Farrell: On The Cautious Side Of The Fence

As we feared, the ten-year Treasury bond auction held Wednesday was a bust. The cover bid was 2.62 times, which is not all that bad but below the 2.88 times of the last five auctions. It took a 3.99% yield to get the buyers, which was a big intraday jump and on the edge, of course, of the 4% barrier that looks to be broken easily and soon.

Foreign buyers were 33% or so of the total, which is mediocre and confirms they are shying away from longer-dated bonds, probably out of fear of inflation caused by the massive borrowing needs of the government.

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Thursday will see a 30-year auction, and I don't expect any good news out of it, but the 30-year is not where many future offerings will be, so the ten-year will remain the focus. The good news is the ten-year did trade better after the auction and was at the 3.95% area towards the end of the day.

The Beige Book is an informal sort of survey of the 12 Federal Reserve districts, and its Wednesday release was a yuk as well. Soleil's Senior Economic Adviser Lyle Gramley, in a quick note to the Soleil sales force, noted the words "weak, weakening, soft, depressed" were sprinkled throughout the report.

The best that can be said is that, while the economy is weak still, there are indications the worst of the recession is over. Five of the 12 districts said the downward trend is moderating, which means 7 didn't. Manufacturing is at a low level, wages are at best flat, and commercial real estate stinks.

New-home construction appears to have stabilized but that is in part because so little has been built. You could have almost taken last month's report and reissued it. No real positive news, but a continuation of the bottoming process. There was roughly a 2-to-1 negative bias on things mentioned, and last month it was more like 3:1, so better in that respect.

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The trade deficit took a back seat to the other reports, but it came in at $29.2 billion. That is down from a deficit of $58 billion last September. In the last six months, exports have fallen at a 40% annual rate, which shows you the depressed state of world trade. Because oil has fallen so much in price, imports have fallen 60% annually over the same six months; thus the improvement in the deficit.

The good news is the market seemed to have figured all this out beforehand and finished only slightly lower on the day. When stocks don't go down on bad news, that is the good news. I feel that, with the end of the quarter approaching, we have unusual cross-currents going on, and, with such light volume still, I'm staying on the cautious side of the fence.