The bond bubble has been burst as yields begin their reascent.
The yield on the new benchmark 10-year government note had
fallen to 4.32%, a level not seen since the late 1950’s, now it’s back
to 5.42%. This, while the FED fixed overnight rates at 1 3/4%
with no immediate indication that they would raise rates anytime
soon. Of course, this has been accompanied with over $2 trillion
in aggregate fiat creation. Another tribute to the ineptitude of
Alan Greenspan. A purchased Congress and the Napoleonic
presence in the White House continues to press for a stimulus
package for political gain. They have to be identified as purveyors
of something for nothing for constituents. We still see a deeper
recession but we see great difficulty in getting rates lower again
due to caution as a Japanese-style debt deflation sets in.
Those who are calling for 4% GDP growth this year need to
reassess their projections. Even though the money creation pedal
is to the metal it doesn’t mean that money will be spent. We don’t
see a buoyant recovery and thus we see only slightly higher rates
for now. We could see the FOMC & the FED raise rates in June
1/4%, but at this juncture we are skeptical. Futures are telling us
rates will be 3 3/4% by year end up 2% from current levels. We
say only in their dreams. A real market interest rate of 5 .82% is
only .18% away. The neglected long bond is projected at 5.75%,
which it’s already attained, thus 6 1/4% could be in the cards.
These conservative yield estimates spell real trouble for equities
and if rates move higher as "experts" believe they will, the effect
will be devastating on the market. Above all, we have not included
any untoward events. Oil is telling us there is going to be war in
the Middle East. We could have another terrorist attack, or our
President Dr. Strangelove could begin his nuclear escapades. We
don’t know what they are smoking but the expert consensus is the
S&P will have earnings of $49.39 this year. We are calling for
$40.00. By consensus and at a 5.75% Treasury yield the S&P is
overvalued by 36%. That puts the S&P at 746 using their
preposterous estimates. That would put the DOW at 7788. If you
use our estimate the correction would be critical thus you can see
these current market highs are but an illusion.
Last week the market for new investment grade bonds totaled 33
new deals for a staggering total of $23.5 billion. The junk market
had nine new issues; totaling $1.5 billion and mutual funds
enjoyed an inflow of $1.23 billion. The first quarter will likely
mark the 16th consecutive quarter of debt downgrades exceeding
upgrades, closing in on the record of 19 straight negative quarters
set in the last quarter of 1990. There has been one upgrade for
every five downgrades so far in the current quarter. The
high-grade firms have been hit hardest. Due to excessive
leveraging there are only nine companies left with AAA ratings.
That’s down from 60 in 1979.
While John Rusnak racked up huge foreign exchange losses at an
Allied Irish Bank’s PLC unit, regulators and auditors raised few
if any questions. Where was the Comptroller of Currency? Where
were the State of Maryland and the Federal Reserve? Obviously
languishing incompetently.
As states struggle with deficits they are balking at adopting the
corporate tax breaks in the new federal economic-stimulus
measure. They can’t afford to lose more tax revenue. The breaks
would cause a loss of $14.7 billion over three years at the worst
possible time. Twenty-five states have tax systems that adjust to
changes in federal laws. Most states are struggling to close deficit
gaps of billions of dollars. The answer, of course, is quite simple.
Do not adopt the federal cuts.
The SEC has started an investigation of the accounting practices
of Qwest Communications.
Prudential Analyst Michael Mayo told a Senate Committee that
companies that are subject to negative analysts’ reports often lash
back at the analysts themselves, denying them access to
management, refusing to take their questions on conference calls,
and declining to participate in conferences organized by analysts.
Despite the bursting of the Internet bubble and Enron there has
been no change in Mayo’s ability to put out honest research.
Quick fixes by the SEC won’t address the external backlash that
bearish analysts often face. They are being cut off just as they are
on CNBC. In last years savage correction 85% of Wall Street
analysts had no sell recommendations. If analysts write negative
reports they are partially or totally shut out of companies.
Negative reports bring exhortative pressure by mutual funds,
which threaten to stop doing business with brokerage houses
unless those negative reports stop. The brokerage industry is
another tattered American disgrace and the SEC does nothing
about it. The SEC and NASD are a farce. All they attack are those
who can’t afford to defend themselves.
You are all well aware of Arthur Andersen’s ignoble demise, but
tucked away and just coming to light is the fact that they were
arranging swaps that inflated revenue for Enron, Global Crossing
and Qwest. Andersen was a prime promoter of swap accounting
and guided these companies into accounting tricks and
subterfuge. Now the FBI and the House are looking into the use of
these instruments. All this is going on and we are not any closer to
derivative regulation.
David Tice of the Prudent Bear Fund has been vindicated
regarding his position on Tyco International. Tyco had Raychem,
which they acquired, deliberately accelerate certain payments, to
boast Tyco’s cash flow after the deal closed, which was confirmed
by internal E-mails at Raychem. Tyco routinely forced companies
it acquired to prepay expenses and lower their earnings and cash
flow just before they were merged into Tyco. What’s worse is
Raychem and others agreed to participate in the false accounting,
lying and chicanery. |
