UPDATE: Near the end of the video I mention the Republican 2012 Presidential campaign strategy (alleged). It seems to be working…
Unless shares rally, they are on track for a sixth straight weekly loss — longest losing streak since the fall of 2002. The market’s last seven-week stretch of losses began in May 2001, as the dot-com bubble deflated.
Stocks have suffered this month after a raft of weak economic news dampened hopes for a speedy recovery. Traders fear that weaker hiring, industrial output, and a moribund housing market are reversing a bull market that lifted the Dow Jones industrial average 20% the past year.
The Dow is down 5% since June began.
Shares bounced back Thursday after a report that U.S. exports unexpectedly hit a record in April.
It’s almost like there’s some underlying “uncertainty” in the market about whether or not the U.S. will default on its loans that is causing everyone do do weird things just in case. For example…
Treasuries are considered the safest and most liquid, investments in the world. The U.S. is the world’s biggest debt issuer. It has $14.2 trillion of debt outstanding, while marketable Treasuries total $9.7 trillion. Central banks and other overseas investors own $4.48 trillion, or 46 percent of marketable debt.
The negative position reflected trades that would profit from a decline in Treasuries. Cash and equivalents, the largest component of the Total Return Fund, rose to 37 percent from 35 percent in April, under the revised categories.
Gross has been betting against U.S. debt through short sales, in which the Total Return Fund would borrow and then sell government bonds, hoping to profit by repurchasing the securities at a lower price in the future. The fund’s annual report showed that, as of March 31, it had sold short about $2.2 billion of Treasuries that mature in about 10 years and $5.8 billion of agency debt that comes due in 2041.
That’s a whole lot of technical finance talk, but what it amounts to is this…
While the swaps are costly for the fund, given that it must pay out more than it takes in under the contracts, Gross would reap profits from the trades should long-term rates rise, causing Treasuries to tumble. Conversely, a decline in long-term rates would punish the fund’s returns.
The bet here is that there is very little chance long term rates will fall. An unattractive dollar has to have higher rates to be more attractive…this is especially true when there is an open question about default (and a goodly portion of the people tasked with answering that question don’t seem to understand it). These kinds of bets, and positions, are how a small crack in a dam becomes a total failure. They are essentially acting as a lever, just watching for an opening to stick in, and break the whole thing wide open.
Of course, simple and responsible lawmaking would make bets like this complete folly…but if you haven’t noticed lately, simple and responsible lawmaking is not very high on certain folks agendas.
UPDATE2: Quick reminder of what happened…
And what happened the next day...
Imagine the firestorm that would be raging on Republican propaganda outlets right now if the stock market had dropped 2.2 percent within 24 hours after Democrats had voted unanimously not to raise the nation’s debt ceiling.
The entire right-wing noise machine — from Fox & Friends to Limbaugh, from Hannity to O’Reilly — would be singing the same refrain: The stock market has sent a clear message of disapproval over the Democrats’ irresponsible vote. Whether that assertion was true would not matter. They would make it true simply by unanimously agreeing that it was.
But because it was Republicans who voted irresponsibly, right-wing media sees no relationship between the vote and market drop.