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The dollar tanked again on Tuesday but commodities turned mixed. Commodity leaders, principally oil and copper, declined. This strongly suggests that commodities will start retrenching. And because commodities have led stocks higher, stocks are likely to follow.

Bloomberg: The dollar dropped to its lowest level against the euro this year on speculation record U.S. borrowing will undermine the greenback, prompting nations to consider alternatives to the world’s main reserve currency. The 16-nation euro gained for a fourth day versus the dollar as the Russian government said emerging-market leaders may discuss the idea of a supranational currency…

Pending Home Sales surged in April but “Lawrence Yun, NAR chief economist, said buyers are responding to very favorable market conditions. “Housing affordability conditions have been at historic highs, but now the $8,000 first-time buyer tax credit is beginning to impact the market,” he said. “Since first-time buyers must finalize their purchase by November 30 to get the credit, we expect greater activity in the months ahead, and that should spark more sales by repeat buyers.”… Yun cautions that the reporting sample for pending home sales is smaller than that of existing-home sales, so it is subject to greater variability. “In addition, the relationship between contracts on pending home sales and closings on existing-home sales is taking longer than in the past for several reasons,” he
said. “Mortgage processing time has increased, it is taking many months to close on those homes requiring short sales with lender approval, and some sales are falling through at the last moment.”

Mark Hanson of Field Check Group: …beginning in Q3 2008, pendings became a highly volatile series that is not representative of future sales for many reasons. One of the most obvious is short-sale volume. When a short sale offer is accepted by the seller, the seller then has to go to the bank and get it approved — it’s a backward process. If the Realtor marks it as a pending in the MLS — which happens in more cases than not — then it shows up as pending and makes the monthly report. But if the bank subsequently does not approve the short sale price — which also happens in more cases than not — then the pending sale generally dies.

David Rosenberg: Long-term, we believe that the U.S. economy is in a gigantic mess and that risk-taking in the stock market is not going to be rewarded on a sustained basis. We continue to hold the view that the stock market, which peaked in 2007 just two months shy of the most intense recession in 70 years, is vastly overrated as a forecasting device and we strongly believe that portfolios will need to be cash-
generating machines… Look at this way — we are going to be hard-pressed to see operating EPS much better than $43 this year. A ‘normal’ first-year earnings bounce is 20%, and again this is being generous, but that would leave us with $52 EPS for 2010. We give that prospect very little chance of occurring, and we have some
difficulty with the stock market going ahead and pricing in an earnings profile that is likely four or more years away from occurring…

Mr. Rosenberg also notes: Two historical factoids underscoring just how overbought this market really is: Going back to 1950, not once has the S&P 500 managed to surge more than 40% in advance of the recession ending. I think mostly everyone would agree that while the recession may be in its final stages, it is not over just yet… Again, back to 1950, by the time the S&P 500 was up 42% from a bear market low (as is now the case), not only was the economy not in recession at that point, but it was typically nine months into recovery mode…

Bloomberg: Volcker Sees Full U.S. Economic Recovery Years Away [Didn’t Paul get the green shoots memo?] While “truly massive fiscal and monetary stimulus is at work,” he said, “a full recovery will be a matter of years.”… Volcker, 81, decried growing U.S. debt, saying the nation has long been spending beyond its means. The U.S. faces “an unimaginable budget deficit as far as one can see,” he said. “Foreign countries have been for a long while willing to finance our excess spending, but that process can’t continue forever,” he said… “The federal government and the Federal Reserve have been forced to ride to the rescue by ways and means never before contemplated, implying both a degree of political intervention and political risk that are bound to preoccupy us for years,” Volcker said.

Bloomberg: Federal Reserve officials surprised bankers in the past week by demanding they raise specific amounts of new capital before repaying taxpayer funds, applying a more stringent assessment than the stress tests in May. Either the Fed desires to keep control of the banks or Little Timmy’s stress test was a lark. ‘Lark’ understates the situation.

The WSJ: Congress Helped Banks Defang Key Rule Not long after the bottom fell out of the market for mortgage securities last fall, a group of financial firms took aim at an accounting rule that forced them to report billions of dollars of losses on those assets.

Marshalling a multimillion-dollar lobbying campaign, these firms persuaded key members of Congress to pressure the accounting industry to change the rule in April. The payoff is likely to be fatter bottom lines in the second quarter…

Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of
whom pushed for the rule change, the filings indicate… [As we keep interjecting, ‘who’s the patsy?]

The WSJ: Banks’ Telethon Is Nearly Over; Financial Giants Raise $85 Billion-Plus in a Month, More Than Needed

The US government can now do to GM what it did to passenger trains. How’s Amtrak working out?

The WSJ: Germany Blasts ‘Powers of the Fed’ German Chancellor Angela Merkel, in a rare public rebuke of central banks, suggested the European Central Bank and its counterparts in the U.S. and Britain have gone too far in fighting the financial crisis and may be laying the groundwork for another financial blowup. “I view with great skepticism the powers of the Fed, for example, and also how, within Europe, the
Bank of England has carved out its own small line,” Ms. Merkel said in a speech in Berlin. “We must return together to an independent central-bank policy and to a policy of reason, otherwise we will be in exactly the same situation in 10 years’ time.”

ABC Consumer Confidence for the week ended May 31 declined to -49 from -47. You didn’t see this publicized nearly as much as last week’s [regression to the mean] surge in the Confidence Board’s consumer confidence.

Has anyone noticed that Fed has refrained from monetizing bonds since May 27?

Our friend Tom alerted us that Northwestern Mutual Makes First Gold Buy in 152 Years

For April 2008, the ‘Total Nonfarm over-the-month change, not seasonally adjusted’ showed a gain of 599k jobs. For May it was 647k jobs. Ergo, May increased 48k jobs over April. The BLS’s goofy Net Birth/Death model created 176k jobs for both April and May 2008.

The Street consensus is for NFP to show a loss of 520k jobs, which is 19k fewer job losses than April. Last year’s BLS data coupled with BLS’s inert methodology augurs for 500k or fewer job losses.

Category: Markets, Think Tank

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