentation of a synthetic CDO named "Abacus" I have received many questions concerning the survivability of Goldman. I believe that questioning the viability of the most profitable investment bank on Wall Street due to such questionable charges is a bit of an overreaction.

The SEC is charging that Goldman Sachs misrepresented how it structured a synthetic CDO and did not properly disclose who was the other side of the transaction. First let's be clear what a synthetic CDO is. A synthetic CDO is a pool of bets, it this case CDS, on assets, such as subprime mortgages, which are not owned by any of the involved parties.


In the case of Abacus noted hedge fund manager, John Paulson wished to take a negative bet on subprime mortgages and asked Goldman Sachs to structure a CDO based on CDS referencing subprime mortgages. Goldman asked structure ABA to assemble the CDO. It was agreed that Paulson would choose the collateral, but that ABA could reject collateral it deemed unfit. Using these guidelines a structure was created. Goldman then marketed Abacus to counterparties it believed would be interested going long exposure to subprime mortgages. Now the SEC claims that because Goldman did not disclose the other side was Paulson and that Paulson had a say as to what collateral would be referenced, buyers of Abacus were not treated fairly.

Truthfully, deals in which a counterparty asks an investment bank to create a security or structure and the investment bank markets the other side of the transaction to counterparties or customers is very common place and not wrong, neither legally nor morally. With every trade, there are counterparties who have contrary opinions. That is inherently necessary. Also, counterparties are often anonymous.


Goldman is being used as the whipping boy for making money on many of these kinds of deals (although it claims to have lost money on Abacus) and to satisfy a political agenda.


I am not a Goldman apologist, but Goldman did not market Abacus to unsophisticated retail investors. These were very sophisticated speculators who made a bet and lost. The SEC is looking to repair its tarnished reputation from years of missing warning signs on two Ponzi schemes (Madoff and Stanford), not to mention lax oversight. This also plays well to with the Obama administration which is looking to revamp Wall Street. By all means, go after those who are truly guilty of fraud, but to say that Goldman took advantage of innocent investors is disingenuous.

Notice that this is a civil suit. It appears as though the SEC has no evidence that Goldman acted in a criminal manner The case is weak based on merits, but even a politically driven outcome is unlikely to be more than a speed bump for GS.

Staking Claims

Initial jobless claims unexpectedly rose by 24,000 to 484,000. A Labor Department spokesman attempted to explain it away by saying it due to administrative factors surrounding Easter. Why is it that when the number is unexpectedly good it is credited to an improving economy, but the number is poorer than expected it is claimed on various formulaic phenomena? The truth is that the economy is healing, but greater economic activity is required to support a given number of jobs than in the past.

Another truth is that the magnitude of the economic activity we saw during the last two expansions is fundamentally unsustainable given the current population. Banks will not lend irresponsibly because investors are wise to their "creative" structures. In the long run, it is better for the U.S., even if many in our business would rather have roaring markets now, regardless of the long-term cost.

The economy is rebounding to be sure. After all, business and consumers have basically spent nothing for a year. Items wear out,. Cars need to be replaced or repaired. Clothing must be purchased. Those who are gainfully employed and have access to credit are coming off of the sidelines to spend. If we all manage are expectations to account for a sustained growth level more in line with the U.S. historical average of about 3.00%, there is money to be made in this market. If we are anticipating a return to annual doubling of home prices, piggy bank home equity and mortgages for all, we will be disappointed.

This morning's strong Empire Manufacturing and Industrial Production reports bear out the recovery, but the Capacity Utilization Report, which came in at 73.2% (from from a prior revised 7.30%, but below an expected 73.3% indicates much slack in the economy. The real question is: Is there really excess capacity which will be used or is it that the U.S. has no use for much of its prior capacity to produce.

What did the bond market think of today's numbers? It put at least much weight on the poor jobless claims numbers as it did the stronger manufacturing data.

There is a great article on page C9 of today's Wall Street Journal. Apparently the short-term funds are up to their old tricks. During the last period of low short-term rates, short-term funds would juice yields buy using auction-rate securities (some tied to asset-backed structures) and asset-backed commercial paper. This time around the short-term funds are using floating rate securities with long maturities. They justify this by pointing their effective duration calculations, which calculate to a short-term number due to the formulas accounting of the floating coupon. However, we know that very few floaters are structured to stay at or near par in all situations. Most are structured to favor the issuer, not the investors, under most scenarios. This could leave investors exposed to rising rates on the long end of the curve. Why, because the coupons on the majority of these securities reset off of LIBOR or some other short-term benchmark. A security having a long-term maturity and a short-term coupon benchmark tend to perform better when the yield curve is flat or inverted and worse when the curve is steep and positively sloped (this is what makes floating-rate preferreds a poor choice versus high-coupon fixed rate issues). Remember, if a short-term fund is offering returns which are substantially higher than short-term benchmarks, it is not because of clever trading of t-bills

What to buy: Short-term - CDS. 5-7 years: Callable agencies. 7-10: Large bank bonds. Over 10: Avoid.

The Reich Stuff

Those who know me are aware that former labor secretary Robert Reich and I have little in common in the way of economic theory or political beliefs. So no one was more shocked than when I was very much (but not totally) in agreement with his assessment of the employment situation and the economy as a whole as published in today's Wall Street Journal.

None of what he said was new or especially intuitive. In fact, much of what he opined has been discussed in this space. Here is some of what Mr. Reich had to say:

"The U.S. economy added 162,000 jobs in March. That sounds impressive until you look more closely. At least a third of them were temporary government hires to take the census-better than no job but hardly worth writing home about. The 112,000 real new jobs were fewer than the 150,000 needed to keep up with the growth of the U.S. population. It's far better than it was-we're not hemorrhaging jobs as we did in 2008 and 2009-but the bleeding hasn't stopped."

He puts employment in its proper perspective.


"Some economic cheerleaders say rising stock prices are making consumers feel wealthier and therefore readier to spend. But most Americans' biggest asset is their homes. The "wealth effect" is felt mainly by the richest 10%, whose net worth is largely stocks and bonds. The top 10% accounted for about half of total national income in 2007. But they were only about 40% of total spending. A vigorous jobs recovery can't be based on 40% of what was spent before the economy collapsed."

He is right about consumers not being willing or able to spend as they had during the most recent economic expansion. However, consumer spending as seen during the expansion was fundamentally unsustainable. He should also be careful of demonizing the so-called investor class as it is their capital which seeds economic growth and job creation (along with consumer spending).


"What's likely to slow the jobs recovery most, however, is the indubitable reality that many of the jobs that have been lost will never return."

This is the truth, but it has been true of the last few recessions and recoveries. However, the U.S. economy has a way of creating jobs in new sectors, if it is permitted to work unimpeded.


"More Americans will be working, but for pay they consider inadequate. The approaching recovery will be tepid because so many people will lack the money needed to buy all the goods and services the economy can produce.
Americans will once again be employed, but they will also be back on the downward escalator of declining pay they rode before the Great Recession."

I will argue, again, that wages are adjusting to levels which are indicative of the supply of jobs versus the demand for jobs. For decades, jobs and wages were protected by union contracts and government legislation. Once the economy went global, U.S workers were priced out of a world of eager and ambitious job seekers


On another topic, there has been much disagreement over the direction and destination of long-term treasuries. Morgan Stanley sees the 10-year treasury yield rising over 5.00%. Goldman Sachs believes it will fall deeper into the 3.00% range. Noted technical analyst Louise Yamada believes that when the long bond reaches 4.80% that will complete the bottom of a head and shoulders pattern and rates to rise sharply. So much disagreement? I guess this is what makes markets.

First of all, I don't like technical strategies. economics is not a science. Things don't just repeat themselves due to natural forces. The markets are as fickle and unpredictable as their participants. Assessing the direction of the markets is not like predicting the natural seiche of Lake Erie.

Too many analysts fall in love with their models. They should get out of the office and hang out with the common folk every once and awhile. They would see that many people are not working. Spending is stronger, but consumers remain cautious. Structural forces such as foreign demand for treasuries to "manage" currency exchange rates and the demand (direct or indirect) from an aging population are helping to keep long-term rates low. This won't change any time soon. Low rates will keep the balance sheet recovery in full force. The stock market will continue to rise.... until calmer head prevail, but that might not happen for quite some time. Meanwhile, enjoy the ride.

The Good, The Bad and The Recovery

The re-opening of the 10-year treasury was a rousing success. In fact it experienced the strongest demand since 1994! Yields approaching 4.00%, doubts about a Greek rescue, cautious, contracting consumer credit and cautious Fed comments the day before helped spark demand.


This was not surprising to me and most fixed income market participants. However, it did surprise the equity markets which have begun to believe their own propaganda. Consumers cannot spend more if they are not working. The cannot and will not borrow if they are not working. The equity markets should remain strong in spite of today's correction as rates will remain low and productivity will remain high. Ladder, barbell and shun TIPS except as a hedge.

Minute by Minute

On March 16th (following the release of the FOMC statement) I wrote the following:

"To me it sounds as though the Fed may be more concerned with deflation than with inflation."


Today's release of that meetings minutes stated: "Participants saw recent inflation readings as suggesting a slightly greater deceleration in consumer prices than had been expected." "A number of participants observed that the moderation in price changes was widespread across many categories of spending."


The FOMC members are concerned that inflation is decelerating. That is disinflation. If that persists the result could be deflation. The minutes also reinforced the sentiment that interest rates will remain low for an extended period of time. The bond market shares this sentiment. Today's three-year treasury auction was well received. In fact, it was the most well received three-year auction in months. There was also much interest on the long end of the curve as rates near their highest levels since last June attracted buyers. I would be shocked if tomorrow's 10-year treasury auction was not well received.

An article in today's Wall Street Journal stated the following:

"The bond vigilantes have piled on too early. But that doesn't mean they won't be right in the end."

"Of course, there is no end of good explanations for the yield on the 10-year Treasury note edging above 4% Monday. No one in their right mind would bet on inflation remaining substantially below 4% for the next 10 years."

Here is a fact: The 200+ year U.S. inflation rate is about 3.00%. I will take the bet that over the next 10-years that inflation averages under 4.00%. Could it spike higher from time to time? Absolutely, but unless the Fed loses its independence (possible, but not likely) inflation will not run persistently over 3.00%. According to the FOMC minutes, the Fed's long-term inflation goal (as measured by its favored PCE data) should run between 1.7% and 2.0% during the next. Even if the Fed misses low by 1.5% the 10-year is cheap. If the Fed misses and inflation runs at 2.5%, TIPS are rich at current levels.

It is in vogue (and a bit naive and uniformed) to believe that inflation has to ticks higher and interest rates must trend dramatically higher simply because of the government's borrowing and printing of money. That would be true of the U.S. was the only distressed economy. However, as decoupling was a myth so is the notion that rates must rise.

Other major economies have injected large amounts of stimulus. This includes the China, Japan and the EU. In fact, the aggregate amount of sovereign debt issued by the U.S., EU, China and Japan makes up about 90% of all government debt issued, world wide. Government debt issuance is like fishing with your friend in Alaska when a bear charges. You don't need to be faster than the bear, just faster than your friend. Everything is relative

Half Full or Half Empty

Today's Jobs numbers came in just shy of consensus. The bad news is that jobs, especially full-time jobs, are slow in coming. The good news is that much of the job growth came from the private sector. According to the Nonfarm Payrolls report the economy added 162,000 jobs, 48,000 jobs were temporary census workers. Manufacturing added 17,000 jobs and construction added 15,000 jobs.

The so-called Household Survey indicated that the unemployment rate is 9.7%. However, the number remained high due to more displaced workers indicating they are now actively looking for work. The Household Survey (which accounts for small business job growth better than Nonfarm Payrolls) indicated job growth of 200,000 for March and approximately one million jobs for the first quarter. Unfortunately many of those jobs were part-time or lower wage jobs. This was evidenced by data indicating that average hourly earnings fell.

Part-time Jobs for economic reasons increased by 263,000. The real unemployment rate (which factors in underemployment came in at 16.9% and those unemployed for more than 27 weeks rose by over 400,000. These are records.

Once again, the CNBC crew and their guests were cherry-picking the positive aspects of the report. Well, not all of their guests. Pimco's Muhammed El-Erian made some insightful observations, such as there was much stimulus in these numbers and that the recession was not cyclical, but a balance sheet issue. Balance sheets were severely impaired and the will only be slowly repaired. Due to what all but the most ardent equity market bull are forecasting, household leverage is not going to return to levels seen during the prior decade any time soon.

Of all the experts interviewed today Mr. El-Erian was the most balanced. He acknowledged the positives, but expressed concerns about the negatives. This is where I stand. The economy is off the bottom and will likely stay off the bottom for now. The question is: How high do we go and how long will we take to get there? It appears that we will be in for a long recovery with economic activity and employment lower than what we have seen during the last two decades. Remember, it was only 20 or so years ago when economists were asking of 6.00% unemployment was full employment. Since then we have seen unemployment with 4.00% and 5.00% handles.

We achieved these stellar numbers during the two biggest post-war bubbles. However, because these bubbles lasted for a number of years and were relatively close together, many people (including man experts) came to believe that this was the new normal. Remember the great moderation. The reason economic data was so strong and recessions so mild and short-lived was that the Fed would inject more stimulus to halt the slide even though it had not taken much of its previous stimulus out of the economy. Even I was sucked in.

We should remember that the economy lost 15 million jobs during the recent recession. It will take years to replace many of these jobs. Due to productivity, outsourcing and lower levels of economic activity, some will never come back.

How are the markets reacting? Equity markers are closed, but S&P futures were up 36 points. The bond market, which is open until 12 noon EDT, is reacting much more modestly. With many bond market participants off, the yield of the 10-year treasury has approached 3.90%, but has not pushed through at the time of this publication. Next week's 3-year, 10-year and 30-year treasury auctions will be import gauges of what the fixed income market thinks of the recovery. I think the 3-year and 30-year auctions will be relatively soft, but the 10-year could be surprisingly strong.


What we saw today is a baby step forward, but a step forward none the less. However, the data was not strong enough to warrant a change in the Fed's language, never mind a change in policy, regardless of what the equity wonks say.

April, No Foolin'

Yesterday, I had the pleasure of attending press day at the New York Auto Show. I was part of a group which was hosted by Shaun Bailey of Road and Track magazine. Besides being an excellent editor and an automotive enthusiast, Shaun has a very good grasp on the inner workings of the auto industry.

Electric cars and hybrids were a main topic of discussion today. The group consisted mainly of automotive sector analysts, money managers and other Wall Street types. They were all interested in how, when and what materials will be used in the manufacture of alternatively powered vehicles. What they seemed to miss was that 95% of the new vehicles on display were conventionally powered. Now it is true that alternative power vehicles will garner a greater share of the market place, conventional power will be with us a while longer. So instead of discussing what commodities one should buy, let's discuss companies.


In the taxable fixed income arena, the discussion comes down to three companies: Ford, GM and Toyota. Yes, we could discuss parts suppliers, but since they supply parts for many different car makers, discussing them would be more of a sector call. Let's just stick to automakers.

We will start with Toyota. The world's largest automobile manufacturer has two problems. The first is the stigma over sticking throttles. Secondly Toyota doesn't have a charismatic vehicle which appeals to younger buyers marketed under its own name. Help is on the way. First: The sticking accelerator pedal problems have not been able to be duplicated in testing. Secondly: A new sporty car, which should spark youthful interest in the brand.

GM has experienced a sales rebound, but the picture Shaun Bailey paints is not pretty. He tells a tale of massive product development cutbacks and defecting engineers. In fact, the only engineering team he considers to be "passionate" about their task at hand is the Corvette team. One other bright spot at GM comes from Buick of all brands. Buick has not appealed to many people born after 1940 for quite some time. Buick is making strides in changing that. The new Regal (which has already been available in China for two years) is very sharp. There are plans to bring high-performance, turbocharged engines to Buick. Will this be new era of power and performance at Buick not seen since the 1980s with the Grand National and GNX? It is too soon to tell, but there is reason to be hopeful.

Chrysler is a mess. In fact, in order to survive, Chrysler may not sell many Chrysler vehicles. The company's nine year marriage to Daimler left it without competitive small car platforms and power plants. This is a shame since Chrysler had the best domestic small car platforms and engines in the 1990s.

The good news for Chrysler is that FIAT has competitive small and mid-size car platforms and it has Ralph Gilles at the helm here in the U.S. Mr. Gilles, who was instrumental in designing the latest Dodge Viper and Chrysler 300. He is a car enthusiast through and through, has been appointed by FIAT CEO Sergio Marchionne to oversee Chrysler. Mr. Gilles has decision making capacity and has a direct line to Mr. Marchionne. I am am cautiously optimistic that there will be a Chrysler, but it will have a pronounced Italian accent.


The real winner is Ford. Not only has Ford avoided bankruptcy, it has an engineer for a CEO in Alan Mulally. It is sourcing platforms from its European unit (the new Focus and Fiesta were very nice) and it has held onto its dedicated team of engineers. Look for big changes from Ford, including with its best selling F-150 pick up truck (think turbo 6 instead or along side V8s. I am glad I bought some Ford common on Wednesday.


All in all the technology now available is amazing. Cars of just five years ago seem primitive. If the economy can start clawing its way back, the auto sector could be a fun place to be (with the possible exception of GM).