“Italian and Spanish two-year notes rose as the European Central Bank lent financial institutions more three-year cash than economists predicted, fueling bets the extraordinary loans will be used to buy the nations’ debt.

The advance drove the Italian two-year yield to a 15-month low. The ECB will lend 800 financial institutions 529.5 billion euros ($711 billion) through its longer-term refinancing operation, more than the 470 billion-euro median of 28 estimates in a Bloomberg survey. German bunds were little changed as the country sold 3.26 billion euros of 2022 securities and a report showed unemployment stayed at the lowest in more than two decades last month.

“What we saw after the first LTRO is likely to develop further, with yields falling, and it will be no surprise to see further support for Italian and Spanish bonds,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. “Demand was relatively strong and far stronger than the demand we saw in December.”

The Italian two-year note yield fell 24 basis points, or 0.24 percentage point, to 2.20 percent at 11:39 a.m. London time, the lowest rate since Nov. 8, 2010. The 2.25 percent note due November 2013 gained 0.38, or 3.80 euros per 1,000-euro face amount, to 100.095. That’s the first time the price of the securities has climbed to more than 100 cents on the euro.

Spain’s two-year notes advanced for a 10th consecutive day, with the yield dropping 11 basis points to 2.34 percent.

Unlimited Loans

Italy’s government note yields have tumbled about 4 percentage points since the ECB announced its plan to offer unlimited loans for three years on Dec. 8.

“An obvious use of LTRO funding is to purchase government bonds paying higher rates,” Fitch Ratings said in an e-mailed report yesterday. “Sovereign spreads showed a marked decline following the LTRO” in December, it said.

Germany’s 10-year bond yield was at 1.80 percent after fall to 1.78 percent yesterday, the lowest since Jan. 31…”

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The ECB had a range of 300-800 billion Euros. Finding the right number is what bulls were worried about. It appears from the markets reaction that they found the right number to lend in order not to upset markets.

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“NEW YORK (Reuters) – It’s time for defense, says Bill Gross, manager of the world’s largest bond fund.

Gross, manager of PIMCO’s $250 billion Total Return bond fund , used American football as a metaphor for his investment model in his March newsletter. He wrote that he has turned defensive as he watches out for potential downside risks and warns about the government’s increased demand on available capital in the economy.

“Over the past 30 years, an offensively minded Federal Reserveand their global counterparts,” or other central banks, “were printing money, lowering yields and bringing forward a false sense of monetary wealth,” Gross wrote.

“Successful investing in a deleveraging, low interest rate environment will require defensive in addition to offensive skills,” he added.

He pointed out that “low yields, instead of fostering capital gains for investors via the magic of present value discounting and lower credit spreads, begin to reduce household incomes, lower corporate profit margins and wreak havoc on historical business models connected to banking, money market funds and the pension industry.

“The offensively oriented investment world that we have grown so used to over the past three decades is being stonewalled by a zero bound goal line stand,” Gross said. “Investment defense is coming of age.”

For example, these have been hard times for retirees who depend on interest income from their fixed-income investments to pay their bills.

“It is Main Street that has failed to keep up with Wall Street and corporate America in the race to see who can benefit more from lower yields,” Gross wrote. “As the interest component of personal income gradually weakens, the ability of the consumer to keep up its frenetic spending is reduced.”

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“The European Central Bank’s second and final 3-year, long-term refinancing operation is coming tomorrow and while analysts are finalizing their bets on the take-up, they generally agree on one thing: The optimism is over.

The ECB’s massive liquidity operation has effectively removed the possibility of a banking crisis in the short term by averting a liquidity crisis and giving banks tons of cheap cash. Consequently, Spanish and Italian banks in particular purchased vast amounts of Italian and Spanish debt, as those bonds can be used as collateral against borrowing from the central bank.

That’s all been positive in the short run. In fact some optimists even suggested that this could bring an end to the crisis by relieving so much pressure off the banks.

But by now, everyone’s recognized that there are major flaws in this argument.

Italy and Spain

Italian and Spanish banks have borrowed from the ECB in record quantities and appear to have made sizable investments in domestic sovereign debt because they can make a profit off the difference between the interest rate on that debt and the one percent interest charged by the ECB.

This makes a lot of sense; if one of the countries were allowed to default, domestic banks would be dealing with complete economic collapse. Default on sovereign bonds would prove just a trivial piece of a much greater catastrophe.

In a closed economy, increasing domestic bank exposure to sovereign debt in order to pull an economy out of a trouble spot makes sense. So long as banks are there to buy up government debt, the government can issue as much debt as it wants and always find buyers. It can even give money to fund people and businesses and that excess money will eventually find its way back through the system as it’s pumped through the financial system via saving and lending.

Even in an economy with a single currency, currency risk will discourage (though not completely deter) investors (people, businesses, and banks) from putting money abroad.

The structure of the eurozone, however, completely eliminates this currency risk, and in fact encourages investors in one country to keep their money in another if its economic prospects are better. And despite currency risk, the prognosis for the euro area—and thus the euro—is so uncertain in the long term that many investors are willing to overlook the currency risk of holding American or Japanese assets because of the assurance that those investments will be worth something someday.

This chart illustrates what’s going on.

Simone Foxman for Business Insider

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“President Barack Obama signed an executive order creating a U.S. panel to investigate unfair trade practices by nations including China.

The Interagency Trade Enforcement Center will bring together lawyers, researchers, analysts and government agents to monitor and enforce trade agreements and laws. The panel, established within U.S. Trade Representative Ron Kirk’s office, will have its director chosen by Kirk, with a deputy selected by Commerce Secretary John Bryson.

The center will be ready to open within 90 days, funded by the trade representative’s office and Commerce, Michelle O’Neill, deputy undersecretary of Commerce for international trade, told reporters today during a conference call. The panel will have employees from the departments of Agriculture, Commerce, Homeland Security, Justice, State and Treasury, as well as U.S. intelligence agencies, according to the order.

“We are doubling down on the administration’s commitment to strong trade enforcement,” Kirk said during the briefing. “We’ll continue to press our trading partners” to comply with World Trade Organization rules “and abide by obligations.”

The effort may aid Obama’s attempt to boost economic growth and cut unemployment by doubling exports to $3.14 trillion by 2015, from $1.57 trillion in 2009. Though the panel will be empowered to investigate all foreign trade, Obama cited China (TBBLCHNA) as a source of concern in his January State of the Union speech to Congress.

WTO Complaints

Obama filed five World Trade Organization complaints against China since taking office three years ago, compared with seven George W. Bush filed from 2001, when China joined the Geneva-based trade arbiter. Obama imposed duties on Chinese-made tires, which he said has helped to create more than 1,000 U.S. jobs….”

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“Ireland will hold a referendum on Europe’s new fiscal treaty, Prime Minister Enda Kenny said on Tuesday, setting the stage for the first popular vote on the German-led plan for stricter budget discipline across the region….”

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Say what you can because some people will believe the shit you spew….

Lawmakers can not agree on corporate tax reform….again.

“The European Central Bank’s willingness to ride roughshod over bondholder rights risks pushing up borrowing costs for indebted governments by making investors less willing to lend.

The ECB swapped about 50 billion euros ($67 billion) of Greek bonds for new securities, identical to the old ones in every way save for identification numbers. The switch makes the ECB senior to other investors, exempting it from the largest sovereign restructuring in history as Greece rewrites the terms of its notes to ensure lenders forgive 53.5 percent of the debt.

“Bondholders are effectively being subordinated every time the ECB gets involved — not legally, but economically,” said Saul Doctor, a credit strategist at JPMorgan Chase & Co. in London. “Foreign investors are going to be less willing to buy sovereign bonds when the ECB can exert itself.”

The ECB has immunity to the losses imposed by the bond-swap plan, designed to trim Greece’s debt burden by 106 billion euros and enforced by the threat of retroactive collective action clauses that prevent holdouts. Greek 10-year yields are almost 35 percent, valuing the securities at 20 percent of par, after Standard & Poor’s yesterday cut the nation’s debt rating to “selective default.”

“They’ve thrown away the rulebook of crisis resolution,” said Gabriel Sterne, an economist at London-based brokerage Exotix Ltd. “It’s a cynical move that will affect the world for years to come and they did it because they can get away with it. It’ll push up costs for other stressed sovereigns so they’re shooting themselves in the foot.”

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Source

“Global research company J.D. Power & Associates found that almost 10 percent of bank customers switched to another financial outlet in 2011, thanks in large part to increased fees.

Last year, 9.6 percent of people moved their money, compared to 8.7 percent in 2010 and 7.7 percent in 2009.

“It is apparent that new or increased fees are the proverbial straws that break the camel’s back,” J.D. Power’s director Michael Beird told the Los Angeles Times.

Along with increased fees, poor service was cited as another reason for the rise in departures.

A majority of the bank switches occurred at the larger banks. Only 0.9% of customers left their small bank or credit union for another outlet.”

Perhaps not yet, but it appears their debt bubble is not looking good going forward…

“MADRID—Spain’s new government said the country will miss its budget-deficit target by a wide margin, and announced spending cuts and tax increases of about €15 billion ($19.4 billion) to stem the tide of red ink.

One week after conservative Prime Minister Mariano Rajoy took his o

ath of office, his government said Spain’s budget deficit will be about 8% of gross domestic product in 2011—well above the 6% target the previous government of Socialist Prime Minister José Luis Rodríguez Zapatero committed to with the European Union and financial markets.

The overrun makes Spain the latest country on the euro zone’s fiscally frail periphery to stumble in attempts to close a yawning budget gap. Portugal, Italy and Greece have all been forced to push through austerity measures in recent months.

On Friday, Madrid proposed about €8.9 billion in spending cuts for 2012 that ranged from trimming public-sector employment to curbing subsidies for political parties.

The government also went back on a campaign pledge of Mr. Rajoy’s and approved tax increases of about €6 billion. The total budget adjustment represents about 1.5% of GDP.

“We weren’t in favor of tax hikes,” government spokeswoman Soraya Sáenz de Santamaría said at a news conference. “They were forced by the size of the [budget] gap we encountered.”

Spain’s latest measures will likely be insufficient to slash the budget deficit from 8% of GDP in 2011 to the target of 4.4% in 2012, a gap of about €36 billion. The government will present a new 2012 budget in March.

Ms. Sáenz de Santamaría hinted more austerity measures will come. “The government has started to take measures; this is the beginning of the beginning,” she said…”

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Citi’s Tobias Levkovich has become a bit skeptical of this rally, but overall he’s still quite bullish on where stocks might head.

One reason for that? The spread between the S&P 500 earnings yield vs. the 10-year Treasury rate.

The basic idea is that if you imagine that stocks could theoretically pay out 100% of their earnings as dividends, you can easily compare stocks to bonds based on yield. If the S&P had an average PE of 20, then you could say that you’re getting a 5% earnings yield. If bonds were only paying 1%, then you’re obviously getting way more meat buying equities, with a fat 4% spread between them.

Anyway, it turns out that using this method shows that stocks are still incredibly cheap, even after their runup.

In the chart below, Levkovich is using the S&P 500 10-year rolling earnings (so it includes the earnings collapse of 2008/2009), and comparing that to the yield on the 10-year, which remains remarkably low, as we’ve been pointing out all year.

The gap is currently between 2 and 3 standard deviations away from the average (going back tio 1971), and based on this, the average 12-month gain from here is a stunning 24.0% for equities, according to Levkovich.

You can see the value in this technique. In 1999, when stocks were near a peak, the spread was exactly the opposite, as investors were getting FAR more yield from risk-free Treasuries than they were from equities.

Bottom line today: Even with the runup, and some yellow warning signs, the outlook is extremely bullish.

Citi

Read more: http://trade.cc/aqdb#ixzz1nbjGSCiM

This was an increase of $2 billion from the prior quarter…..

Source

“(New York Post) – More American households are falling back into the debt hole, this time without the safety net of home values to help bail them out, the New York Post reported Sunday.

Last year, total US consumer debt reached its highest point in a decade, according to a credit card industry observer.

“Now more than ever, families need to work at saving and paying off any outstanding debts,” said Howard Dvorkin, a certified public accountant and founder of the credit counseling service Consolidated Credit.

After a few months of reducing credit card debt levels, Dvorkin said, Americans are starting to return to their reliance on debt.

“People made some progress in reducing card debt earlier in the year, but in the last few months, as the stock market started to rise, they started to return to their old ways of charging things,” he explained.

In December 2011, the total consumer debt — which is the combination of non-revolving and revolving debt — rose by some 9.3 percent to $2.498 trillion, according to the latest Federal Reserve Board numbers.

Both revolving debt and non-revolving debt increased. Revolving debt, which is credit-card debt, went up by 4.1 percent. Non-revolving debt, which includes loans for cars and education, rose 11.8 percent, the central bank’s report said.

The trend — month to month, quarter to quarter and year to year — is rising steeply.

“Consumer credit increased at an annual rate of 7.5 percent in the fourth quarter. Revolving credit increased at an annual rate of 4.5 percent, and non-revolving credit increased 9 percent in December,” the Fed wrote in a note along with the latest monthly report, which also reviewed 2011.

These numbers, Dvorkin warns, mean that many middle-class Americans are taking big risks.

In a weak economy with high unemployment, Dvorkin noted, many people with big card balances become vulnerable to financial catastrophe.

Lewis J. Altfest, a Manhattan adviser who targets professional, high-income clients, devotes part of his practice to telling the well-heeled how to cut back on credit card debt.

“It’s still a big problem. Some people want to live life to the fullest even though they are using their cards too much,” Altfest explained. He said many clients last year tried to reduce card debt. But some “are falling back into their old ways.”

Indeed, last holiday season many consumers financed Black Friday trips to the mall and Cyber Monday online buying sprees by making purchases with plastic, Dvorkin contends.

“As the bills begin to roll in, consumers may find themselves unable to pay them off. It’s good to see an increase in consumer spending, but never is it worth going into debt,” according to Dvorkin.”

Read more: New York Post

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Interesting chart here from Goldman Sachs on large-cap mutual fund holdings…

Goldman Sachs

The left column shows the top 10 stocks that funds like relative to their weight in the S&P 500.

So in other words, mutual funds are overweight Dow Chemical, to the tune of 16 basis points. Technically, funds own a lot more GE shares (top of the right column) than Dow Chemical, but compared to GE’s weight in the S&P 500, mutual funds are relatively skeptical of it.

The whole top 10:

• Dow Chemical
• Union Pacific
• Lockheed Martin
• Potash
• Celanese (a high-tech materials company)
• Waste Management
• FedEx
• Precision Castparts (high tech parts)
• Canadian National Ralway
• Praxair (industrial gasses)

YOU don’t have to be a genius to pick good investments. But does having a high I.Q. score help?

The answer, according to a paper published in the December issue of The Journal of Finance, is a qualified yes.

The study is certainly provocative. Even after taking into account factors like income and education, the authors concluded that people with relatively high I.Q.’s typically diversify their investment portfolios more than those with lower scores and invest more heavily in the stock market. They also tend to favor small-capitalization stocks, which have historically beaten the broader market, as well as companies with high book values relative to their share prices.

The results are that people with high I.Q.’s build portfolios with better risk-return profiles than their lower-scoring peers.

Certainly, caution is needed here. I.Q. tests are controversial as to what they measure, and factors like income, quality of education, and family background may not be completely controlled for. But the study’s results are worth pondering for their possible implications.

The paper, by Mark Grinblatt of the University of California, Los Angeles, Matti Keloharju of Aalto University in Helsinki and Juhani Linnainmaa of the University of Chicago took advantage of some unusual data. The crucial numbers came from, of all places, Finland.

Why there? Two reasons. First, Finland requires all able young men to perform military service. As a result, the authors were able to obtain I.Q. test scores of all of men conscripted in Finland from 1982 to 2001.

Second, Finland had a wealth tax, and its citizens had to report their investment portfolios to the government. This means the authors could compare the men’s I.Q. scores and their investing habits, as well as link those factors to other individual data. Similar data sets aren’t available in other countries, however, so we may not want to generalize too much.

Still, the results are interesting. The authors didn’t claim that people with high scores had some kind of monopoly on stock-picking genius. What they did contend was that these people tended to follow basic rules of successful investing….”

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“The bailout that rescued Greece from a looming default has failed to restore confidence in credit markets, where traders are paying nine times more to insure European government bonds than they are for Treasuries.

While European stocks are off to their best start since 1998, the relative cost of credit default swaps has risen to a record, more than double the July level, according to CMA. To obtain 130 billion euros ($175 billion) in aid to help pay interest on bonds due March 20, Greek Prime Minister Lucas Papademos agreed to reduce debt to 120.5 percent of gross domestic product by 2020 from about 160 percent last year.

While chances of defaults and the breakup of the euro may have diminished, investors are no longer rewarding European governments for reducing spending to cut debt as their economies shrink. U.S. bond yields have stayed near record lows and growth is accelerating as President Barack Obama uses a different strategy, more than doubling the amount of outstanding debt to $10 trillion to fuel the recovery.

“Bond markets don’t believe in the same story that stock markets do,” Robin Marshall, director of fixed income in London at Smith & Williamson Investment Management, which oversees about $18 billion, said in a Feb. 22 interview. “Countries are still saddled with huge debt, are facing either economic downturn or recession.”

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“European leaders shift their focus this week to bolstering the euro region’s debt-crisis firewall after the Group of 20 nations rebuffed their call for help.

The decision by G-20 finance ministers to fend off pleas for assistance pending an increase in the euro-area backstop puts the onus onGermany, the biggest national contributor to bailouts, to overcome its resistance to doing more.

With a parliamentary vote on a second Greek aid package looming in Berlin today, German Chancellor Angela Merkel’s government must now decide whether to back plans at a March 1-2 European Union summit to combine rescue funds and produce a potential firewall of 750 billion euros ($1 trillion).

Europe “doesn’t really need any outside money,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said in an e-mail. “It needs their own policy makers, especially Germany, to show leadership.”

Finland votes on the same package on Feb. 29 while the European Central Bank is preparing to issue a second round of unlimited three-year loans to help shore up the region’s banks….”

Full article