Monday, July 16, 2012

It's The Economy Stupid: Empire Mfg. & Retail Sales


Economic Event


Economic Survey

Actual Reported

Original Prior

Revised Prior

Empire Manufacturing






Advance Retail Sales






Retail Sales Less Autos






Retail Sales Ex Auto & Gas






Retail Sales "Control Group"







Empire Manufacturing Good

Retail Sales Bad, Very, Very, Bad


The New York Fed’s Empire Manufacturing Index is headed in a good direction, up 7.39, better than economists prediction of 4.0 and way better than June’s 2.29. 


Advance Retail Sales is headed in a bad direction, -0.5%, much worse than economists prediction of +0.2%, and worse than May’s -0.2%.  So, it doesn’t look like the consumer is going to bail out the economy.





Treasuries Doomsday 4 Years Away for Biggest Owner Vanguard


By Susanne Walker and Daniel Kruger


     July 16 (Bloomberg) -- Vanguard Group Inc., whose $148.2

billion of Treasuries makes it the largest private owner of U.S.

debt, says the nation has until 2016 to contain its borrowings

before bond investors revolt and drive up interest rates.

     “In the absence of a long-term credible plan, we are

somewhere around four years away on where the markets are going

to say ‘enough is enough,’” said Robert Auwaerter, head of the

Valley Forge, Pennsylvania-based Vanguard’s fixed-income group

since 2003 and who this year was inducted into the Fixed Income

Analysts Society Inc.’s Hall of Fame.

     The U.S. has avoided the turmoil rocking Europe, where five

nations have sought bailouts as their borrowing costs soared

because investors boycotted their bonds. Instead, they have

sought U.S. assets as a haven due to the dollar’s status as the

world’s primary reserve currency, pushing note yields to record

lows even though the amount of public debt outstanding has grown

to $15.9 trillion from less than $9 trillion in 2007.

     Demand for U.S. bonds and the dollar has bolstered

President Barack Obama’s ability to fund a budget deficit

forecast to exceed $1 trillion for a fourth straight year, and

helped Federal Reserve Chairman Ben S. Bernanke’s efforts to

keep borrowing cost low. The greenback makes up 62.2 percent of

all currency reserves, compared with 24.9 percent for the euro,

according to the International Monetary Fund in Washington.


                            ‘A Pass’


     “The U.S. Treasury gets a pass, in part because the

liquidity in that market brings buyers in that would maybe not

be there if there was a viable alternative,” Auwaerter, 56,

said in a recent interview at Vanguard’s headquarters, where he

oversees about $675 billion of fixed-income assets.

     Vanguard’s flagship bond fund, the $110 billion Total Bond

Market Index Fund, returned 6.98 percent over the past five

years, beating 64 percent of its peers, according to data

compiled by Bloomberg. The world’s largest bond fund, the $263.4

billion Pimco Total Return Fund, which unlike Vanguard’s is

actively managed, gained 9.44 percent in the same period.

     The 10-year Treasury yield fell six basis points, or 0.06

percentage point, last week to 1.49 percent, according to

Bloomberg Bond Trader prices. The 1.75 percent note due May 2022

rose 18/32, or $5.63 per $1,000 face amount, to 102 12/32. The

yield was 1.47 percent at 8:25 a.m. New York time.

     The yield, which touched a record low of 1.44 percent on

June 1, is down from this year’s high of 2.4 percent on March 20

as global growth slowed and compares with the average of 4.88

percent over the past two decades.


                        ‘Little Upside’


     Even with record-low yields, Treasuries maturing in 10

years or more have returned 7.4 percent this year, including

reinvested interest. The Standard & Poor’s 500 Index of stocks

has gained 9.1 percent, including dividends, and commodities as

measured by the S&P GSCI Index have lost 3.6 percent.

     Investors aren’t getting paid enough for the risks of

holding the debt, Elaine Stokes, a money manager at Loomis

Sayles & Co., who helps oversee the $21 billion Loomis Sayles

Bond Fund, said in a July 11 telephone interview.

     “There’s very little upside, but there’s all kinds of

downside,” Stokes said. “There’s a finite timeline to some of

the issues that we’re facing. It’s no longer that we can keep

kicking the can down the road,” she said in reference to

lawmakers who keep raising the nation’s $16.4 trillion debt

ceiling instead of reducing borrowing.


                          Term Premium


     Investors would lose $1.08 million, or 10.8 percent, for

every $10 million invested in 10-year Treasuries if yields were

to rise to 3.8 percent by December 2014, the average for the

past decade. Loomis Sayles sees yields between 2 percent and 2.5

percent a year from now.

     The term premium, a model created by the Fed that includes

expectations for interest rates, growth and inflation, showed

Treasuries are the most expensive ever. The gauge fell to a

negative 0.9617 percent on July 10 from negative 0.2265 percent

in July 2011. It averaged positive 0.8579 percent in the decade

before the start of the financial crisis in mid-2007.

     With $1.9 trillion, Vanguard is the largest mutual-fund

manager in the U.S., having grabbed the top spot from Fidelity

Investments in 2010. Its Treasuries holdings rank ahead of

Newport Beach, California-based Pacific Investment Management

Co., with $110.2 billion, data compiled by Bloomberg show.

     The firm ranks ahead of Russia and just behind Switzerland

as the eighth-largest U.S. creditor. The Fed, with $1.66

trillion, is the biggest, followed by China at $1.15 trillion

and Japan with $1.07 trillion.


                        Nelson’s Flagship


     Auwaerter joined the company in 1981 to manage municipal

bonds and money market funds. He now oversees a staff of 115,

who are called crewmembers in keeping with a firm named for HMS

Vanguard, one of British Admiral Horatio Nelson’s flagships. He

spends his work days in the middle of a 5,400-square foot (1,700

square-meter) trading floor in a building called Victory, named

for Nelson’s flagship at the Battle of Trafalgar in 1805.

     “There’s constant interaction,” he said. “We argue about

things with the idea that everybody can be challenged on any


     With a bachelor’s degree in finance from the University of

Pennsylvania’s Wharton School and a master’s in business

administration from Northwestern University’s Kellogg Graduate

School of Management, Auwaerter has during his career testified

before Congress on matters pertaining to the fixed-income market

and trading.


                      ‘Difficult Markets’


     “He’s been through a lot of difficult markets over those

30 years,” said Stephen Lessing, global head of senior

relationship management in New York at Barclays Plc, a 32-year

bond-market veteran who first met Auwaerter in 1981.

     Congress will have to work with the winner of this year’s

presidential election -- Obama or presumptive Republican

challenger Mitt Romney -- to pass a plan within three to five

years that puts the U.S. on a path toward sustainable budgets,

Auwaerter said.

     “With health care plus the demographics of the Baby Boom

generation and the pressure that’s going to put on Social

Security, all those things are going to come to a head over a

three-to-five year time frame,” he said. “In a three- to five-

year time frame the market can start to look at us like an Italy

or Spain and start to assess a credit risk premium to U.S.

Treasury yields.”


                        Marketable Debt


     In Italy, whose more than $2 trillion of marketable debt

outstanding ranks as third-most behind Japan and the U.S.,

yields on 10-year bonds have soared to more than 6 percent from

less than 4 percent in October 2010. The spread to benchmark

German bunds has widened to about 4.8 percentage points from

about 1.5 percentage points in that period.

     With taxes set to rise and spending cut by $1.2 trillion if

Congress fails to agree by Dec. 31 on ways to reduce the

deficit, the so-called fiscal cliff facing the U.S. might

imperil an economy that is already slowing. The International

Monetary Fund will this week cut its 3.5 percent estimate for

global growth this year, Managing Director Christine Lagarde

said July 12.

     Goldman Sachs Group Inc. and Bank of America Corp., two of

the 21 primary dealers of U.S. government securities that trade

with the Fed, say the central bank will likely keep its

benchmark rate at almost zero until mid-2015. Credit Suisse

Group AG, another primary dealer, said in a report July 13 that

10-year yields will end next year at about 1.75 percent.

     “The threats of what could drive rates higher have been

out there for a long time and has not inhibited us from getting

to this stage of the game,” David Ader, head of U.S. government

bond strategy at CRT Capital Group LLC in Stamford, Connecticut,

said in a telephone interview July 9. “The global economy is

slowing and the dollar looks like the least pathetic thing and

that’s going to keep bond flows coming in. This is where we are

going to be: low rates for a long, long time.”



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