Trader's Digest

Diffusion

6/26/2010
[Austerity may lead to competence]
http://online.barrons.com/articl ... 20852270192016.html (May require subscription)

According to Yardeni, things are looking up in the EU since the dark days that followed the Standard & Poor's downgrade of Greek sovereign debt to junk in late April. Last week, for instance, Germany's Ifo business-sentiment index in June edged up to its highest level since May 2008.

Other signs abound of a fundamental restructuring of the EU welfare-state model, which Yardeni insists will redound to the ultimate benefit of Europe. He cites labor reforms passed last week by Spain's lower house making it easier and cheaper for businesses to fire workers. Adoption of such legislation would boost rather than discourage hiring and help bring down Spain's soaring unemployment rate.

Likewise, Yardeni insists, many bears are ignoring the immediate boost EU exports are getting from the slide in the value of the euro.

"Is telling workers that they have to delay their retirement from 60 to 62, as France is proposing, really austerity?" he asks. "I don't think so." In fact, many of the changes being proposed will bolster productivity and cost-competitiveness and ultimately lead to more growth and a higher standard of living in the EU.

Or as Yardeni puts it: "The La Dolce Vita era in Europe is coming to a close. The EU just can't afford it."

Diffusion

6/24 - 6/25 Midnight
[Default may not be a bad thing]
http://noir.bloomberg.com/apps/n ... FLavpKtA0&pos=5

Islamic bonds are trading at their highest level in more than six months as companies reach agreements with creditors to restructure debt and the global economy recovers.

The Dow Jones Citigroup Sukuk Index, which measures the performance of Islamic bonds globally, closed at 120.53 yesterday, the highest since Nov. 30 and leaving it 3.8 percent short of the record set Nov. 25. The index has climbed 6.3 percent from its low in December, helped by Dubai World’s May 20 agreement to restructure part of its $23.5 billion of debt.

“That was a big boost for the global sukuk market,” said Zeid Ayer, who helps manage $1.6 billion of Shariah-compliant equities and bonds in Kuala Lumpur for Principal Global Investors and Malaysia’s CIMB Group Holdings Bhd., which have an asset management joint venture. “Restructuring deals help to bring a lot more clarity to the situation.”

Diffusion

6/24/2010
[Banks planning for housing market recovery]
http://money.cnn.com/2010/06/24/ ... e_lending/index.htm

JPMorgan Chase (JPM, Fortune 500), one of the nation's largest lenders, is in the midst of hiring 1,200 mortgage officers. "We may not be inundated with applications tomorrow, but we are confident the the need will be there," said Christine Holevas, a spokeswoman for JPMorgan Chase.

Housing experts, however, warn that overall mortgage lending is expected to remain flat, largely due to a decline in refinancing.

Loans for home purchases should steadily increase over the next two years to $916 billion, up from an expected $725 billion this year, according to forecasts by the Mortgage Bankers Association. But refinancings should plummet to $474 billion in 2012, down from $717 billion this year.

Diffusion

6/23 - 6/24 Midnight
[Germany, Europe's blinded leader]
http://noir.bloomberg.com/apps/n ... f1Jd.EwFA&pos=7

“As the strongest and most creditworthy country it is in the driver’s seat,” Soros said in a speech at Humboldt University in Berlin yesterday. “As a result Germany objectively determines the financial and macroeconomic policies of the euro zone without being subjectively aware of it. When all the member countries try to be like Germany they are bound to send the euro zone into a deflationary spiral.”

“The euro is in crisis and Germany is the main protagonist,” Soros said. “Unfortunately Germany does not realize what it is doing. It has no desire to impose its will on Europe; all it wants to do is to maintain its competitiveness and avoid becoming the deep pocket to the rest of Europe.”

Chancellor Angela Merkel this week championed German export strength as “the right thing” for her country, spurning President Barack Obama’s call to boost private spending as both leaders prepare for Group of 20 talks. Reducing Germany’s budget deficit by 10 billion euros ($12 billion) per year “won’t put a brake on the world’s economic growth,” Merkel said.

“By insisting on pro-cyclical policies, Germany is endangering the European Union,” Soros said. “I realize that this is a grave accusation but I am afraid it is justified. To be sure, Germany cannot be blamed for wanting a strong currency and a balanced budget but it can be blamed for imposing its predilection on other countries that have different needs.”

Diffusion

6/23/2010
[CEO's are more optimistic]
http://noir.bloomberg.com/apps/n ... iaTCi4g6M&pos=4

hief executive officers in the U.S. turned more optimistic in the second quarter, expecting stronger sales and additional hiring in the next six months, a survey showed.

The Business Roundtable’s economic outlook index rose to 94.6 in the April-to-June period, the highest level since the second quarter of 2006, the Washington-based group said today. Readings higher than 50 are consistent with economic expansion, and the measure increased from 88.9 in the first quarter.

Seventy-nine percent of executives said they expect sales will grow in the next six months, up from 73 percent in the first quarter of 2010, while 39 percent said they will add to payrolls, an increase of 10 percentage points. Forty-three percent plan to spend more on equipment, down from 47 percent.

“Our member CEOs plan to continue hiring and expect improved sales,” Ivan G. Seidenberg, chairman of the Business Roundtable and chief executive officer of New York-based Verizon Communications Inc., said in a statement. “That said, our CEOs are demonstrating some caution in the area of capital expenditures.”

The survey, in which 106 CEOs responded, was taken from May 24 to June 14. Respondents estimated the economy will expand 2.7 percent this year.

Seventeen percent of the executives said they would decrease headcount, down from 21 percent in the prior quarter, and 43 percent said employment will be unchanged.

[Riches got richer]
http://money.cnn.com/2010/06/23/ ... ld_wealth/index.htm

The number of high net worth individuals, those with assets of $1 million or more, surged by 17.1% in 2009 to 10 million, a survey by brokerage firm Merrill Lynch and consulting firm Capgemini showed. In 2008, the millionaire ranks plunged to 8.6 million worldwide from 10.1 million in 2007.

Millionaires saw the value of their collective assets climb to $39 trillion, up 18.9% from $32.8 trillion in 2008, thanks to substantial growth in emerging markets, the survey showed.

[What makes Bernanke smile]
http://noir.bloomberg.com/apps/n ... iS0tS4LCI&pos=4

Federal Reserve Chairman Ben S. Bernanke’s efforts to keep U.S. prices and employment from falling may get a helping hand from China’s decision to let its currency gain against the dollar.

Greater yuan flexibility will eventually raise prices of goods imported to the U.S. after a decline in the consumer price index for two straight months and as some Fed officials voice concern about inflation slowing too much. The move should also eventually increase U.S. exports of aircraft, steel and wheat to China, said Charles Lieberman, a former New York Fed official.

Fed officials, who are likely to repeat the commitment to an “extended period” of low interest rates in a Washington meeting today, are contending with joblessness that’s still close to a 26-year high. China’s announcement on June 19, which pushed global stocks higher, may ease their concerns that Europe’s debt crisis poses a risk to the recovery.

“It implies a little bit of a positive fillip to domestic growth,” said Lieberman, chief investment officer at Advisors Capital Management LLC in Hasbrouck Heights, New Jersey. “It does also imply some upward pressure on import prices, but I don’t think that’s going to be particularly troublesome to the Fed when the unemployment rate is so high.”

At the last Federal Open Market Committee meeting in April, some policy makers saw inflation risks as “tilted to the downside in the near term” because of slack in the economy and the chance price expectations could decline. Other officials said inflation may pick up because of an expanding global economy and U.S. budget deficits.

[Numbers about delinquency and foreclosure]
http://money.cnn.com/2010/06/23/ ... edefaults/index.htm

Only 40.7% of loans modified in the second quarter last year were delinquent after nine months, compared to 51.6% of those adjusted at the end of 2008, according to the report, published by the Office of Thrift Supervision and Comptroller of the Currency.

The quarterly report covers 64% of all mortgages outstanding in the United States -- some 34 million loans totaling nearly $6 trillion in principal balances. It offers one of the most comprehensive looks at the state of mortgages in America.

And modifications made under President Obama's foreclosure prevention program, known as HAMP, also had lower redefault rates than non-government modifications. Some 7.7% of HAMP modifications were delinquent after three months, compared with 11.3% of all modifications.

Under the HAMP program, borrowers' monthly payments are reduced to no more than 31% of their pre-tax income. Borrowers also receive incentives for making timely mortgage payments.

Interest rate reductions were the most common method that servicers used to reduce monthly payments in the first quarter, implementing them in 85.9% of all modifications. Term extensions were used in 46.8% of modifications, while principal reduction was utilized only 1.9% of the time.

The report also found that delinquency rates dropped for both mortgage made to credit-worthy and to subprime borrowers. The number of newly initiated and completed foreclosures, however, increased by nearly 19% each.

Short sales increased by 9.2% for the quarter, but 120.4% for the year.

Diffusion

6/22 - 6/23 Midnight
[Expect a watered-down Volcker Rule]
http://noir.bloomberg.com/apps/n ... RvgcSapo8&pos=7

Senate negotiators will probably offer changes today that would soften the Volcker rule by allowing banks to sponsor hedge funds and invest their own money, within limits, alongside that of clients.

The compromise, designed to win the support of at least three Republican senators, comes as lawmakers struggle to reach agreement on financial reform this week. To appease Democrats in favor of stronger regulation, negotiators also plan to make it harder for regulators to undermine the rule, according to lobbyists and congressional aides involved in the discussions.

“There’s pressure from both sides to toughen and to soften the Volcker rule, and politics is the art of compromise,” said Lawrence Kaplan, an attorney at Paul Hastings Janofsky & Walker LLP in Washington. “Running a hedge fund wasn’t the problem, and this way they’re saying all of it wasn’t bad, you just can’t use too much of your capital on it. Politics is the art of saying ‘we made it tougher’ without making it really tough.”

[MS is immune to swap proposal]
http://noir.bloomberg.com/apps/n ... r8.nOy55g&pos=6

Three of the five U.S. banks that dominate swaps trading already perform most transactions outside their depository institutions and would face minimal disruption from a congressional proposal to reorder the derivatives business, financial statements and banking records show.

JPMorgan Chase & Co. and Citigroup Inc. would be hit hardest by the proposal, crafted by Arkansas Senator Blanche Lincoln, to wall off swaps desks from commercial banks. JPMorgan had 98 percent of its $142 billion in current value derivatives holdings inside its bank in the first quarter of this year while Citigroup had 89 percent of $112 billion, the records show.

Morgan Stanley and Goldman Sachs Group Inc., each of which entered the commercial banking business in 2008 in the midst of the financial crisis, would be less affected. Morgan Stanley kept just over 1 percent of its $86 billion in derivatives holdings in its bank in the first quarter, and Goldman Sachs Group’s held 32 percent of its $104 billion. Bank of America Corp., which absorbed broker-dealer Merrill Lynch in 2009, had 33 percent of its $115 billion in its bank.

Diffusion

6/22/2010
[Bet on a return of the growth stock]
http://money.cnn.com/2010/06/22/ ... .moneymag/index.htm

Historically the P/E ratio for growth stocks is more than eight points higher than that of value shares. Today that has narrowed to two points. When this gap is small, it's usually good news for growth.

Diffusion

6/21 - 6/22 Midnight
[Yuan stays controlled]
http://noir.bloomberg.com/apps/n ... g.SyWViio&pos=2

The central bank set the yuan’s daily reference rate at 6.7980 per dollar, compared with 6.8275 yesterday. The currency is allowed to fluctuate 0.5 percent either side of that rate.

“The fixing was at yesterday’s spot close, which indicates that true to their word, they are allowing market forces to play a greater role in determining the renminbi’s value,” said Mirza Baig, a Singapore-based currency strategist at Deutsche Bank AG, the world’s largest foreign exchange trader.

[Loonie gains]
http://noir.bloomberg.com/apps/n ... shtW.hsVk&pos=3

The Australian and Canadian dollars are becoming reserve currencies for central bankers seeking alternatives to deteriorating government credit quality in Europe, the U.S. and Japan.

“They’ll gain an increasing place in reserves because of diversification,” European Central Bank governing council member Christian Noyer said in a June 16 interview with Bloomberg News in Paris.

Diffusion

6/20 - 6/21 Midnight
[China's purchase of Treasury focused on long term debt]
http://noir.bloomberg.com/apps/n ... 6K8AfR_zo&pos=4

Purchases in recent months have focused on longer-term debt, unlike in 2008, when most of the cash went into Treasury bills. China boosted its holdings by 18 percent in the 12 months through this April, with notes and bonds due in two years or more surging 46 percent.

By purchasing longer-term securities, China is helping keep U.S. borrowing costs near record lows, aiding companies and individuals as the U.S. economic recovery strengthens.

Long-term U.S. rates would be about a percentage point higher without foreign government and central bank buyers, according to studies done in 2006 and 2009 by Professors Francis and Veronica Warnock at the University of Virginia in Charlottesville, who researched the matter for the Federal Reserve.

[Transportation heads north]
http://noir.bloomberg.com/apps/n ... dTg3_9buY&pos=7

U.S. diesel demand is rising at the fastest pace in five years as the economy expands and truckers haul more goods, boosting profits for refiners.

Use of the fuel in the four weeks ended June 11 increased 12 percent from the previous year, the Energy Department said June 16. About 9.6 percent more freight moved by road in April than in the same period of 2009, according to the American Trucking Association. Refiners earned $12.23 a barrel on June 18 turning crude oil into diesel and other distillates, more than double levels of a year ago, according to futures market data.

“Given the trend we’re seeing, we would expect diesel demand to contribute to a larger proportion of oil-demand growth,” said Costanza Jacazio, a commodities analyst at Barclays Capital in New York.

Diffusion

6/19 - 6/20 Midnight
[U.S. received advance notice on the end of Yuan's peg]
http://www.bloomberg.com/apps/ne ... xlm_o.Eq0&pos=1

“This is another small victory for Tim Geithner,” Goldman Sachs Group Inc. Chief Global Economist Jim O’Neill said in an interview with Bloomberg Television in St. Petersburg, Russia.

“It makes it a lot more difficult for Washington and Congress to do China bashing,” O’Neill said. “The Chinese are increasingly confident they can make this adjustment to a domestic-driven economy rather than the one relying on exporting low-value-added stuff to the rest of the world.”

Geithner, in a statement, praised China’s decision and added that “vigorous implementation would make a positive contribution to strong and balanced global growth.” The Obama administration received advance notice of the announcement, U.S. officials said.

China, by moving on its currency ahead of the G-20 meeting June 26-27 in Toronto, has shifted attention to the budget deficits of developed nations, said Eswar Prasad, a senior fellow at the Brookings Institution in Washington.

Diffusion

6/19/2010
[Charitable giving]
http://online.barrons.com/articl ... 08711012468310.html (May require subscription)

The Numbers
Giving USA Foundation reported that charitable giving held up better than expected in 2009:

$303.75 billion: Charitable giving in the U.S. in 2009, the third year in a row it surpassed $300 billion

3.6%: decline in contributions from the previous year in current dollars

33%: portion of contributions given to religion, the biggest share, totaling $100.35 billion

5.5%: increase in giving by corporations

Diffusion

6/17 - 6/18 Midnight
[Citi feels comfortable with financial reform bill]
http://www.bloomberg.com/apps/ne ... yocuhTJro&pos=1

Citigroup Inc. plans to raise more than $3 billion for its private-equity and hedge funds, even as U.S. lawmakers consider banning banks from owning and investing in so-called alternative funds, people with direct knowledge of the plan said.

Citi Capital Advisors, which oversees about $14 billion, may seek $1.5 billion for private equity this year and $750 million for hedge funds, said the people, who declined to be identified because the plans aren’t public. An additional $1 billion is targeted next year for hedge funds, the people said.

“Citi must be comfortable enough that whatever happens, even in the extreme version, they’ll be able to move ahead with these businesses,” said Steven Kaplan, a professor at the University of Chicago Booth School of Business who studies the private-equity industry. “I don’t think any of these bills envisioned not being able to manage someone else’s money. It’s the bank capital that’s still an open question.”

[Contagion ebbs in credit market]
http://www.bloomberg.com/apps/ne ... 655ZVUdPU&pos=6

Bank of America Corp. and JPMorgan Chase & Co. raised $4.25 billion in the bond market as investors grow more confident Europe’s debt crisis will be contained, averting another credit freeze for financial companies.

Bank of America’s $3 billion offering yesterday was its first benchmark issue of dollar-denominated 10-year notes in a year, according to data compiled by Bloomberg. New York-based JPMorgan boosted its sale by 25 percent to $1.25 billion as relative yields on U.S. bank debt fell for a fourth straight day, the longest streak since March.

The banks’ offerings followed Spain’s sale of 3.5 billion euros ($4.3 billion) of bonds, the maximum set for the auction, easing concern it will struggle to finance looming debt maturities. Even as potential regulations loom, U.S. banks are taking advantage of “very attractive financing rates and a receptive marketplace,” said Wells Fargo Funds Management’s James Kochan.

“There’s a lot less fear among investors than was true a week ago or a month ago,” said Kochan, who helps oversee $179 billion as chief fixed-income strategist for the firm in Menomonee Falls, Wisconsin. “Things are calming down a bit in world markets.”

Deutsche Bank AG, Germany’s biggest bank, issued 1 billion euros of so-called lower Tier 2 bonds that were priced to yield 210 basis points, or 2.1 percentage points, over swaps, according to a banker involved in the deal. Credit Suisse Group AG added 550 million euros to its existing 4.75 percent bonds due August 2019, according to data compiled by Bloomberg. The additional notes yield 180 basis points more than similar- maturity German debt.

Diffusion

6/17//2010
[Senators to scale back jobless benefit]
http://money.cnn.com/2010/06/16/ ... tversion=2010061623

Seeking to appease deficit hawks, Senate Democrats scaled back unemployment benefits and Medicare physician reimbursement measures on Wednesday.

The revised jobs bill eliminates a $25 weekly supplement for the jobless that had been part of the last year's stimulus act. Those currently receiving the supplement in their unemployment benefits check will continue to do so until they exhaust their extended benefits, or until the week of Dec. 7, whichever comes first. That cut will reduce the bill's cost by $5.8 billion over the next decade.

The Senate's actions mirror what happened in the House, which twice had to shrink its version of the jobs and tax extenders bill to secure enough votes among members wary of raising the federal deficit even further. Representatives ultimately passed a measure in late May that would increase the deficit by $54.3 billion.

[GM won't close plants this summer]
http://money.cnn.com/2010/06/17/ ... main_open/index.htm

General Motors said Thursday it will not shut down most of its assembly plants this summer, as it usually does, due to sizzling demand.

GM, the largest U.S. automaker, said that 9 of its 11 assembly plants will continue to operate from June 28 and July 9, a move that is expected to generate up to 56,000 additional vehicles.

"Our manufacturing teams are taking creative approaches to increase production and reduce the wait times for our dealers and customers," said Mark Reuss, president of GM North America, in a prepared statement.

Plants have traditionally closed for a short period during the summer to facilitate annual model changeover, maintenance and to manage employee vacation schedules.

[Mismatched maturity]
http://www.economist.com/node/16381310 (May require subscription)

Lots of countries are now experimenting with capital controls: on June 16th Indonesia became the latest, introducing mild curbs on flows of hot money. But Mr Shin insists the limits are a “surgical response” to unique circumstances in South Korea. These include a shipbuilding industry that is paid in dollars over three years and needs to hedge its won costs by selling forward dollar contracts to banks. The country also lacks a deep local-bond market attractive to long-term foreign investors. There is, says Mr Shin, a maturity mismatch in South Korea between long-term assets and short-term liabilities that makes it vulnerable to sudden bursts of deleveraging. “Whenever Europe trembles, we are the first place to jump from,” he says.

Diffusion

6/16 - 6/17 Midnight
[Gross buys BP's debt]
http://www.bloomberg.com/apps/ne ... xOuBUi8Lc&pos=1

BP bonds were the most active yesterday in U.S. trading, Trace data show. The manager of the world’s largest bond fund, Bill Gross, recently bought $100 million of shorter-maturity BP debt, Pacific Investment Management Co. spokesman Mark Porterfield wrote yesterday in an e-mail.

Gross, co-chief investment officer at Pimco in Newport Beach, California, also bought notes of The Woodlands, Texas- based Anadarko Petroleum Corp., owner of a 25 percent stake in the well that has been spewing oil into the Gulf since April 20.

Diffusion

6/16/2010
[Bearish sentiment approaching July 2009 high]
http://www.bespokeinvest.com/thi ... uly-2009-highs.html

Bearish sentiment has now risen convincingly above the levels from February.  According to the weekly survey from Investors Intelligence, 32.6% of newsletter writers now consider themselves bearish, which is the highest level since July 2009 when bearish sentiment peaked out at 35.6%.  Given that the February lows in the S&P 500 have held so far, have investors gotten overly bearish this time around?

Diffusion

6/15/2010
[Fed test tightening tool]
http://www.bloomberg.com/apps/ne ... CbimrCvjI&pos=2

The Federal Reserve said it sold $1.15 billion in deposits in the first test of a credit- tightening tool it may use to drain a near-record amount of cash from the banking system.

The Fed offered $1 billion for 14 days through its Term Deposit Facility and received bids worth $6.14 billion, the central bank said in a statement today. The successful banks will deposit money with the Fed from June 17, 2010, to July 1, and receive interest of 0.27 percent. Banks currently receive 0.25 percent in interest on their excess reserves.

Fed Chairman Ben S. Bernanke is planning to use the program, which he says is analogous to a bank certificate of deposit, to eventually help policy makers raise interest rates. With $1.05 trillion in excess reserves in the banking system, central bank officials are looking for new ways to help achieve their target rate for overnight lending among banks.

The Fed also awarded $152 million in deposits through non- competitive bids. The Fed said the auction drew 109 participants and 194 bids.

The tests “are a matter of prudent planning and have no implications for the near-term conduct of monetary policy,” the Fed said last month when it announced the schedule for the tests.

[Housing shortage]
http://money.cnn.com/2010/06/15/ ... ng_bubble/index.htm

As the nation struggles to shrug off the worst housing crash since the Great Depression, it may be hard to believe a housing shortage could be on its way.

The nation is simply not building enough homes to keep up with potential demand. Just 672,000 new homes were started in April, an annualized rate and less than half the long-term run rate needed to meet the nation's natural population growth.

"It is ironic, but there is a growing consensus that there may be a new housing shortage coming," said James Gaines, a real estate economist with Texas A&M.

So far, the shortfall has been masked by a weak economy that has put a damper on home buying. Once the job market rebounds, however, people will look to have their own homes again. This pent-up demand could get unleashed on unprepared markets, causing shortages and rising local prices.

Diffusion

6/14 - 6/15 Midnight
[China leading indicator rises the most in 14 months]
http://www.bloomberg.com/apps/ne ... n45dz_b4k&pos=4

A leading indicator for China jumped by the most in 14 months, adding to signs that the world’s third-biggest economy is maintaining momentum as Europe’s debt crisis threatens to undermine the global recovery.

The measure gained 1.7 percent to 147.1 in April, compared with a revised 1.2 percent increase in March, The Conference Board said on its website today.

“China is performing among the best of any economy around the world,” Bill Adams, resident economist for the New York- based research organization, said in Beijing today.

The nation’s expansion could be capped by weakness in exports in coming months and a government crackdown to cool property prices, which rose at a near-record pace in May. The banking regulator warned today of growing risks of non- performing loans, especially in real estate, after unprecedented credit growth under the nation’s stimulus program.

Diffusion

6/14 - 6/15 Midnight
[Stocks undervalued relatively to bonds]
http://www.bloomberg.com/apps/ne ... 162ZLy4J4&pos=6

The biggest decline for global equities in 15 months has left stocks at the cheapest level relative to bonds since the collapse of Lehman Brothers Holdings Inc., a sign that shares in the U.S. and Europe may rally.

Standard & Poor’s 500 Index companies yielded 4.4 percentage points more in profit than the average interest rate on investment-grade bonds last week, according to data compiled by Bloomberg and Barclays Plc. The inflation-adjusted spread shows stocks are trading near the lowest prices compared with corporate earnings since November 2008 next to bonds.

Cliff Remily at Thornburg Investment Management, which oversees $57 billion, and Barry Knapp of Barclays say the yield gap shows shares are too cheap to pass up with corporate profits forecast to rise the most in 16 years. While bears say the S&P 500 will tumble as Europe’s debt crisis curbs global growth, rising profit yields in stocks over bonds may provide a margin of safety for investors after $6.16 trillion was erased from equity markets worldwide since April 15.

“From a valuation perspective, you’ve got a little bit of the best of both worlds,” said Leo Grohowski, who oversees $157 billion as chief investment officer at BNY Mellon Wealth Management in Boston. “Bond yields are still low,” he said. “But earnings estimates are still at levels that are baking in an economic recovery. Something may have to give.”

Diffusion

6/12/2010
[A bottom like 1974, 2002-2003, and 2009]
http://online.barrons.com/articl ... 96722750699864.html (May require subscription)

But it does mean that something approaching the historical market returns of the pre-bubble period has become a decent bet again. The S&P 500 is down by a quarter since 2000, while its companies' profits have doubled and long-term interest rates have been halved.

Near the recent market lows, the comprehensive Wilshire 5000 index was flirting with a trailing three-year annual total return of minus 10%. Since 1970, it has had a 10% or greater three-year annual loss three times: near the 1974 market low, at the 2002-2003 bottom and in early 2009. In the first two instances, the markets didn't quickly turn for the better as the trailing loss hit 10%. But both times, after first reaching a 10% three-year loss, the market produced a handsome annual return over the next three years—22% and 18%, respectively.

Diffusion

6/10 - 6/11 Midnight
[European debt's Prisoner’s Dilemma]
http://www.bloomberg.com/apps/ne ... INInuvuzE&pos=2

Banks holding sovereign debt are faced with a “prisoner’s dilemma,” said Hoffmann-Becking, referring to a mathematical theory that seeks to explain the behavior of two parties that can choose to either cooperate or pursue their own interests.

“From an individual bank’s perspective, it would be great to get rid of the sovereign debt,” Hoffmann-Becking said by telephone. “However, if everybody did it you’d have a rapid collapse of the government bond market and then you’d have the default. And in the default, the fact that you have no sovereign debt actually doesn’t help you at all.”

German financial companies including Deutsche Bank agreed in May to refinance maturing Greek debt and maintain existing credit lines to Greece and its lenders for the next three years. French banks made a similar pledge.

A majority of European banks haven’t tendered their Greek sovereign debt to the European Central Bank, according to an informal survey by Morgan Stanley analysts. One reason may be that some banks bought their Greek bonds when they were trading at 20 percent above par, meaning a sale to the ECB would prompt a loss, Morgan Stanley’s London-based analyst Huw van Steenis said in a note to clients on June 9.

[European corporate bond got trashed]
http://www.bloomberg.com/apps/ne ... oHAO8vIHA&pos=4

The risk of owning Europe’s corporate bonds is the highest on record relative to U.S. company debt as investors lose confidence lawmakers and central bankers can tame the region’s worsening fiscal crisis.

Yields on investment-grade bonds in euros rose to a 10- month high of 239 basis points, or 2.39 percentage points, more than government debt, according to Barclays Capital index data. That’s 43 basis points more than the spread for U.S. company notes, near the record 44 basis points reached May 27. European bond spreads were below those on dollar debt as recently as February, the indexes show.

Yields suggest debt investors are concerned Europe’s sovereign debt crisis will stifle growth and curb profits even after European Union President Herman Van Rompuy said yesterday a 750 billion-euro ($908 billion) rescue package will be increased if it fails to quell volatility. About 75 percent of investors and analysts expect some governments in the region to default or the 16-nation euro area to break up, according to a quarterly poll of Bloomberg subscribers.

“It’s largely fear driven,” said John Milne, chief executive officer of JKMilne Asset Management, who oversees about $1.8 billion in Fort Myers, Florida, and favors U.S. corporate bonds. “People like ourselves are holding onto positions, watching the market like a hawk.”

[Expansionary fiscal contractions]
http://www.economist.com/node/16322542?story_id=16322542 (May require subscription)

A lot also depends on how budgets are cut. A much-cited study by Alberto Alesina of Harvard University and Roberto Perotti, now of Milan’s Bocconi University, found that budget adjustments that rely on cuts in welfare payments or the government’s wage bill are more likely to produce lasting benefits—lower public debt and faster GDP growth—than those based on tax increases or cuts in public investment. The least harmful taxes were on firms’ profits or on consumer spending.

Examples of such “expansionary fiscal contractions” are much harder to replicate now. Countries that managed to grow strongly in the past while cutting budget deficits were often aided by a falling exchange rate or were rewarded by a big drop in borrowing costs. Most rich countries today already enjoy low bond yields. And not everyone can devalue their currencies.