Why Not Just Keep Those Bonds?

Volumes ended up higher yesterday, albeit still weak, and after trading down all day stocks ended up unchanged. Momentum is ebbing, but to that observation I must fairly add the suffix “again” since momentum has ebbed a couple of times already in this bull run. The true believers don’t need momentum, so it won’t bother them; the true disbelievers are already short. The story increasingly is about what happens to the guys in the middle, who are uncommitted.

Those investors have a little more of a boost from yesterday’s potpourri of news. The European Financial Stability Facility (EFSF, aka “the European bailout fund”) sold €5bln of bonds to finance the bailout of Ireland, but received orders for about nine times that amount. In my mind, they ought to say “yours” and sell the full €45bln before investors stop and think carefully about who is guaranteeing the bonds. “Europe” is the answer. To paraphrase Henry Kissinger, who do we call when we want the redemption proceeds? Look, I didn’t read the prospectus, but I know this: when I send them 5 billion, they’re going to send it to Ireland. If Ireland doesn’t give it back, there are no assets left in the Facility so…am I trusting that all of the various countries will pony up the money and pay me back without haircuts?

Really? Keep your bonds, I’ll keep my money. At least if I buy Johnson & Johnson (JNJ) bonds, there’s something to seize if they go under.

Still, whether the success of the auction was predicated on the gullibility of investors or a need to appear to be part of the solution (some 43% of the bonds went to central banks, governments, and agencies), there is no doubt that it was a success. And that got Spain thinking. So Spain’s rescue fund, called the Fondo de Reestructuracion Ordenada Bancaria (fondly, FROB) is reportedly to sell a few billion euros’ worth of bonds. After all, says Spanish Finance Minister Salgado, the banks only need about €20bln in extra capital (Moody’s says the real number may be as high as €89bln). Well, at least in the case of FROB I know who to call.

There was one piece of weak economic news, in the form of significant downward guidance from Johnson & Johnson (JNJ) about their full-year sales for 2011. If you want to give the economy credit for GE earnings (although as some readers noted, revenues being up 1% when the economy is expanding by 2% or 3% and the Fed is providing massive liquidity doesn’t exactly constitute a home run even if operating and financial leverage turns those revenues into good-looking earnings), then you have to consider whether JNJ – also a mega-company that sells a wide variety of products although not as wide a variety of GE, to be sure – is sending the opposite signal.

But in my mind, that niggling negative is more than compensated for by two items. The first is the sharp improvement in the Jobs Hard To Get subindex of the Consumer Confidence report to a marginal new low of 43.4 (see Chart, click to enlarge). It is worth remembering, though, that the prior low came in June of last year, when the Census was busy hiring scores of thousands of new workers. Hammer that point back into line, and the current decline starts to look more legitimate.

The man on the street says jobs aren't QUITE as hard to get as they were.