Comstock Partners: investors are in a state of denial, ignoring all of the bad news that is certainly no secret, Looks like 2000/2007 Part Deux

The spread between the percentage bullish

and the percentage bearish soared to 41.6,

the widest since October 2007,

when the market peaked.

Comstock Partners, Inc.
April 7, 2011

In both late 1999 and 2007 we warned against the mentality that caused investors to overlook the dire-looking events that were swirling all around them. The warnings were generally ignored on the grounds that you couldn't fight against a market that was continually rising. Of course, we now know the eventual outcome. Once again the market is rising despite a spate of negative factors that are widely known to the investing public. The main bullish theme is that the economic numbers are improving, corporate earnings are robust and the Fed will guarantee this will continue even if it has to institute QE3 and QE4. Unfortunately, however, a number of factors are indicating that the good fortune is about to end soon. We cite the following.

1. QE2 is ending on June 30th. The program will, by that time, have pumped $600 billion into the economy, meeting Chairman Bernanke's stated goal of jump-starting the stock market. The end of the program means a defacto tightening of monetary policy. This has been the major factor holding up both the stock market and a fragile economy that will not be self-sustaining once the Treasury bond purchases are halted. A continuation of quantitative easing is highly unlikely as it would be politically difficult. Furthermore an increasing number of FOMC members are themselves hinting at a possible imminent tightening.
2. Fiscal policy is about to tighten as well. That is obviously what the discussion in Washington is all about. Whether the government temporarily shuts down or not is a non-issue. The fact is that, one way or another, both sides of the debate are now intent on reducing the federal deficit. So, whatever the merits, both fiscal and monetary policy will be less easy. That is a headwind against the economy and stock market
3. A broad array of commodity prices is rising. This is increasing corporate costs at a time when they will be difficult to pass on as consumers are strapped for income and are paying down debt. This is bound to squeeze profit margins in the period ahead and result in downward earnings guidance.
4. The Mid-East turmoil is continuing and showing no signs of slowing down. Although the eventual outcome is unknown, it is doubtful that it will be market-friendly.
5. The European Union (EU) is another major problem. First the authorities tried to build a firewall around Greece, second around Ireland, and now around Portugal. These are relatively small economies, and the EU can probably "kick the can down the road" one more time with no real solution in sight. Now they are attempting to build a wall protecting Spain, a nation said to be "too big to fail and too big to rescue". If Spain follows the lead of Greece, Ireland and Portugal, the results could be catastrophic to the global financial system. In the midst of these events the EU has also raised interest rates, a move they last made in the summer of 2008 just prior to the credit crisis.
6. China is battling against soaring inflation and has increased interest rates four times in the last five months in an attempt to slow down the economy. No financial bubble has ever been stopped without a recession, and we doubt that this will be the first. This would have major ramifications on the global economy including the commodities markets, emerging market suppliers, multinational corporations and the U.S bond market.
7. The Japanese earthquake is yet another headwind to the economy. Toyota is shutting down all of its American factories, and American vehicle manufactures are facing parts shortages as well. According to AutoNation, "production disruptions will significantly impact product availability from Japanese auto manufacturers in the second and third quarters." We're hearing about supply disruptions in a number of other industries as well. We won't be surprised to hear numerous companies comment on this issue when they report first quarter earnings and give guidance for the rest of the year.

All in all, we see the tailwinds that have helped the economy and markets over the past year suddenly turning into headwinds. We expect to see downward revisions in both economic growth and corporate earnings in the period ahead. At the same time, according to "Investors' Intelligence" , the bears seem to have thrown in the towel as the percentage of bears dropped to 15.7%, the lowest since December 1999. The spread between the percentage bullish and the percentage bearish soared to 41.6, the widest since October 2007, when the market peaked. Just as in early 2000 and late 2007, investors are in a state of denial, ignoring all of the bad news that is certainly no secret. Comstock Partners Bios



Next Subprime: Municipal Bonds Going Down at Least 15-20% (Jeff Gundlach)

Between here and the endgame lies the valley

and the valley is full of fear. And I think the

muni market is going to go down by

at least 15 to 20%. At least.

CNBC
March 9, 2011
Bond king Jeff Gundlach likened municipal bonds to subprime mortgage bonds on CNBC’s Strategy Session on Wednesday.

“You’ve got a history of low defaults, which is comforting. But that kind of sounds like what subprime sounded like back in 2006,” Gundlach said.

Gundlach said the markets for subprime bonds and municipal bonds are similar because the buyers are similar. Muni bond buyers aren’t seeking fundamentally good credit stories—they are buying for “technical reasons,” Gundlach said. This is exactly what happened with subprime

With subprime bonds, buyers were seeking highly-rated credit with very low default histories in order to satisfy regulatory bank capital requirements. They largely ignored deteriorating fundamentals, and continued to buy subprime mortgage-backed securities at a rapid clip even when the problems with the market were becoming apparent in the first half of 2007.

Muni bonds are bought for a different “technical reason”—the tax benefit—and buyers are once again ignoring deteriorating fundamentals. So are munis going the way of subprime?

“If by that you mean, lower, then yes. If you mean crashing, I’m agnostic on that,” he told David Faber.

Got that? Munis are headed lower. And he’s “agnostic” on whether or not they will crash. When one of the most important names in bond investing says he cannot tell whether or not an entire class of bonds will crash, there’s reason for investors to worry.

It wouldn’t be surprising if Gundlach’s comments spark a renewed sell-off of bond funds.

Gundlach pointed out that even if defaults do not ultimately climb as high as critics like Meredith Whitney have warned, muni bonds will likely trade much lower.

“Between here and the end game, lies the valley. And the valley is full of fear. I think the muni market is going to go down by at least, on the long end, something like 15 and 20 percent,” he said.

He brushed off the notion that the investors in the muni market are buy-and-hold types who are unaffected by declines in trading prices.

“It gets scary when the prices start to drop. The fear factor here is going to be palpable. People who own munis tend to own them for the tax benefit and they tend to own most of their assets, if not all of their assets, in the muni asset class. So when they get to fall, they get nervous," Gundlach said.

Just 2 1/2 months ago, Meredith Whitney fired the

first warning shot on 60 Minutes.

Governor Chris Christie telling the truth is deemed a "rookie mistake" by Miller Tabak

“The market is very sensitive

to the word ‘bankrupt.’”

(telling the truth is a rookie mistake)

By Brendan A. McGrail
Jan. 14, 2011 (Bloomberg) -- New Jersey Governor Chris Christie’s comments that rising health-care costs might “bankrupt” the state, made on the same day of a planned bond sale, drew criticism for their poor timing and may have driven borrowing costs higher.

About 20 minutes after Christie, 48, made the bankruptcy reference in a town-hall meeting in Paramus yesterday, the New Jersey Economic Development Authority cut its tax-exempt school bond offering by almost half to $777.5 million.

“He is scaring some people when he says the state is going bankrupt,” said Gary Pollack, head of bond trading at Deutsche Bank Private Wealth Management in New York.

“It wasn’t timed well,” said Pollack, who oversees $6 billion and said he continues to buy New Jersey bonds.

Linking the governor’s remarks with the decision to reduce the debt sale is a “completely bogus interpretation and an irresponsible connecting of unconnected events,” Michael Drewniak, a spokesman for Christie, said in an e-mail to Bloomberg News. A spokesman for the Treasury Department also denied any connection, as did the deal’s main underwriter.

Christie, a first-term Republican, said health-care spending “will bankrupt” the state unless it requires its workers to pay more for medical coverage. New Jersey will spend $4.3 billion on employee and retiree health insurance this year, and that cost will rise 40 percent within four years, he said. He wants all public employees in New Jersey to contribute more than the current 1.5 percent of salary toward medical benefits.

‘Rookie’ Error

“Mr. Christie made a rookie mistake,” said Mike Pietronico, who oversees $360 million as chief executive officer of Miller Tabak Asset Management in New York. “The market is very sensitive to the word ‘bankrupt.’”

The Christie administration rejected that interpretation.

“The governor has been making these comments and warnings for months, all while instituting and pursuing reforms to fix the well-documented policy failings of prior administrations -- which, by my recollection, analysts have recognized and applauded,” Drewniak said.
Complete article

Federal Reserve's Little Rascals Responsible for Buying $600 Billion of Bonds

Mr. Frost’s task is to avoid paying top dollar for bonds

that could be worth less when the Fed tries to sell them one day. New York Times

By Graham Bowley
1/10/2011

Deep inside the Federal Reserve Bank of New York, the $600 billion man is fast at work.

In a spare, government-issue office in Lower Manhattan, behind a bank of cubicles and a scruffy copy machine, Josh Frost and a band of market specialists are making the Fed’s ultimate Wall Street trade. They are buying hundreds of billions of dollars of United States Treasury securities on the open market in a controversial attempt to keep interest rates low and, in the process, revive the economy.

To critics, it is a Hail Mary play — an admission that the economy’s persistent weakness has all but exhausted the central bank’s powers and tested the limits of its policy making. Around the world, some warn the unusual strategy will weaken the dollar and lead to crippling inflation.

But inside the Operations Room, on the ninth floor of the New York Fed’s fortresslike headquarters, there is no time for second-guessing. Here the second round of what is known as quantitative easing — QE2, as it is called on Wall Street — is being put into practice almost daily by the central bank’s powerful New York arm. Primer on Quantitative Easing

Each morning Mr. Frost and his team face a formidable task: they must try to buy Treasuries at the best possible price from the savviest bond traders in the business.

The smallest miscalculation, a few one-hundredths of a percentage point here or there, could unsettle the markets and cost taxpayers dearly. It could also embolden critics at home and abroad who say QE2 represents a dangerous expansion of the Fed’s role in the markets.

“We are looking to get the best price we can for the taxpayer,” said Mr. Frost, a buttoned-down 34-year-old in a striped suit and rimless glasses.

Whether Mr. Frost will reach that goal is uncertain. What is sure is that market interest rates have risen, rather than fallen, since the Fed embarked on the program in November. That is the opposite of what was supposed to happen, although rates might have been even higher without the Fed program.

Mr. Frost’s task is to avoid paying top dollar for bonds that could be worth less when the Fed tries to sell them one day.

Louis V. Crandall, the chief economist at the research firm Wrightson ICAP, said Wall Street bond traders were driving hard bargains. The Fed has tipped its hand by laying out which Treasuries it intends to buy and when, giving the bond houses an edge.

“A buyer of $100 billion a month is always going to be paying top prices,” Mr. Crandall said of the Fed. “You can’t be a known buyer of $100 billion a month and get a good price.”

Nevertheless, Mr. Frost and his team have been praised on Wall Street for creating a simple, transparent program. Neither the Fed nor Wall Street wants any surprises. The central bank is even disclosing the prices at which it buys.

Mr. Frost and his team work out of a small, beige corner office with arched windows that used to be a library. There, at about 10:15 most workday mornings, one of them pushes a button on a computer. Across Wall Street, three musical notes — an F, an E and a D — sound on trading terminals, alerting traders that the Fed is in the market.

On one recent Tuesday morning, what Mr. Frost and his five young colleagues did over a 45-minute period might have unsettled even a seasoned Wall Street hand: they bought $7.8 billion of Treasuries.

The real work is done by three traders who are referred to during the operation as trader one, trader two and trader three. They sit at a long table against the wall, tapping at seven screens.

On one recent morning, trader one was Tiffany Wilding, 26. While she reviewed the stream of offers and then the prices finally accepted by the algorithm, trader two, Blake Gwinn, 29, double-checked her decisions and trader three, James White, 29, made a duplicate of everything in case the computers crashed.

All the while, Mr. Frost stood behind his colleagues, ready to intervene — and even cancel the Fed’s purchases — at any sign of trouble. 

They have their work cut out, trying to outwit the 18 investment firms that deal directly with the Fed. These so-called primary dealers — the Goldmans and Morgans of the world — employ some of the sharpest minds on Wall Street.  Complete article

Republicans Ready to Implement "Pledge to America", well maybe after they Raise Debt Ceiling

We Have a Pinky Promise from the Republicans

and they Titled it:

"Pledge to America: The New Republic Agenda"

(in small print of course):

Roll back non-discretionary spending to 2008 levels before TARP

and stimulus (will save $100 billion in first year alone)

Establish strict budget caps to limit federal spending going forward

Require congressional approval for any new

federal regulation that would add to the deficit

By David Lawder, Andy Sullivan
and Glen Somerville
1/6/2011

(Reuters) - Republicans acknowledged on Thursday they will have to sign off on more deficit spending to avoid a debt default that would roil financial markets and bring the government to a grinding halt.

Treasury Secretary Timothy Geithner pressed lawmakers to raise the nation's $14.3 trillion debt limit to allow the United States to borrow more and avert a crisis in the coming months.

House Budget Committee Chairman Paul Ryan, a Republican, said he recognized the need to allow the government to go deeper in debt.

"Will the debt ceiling ... have to be raised? Yes," said Ryan, who leads Republican efforts to slash deficit spending.

But he called for deep spending cuts in 2012 and the Pentagon announced it would trim its budget by $78 billion as both government and opposition in Washington vied to outdo each other in promises of tighter spending.

Geithner said the federal government may hit the ceiling by March 31 on the amount of debt it is legally allowed to issue, and urged Congress to raise it before then to avoid pushing the United States into default.

"Even a short-term or limited default would have catastrophic economic consequences that would last for decades," Geithner said in a letter to Senate Majority Leader Harry Reid, a Democrat.

Republicans won control of the House of Representatives in November elections on a promise to cut government spending and reduce debt but are faced with having to compromise on the debt limit.

They say any vote to increase the ceiling must be paired with a commitment to lower federal costs over the long term.

"The American people will not stand for such an increase unless it is accompanied by meaningful action by the president and Congress to cut spending," House Speaker John Boehner said.

DEFAULT DANGERS

A debt default would throw markets into turmoil and dramatically increase government borrowing costs for years to come, further increasing the U.S. debt burden and sapping resources from the economy.

Bond investors remain wary of the safety and soundness of sovereign debt after the bailouts of Greece and Ireland last year, but Treasury officials said they did not see any evidence of such concerns pushing up U.S. debt yields at this time.

A Treasury official urged lawmakers preparing for a new budget not to mix up the debt limit issue with calls for greater restraint in government spending.

The official, who spoke on condition of anonymity, expressed confidence that Congress will raise the debt limit if only because not doing so would be so damaging. The rest of the sad story

For those of uswith a memory beyond 2 years,

DEFAULT DANGERS sounds an awful lot like

Hank Paulson's GLOBAL FINANCIAL ARMAGEDDON

if TARP was not approved. Are we at Level Orange Yet?

Mr. Boehner, you are now cued up for

shedding another tear.

Wall Street Gives Uncle Sam Too Much Credit (Michael Pento)

By: Michael Pento
More Michael Pento
Monday, December 13, 2010

Despite the fact that the S and P is up over 80% in the last 21 months, US financial firms are currently tripping over each other in their zeal to raise their S and P 500 and GDP targets for 2011. JPMorgan's chief US equities strategist, Thomas Lee, came out on December 3rd with a target of 1425 on the S and P for 2011, which would be a 15 percent gain.

Barclays Capital last Thursday released a 1420 estimate. Not to be outdone, Goldman Sachs also recently released its forecast, and it sees a more-than-20 percent increase next year, to 1450. Meanwhile, PIMCO’s idea of a “new normal” has translated into a 2011 GDP forecast raised from 2-2.5% to 3-3.5% due to “massive” government stimulus.

In the midst of this collective 'hurrah,' very little attention is being paid to what is going on over in the bond market. With my due condolences to Fed Chairman Bernanke, the yield on the 10-year Treasury note has increased from 2.33% on October 8th to 3.29% today. And, if there is any notice at all given to that recent run-up in yields, it is merely explained away as a sign of robust growth returning to the economy.

In reality, growth doesn’t cause an increase in interest rates; it is either lack of savings or inflation that is responsible. To refute the 'robust growth' reasoning, turn your attention to the fact that the spike in yields just happened to coincide with the news that the unemployment rate jumped to 9.8% in November.

A slightly broader explanation for the surge in borrowing costs might be the failure of the Bowles-Simpson deficit commission to implement any cost cutting measures. Or, perhaps it was the intimation from Bernanke himself that QE III may already be under construction in his infamous interview on 60 Minutes. Or, maybe it is the fact that the $150.4 billion November budget deficit was the highest total for that month... ever, and was the 26th straight month of red ink! I often wonder to myself, where in the midst of all this good news do I summon a bearish attitude?

I think it's pretty clear that 'robust growth' is going the way of 'green shoots' and knickers – right into the dustbin of history.

So, what will the increase in interest rates – ignored by all of Wall Street – actually mean for the economy in 2011?

For starters, the National Home Price Index already fell 2% in the third quarter of 2010. On a national basis, home prices are 1.5% lower year-over-year, and 15 out of the 20 cities measured were down over the last 12 months. On a month-over-month basis, 18 cities posted a price decline in September, compared to 15 MoM drops in August, and just 8 cities experiencing price reductions in the July report. Therefore, home prices, which were already headed lower before this recent spike in mortgage rates, are set to take another tumble downward. According to Freddie Mac’s weekly survey of conforming mortgages, the average rate on the 30-year fixed is at its highest level in six months. 30-year rates averaged 4.61% for the week ending Dec. 9, up from 4.46% last week.

It’s the fourth week in a row that the mortgage rate has increased. The ramifications for the real estate market and bank lending are clear. Lower home prices will send more mortgages under water and force many more homes into foreclosure. Higher borrowing costs will lower the demand for borrowing and place more strain on the capital of lending institutions.

On top of that, household debt as a percentage of GDP still stands at a lofty 91%. It should be clear that with near double-digit unemployment, the last thing consumers can now tolerate is a significant increase in debt-service payments.

The rising cost of money is even worse news for the federal government and its chronically ballooning debt problem. According to the Federal Reserve’s Flow of Funds Report, total non-financial debt reached an all-time high of $35.8 trillion in the third quarter of 2010. In fact, household debt, business debt, and government debt increased at a 4.2% annual rate last quarter.

To put that record level of nominal debt into perspective: in 1980, the total non-financial debt-to-GDP ratio was 144%. In the height of the credit boom, at the end of 2007, that figure was 226%. Today, the figure stands at a mind-blowing 243%! So you can forget about all that deleveraging talk. The US is in fact still leveraging up, both in nominal terms and as a percentage of GDP.

I think the rising cost of money will become the story of 2011. Its effect on consumers, the real estate market, and government borrowing costs will be profound. Apparently, most major brokerage firms have no fear of soaring interest rates causing our economy to implode. However, it's clear to me that the bond market has already started to crack due to inflation and massive oversupply from the Treasury. Prudent investors should think twice before overlooking what could be the initial holes in the biggest bubble in world history – the full faith and credit of the United States.

S and P to hit 450..OUCH!!

S and P to hit 450 with U.S. worse than

'lost' Japan: strategist

By Steve Goldstein

WASHINGTON (MarketWatch) -- A noted bearish strategist said Thursday that the S and P 500 will tumble to 450 because conditions in the U.S. are "much, much worse" than during the lost decade in Japan.

As the market debates whether bond prices are in bubble territory, Societe Generale's London-based strategist Albert Edwards said bond markets are at least moving to discount deflation but that sell-side strategists still say the current situation in the U.S. is unlike Japan a decade ago, when the now-third-largest economy suffered through a prolonged no-growth period.

"There is still too much hope about. Until the mantra changes from 'Equities for the long term' to 'Bonds at any price,' we will not have completed our Ice Age journey," he said in predicting the S and P 500 would tumble to 450 from 1,055 at the close on Wednesday.

Edwards noted that the total return of U.S. long bonds over the S and P is over 20 percentage points this year.

"The structural bear market has not reached the end. We have long said that the de-bubbling process would end only when equities became very cheap and revulsion in equities as an asset class hangs in the air like a fog," he said.

He forecast that yields on 10-year Treasury bonds (TNX 25.39, +0.01, +0.04%) would fall to the 1.5%-to-2% range and that German 10-year bonds would break below 1.5% while U.K. government-bond yields would fall below 2%. The U.S. 10-year was yielding 2.55% Thursday morning, the German 10-year bund 2.14% and the U.K. 10-year gilt 2.87%

Edwards also noted that the Cleveland Fed's alternative measure of core CPI shows that core inflation is evaporating far faster than the original measure suggested.

"So far the equity market has shrugged off much of the weaker data that abounds, and has not joined the bond market in a perceptive move. The equity market will though crumble like the house of cards it is, when the nationwide manufacturing ISM slides below 50 into recession territory in coming months," he said. "Indeed the new-orders data for August, already reported in regional ISMs, suggest the equity market is going to get some sentiment-crushing data in the very near term."

Not likely that Albert Edwards will be appearing on CNBC anytime soon.

Michael Pento: The Fed's Biggest Bubble

By: Michael Pento
Tuesday, August 24, 2010
(thanks to Euro Pacific Capital)

I’ve made a living out of exposing economic fallacies, but there’s one whale that I can’t seem to harpoon. Even top-flight Wall Street analysts seem to believe that the Fed’s doubling of the monetary base after the credit crunch has not had an inflationary impact on our economy. Their logic can be summed up like so: “The money the Fed created and dropped from helicopters has all been caught in the trees.” In other words, the Fed is creating money, but it is just being held as excess reserves by the banking system instead of being loaned to the public. Therefore, the money supply hasn’t truly increased, there is no money multiplier effect, and aggregate price levels are behaving themselves.

But this is only a half-truth. Yes, most of the money created by the Fed has been kept by commercial banks as excess reserves. However, the Fed doesn’t conjure reserves by magic. It first creates an electronic credit by fiat, then purchases an asset held by a financial institution. Those primary dealers then deposit that Federal Reserve check into a bank, thus creating excess reserves for the banking system. The act of creating money from nothing and buying an asset — be it a Treasury bond or Mortgage Backed Security (MBS) — drives up the price of that asset in the open market. Those price distortions send erroneous signals to private buyers and sellers, eventually creating gross economic imbalances.

Therefore, the inflation created by the Fed first gets concentrated in whatever asset it has chosen to purchase – before spreading throughout the economy.

In the latest example of the Fed’s monetary manipulations, Bernanke & Co. purchased $1.25 trillion in MBS. The prices of MBS were therefore driven up (and yields down). Before that, the Fed forced the entire yield curve lower by purchasing not only Treasury bills but also $300 billion in notes and bonds. The Fed has also recently indicated that it will be swapping maturing MBS for longer-dated Treasury securities in an effort to keep its balance sheet from shrinking.

While it is true that — for now at least — we have been spared from the imminent curse of skyrocketing consumer prices, thanks to the falling money multiplier, it is blatantly untrue that the trillion-plus dollars the Fed created have been rendered inconsequential.

Not only has the huge buildup in the monetary base put pressure on the US dollar and caused gold to soar, but it has also broadcast an egregious and distortive price signal for US debt securities. The 10-year note is now trading just above 2.5%. That yield is near its all time record low, nearly 5 percentage points below its 40-year average, and 13 percentage points below its record high of September 1981.

US sovereign debt should only enjoy such historically low yields due to an overabundance of savings, low inflation, and low debt. None of those preferable conditions currently exist. Hence, US Treasuries are the most over-supplied, over-owned, and over-priced asset in the history of the planet! Once the debt dam breaks, it will send the dollar and bond prices cascading lower, and consumer prices and bond yields through the roof.

While Wall Street and Washington are petrified of the deflation boogieman, the real menace lurking in the shadows is the Fed’s bond bubble – and it’s going to eat small investors alive.

Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.

Peter Schiff: The bond market is the mother of all bubbles

Peter Schiff and Marc Faber explaining risk reality to CNBC varsity cheerleaders.

"The bond market is the mother of all bubbles right now and I think when it bursts the losses will dwarf the combined losses of the stock market bubble and the real estate bubble. The problem is that there is no way for the government to pay things back, the only way they could do that would be tax increases which are horrendous and would never be accomplished..."

"This decade will be the worst decade for bonds in US history..."

At 7:00 am CDT Tuesday, August 24th, the bond market continues its rally as the 10 year treasury is printing 2.54% (down from 2.61% Monday) and lowest level since March 2009.

Build America Bonds to cost the federal government (a.k.a. taxpayers) $36 billion through 2019

By Esmé E. Deprez

Aug. 20 (Bloomberg) -- Build America Bonds, the fastest- growing part of the $2.8 trillion municipal debt market, will cost the federal government $36 billion through 2019, $6 billion more than forecast, the Congressional Budget Office said.

The U.S. subsidizes 35 percent of the interest cost of the taxable Build America securities, which were authorized under the economic stimulus legislation signed by President Barack Obama last year. Issuers have sold about $128.5 billion of the debt, according to data compiled by Bloomberg.

Federal spending on Build Americas will rise to $2 billion for the 2010 fiscal year ending Sept. 30, from less than $500 million in 2009, the non-partisan agency said yesterday in its semi-annual budget report. From 2009 to 2019, the total cost will grow to $36 billion, up from a $30 billion estimate in January. The Bond Buyer newspaper reported the findings earlier.

According to the CBO’s March analysis of Obama’s fiscal 2011 budget, his plan to expand and permanently extend the program -- as well as lower the subsidy to 28 percent -- would increase revenue by $80 billion over the 2011-2020 period. More than two-thirds of the Build America program’s cost is currently offset by higher tax revenue, according to the CBO.

The House of Representatives postponed on July 29 a vote to extend the Build America program for two years beyond its Dec. 31 expiration. Two previous extensions sought by the House were killed in the Senate.

Independent researcher CreditSights Inc. forecast on July 29 that total issuance would reach $165 billion by year-end, as borrowers come to market before the program is set to cease.

Build Americas yield about 5.63 percent on average, according to the Wells Fargo Build America Bond index. The index has an average maturity of 28.8 years and an average credit rating of Aa3 and AA- from Moody’s and Standard and Poor's, respectively. Both ratings are the fourth-highest investment grades.

Grandpa

Build America Bonds is synonymous with Build American Banks...the U.S. government continues to afford the Wall Street Banks with unbelievably profitable income producing opportunities while the U.S. taxpayer continues to struggle and our children and grandchildren are left with the financial shortfall. The following article albeit 5 months old, remains relevant.

CBO projects a $36 billion hit to the federal government while Goldman Sachs booked $55.7 million of Build America Bond fees as of March 2010.

By Michael McDonald
March 10 (Bloomberg) -- Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, has made $55.7 million from the sale of $36.4 billion of Build America Bonds, about a third of the fees it earned from its municipal business, it said in response to queries from Iowa Senator Charles Grassley.

The effort to underwrite the federally subsidized municipal bonds is “highly competitive” with “over 10 major firms” vying for the business, Goldman Chairman Lloyd Blankfein wrote in a letter dated March 1 to the top Republican on the U.S. Senate Finance Committee. Grassley said in a letter to Blankfein last month that he is “concerned that American taxpayers are subsidizing larger underwriting fees for Wall Street investment banks.”

Congress created the Build America Bond program last year as part of the $862 billion American Recovery and Reinvestment Act in an effort to revive the $2.8 trillion municipal bond market. The U.S. Treasury pays 35 percent of the interest cost if states and local governments sell the taxable securities for their capital projects instead of tax-exempt debt.

Goldman, which got $10 billion in taxpayer bailout money amid the credit crisis in 2008, was paid $54 million to lead underwrite or help sell $34 billion of the bonds and $1.7 million to serve as an adviser on a separate $2.4 billion of Build America Bond sales, the bank told Grassley’s office in a second communication dated March 9. Jill Gerber, a Grassley spokeswoman, confirmed the content of the letters.

Borrowers Paid More

Blankfein replied to Grassley that the bank is paid to “educate the market about the issuer and the securities they are offering,” as well as “assume the risk of underwriting.” He said that as Build America Bonds “have become better known to investors, underwriting fees have come down.”

The bonds are marketed to investors that typically don’t buy municipal securities because they don’t need tax-exempt income.

Goldman’s Fees

Goldman charges a fee of between 0.6 percent and 0.875 percent of the borrowed amount of money to underwrite Build America Bonds, compared with 0.875 percent for investment-grade corporate bonds and 0.5 percent to 0.625 percent for tax-exempt municipal securities, Blankfein said. Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment further.

The bank earned a total of $149.7 million underwriting and advising on the sale of municipal securities, including Build America Bonds, since the beginning of last year, according to information it provided Grassley’s office. It generated $885 million in revenue from underwriting all types of debt in the final nine months of 2009, or 2.5 percent of the firm’s $35.75 billion in total net revenue in the April through December period, according to company filings.

President Barack Obama last month proposed extending and expanding the program, which expires at the end of this year. There have been $84 billion of the securities sold since last April, according to data compiled by Bloomberg.

Goldman Sachs, which paid back the bailout last year, was the top underwriter as of Dec. 31 for debt issued under the stimulus program, followed by banks including JPMorgan Chase & Co., Bank of America Corp., Morgan Stanley, Citigroup Inc. and Barclays Plc, according to data compiled by Thomson Reuters. Goldman Sachs led a group selling $2.6 billion of securities for Georgia’s Municipal Electric Authority this month.

Business Insider-David Rosenberg: Here's why you ignore the bond market at your peril

Business Insider: most informative comments from David Rosenberg. David remains one of the few straight shooting realists in the marketplace.

You want more talk about the bond rally? You got it.

Here's David Rosenberg of Gluskin-Sheff on why equities and economists just don't get it, but that the bond market does.

The yield on the 10-year note hit its nearby peak on April 5, at 4.01%, and has since plunged nearly 120 basis points.

Declines of this magnitude very often presage the onset of bear markets and recessions. Typically, equities and then economists are late to the game. Nothing we are seeing is any different from the past, at least on this score.

What is key to note is that the bond market is the tail that wags the stock market’s dog — it leads.

The 10-year note yield peaked on May 2, 1990 at 9.09%. By December 12, 1990, the yield was all the way down to 7.91%. The S&P 500 peaked on July 16, 1990, the same month the recession started. So Mr. Bond led both by over two months — the 120 basis point slide in yields by December provided ratification (though there were still some, including Alan Greenspan at the time, who still believed a recession had been averted).

The yield on the 10-year T-note peaked at 6.79% on January 20, 2000 — the stock market peaked less than eight months later on September 1. By November 28, 2000, the yield had plunged to 5.59% — down 120 basis points (as is the case today), again providing ratification that we were not heading into some routine soft patch. Indeed, the recession started in March 2001, so the bond market again played the role of the real leading economic indicator, not the stock market.

Then in the most recent cycle, the 10-year T-note yield reached its high on June 12, 2007 at 5.26% — by November 21, it was all the way down to 4.00%. The S&P 500 peaked on October 9, 2007, three months after the peak in the bond yield. Yet again, a 120 basis point slide was the smoking gun for the economic downturn — it was called the ‘hard landing’ then, though the plethora of economists decided to look the other way; and today it is called the ‘double dip’ and once again this view is met with widespread ridicule from the economics intelligentsia.


Grandpa:
Today is yet manipulated and disconnected day in the equity market. 10 year at 2.82% while the DOW was up 60+ points on an anemic volume day. Based on the volume at 2:23 pm CDT, today could very well be one of the 5 lowest volume days of 2010. Flash Crash Deux is on the horizon.

Economy as perceived by the Bond Market versus the HFT gamed broken Equity Market

Grandpa's recap of economic perceptions as seen by the bond market (those that understand fundamentals) and the High Frequency Traders gaming a broken U.S. equity market. NUFF Said!

U.S. Economy through the eyes of the bond market

U.S. Economy through the eyes of the HFT gamers equity market