The Week Ahead

The private sector increased purchase of U.S. treasuries among foreign buyers.

According to January data, foreign purchases of U.S. treasuries declined. This was particularly true of foreign governments. However, foreign private investors actually increased their purchases of U.S. treasuries, purchasing $60,709B. This was up from $48,060B in December. Private investors have been increasing their purchases of U.S. treasuries in recent months, purchasing $86,638B last November. This is a marked increase from $23,745B last October and $25,120B last September.

Market participants are concerned that China's efforts to slow its domestic economy, it will not be able to purchase sufficient quantities of U.S. treasuries to keep interest rates under control. Market participants are also becoming uneasy at the prospect of not having the Chinese economy leading the world toward recovery. Doubts that the global economic recovery may not be sustainable is evidenced by today's data which indicated that foreign purchases of U.S. equities fell to $4.3B in January, down from $20.1B last December. Comments made by Chinese Premier Wen Jiabao that the global economy could experience a so-called "double-dip" recession and that China is becoming increasingly concerned over its U.S. dollar holdings rattled the overseas markets and pushed U.S. equities lower early in the day.

What is real and what is an illusion?

Lackluster job growth, potential restrictive legislation governing the financial sector and proposed changes to FASB rules which would require banks to value assets more accurately based on performance rather than to a model or mark to maturity threatens to derail or at least hamper the market's recovery. In my opinion, a market rising because negative issues are being ignored or explained away is like a house of card waiting to Fall. Even financial sector apologist Dick Bove told CNBC today that there is no way to truly know how much the economy and lending has recovered because the GSEs mission of acting as the lender / securitizer of last resort is probably responsible for a major portion of the recovery experienced thus far.

Take Nothing For Granted

An article in this week's Barron's advises investors wishing to speculate in AIG due so by investing on the debt side of the balance sheet, including the trust preferreds AVF and AFF as the are technically ahead (more senior of the capital structure) than the government's preferred investment. Although I do not think the government intends AIG to not make its creditors whole, there are ways it can do so.

First, let's address the idea of being senior to the government. Technically the E-TRUPs, AVF and AFF are senior to the government, but as we have already seen with GM and Chrysler, capital structure may not matter that much where the government is concerned. Both Chrysler's secured creditors and GM's creditors (including bondholders) where "crammed-down" to receive less in the way of compensation than both the unions; and the government's equity claims. Nothing is impossible.

Also, unsecured corporate bonds are general obligations of the issuer. They are only as good as the assets and cash flows within. In the past two weeks, we have seen AIG engage in asset sales. AIG has said that the proceeds of these sales would be used to pay back the government Although it is good to get the government off of one's back, what has happened here is that the government (an preferred equity investor, will receive compensation ahead of creditors.

Sorry

It has been very difficult to write at night after long, frustrating days. I know the quality has not been what it was years ago when I was writing every day for a major bank (in the morning). It is not easy trying not to come across as depressing when one is not a believer in a v-shaped recovery. I am considering suspending publication. Feed back on the subject would be appreciated.