She Cried More, More, More

Today's $12 billion auction of 30-year U.S. government bonds went exceedingly well. In fact, demaind for the longest dated U.S. government debt drew the strongest interest since November 2007. The price of the long bond rose over two points as its yield fell to 4.20% late Thursday afternoon.

Who was buying long-dated treasuries? Many institutional investors, especially foreign investors including central banks. Some foreign central banks are doing what they can to manage (I didn't say manipulate) their home currencies versus the dollar. They know full well that U.S. consumers will not be spending like drunken sailors any time soon and exporting nations need to maintain or capture as much share of the shrunken market as possible. This is yet another example of the difference of opinion between the bond market and the stock market. I would bet on the bond market being correct yet again.

More data supports the idea of a slow economic recovery. Consumer credit continues to shrink, new foreclosure filings topped 300,000 yet again (357K), jobs are scarce and mortgage delinquencies are on the rise. One only needs to listen to Treasury Secretary Tim Geithner to understand the challengers facing the economy. He warned that banks still have to deal with toxic assets, today's stimulus has to be paid for down the road (higher taxes) and that the recovery will be gradual. For baby boomers and gen-xers whose market knowledge only goes back as Paul Volcker or Alan Greenspan. Anything but a V-shaped recovery is a foreign concept. Sorry folks, rates cannot get cheaper and credits standards are not going back to foolishness (yet).

Mr. Geithner summed it up this way:

“Given the extent of damage done to the financial system, the loss of wealth for families and the necessary adjustments after a long period of excessive borrowing around the world, it is realistic to assume recovery will be gradual, with more than the usual ups and downs.”

He also stated:

"We are not close to being through this."

The proposed FASB rule which will require banks to place what have been until now off balance sheet loans onto bank balance sheets slated to go into effect this November. Economic discomfort lies ahead. I would especially beware regional banks.

I have been asked many questions regarding foreign bank preferreds. I would be very concerned with preferreds issued by RBS, ING and ABN. All are on life support and the plug could be pulled by year end. Why? Way too much leverage and mounting credit-related lossed.