The views expressed in this column are solely those of the
author and do not reflect the views of SVB Financial Group, or Silicon Valley
Bank, or any of its affiliates.
I've got some questions
I want to know you
But what if I could ask you only one thing?
- Jack Johnson
Last week provided many slightly interesting topics and
no very interesting topics. Asking just
"one thing" did not seem so compelling.
So, rather than focus on a single topic this week I
picked a few below:
1. Who owns the most Treasuries?
In fact, the Fed owns more Treasuries than anyone with
a cool trillion dollars of those risk-free assets. OK, maybe this was a trick question. I mean,
after all, if I asked who owns the most IBM stock, you wouldn't think counting
the stock in their Treasury department would count.
China comes in second, narrowly beating out Japan. Both countries have about $900 billion
invested in our government with China adding more aggressively over the past six
years, though leveling off since 2009.
With all the concern about when/whether China will sell
our debt, I would think the same concern should exist around the Fed's decision
to sell at some point. Today, of course,
they are working on their additional $600 billion figure announced last year,
but eventually these bonds will come out for bid, too.
2. What has been the easiest and most
successful way to replicate stock market returns without committing cash
throughout the year?
Oddly enough, since January 2010 buying the stock
market at the open of the first trading day each month and selling at the end
of that day has returned almost as much as holding stocks throughout the month.
To be specific, this strategy would have returned about
94 percent of the markets return while only placing funds at risk 5 percent of
the time. The trend continued February 1
with a 21.5 point rally in the S&P 500.
Some believe this is being caused by flash traders —
computers, mostly, that make trading decisions based on technical factors and
very small price movements. But flash
trading was well established in 2008 and 2009 when this strategy would not have
yielded similar results.
3. Is the ADP Employment Report important?
For you lucky folks who don't know what the ADP
Employment Report is, it is a measure of job growth compiled by — you guessed
it — ADP data. It is released on the day
before the Labor Department's monthly jobs report and is used by many market
participants as an indicator of job growth.
It gets more hype than a weekend at Charlie Sheen's
house. Unfortunately, the track record is terrible. My best advice is to ignore it.
4. What options are being considered by
the Treasury to reduce overseas holdings of their securities?
Last week, the minutes of a recent Treasury Borrowing
Advisory Committee (TBAC) meeting were released, revealing just such a discussion. Noting that foreign ownership is
"significant" and concentrated among a few large borrowers (shocking!), the
TBAC suggested three specific changes to the structure of future Treasury
issuances that might encourage domestic ownership over foreign.
First, "ultra-long" bonds could be issued, which would
be attractive to those who have an extended time horizon. Such 50- or even 100-year bonds would be
marketed primarily to pension funds and insurance companies who wish to
inoculate themselves to market fluctuations given their long-term liabilities.
Second, they could issue callable debt. Historically, Fannie and Freddie have
dominated the callable landscape as they immunize their mortgage holdings, but
with the coming decline in mortgage issuance — so the report goes — there could
be a demand void to fill here.
Third, it is suggested that floating rate Treasuries
might be attractive to private investors who, through recent regulation, are
required to hold more short-term investments.
Here, they are referring primarily to financial institutions and money
From my perspective, this seems a ridiculous exercise
as foreign-based investors hold Treasuries not due to their structure, but due
to their safety. What puts us at risk of
a Treasury auction failure is not purely reliance on foreign investors, but the
massive refunding that must occur each and every week.
Washington should address the source of the problem,
not the symptom.
5. Is QE2 toppling regimes?
Many in the financial world are blaming QE2 on rising
food prices along with the events in Tunisia, Yemen and Egypt over the past
couple weeks. It is likely QE2 is
contributing to rising prices, but price shocks have been occurring for some
time in these countries. There have been
droughts in the former Soviet Union which lead to higher wheat prices in 2010,
monsoons in India in 2009 which lead to higher sugar prices, and droughts and
flood in Argentina and Australia respectively leading to a poor harvest for the
2010-2011 growing season.
In fact, food prices were already on a steady upward
trajectory when Bernanke announced the possibility of QE2 back in August.
But if the Fed is focusing on core inflation (which
ignores food and energy) when setting long-term policy, it is doing so at the
peril of all of us. It is clear the Fed
is happy stocks are rising and they believe QE2 deserves some credit for
this. The idea that prices of all goods and services wouldn't be
affected by the increase in money supply, though, is disingenuous.
Consumer spending in the U.S. rose more than forecast
in December, giving the economy a lift heading into 2011. Purchases
increased 0.7 percent after climbing 0.3 percent the prior month.
Personal incomes also increased, showing a 0.4 percent growth. U.S. same
store sales, excluding Wal-Mart, rose 4.8 percent in January from a year
earlier, another sign of strength in the recovering economy.
The ISM factory index rose to 60.8 in January at the
fastest pace in more than six years, exceeding economists' expectations.
The ISM index of non-manufacturing businesses rose to 59.4 in January, the
fastest pace since August 2005. Orders were the highest in seven years,
while companies showed more confidence to hire.
The unemployment rate unexpectedly fell in January to
the lowest level in 21 months; however, nonfarm payrolls came in much lower
than the anticipated 146K increase at only 36K. Most economists are
attributing this underwhelming news to winter storms keeping employers from
hiring and people looking for jobs. The markets viewed these numbers as
optimistic for the labor market causing the bond market to sell off. The
yield on the 10-year Treasury rose to 3.64percent, the highest since May.
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