Is Selling Bonds the Taste of Things to Come?

Treasury yields are on the rise as I have noted on numerous occasions recently.

The action has prompted the world’s largest hedge-fund manager, to throw in the towel on treasuries and inflation-linked TIPS.

Please consider Dalio Patched All Weather’s Rate Risk as U.S. Bonds Fell

As the bond market plunged in late June, Ray Dalio convened the clients of Bridgewater Associates LP, the world’s largest hedge-fund manager, to tell them that a fund designed to withstand a broad range of market scenarios was too vulnerable to changes in interest rates.

Bridgewater, citing months of study, said it had underestimated the interest-rate sensitivity of various assets in its All Weather fund and was taking steps to mitigate the risk, according to clients who listened to or read a transcript of the June 24 call. By the end of the month, the Westport, Connecticut-based firm had sold off enough Treasuries and inflation-linked bonds to help reduce the fund’s most rate-sensitive assets by $37 billion, according to fund documents and data provided by investors.

The move, disclosed to investors five days after the Federal Reserve said it’s prepared to phase out its unprecedented bond purchases, was unusual for the fund. As its name suggests, All Weather is designed to produce returns in most economic environments and avoid altering asset allocations when the outlook changes. All Weather incurred a second-quarter loss of 8.4 percent that was primarily tied to its $56 billion portfolio of inflation-linked debt, said the clients, who asked not to be named because the fund is private. ‘A Foretaste’

The decline at All Weather and similar funds, including those run by Cliff Asness’s AQR Capital Management LLC and Invesco Ltd. (IVZ), shows Bridgewater’s pioneering strategy for allocating assets between stocks and bonds, known as risk parity, can leave investors overexposed to rising interest rates. The losses were amplified for some funds by a selloff in inflation-linked securities that also caught Bill Gross’s $262 billion Pimco Total Return Fund (PTTRX) off guard.

“This is just a foretaste of what is going to happen,” said Ramin Nakisa, a global asset-allocation strategist at UBS Investment Bank who co-wrote a March research report titled “When Risk Parity Goes Wrong.” Nakisa called June’s selloff in Treasuries and inflation-linked bonds “a dress rehearsal” for the volatility awaiting when the U.S. Federal Reserve actually begins to taper its bond-buying program, known as quantitative easing.

All Weather trimmed its use of leverage to about 144 percent of net assets at the end of June, according to the clients who requested anonymity. Gross exposures to different asset classes declined to about $116 billion from $138 billion in the quarter, while net assets stayed at $80 billion.

Reflections on Leverage

Lovely. All Weather now has a mere 144 percent leverage? What happens if stocks, bonds, and commodities all take a dive?

Here's the deal: This selloff in treasuries may be over. Or it may not be. Anyone who thinks they know is fooling themselves.

What I do know is leverage works both ways. I also know that the Fed has so distorted the economic horizon that it is next to impossible to predict what's coming down the pike.

Stocks, bonds, and commodities other than gold all rose in union over the past few years. My bet is on an unwinding of that trade.

I see no value in treasuries, no value in corporate bonds, no value in equities, and no value in municipal bonds.

I do see value in gold, so that is where I am. Without leverage. Patiently waiting.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Is Obamacare Really Responsible for Rise in Part-Time Employment? If So, Why Doesn't Average Weekly Hours Show Just That?

Inquiring minds are digging into average weekly hours of workers looking for Obamacare effects on which to place blame.

Average Weekly Hours Of Production And Nonsupervisory Employees



Since this data series began in 1964, the average weekly workweek has been trending lower.

Note the tendency following each recession. 1990-1998 is the only exception to the general rule that hours never recovered to the previous pre-recession level.

Last Five Observations

• 2013-07: 33.6 Hours 
• 2013-06: 33.7 Hours   
• 2013-05: 33.7 Hours   
• 2013-04: 33.7 Hours   
• 2013-03: 33.8 Hours   

Lets' zero in to a tighter timeline for a closer look.



The second chart shows that in spite of Obamacare, average weekly hours has been bouncing between 33.6 and 33.8 for quite some time.

Several readers emailed such data is proof that Obamacare is not having the effect that I have repeatedly stated that it has.

They are wrong.

Just because hours have stabilized does not mean there is no Obamacare effect. It simply means some industries have not been impacted as much as others.  You just have to know where to look.

Focus on Home Centers, General Merchandise, Services for Elderly

Jed Graham at Investor's Business Daily highlights select areas in his report ObamaCare Fuels Sharp Workweek Drop In 4 Industries, while coming to the proper conclusion.

Anyone who insists ObamaCare employer penalties aren't having a meaningful impact on work hours simply hasn't looked closely at the evidence.

In a private economy with 114 million workers clocking 34.4 hours a week on average, it's easy to miss important changes. What feels like a wave to modest-wage workers getting hit may appear to be a mere ripple from an altitude of 40,000 feet.

After all, 1.4 million workers could lose an 8-hour shift and it would shave just six minutes off the average workweek. But if one looks closely, it's not hard to find industry groups with an unprecedented drop in work hours since ObamaCare became law.



Among retail bakeries, home-improvement stores and providers of social assistance to the elderly and disabled, the workweek for nonmanagers has fallen to record-low levels — by far.

At general merchandise stores, department stores and discounters, the rate at which the workweek has fallen since early 2012 is way off the charts relative to prior data going back to 1990.

The White House pointed to hours worked in the restaurant sector to disprove an ObamaCare impact, but the data don't support the claim. Because average hours worked are already below 25 hours, part-timers hired for 28 hours would raise the average.

Questions and Answers

Q: Why doesn't a chart of average weekly hours show the Obamacare effect?
A: It does. You just have to look in the right places.

Q: Is Obamacare responsible for the overall trend of declining workweek hours?
A: The workweek has been declining since the series began, so the answer must be no. However, Obamacare has indeed contributed to the trend as shown above.

Q: Is Obamacare to blame for rising part-time employment?
A: Yes

Obamacare Effects

For more on "Obamacare Effects", please see

• Trends in Full and Part-Time Employment; Obamacare Job Double Counting and Other Economic Distortions
 
• Immigration Bill Incentivizes Employers To Fire Americans and Hire Amnestied Immigrants; Immigration and Obamacare’s Employer Mandate
 
• 22% Think Obamacare Will Make Their Situation Better, 42% Say Worse
 
• Obamacare Effects Hit Local Governments, Small Businesses, Temp Staffing Agencies; Chicago Dumps Retirees Into Obamacare
 
• Don't Worry, Trend Towards Hiring Temps is Only Temporary (And Not at All Related to Obamacare)
 
• Obamacare Premiums 47% Higher But Deductibles 27% Lower Than Grandfathered Health Plans; Obamacare Lies
 
• Opting Out of Obamacare (the Unaffordable Health Care Act); Not Even Labor Unions Want It 
 
• Prepping for Obamacare, Olive Garden and Red Lobster Cut Workers' Hours; Are Other Companies Doing the same? Tip Sharing Lowers Minimum Wage; Like One, Like All?
 
• Is Obamacare Responsible for the Surge in Part-Time Jobs? What About Obama's Defense Layoff Suspensions?

As Jed Graham states "Anyone who insists ObamaCare employer penalties aren't having a meaningful impact on work hours simply hasn't looked closely at the evidence."

To which I would add ... the economic distortions go far beyond part-time employment.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Philly Fed Misses Expectations; Industrial Production Unchanged; Manufacturing Declines; Treasury Yields Soar Anyway

Philly Fed Misses Expectations

Bloomberg reports Manufacturing in Philadelphia Regions Expands for Third Month

The Federal Reserve Bank of Philadelphia’s general economic index fell to 9.3 this month from a reading of 19.8 in July that was the highest since March 2011. Readings greater than zero signal growth in the area, which covers eastern Pennsylvania, southern New Jersey and Delaware.

The median forecast of 54 economists surveyed by Bloomberg called for a reading of 15. Estimates ranged from 7 to 23.

Industrial Production Unchanged

Manufacturing in the Philadelphia region may be up, but overall manufacturing is negative while industrial production is unchanged for July.

Industrial production in the U.S. was unchanged in July as a slowdown at factories overshadowed an increase in mining.

The reading for output at factories, mines and utilities followed a 0.2 percent gain the prior month that was smaller than previously reported, a report from the Federal Reserve showed today in Washington. The median forecast in a Bloomberg survey of 82 economists called for a 0.3 percent rise in July.

Manufacturing, which makes up 75 percent of total production, declined for the first time in three months.

Month-Over-Month Manufacturing Declines



Manufacturing is down month-over-month but only slightly. Let's look at some longer term trends in manufacturing and industrial production.

Industrial Production Percent Change From Year Ago



Manufacturing Percent Change From Year Ago



Trends are certainly weakening in manufacturing and industrial production.

Wal-Mart Cuts Profit Outlook

As noted earlier, Wal-Mart, Macy's, Kohl's Cut Profit Outlook; Cisco to Cut 4,000 Jobs, Blames Weak Economic Recovery.

With a weaker than expected Philly Fed, negative manufacturing, flat industrial production numbers, and a declining outlook at Wal-Mart and other retail stores, one might have thought treasury yields would drop.

Nonetheless, treasury yields rose, presumably on the assumption the Fed is still going to taper asset purchases starting next month and the economy will strengthen.

The first assumption is questionable, the latter is highly overoptimistic.

$TNX 10-Year Treasury Yield



$TYX 30-Year Treasury Yield



Yields Rise Significantly in Two Days

• In the last two days Yield on the 30-Year long bond rose from 3.602% to as high as 3.837%, a rise of 23.5 basis points (nearly a quarter percentage point).
• Yield on the 10-Year treasury note rose from 2.552% to as high as 2.821%, a significant rise of 26.9 basis points (over a quarter percentage point).

Curve Watchers Anonymous offers the following chart to help put things in proper perspective.

Yield Curve Historical Perspective



 click on chart for sharper image

• $TYX: 30-Year Treasury Yield - Green
• $TNX: 10-Year Treasury Yield - Orange
• $FVX: 05-Year Treasury Yield - Blue
• $IRX: 03-Mnth Treasury Yield - Brown

To understand the significance of this move higher in treasury yields, please see Mortgage Applications Decline 13th Time in 15 Weeks; Are Mortgage Rates Cheap? What's Next For Housing?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Wal-Mart, Macy's, Kohl's Cut Profit Outlook; Cisco to Cut 4,000 Jobs, Blames Weak Economic Recovery

The earnings hit parade keeps on rolling, but not in the directions bulls wanted or expected. And with stocks priced well beyond perfection, today's reaction should hardly be a surprise. Yet, treasury yields soared once again in spite of poor earnings, and in spite of a flat industrial production report.

Wal-Mart, Macy's, Kohl's Cut Profit Outlook

Yahoo!Finance reports Wal-Mart cuts profit outlook on shopper worries

Wal-Mart Stores Inc. cut its annual profit and revenue outlook Thursday as the world's largest retailer expects a tough economy at home and abroad to continue to squeeze its low-income shoppers through the rest of the year.

Wal-Mart also reported second-quarter results that missed Wall Street estimates. The company's stock fell nearly 2 percent in premarket trading.

Wal-Mart's sober assessment of consumer spending adds to worries in earnings from Macy's Inc. and Kohl's Corp. Both lowered their expectations for the year after reporting disappointing results.

Wal-Mart said recent tax changes have further put pressure on its shoppers. Americans are dealing with a 2 percentage-point increase in payroll taxes that took effect Jan. 1. That means that take-home pay for a household earning $50,000 a year has been sliced by $1,000.

"The retail environment remains challenging in the U.S. and our international markets, as customers are cautious in their spending," Wal-Mart Chief Financial Officer Charles Holley said in a statement. He noted a "reluctance" among its customers to spend on discretionary items like flat-screen TVs.

Cisco to Cut 4,000 Jobs, Blames Weak Economic Recovery

The Wall Street Journal reports Cisco to Cut 4,000 Jobs, Blames Weak Economic Recovery.

Cisco Systems Inc. is once again tightening its belt, this time before bad news hits the bottom line.

The Silicon Valley network-equipment giant on Wednesday said it would cut 4,000 jobs, or 5% of its workforce, despite reporting an 18% jump in profit in the fourth fiscal quarter.

"What we see is slow steady improvement, but not at the pace we want," Mr. Chambers told analysts on a conference call.

While orders from customers in the Americas rose 5% in the fourth period, for example, orders from Asia declined 3%—and its business in China fell 6%.

Cisco, based in San Jose, Calif., is best known for hardware that helps pump data to and around the Internet, selling both to communications carriers as well as other classes of companies. The performance of those mainstay businesses was mixed.

Revenue in Cisco's biggest segment, switching equipment, rose 5%. But sales were flat in the company's original business of routing gear.

Cisco may be a mixed bag, but the outlook for retailers certainly is not. Wal-Mart accounts for a whopping 10 percent of nonautomotive retail sales, and its outlook is telling. And once again interest rates are up across the US treasury curve which certainly will not be good for housing or jobs.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Interested In Buying Gold? Why Wait?

The title of this post is a play on the Yahoo! Finance video Wait for Further Pullback in which Jeff Macke asked Options Monster founder Jon Najarian if this rally was the "real deal".

Najarian says gold is looking good so far but it's still locked in a range. Where others see resistance in the $1,325 area, Najarian is more optimistic. "It was $1,425 in June of this year. I think that's the next stopping point."

Najarian says the trade here is to chill and wait for a pullback. If it gives up the ghost again and drops below $1,300 he's a buyer. If not he's happy to let others chase.

Gold "Looking Good" So Why Wait?

Najarian says "gold is looking good". He also thinks "$1,425 is the next stopping point".

But low and behold,  Najarian wants another pullback to $1300 first. Good grief. Why does anyone think they can time anything to that degree?

I suggest it cannot be done. If you think $1,425 is the next stopping point, does it matter that much if you buy at $1300 vs $1325?

Here's the deal: I do not know what the "next stop" is for gold, nor does anyone else.  What I do know is that micro-managing entry points, hoping for a $25 pullback when you believe the price is headed $100 or more higher is silly.

By the way, I also think "gold is looking good" here, but I am talking my book as well as my belief. That aside, I am pleased to see all these wimpy bulls. One of these breakouts is going to hold, and I will not be hoping for a pullback when it happens.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Mortgage Applications Decline 13th Time in 15 Weeks; Are Mortgage Rates Cheap? What's Next For Housing?

Here are a couple of charts courtesy of Bankrate. The annotations are mine.

15-Year Fixed Rate Mortgages



30-Year Fixed Rate Mortgages



Explaining the Rebound in Housing

If you are looking for what fueled the rebound in home sales and the increase in home prices, look no further than the above chart.

In the two-year period from December 2010 until December 2012, the rate on popular 30-year mortgages fell from 4.97% to 3.42%, a decline of 155 basis points (1.55 percentage points). In April, rates were still near record lows at 3.56%.

Are Mortgage Rates Cheap?

From the record low in December 2012, 30-year fixed rate mortgages have risen 97 basis points to 4.39%.

While still low historically, it's the direction of the trend that is important, not the absolute number. A one percentage point increase in rates decreases housing affordability by 10-11%.

US Treasury Rates

Mortgage rates are generally tied to rates on 10-Year US treasuries. Here is a chart that explains the rise in mortgage rates.



click on chart for sharper image

• $TYX: 30-Year Treasury Yield - Green
• $TNX: 10-Year Treasury Yield - Orange
• $FVX: 05-Year Treasury Yield - Blue
• $IRX: 03-Mnth Treasury Yield - Brown

The above chart from yesterday's post Treasury Yields Rise Following .2% Rise in Retail Sales; Fed Tapering Begins in September?

Treasury Yields and Housing Affordability

On June 24, in 10-Year Treasury Yield Up 100 Basis Points Since May; What's That Mean for Mortgage Rates and Housing Affordability? I commented ...

Anyone who stretched to buy is no longer qualified unless they locked some time ago.

Refinancing will soon be dead in the water (anyone who has not already locked no longer has any incentive) and new home affordability has taken a big hit.

Mainstream media talking heads say this will not affect the housing recovery. Assuming this trend sticks (even if rates simply level off now), how can this bond revolt not affect housing?

Mortgage Applications Decline 13th Time in 15 Weeks

From the latest Mortgage Bankers Association Weekly Application Survey ...

• Mortgage applications decreased 4.7 percent from the previous week
• The Refinance Index decreased 4 percent from the previous week
• The seasonally adjusted Purchase Index decreased 5 percent from the previous week
• The unadjusted Purchase Index decreased 6 percent compared with the previous week

One week does not make a trend, but the trend looks ominous. The weekly application surveys show a decline in mortgage applications for the 13th time in 15 weeks.

What's Next For Housing?

Curiously, refinance applications although trending lower, still account for about 63% of applications.

I spoke with my friend Michael Becker, a mortgage broker at WCS Funding Group and he commented that he is still refinancing people with rates over 6%. Some people just now have the equity available to refinance.

Yet, with rising rates, the drop in affordability, the pent-up demand to buy declining, and the decline in the number of applications, don't expect too much more (if any), rise in home values. And don't expect mortgage applications to break this trend either.

OK Ben, you still going to taper?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com