Update: 8 Feb 2011
This week's news:
European Inflation
Last week Eurostat announced consumer prices rose 5.3 % year-on-year. But that is Euro-wide - in one of the best performing Euro countries, the Netherlands inflation was even 7.5 %. Prices keep rising and producers either accept a reduced profit margin or raise prices. Last week Unilever announced a price hike, and others will definitely follow.The run on our Hot Stock Picks is overwhelming and we will most probably close the 'sign-up' for an undecided period starting from next weekThe Swiss do not even notice the price hikes as inflation was a very low 1.1 % y.o.y. How come? It's the Swiss Franc (CHF)! The CHF gained 11 % to the USD and even 19 % to the Euro. A strong economy creates a strong currency. And a strong currency creates a strong economy - a win-win.
The politicians, bankers and other direct stakeholders make Europeans believe the Euro means prosperity, and is the best they could have ever hoped for. Disembarking the Euro-train would be the worst option, but do you think German politicians believe what they say? The D-Marc would be in a far better position to weather this crisis than the euro is. Look at Switzerland, Norway and Sweden; why are they performing way better than the Euro-zone?
American Treasury Bond Bubble is Breaking
Despite their calm words , bond managers can't be sleeping well with their worries about interest rates and inflation, the housing market and municipal bankruptcies keeping them up at night.Still nothing catastrophic has happened, even though many had predicted the bubble to burst two years ago. But smart financial advisers and fund managers are diligently watching for signals that the end is near and so should you. Ironically, good economic news - such as an improved housing market or increased consumer spending - could be disastrous for bonds.
Here then are five key signs too look for that could signal the bond market is taking a turn for the worse:
Let's face it: Interest rates can't get much lower after falling steadily for the past three decades, so a hike is coming sooner or later - and that's bad news for bonds, especially Treasurys. If employment and consumer spending improve, the Federal Reserve is likely to lift interest rates to control inflation, says Greg McBride, a senior financial analyst at Bankrate.
Concerns about deflation have eased in recent months as consumer spending has improved, but if the economy continues to heat up, it could stimulate inflation as more dollars go toward buying clothing, food and other products. Did we not just mention the Netherlands' inflation was up at 7.5 %?
Economists are particularly concerned that this buying spree could come from abroad – especially developing countries - in the form of higher prices for oil and commodities.
Many states and major cities are facing a financial crisis and an enormous deficit, especially those hardest hit by the recession, including California, Illinois and Florida. Many governors and mayors are eager to slash spending, rein-in pension benefits and in some cases raise taxes. While states currently cannot declare bankruptcy and avoid paying bonds, many cities could, and some states are even litigating to avoid pension obligations.
No one expects a recovery in the housing market anytime soon, but when it does come it will certainly have an impact on bonds. Any uptick in home values and occupancy rates would provide additional revenues to cash-strapped states and cities, says Michele Gambera, head of quantitative analysis at UBS Global Asset Management.
Another thing to watch out for: U.S. and corporations piling on more debt, experts say. Investors feel safe right now with their investments in high-quality corporate bonds, but that can change quickly if those businesses decide to increase their stock value by buying back stock or borrowing to buy a competitor. "Those things are not bondholder friendly," says Leduc, chief investment officer, active fixed income for Standish. Publicly traded companies are required to disclose information about their debt and share repurchases in their financial statements. All eyes will also be on the U.S. government's handling of its soaring debt load.
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