U.S. Stocks Retreat, Snapping Six-Day Advance for S&P 500

A six day gain in the S&P 500 has been snapped. This decline has been led by a decrease in the stock prices of energy, financial and technology companies. The initial gain was the result of news of rise in home prices and increase in consumer confidence. However, as the dollar appreciated thereafter, its inverse relation with stocks prevailed. This allowed market watchers to observe a seventh day loss in the S&P 500.

Treasury Yield Curve Steepens to Record Amid Growth Outlook

US Treasury yield curve has steepened to record levels reflecting sentiments of the recovery of economic growth in the country. Economists are of the opinion that economic growth has returned and inflationary pressures are now a concern.

Funding of the purchase of US Treasuries will be a problem. With the US government trying to lower its current account deficit, other nations will not have enough US dollars on hand to purchase US Treasuries. The Americans will have to fund these Treasury sales internally.

According to the break even rate reflected by TIPS, the expected inflation rate is at 2.32%, up 9 basis points from last year.

Geithner Says TARP Repayments Don’t Hurt Bank Lending Ability

Banks that have received financial assistance from the US government's TARP scheme have been in a rush to sever all ties with the government to free themselves from the executive compensation restrictions imposed. These institutions have been doing this by drawing in private capital to replace government capital. This recapitalization exercise would not adversely affect their ability to lend to others. However, analysts have pointed out that private lending will not increase without any demand and collateral from private firms.

Citigroup's current capital raising program has hit a snag when it was forced to sell its shares at a price lower than expected, prompting the government to put the sale of its share on hold.

Initial Jobless Claims in U.S. Unexpectedly Increase

There has been an increase in first time jobless claims recently, counter to what economists have expected. This just goes to show that the recovery will not be smooth sailing. The road to recovery will be filled with treacherous obstacles.

Citigroup Says Abu Dhabi Seeks to End Share Purchase

Abu Dhabi Investment Authority (ADIA) is of the opinion that Citibank has misrepresented to them on the terms within the investment agreement they had with them. Right now, ADIA is required to purchase Citibank shares at 8 times its current market price based on the agreement. That equates to a share price of about $31.83 to $37.24. Naturally, ADIA is disappointed and has decided to sue Citibank.

It remains to be seen as to how far Citibank would be willing to subsidize ADIA's botched investment.

Abu Dhabi Bails Out Dubai World With $10 Billion

The Abu Dhabi government has finally decided to bail out Dubai World with $10 billion. This move has caused the stock markets there to soar as what has been determined implicitly has crystallize at last. This sum of money given to Dubai World would provide the company with the leeway to restructure its debt.

Dubai Company Bonds Dive as Swaps Show Default Risk

The ripple effects from the debt restructuring of Dubai World can be felt throughout Dubai with the series of credit downgrades being initiated by the various rating agencies.

Many analysts believed that the Dubai government would guarantee the debts of the those state-owned companies. Now they realize that this is not the case which has resulted in a series of credit downgrades. The ownership structure of these companies is very complex and it would take some time before analysts figure out which companies are actually government guaranteed and which are not.

Gold Can’t Beat Checking Accounts 30 Years After Peak

Many asset classes beat the returns obtained from gold. History as also taught us that gold is not a great hedge against inflation. This asset class also does not deserve a very significant weight-age within an investment portfolio.

NBER’s Hall Says Recession May Be Over

NBER (National Bureau of Economic Research) believes that the recession is over. This is determined from the fact that payrolls have been decreasing at a lesser amount than predicted by many. This coupled with the fact that unemployment rates have declined to 10 percent goes to show that the recession may be over.

Pimco Says Bet on Yuan After Dubai Reminds of Risks

Yuan has been appreciating steadily over the previous years. This has been achieved by the effective government policy of disallowing the yuan to appreciate in the short-term so as to allow the economy to recover.

Once the recovery of the economy has been achieved, the yuan will become a market-based currency. This is so as the Chinese central bankers know that under a flexible exchange rate, the China's growth will shift its focus to domestic demand, allow resources to be allocated more efficiently and reduce the risks of asset bubbles.

India Studying Effect of Dubai’s Debt Delay Plan on Its Economy

The spillover effects of Dubai's debt delay plan could lead to a downturn in India's economy. However, the direct impact of this is still being studied by India. Remittances from Dubai account for about 25% of the remittances in India. This coupled with the large amounts of receivables that Indian companies have with Dubai's companies could bring about a "W-shaped" economy.

Dubai Crisis May End in ‘Major’ Default

Dubai World, a state-owned enterprise, has requested to reschedule its USD 80 billion of debt that has been used to fuel the construction boom in the last 4 years. With property prices down by 50% from its 2008 peak, it currently has trouble servicing its loan.

Analysts fear that this event might trigger a series of defaults by other emerging economies. This has caused the spread between US Treasuries and developing nations' bonds to increase by 14 basis points. However, many governments believes that this crisis is "containable".

Stocks, Commodities Gain on Economic Optimism as Dollar Slumps

The economic outlook in America is slowly turning optimistic as the current data shows. Weekly jobless claims fell to the lowest level since September 2008, while home sales, consumer confidence and personal spending topped estimates. These optimistic data has caused stocks and commodities to gain. These gains are also partially due the weakening of the greenback. The main reason for this is the fear that investors will perform carry trades (i.e. the buying of high-yielding assets using money borrowed from low interest rate nations).

Gold prices have soared for another reason as well. That is due to the news of India's central bank intention of stocking up on the bullion.

Pimco’s Gross Increases Government Debt to Most in Five Years

Bill Gross has increased the proportion of government debt in its portfolio to the highest level in 5 years. This shows how overvalued asset prices Bill believes them to be.

The "Total Return Fund" currently has 63% of its assets invested in government debt. He thinks that with low interest rates, regulatory tightening, lower consumption, slower growth and shrinking global economic role for America, investors will be experiencing low returns for the subsequent years. This is his rationale for over-weighting on government debt.

Dollar Slump Persisting as Top Analysts See No Bottom

Analysts see that the dollar will continue its downhill slide in the medium term as long as the Fed carries on its low interest rate policy for an "extended period". History has shown that it takes a period of about 12 months after an increase in interest rates for the dollar to appreciate relative to the other currencies. Many analysts believe that the dollar will continue its slide even till after 2010.

Financial markets around the world have been too optimistic about global demand. Risk aversion should rise again.

Dollars Strengthens as Equities Drop

People are taking their profits by selling equities and buying treasuries. This has caused the greenback to rise. This phenomenon is not unusual as the year end is approaching and naturally fund managers are booking in their profits. Now is not the time for people to be taking additional risks.

Pimco’s Gross Says Risk of Asset Bubble Rises With Low Rates

Bill Gross advises investors to invest in utility stocks. The asset bubble is currently being inflated again with persistent low interest rates. Low interest rates force investors to invest in high risk securities. This increases the systematic risk in the financial markets.

Bernanke Signals ‘Extended’ Low-Rate Period May Become Longer

The Central Bank has signaled that the period of low interest rates would not come to end so soon. With jobless rates remaining high and increasing, it is not within the Federal Reserve's interest to raise interest rates. As for the issue of asset prices, the Federal Reserve Chairman is of the opinion that there are no evidence pointing to any misalignment between asset prices and fundamental value. This is an issue that is difficult for anyone to comment on. There is no solid timeline on the exit strategy of the government stimulus given the current economic situation in America.

As for the emerging economies, they believe that low interest rates in America is inflating prices around the world. There is a fear that this will turn out into another financial crisis causing a meltdown in the economies.

Wall Street Faces ‘Live Ammo’ as Congress Aims to Unravel Banks

Paul Kanjorski is planning to dismantle banks that are deemed too big to fail. This is to preempt the next financial meltdown. Bill Clinton signed the repeal of the Glass-Steagall Act a decade ago and now politicians seem keen to reinstate this to prevent the next financial crisis. This has to be done to keep tax payers safe from future bailouts required.

Bloomberg Professional Confidence Index Global Economy

This index comprises responses from users globally about the outlook of the economy. A value above 50 denotes a positive sentiment about the global economy.

As central bankers withdraw their stimulus around the world, confidence in the outlook of the global economy has fallen in many countries. With the rising unemployment around the world, this will take out a large chunk of the consumer spending required to spur the economy back to growth. Hence, many believe that the current growth could just be a two quarters kind of event.

Greenspan Says Stock Market Rally ‘Re-liquifying’ U.S. Economy

All the price indexes are rising from the impact of the government stimulus of USD 787 billion. However, whether this will last is another story. Overall, such price increases will help to prevent foreclosures as the equities of the mortgages would allow home owners to keep their homes.

Inventories have also been depleting. This will signal manufacturers to ramp up production and therefore employ more staff. After that, the economic outlook would depend on what the stock market does. This is because of the "wealth effect" associated with the stock market. According to Greenspan, the deciding point is in the second quarter of 2010.

Tobin Taxes

Europe and US are split on the need for Tobin tax, a tax on every trade of the financial markets. This was portrayed during the ongoing G20 meetings.

Unemployment Rates in the US Jumps to 10.2%

Unemployment data for the October is out. US employment rate rose to 10.2%. This will definitely put pressure on consumer spending making the sustainability of the recovery a question.

Buffet's bet on Burlington Northern Santa Fe Corp.

No changes will be made as it always has been the case for the investments made by Buffet. In fact, it is important that Buffet utilizes the management's capabilities and keep them in their current place. That is what he will do.

Rose, CEO of BNSF, will have an easier time in borrowing funds. That will be one of the perks of being acquired by a triple-A rated company.

The reason for Buffet's investment in the company is simple. BNSF has managed to double its revenue from 2001 to 2008. They have also managed to reduce expenses while at the same time expanding capacity. This has been achieved by reducing variable costs through the use of longer and fewer trains. Capacity has been increased by including parallel tracks and increasing the number of locomotives under the company's ownership. The company also has no problem in generating free cash flow.

Buffet seems to understand the US economy well. By making a bet on railroads when diesel prices are increasing, Buffet understands that railroads will be the transport mode of choice as trucks would be more expensive in such a situation.

Feds Pledge to Keep Rates Low

The Federal Reserve has pledged to keep its interest rates low for an "extended period" as long as inflation remains low and unemployment fails to decline. The Chairman (Ben Bernanke) is of view that the current recovery is still reliant on the government stimulus and thus it is still too early for them to pull out of the economy.

Burlington Northern Santa Fe Corp Acquired by Buffet

Buffet has stuck to the bread and butter of his investment expertise. He has acquired the entire stake in Burlington Northern Santa Fe Corp, a railway company, and has finalized the deal within 10 days.

Explanation on the Purchasing Managers Index (PMI)

The data for the index are collected through a survey among 400 purchasing managers in the manufacturing sector on five different fields, namely, production level, new orders from customers, speed of supplier deliveries, inventories and employment level. Respondents can report either better, same or worse conditions than previous months.

Banks' Reluctance to Lend

Timothy Geithner (TG) is concerned that the banks' reluctance to lend could cause the economy to experience hiccups to its march to recovery. Although recent manufacturing data shows that the economy is well on its way out of the recession, the unemployment figures were not as rosy. This coupled with the decreasing household and business borrowings will hinder the economy's recovery.

TG has also expressed that no further government stimulus would be required as the previous package has not been fully utilized as yet and half of the package is still available for them.

Possibility of World Slump if Government Stimulus Withdrawn

China warns that current economic data is not as rosy as it seems. The economy still faces with many challenges, including high unemployment, weak investment and consumption, rising commodity costs and fluctuating currencies. These challenges, if not taken into consideration, will cause the global economy to face yet another recession in 2010 or 2011. However, governments around the world would be faced with other long term problems such as inflation, government deficits and protectionism.

Inventory Cycle Points to V-Shaped Rebound

US Companies are trying to slowdown the dramatic draw down of inventories. To replenish this draw down, it is likely that companies will pick up production very quickly and start a hiring binge.

Weak Spending Holds Back Wall Street

The latest US data has reflected that consumer spending has fallen for the first time in 5 months. This suggests that the recovery might be slow and protracted prompting fears in the market causing US equities to fall.

AIG Dismantled by Non-US Buyers as Dollar Falls

A perfect storm has occurred for Asian and European investors to take advantage of. They have managed to buy up bits and pieces of AIG's divisions at low prices to complement their own businesses. Two factors created the perfect storm, (1) depreciation of the dollar and (2) the dearth of US investors. This resulted in many of AIG's crown jewels being sold off to buyers from other countries.

Asia's Central Bankers Aims to Lean Against Asset Prices

With the lesson learnt from the financial meltdown in the US, Asia's policy makers have begun an unprecedented move to deflate asset bubbles. To do this they have begun to utilize monetary policy and supervisory and regulatory policy (i.e. barring interest-only loans for housing projects).

Central Banks Hitting Asset Bubbles Show No Faith in Greenspan

During the days when Alan Greenspan was the Fed Chairman, he noted that monetary policy is a blunt instrument to regulate asset prices. What he possibly meant with that statement is that one would find it difficult to deflate asset bubbles by increasing interest rates. However, with the financial crisis fresh in the public's mind, central bankers are now looking at interest rates as a means to regulate asset prices. A new era has dawn upon us where central bankers would need to study the valuation of the assets within its borders and decide on the appropriate level of interest rates.

Galleon Traders

Galleon Traders' founder has been charged with insider trading. This is to be expected as many investors have pointed out that the source of alpha for the hedge fund has been unexplainable. This has raised many concerns on Wall Street. The man himself is currently out on $100 million dollar bail.