Economy Not in Good Shape; Recent Changes to the Way the U.S. Treasury Tallies Demand at its Bond Auctions

News That Moves Markets


RCM Comment: O.K. we have a lot to get to today, so let’s get started. First, I’ve put together a list of economic numbers recently released to offer more evidence in support of my pronouncement that “the economy is not in good shape”.

I know this proclamation is not the favored view at the moment. You are, no doubt, reading in Wall Street rags and hearing bobbleheads on CNBC decree the end of economic hardship and the beginning of a new day. There is so much spin you would think flax is turning into gold. But, alas, that is just a fairy tale. In fact, all this spinning reminds me of a favorite childhood pastime. We have all done it. Remember when you stood in the front yard, spread your arms and spun around and around in a circle until you fell down? Now, think back, what happened? You would lay on your back and look up. The world would look different as it spun. But, in reality had anything changed? And in the end when the spinning stopped you would question whether or not your nausea was a result of the spinning or the KoolAid you were drinking.

I hope the information below will help you to avoid the KoolAid stand. As for the spinning, I can only say, enjoy the feeling if you want to but don’t believe in the altered state.

Associated Press Headline: May new home sales dip 0.6 percent…

New U.S. home sales fell slightly last month, another sign that the housing market’s recovery is likely to be gradual and prolonged.”

Department Of Commerce News Release: click here.

Key Numbers: New Houses Sold Unadjusted: 32,000, Year Ago: 49,000, Year Over Year %: -34.69. Median Price Unadjusted: $221,600, Year Ago: $229,300, Year Over Year %: -3.36.
Last Month’s Numbers: New House Sold YoY=-32.65%, Median Price Yoy=-3.36%

Census Department Durable Goods Manufacturers New Orders Down 24.5%

ECONX More than Meets the Eye in Personal Income and Spending Report
The Personal Income and Spending report produced some nice headlines, with income increasing 1.4%, spending rising 0.3% and core PCE increasing just 0.1%. The pleasing nature of the headlines is based on the understanding that consensus estimates for those components were set at 0.3%, 0.3%, and 0.1%, respectively. Additionally, the personal income increase for April was revised up to 0.7% (from 0.5%) while the spending number for April was revised to unchanged from an originally reported -0.1% decline…

There was more to the May report, though, than meets the eye. Real disposable personal income was up 1.6% in May; however, when excluding the benefits of the American Recovery and Reinvestment Act (read: lower personal taxes and higher government transfers), real disposable income was up just 0.2%. That’s OK, yet it certainly doesn’t have the pleasing quality of the leading headline, especially when one also takes into account that private wage and salary disbursements fell -0.2%, marking the ninth straight monthly drop in that series.

In turn, the personal savings rate increased to 6.9% from 5.6% in April, which underscores the consumer’s bid to save more and spend less, which isn’t the best combination when contemplating the prospects of a quick and robust recovery effort…

RCM Comment: (EXTREMELY IMPORTANT) The story above about personal spending and the story you are about to read are two egregious examples of the government’s desire to spin, lie and cheat its way out of this economic crisis. The spin about personal income and spending was positive but clearly misleading as “the benefits of the American Recovery and Reinvestment Act” are the real reasons for the uptick.

In the same manner, the “recent changes to the way the U.S. Treasury tallies demand at its bond auctions” is a blatant attempt to confuse the markets and lie about the true demand coming from foreigners. This chicanery reminds me of a Ben Bernanke decision in 2006. Almost immediately after taking control of the Fed, Ben decided to eliminate the reporting of money supply as reflected by M3. He did his best to cast aspersions at the figure and claim it had no purpose. However, time has shown that he proliferated this lie to help hide the amount of US$ he was creating. Of course, the world is now catching on and China (Wary of dollar, China wants super-sovereign currency –, Russia and the like are calling for a new reserve currency as the value of the Greenback is faltering under the weight of Ben’s creation scheme.

Ben’s 2006 M3 ploy was one of the contributing factors that led us to launch our Fortune’s Favor Precious Metals Fund. Our commitment to precious metals across our entire assets base is without a doubt a key reason for our success to date. Likewise, understanding the ramifications of the new U.S. Treasury bond auction reporting changes will likely be a major piece to the puzzle of success going forward.

NEW YORK, June 24 (Reuters) – Recent changes to the way the U.S. Treasury tallies demand at its bond auctions may be artificially inflating “indirect bids,” a category used by investors as a loose proxy for foreign demand.

Foreign investors own more than a quarter of the Treasury market, making their continued interest in U.S. bonds of paramount importance to the market. At the very least, the Treasury’s shift, made earlier this month, is confusing traders, prompting some to second-guess the apparent strong interest in recent auctions.

Indirect bids have been unusually strong of late, reaching a record 68 percent at Tuesday’s two-year note sale, and exceeding 62 percent at Wednesday’s sales of $37 billion in five-year notes. “We’re not going to make much of that, given the information we’ve gotten on the rule changes,” said John Spinello, fixed-income strategist at Jefferies, a primary dealer. “The indirect bids are now going to be higher given the change in procedures.”

Indirect bids are defined as ones that do not go through primary dealers, large banks that do business directly with the Fed and are required to actively take part in Treasury auctions. Top officials in China (Wary of dollar, China wants super-sovereign currency – and Russia have expressed unease about the growing U.S. budget deficit, slated for a record $1.75 trillion in fiscal 2009 alone. This means that traders pay extra close attention to foreign demand figures. The Treasury’s changes, contained in a June 1 entry to the Federal Register, relate to what it considers a “guaranteed bid.” Under the previous arrangement, once a primary dealer offered securities at a pre-specified level to its customer, that bid was considered to be the dealer’s own.

The matter was technical enough to confuse even industry veterans. “We are not precisely sure what this all means,” said Ward McCarthy, managing director at Stone & McCarthy Research Associates in Princeton, New Jersey. “We spoke with some very seasoned market players with decades of experience on dealer trading floors who were similarly unsure what to make of the contents of the Federal Register.” The Federal Register entry can be found at

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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