Stocks Get Crushed

How badly did investors want to put their cash into
safe-havens during yesterday’s huge sell-off? Money market rates went
negative at one point during the day.

That’s right it actually cost you a fraction of a penny to exchange your
cash for shares of a money-market fund. And money-market funds are more
similar to the dollar than any other the asset in the world.

Treasury bonds did pretty well, too. The iShares Barclays 20+ Year Treasury
Bond ETF (TLT) was up 3.5% to $105. It’s rallied 10% since July 25. Demand
for Treasuries is high, investors aren’t just fleeing risk. It’s more like
a stampede. Not coincidentally, the S&P 500 is down 10% in over the
exact same period of time.

Is a Recession Coming?

Financial markets like money. When the Fed was
pumping cash in to the system via QE2, stocks moved relentlessly
higher.

Yesterday’s vicious sell-off was a snapshot of a market worried about a
lack of money.

The debt deal passed in Congress yesterday calls for $2.4 trillion in
government spending cuts over the next 10 years. We looked at some of the
impact of
reduced government spending
yesterday…

Debt Deal Done: Will the U.S. Get Downgraded?

Well, well. Congress did it. And more than a full
day ahead of Treasury Secretary Geithner’s absolute deadline on Tuesday,
August 2. I will admit, I’m surprised. Not that they reached a deal —
after all, I playfully wagered my entire business that a deal would get
done with High Yield
Wealth
editor Steve Mausy. But I figured it would be a
midnight deal.

Of course, nothing is signed, sealed and delivered just yet. I expect that
may not happen until this evening. But the rhetoric from Congressional
leaders and the president suggest the signatures are a
formality.

Why Bonds are Rallying

Another day, and still no agreement on a 2011 budget
in Congress. Surprisingly though, the stock market is not really being
affected by the impasse. Sure, the major indices are down slightly again
today, but I think we can all imagine that it could be much worse.

Treasury bond prices have been choppy, with big $3 price swings on the
chart of the iShares Barclays 20+ Year Treasury Bond ETF (TLT) in July. But
overall, bonds are holding up well, and this tells us clearly that no one
expects the U.S. government to default on its bond payments.

Tech Market Heats Up: What

Congress and the Obama administration are at it
again. Talks broke down over the weekend, which is a familiar development.
The impasse is certainly weighing on the stock market.

Precious metals are rallying, bonds and stocks are down. Of these assets,
it’s the move in bonds that are most telling. Bond prices are falling, and
yields are rising, because failure to pass a budget opens the door for a
downgrade of U.S. debt from the ratings agencies. That, in turn, raises
borrowing costs (interest rates) because repayment is suddenly less
certain.

What We Can Learn from American Airlines (AMR)

Earnings season continued at a torrid pace, with
large cap stocks beating on revenues and/or earnings per share. The EU
finalized a bailout plan, and reports seem encouraging that Congress will
reach a budget deal soon.

We’ve had to suffer through a perfect storm of bad news since May. Now, we
seem to be getting a perfect storm of good news. Even the most recent
housing construction data was better than expected.

Unemployment, however, continues to lag. And as we’ve discussed at length,
there’s no reason to expect hiring to improve significantly, especially
with spending cuts coming at the federal level.

Why Companies Aren’t Hiring

China’s got a heck of a nerve. Yesterday, CNN
reported that the Chinese government’s State Administration of Foreign
Exchange published the following statement on its website:

“We hope the U.S. government will take responsible policies and
measures to boost global financial market confidence and respect and
protect the interests and investors…”

And even went so far as to say that the debt issue is a “… reflection
of the credibility of the U.S. government…”

Now, I know none
of us are happy
with the way Congress and the administration has
approached our debt issues so far. But China’s sitting in its own glass
house.

Q2 Earnings Season Starts Today

When it comes to conspiracy theories, and the
theorists who theorize them, I definitely fall into the armchair variety.
Sure, conspiracy theories can be fun (like The Da Vinci Code), and
sometimes there may even be a little meat in the conspiracy bone. For
instance, there’s no evidence to say that former Treasury Secretary Henry
Paulson let Lehman Brothers fail because he didn’t like CEO Richard Fuld.
But after engineering a buyout for Bear Stearns, I feel strongly that
Paulson got personal.

And we can’t be sure that the Chicago Merc raised margin requirements on
silver to protect big banks short positions. But it makes some
sense…

So, I couldn’t help but get a little conspiratorial after Friday’s dismal
jobs numbers. Not one economist got even close to the real number (18K).
And after the ADP Payroll number came out, estimates for the government’s
NonFarm payrolls went up.

Now, we know pretty much any government statistic is suspect. They are
usually calculated to give a rosy picture. And the NonFarm Payroll number
is especially variable because, as a Bloomberg article notes:

The Labor Department, which houses the Bureau of Labor Statistics,
adjusts the employment figures each month to account for things like
teachers falling off school payrolls in June and workers finding temporary
employment with retailers during the December holiday season.

“There was a big adjustment this month,” Labor Department Chief Economist
Betsey Stevenson said on a conference call with reporters. “It’s an art and
a science doing seasonal adjustments and it’s really hard to
predict.”

At a time when we’ve already seen weak economic data for a couple months,
wouldn’t it be a good time to be less aggressive with seasonal adjustments?
Or does the weak employment number support the Obama administrations budget
battles in Congress? It seems to me that austerity is a tougher sell when
it could easily push the economy into recession.