Author: Vincent Fernando, CFA

The Wall Street Journal has a great interactive graphic that sums up the quakes we’ve had so far in 2010. It shows that we’ve had 18 major earthquakes ranging from 4.0 to 8.8 on the Richter scale. The very recent Baja, California quake was 7.7.

In some places we been fortunate enough to see little damage, yet others are still suffering the economic consequences, such as in Haiti and to a far lesser extent Mexico and the U.S. right now.

Here’s a snapshot of what we’ve seen so far.

For more detail, see the interactive WSJ piece here (subscription required) >

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So far no reports of any tsunami danger, though parts of Indonesia’s previously hit areas were temporarily evacuated.

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JAKARTA, Indonesia (AP) — A 7.7 earthquake shook Indonesia’s northwest island of Sumatra early Wednesday, prompting a brief tsunami warning and sending residents rushing for higher ground. There were no immediate reports of widespread damage.

The quake struck at 5:15 a.m. (2215 GMT) and was centered 125 miles (205 kilometers) northwest of Sibolga in Sumatra at a depth of 28.6 miles (46 kilometers), the U.S. Geological Survey said. It had earlier said the quake measured 7.8.

The Indonesia Meteorology and Geophysics Agency and the Pacific Tsunami Warning Center in Honolulu issued tsunami warnings following the quake, but lifted them two hours later.

“So far no damage or casualties have been reported and the situation is under control,” Aceh Governor Irwandi Yusuf said.

At least five strong aftershocks measuring up to 5.2 were recorded, the meteorology agency said.

The quake, which struck as people in the region were preparing for morning prayers, caused panic in North Sumatra’s capital of Medan and other cities in the region. Electricity was cut in Medan and Banda Aceh, provincial capital of Aceh.

People in several cities along the southeastern coast of Sumatra as well as Sinabang on Simeulue island and Gunung Sitoli on nearby Nias island poured into the streets and rushed to higher ground after the quake.

“Rumors about a tsunami panicked villagers living near the beach,” said Eddy Effendi, a resident in Nias district of North Sumatra province. “They ran away on motorbikes and cars or by climbing the hills. There was panic and chaos everywhere, but I don’t see serious damage or injuries in my village.”

Residents in Sibolga said the shaking lasted more than a minute and utility poles in the area were knocked down.

A 2004 tsunami triggered by a magnitude-9.2 earthquake in the same region killed 230,000 people in a dozen countries on the Indian Ocean basin.

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Colin Campbell, a leading peak oil theorist who is a retired geologist, has discovered the pricing mechanism.

After record prices and an economic downturn caused oil consumers to change their behavior, and oil demand in the developed world to fall, he’s now a believer in peak demand for the developed world. We’re already past it even.

Reuters:

“I have changed my point of view about future prices,” said Campbell, who used to think the peak in conventional oil production, which he believes happened in 2005, would lead to a relentless price surge.

Instead, the record rally led to a peak in demand in the developed world.

“Peak oil drives prices up in the first place. It has its own mechanism. We’re sort of at peak demand right now,” Campbell told Reuters from his home in the village of Ballydehob, West Cork. “I think presently the price limit is about $100.”

We frequently see peak oil believers who are highly accomplished scientists, but with little economics background. It shows how peak oil theory would make total sense if we existed in a world without economic forces, such as behavioral responses to rising or falling prices.

The funny thing is that Mr. Campbell is now probably too bearish on oil prices with his $100 near-term limit. With oil prices at $86 as it stands, it’s pretty feasible they could break $100 if the world economy keeps growing at a decent clip. That’s only a 16% move, which from the perspective of a market participant is nothing and definitely within the realm of possibilities.

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The Federal Open Market Committee’s minutes are coming out in under an hour.

Stocks are starting to pull up ahead of the release. 10-year treasuries have dipped back below 4%. Gold is holding at $1,135.

It’ll be curious to see if recent stronger-than expected U.S. economic data has any effect on what’s said. Bond markets certainly became more optimistic about the economy on the data.

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Treasury Secretary Timothy Geithner, while visiting India, has said that a change to China’s yuan-dollar peg is ‘China’s choice‘.

“As I said before and I’ll say it again, but I want to make sure I am repeating myself, I am confident that China will decide it’s in their interest to resume the move to a more flexible exchange rate that they began some years ago and suspended in the midst of the crisis,” he explained.

Congratulations.

This is a far more productive approach to the issue than trying to bully China into adjusting the yuan.

As we’ve said before, a hike is coming, but American complaining only makes it harder for the Chinese government to implement it without looking like they’ve sold their citizens out due to U.S. pressure. This is because there will be some short-term pain within China when a hike happens even though it is in China’s long-term interest.

The Chinese government has already hiked the yuan in the past. Recently, Wen Jiabao explained that future flexibility was still in the cards, despite appearing to present a sharp rebuke of America’s escalating yuan criticism.

While telling China it’s their choice to hike the yuan might not play too well within the U.S. right now, the reality is that this tactic is in the most likely to make a hike happen. Explain why it’s in China’s interest and then leave it for them to connect the dots.

Thus here Geithner gets it right. He’s actually paving the way for a hike to happen.

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Regulations tend to track political sentiment more than logic, and thus it’s positive news for the future of U.S. domestic energy that there are twice as many American pro-drillers these days as their are anti-drillers.

Pew Research:

Fully 63% support more drilling, while just 31% oppose it. These opinions have changed little since 2008. However, more drilling is not the most popular energy policy in America. Increasing federal funding for research on wind, solar and hydrogen technology is supported by 78% of the country, and spending more on subway, rail and bus systems is backed by 70%. A majority also favors promoting the use of nuclear power (52%).

So there is still substantial interest in alternative energy, which is good, but in the end Americans probably just want cheap energy, produced at home. They are willing to accept a certain degree of environmental trade-off in order to get this.

This makes regulatory risk low for energy stocks in the long-term. While Pew data shows how strong U.S. sentiment is for offshore drilling, we’d imagine that similarly strong sentiment (perhaps slightly less due to ‘not in my backyard’ issues) could be extrapolated to U.S. onshore exploration as well, especially when it comes to natural gas.

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During the darkest parts of 2009, it took some serious grit to step into the breach and buy high yield bonds. Early investors were contrarian and made substantial sums.

By January 1st, the cat was well out of the bag, and high yield had been back in style for awhile. Yet investors still made money by simply getting on board, especially for the worst rated bonds. Returns continued to rise in 2010. (Chart via Econompic)

This trade is getting crowded. Fund flows into high yield increased year over year in Q1 of 2010, and $972 million dollars just flowed into high yield during the week ending April 2nd, according to EPFR Global.

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A report came out suggesting that Greece wanted to change the recent Europe-IMF aid plan, in order to avoid the fiscal austerity measures, and Greek bond spreads exploded as investors routed from Greek bonds overnight.

Yields on 2-year Greek debt rose an astonishing 95 basis points to hit 6.60%.

Now, Greek officials are rushing out control the damage and deny the contents of the aforementioned report, post the market reaction.

According to Reuters, an official has attempted to counter claims of wanting to skirt the IMF, saying, “There is no request from Greece to renegotiate the agreement. There is a deal on the support mechanism and we are sticking to it.” 

So let’s face it… Greece has turned into Europe’s 13-year old economy.

It is immensely terrified of how markets perceive it, given the country’s precarious debt situation. Even current levels of interest cost demanded from the marketplace are clearly unsustainable based on even simple math, thus the rush to clarify official positions at even the smallest sign of market jitters.

Yet also like an adolescent, the nation doesn’t see the incongruity of repeatedly biting the hand that feeds it. Greece has been defiantly attacking Germany and Europe over how it should be bailed out, even accusing Germany of playing a race card. Protesters oppose efforts to bring rampant over-spending under control, at the same time outraged that markets should punish their actions while simultaneously being financed by markets to meet their current standard of living.

In a third parallel to adolescence, the nation isn’t supporting itself either. Greek debt would be trading at far higher yields (lower prices) if the nation didn’t have an implicit promise of support from Europe. If Greece were forced to pay substantially higher yields, it would most likely face an acute financial crisis. This is because even current yields aren’t sustainable.

Thus Greece is Europe’s 13-year old, but its lack of financial independence means that this isn’t by choice. It is simply the harsh reality.

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It’s well known that Hong Kong property doesn’t come cheap, and its office rents have just recently been named the most expensive in the world, for the second year running.

Thus the easiest argument to make is that Hong Kong property prices are at dangerous levels, a bubble set to burst.

You can just point to the fact that residential property prices jumped 30% last year and are fueled by Chinese investor demand coupled with artificially-low interest rates due to the Hong Kong dollar’s peg to the U.S. one. (Which effectively enslaves Hong Kong to America’s ultra-low interest rate policy)

Yet we have to admit that a counter-argument caught our eye — industrial land prices are soaring. They jumped 38% in the second half of 2009 according to Colliers International. Yields have fallen as a result of rising prices, but they aren’t completely ridiculous. They are still in the 5% range:

Industrial land is less prone to the speculative excess of office or residential property in Hong Kong. It’s not like businesses opt for spare trophy warehouses or buy opulent vacation factories on a whim. There will be speculation as always, but far less.

Moreover, Colliers remains optimistic on industrial land thanks to underlying demand for industrial land from businesses looking to capture economic opportunities via Hong Kong.

Colliers:

Looking ahead, amid a gradual recovery of the global economy, Hong Kong’s external trade performance is expected to improve gradually, which in turn will provide some support for the industrial property market. Moreover, it is reported that two multinational logistics operators have pre-committed to about half of the floor space in Interlink – a 2.4 million-sq-ft logistics warehousing facility in Tsing Yi scheduled for completion in 2012. This highlights logistics operators’ confidence in Hong Kong’s external trade performance in the medium term. It is our prediction that the rentals of the factory and I-O sectors will increase 5% and 8%, respectively, over the next 12 months. In the warehousing sector, rentals are expected to increase 3%-5%, depending on the availability of such physical provisions as ramp access. Meanwhile, we expect the prices of industrial properties to increase 10% over the next 12 months.

This doesn’t mean we’re about to buy a Hong Kong apartment. The property market certainly seems pretty frothy and at risk of major correction, especially if U.S. interest rates rise substantially. As we said above, this is a horribly difficult side of the argument to defend with conviction.

Yet strong demand for Hong Kong industrial land at least suggests that a large portion of Hong Kong’s office and residential property prices is justified by actual economically-driven demand, rather than simply speculation. A 30% spike in residential property prices last year looks far less wild when juxtaposed with a 38% jump for industrial land in just six months.

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Chinese art prices had collapsed 70% from their March 2008 highs during the financial crisis, but now they’re back. Big time.

Luxist:

Seven lots fetched more than $1 million at the last Sotheby’s auctions in Hong Kong, led by Liu Ye’s acrylic and oil “Bright Road,” which sold for more than $2.5 million. This was the top take for a Chinese contemporary artist in two years, indicating that Chinese art is on its way back to levels we haven’t seen since the financial crisis. Last year, similar pieces were moving for only a third of this year’s pricing.

That’s roughly 200% inflation for Bright Road, below via Sotheby’s.

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The Chinese government has set a target for just 7.5 trillion yuan in new credit for 2010, yet it’s hard for some analysts to see how this is even possible given soaring investment into urban fixed assets already taking place.

It’s not like these projects will want to just suddenly stop, half-way finished. And it’s tough to see how they would be forced too, given that this could expose and create bad loans in the banking system:

China Daily:

Projects newly started this year totaled 18,462, a slight drop of 71, while total planned investment reached 1.06 trillion yuan, up 42.7 percent year on year, despite the government’s pledge to cut the number of new projects from late last year in its effort to squeeze credit.

“That makes the (government) cap of 7.5 trillion yuan far from enough to sustain these projects,” said May Yan, an analyst at Nomura International (HK) Limited.

Based on the NBS data, the average investment in a newly started project rose to 58 million yuan from 40 million yuan a year ago, which means the scale of these new projects has swollen, and some of them may be large infrastructure projects requiring additional input for many years, Yan said.

“That must bring continuously thriving demand for credit and raw materials,” Yan said, estimating new credit this year would reach 10 trillion yuan if the investment trend in the first two months continues.

“Otherwise, many existing projects will be short of funding and non-performing loans will rise at banks, because, while some projects can be temporarily suspended, many cannot.”

Read more here >

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The National Retail Federation just released their latest Global Port Tracker, and it points to further upside for U.S. retail sales.

Based on data from America’s major retail container ports such as Los Angeles and Savannah, the federation expects import volumes to surge 8% in April, year over year.

They also believe that ‘solid’ increases will continue through the summer at least.

According to NRF Vice President for Supply Chain and Customs Policy Jonathan Gold, “Retail sales are starting to improve and retailers are importing merchandise in the quantities they need to meet that demand.” He expects “these numbers to continue to climb as merchants and their customers move away from the recession and back toward normal shopping habits.”

Hackett Associates, who co-writes the Port Tracker, has highlighted that “Port volumes have begun to rebound and we expect growth to continue going forward. Retailers were maintaining lean inventories during the recession but are carefully building back up.”

This means that the U.S. consumer is back in consumption mode.

Thus the surge at U.S. ports data bodes well for major retail companies such as Walmart (WMT), Costco (COST), and Target (TGT) plus many others as well.

In fact, as U.S. consumer spending picks up, even companies that price their products at higher than average price points or sell non-essentials can look forward to good news since growth in spending will likely be disproportionately biased towards non-essentials and small luxuries, such as say Apple (AAPL) iPads, since this is where Americans had cut back during the downturn.

A good few months, at least, of strong retail numbers are coming.

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See Also:

• Maersk: The Lopsided Trade Data Proves This Recovery Won’t Float
• A Recap Of The Huge Shipping Rebound You Might Have Missed, And Why It Matters
• And Now Air Traffic Is Nearing Pre-Recession Levels

Today, 10-year treasury yields are close to breaking 4% and are approaching their 2008 highs.

Since collapsing at the height of the financial crisis, when investors sold everything just to own ‘safe-haven’ investments, U.S. 10-year treasury yields have now come nearly full circle, or shall we say full-V:

Government bond yields can go up for many reasons, both good and bad. Investors might think U.S. creditworthiness is deteriorating due to large amounts of debt, or they could believe that inflation is likely to pick up and thus need to be compensated.

At the same time, investors may demand higher yields from government debt if they expect higher interest rates from the Fed in the future, created by the Fed in response to a strengthening economy. They can also simply find other forms of investment more attractive, due to higher expected returns in alternatives like stocks. Thus we know U.S. government bond yields are rising, but the question is why.

Are rising bond yields are positive or negative sign? Should we be worried that bond markets are ready to take America to task for its debt? Or should we be happy to see bond markets signaling a rebounding economy?

Well today says it’s the latter, positive take on the bond market. Last Friday we had good news on the jobs front, we’ve recently had good news on the U.S. manufacturing front, and today we got good news on the U.S. services front. Bond yields have continued to surge. The yield curve has also steepened whereby the gap between short and long-term U.S. government debt has expanded.

Bond investors aren’t demanding higher yields because they fear inflation. You can easily check the bond market’s inflation expectations by examining the difference between inflation-linked and plain vanilla U.S. bonds. These inflation expectations remain muted, despite the recent government bond yield surge, at just 2.4% priced-in and expected U.S. inflation per year out to 2028 according to The Economist.

Bond traders don’t fear America’s creditworthiness either. Yields are rising on signs U.S. economic strength, such as is happening today. A stronger economy makes a country more creditworthy, thus you would expect bonds to rally (and their yield to fall) when good news comes out, if they are trading based on national creditworthiness.

Rather, bond yields are rising because decent U.S. economic growth has now become far more likely. As Scott Grannis, the retired Western Asset economist at the blog Calafia Beach Pundit, says, U.S. bond markets could now be pricing in about 2-2.5% U.S. GDP growth going forward. It isn’t mind-blowing growth, but it isn’t too bad considering where we have come from.

So bond yields are, yes, rising, but today shows that it is for the right reasons. They’re making a full-V, signaling a full-V for the broader economy as well.

But don’t miss: 11 signs of an imminent market reversal >

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The ISM non-manufacturing index just beat expectations in March, coming it 55.4 vs. just 54 expected. Still, note below that the Employment sub-index continues to indicate some contraction on the jobs front.

Nevertheless, there’s a lot of good news, in that multiple sub-indices such as Export Orders and Order Backlog where previous contraction has switched to expansion.

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* “Business conditions have returned to normal (pre-recession). Our business is up significantly since 2009. We are very positive about the upcoming year.” (Information)

* “Demand for loans, credit cards, mortgages and equity lending is expected to continue to increase.” (Finance & Insurance)

* “Brisk business activity continues as more projects get ‘green light.’” (Utilities)

* “Observing some relaxation on several fronts regarding spending and hiring. Still very cautious, but making investments where they make sense.” (Retail Trade)

* “Limited funding available for development [and] expansions.” (Accommodation & Food Services)

* “The economy appears to be holding its own; however, state and local funding is projected to decrease next fiscal year.” (Educational Services)

We’re looking at a decent upwards trend now in the monthly numbers:

See the full official release here >

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The Energy Information Administration is finally reacting to accusations that it has been substantially over-stating monthly U.S. natural gas supply due to a faulty calculation methodology.

The error stems from the organizations polling of just large producers. It then estimates total supply from this sample.

Perhaps there was a day when this worked, but recently it has led to suspected gaps between the supply reported and that which actually exists according to industry players such as EOG resources.

Gary Long, the acting director of the EIA’s monthly natural gas report, called the ‘914 form’, has now announced that indeed there are major problems with the current system and that it will be corrected.

Expect past supply numbers to be slashed:

WSJ:

“The model we have now overestimates” production, Mr. Long said in an interview. He said the review was prompted by the EIA noticing aberrations in some states. “We saw some numbers we didn’t like in Texas; we thought they were a little too high,” Mr. Long said.

Mr. Long said the EIA plans to change its methodology, though he didn’t give details. The changes could lead to a downward revision of the nation’s gas production. While overall there mightn’t be a big change, Mr. Long said, some states will see “significant” revisions in production.

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In December, the agency reported total new gas supply at 87.8 billion cubic feet a day and total demand of 80 billion, leaving 7.8 billion cubic feet unaccounted for—a margin of error of 10%.

“It’s getting ridiculously large,” said Ben Dell, an analyst with Sanford C. Bernstein. “When you have a 10% gap, that’s somewhat making a mockery of the data.”

The first report using the new report is slated for release on April 30th. With natural gas at just $4.05 right now, it can use all the help it can get.

The author owns shares of Chesapeake Energy (CHK), a natural gas play.

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Someone forgot to tell U.S. office property about the rebound. According to the research firm Reis, U.S. office vacancies just hit 17.2%, their highest level since 1994. In the first quarter of 2010 alone, 11.6 million square feet of office space went vacant.

Rental rate declines may have stabilized, as they fell just 0.8% from the fourth quarter, but they remain down 7.4% year over year if you include free rent and other incentives land lords had to pull out in order to keep tenants.

Reis director of research Victor Calanog has explained that:

“As labor markets stabilize, we expect occupancies and rents to require another 12 to 18 months before showing signs of improvement, given typical lags in commercial real estate… Even as occupancy continues to deteriorate, we’re observing signs of renewed leasing activity across different metros.”

“While we do not foresee positive rent growth resuming until next year at the earliest, office buildings at least do not seem to be experiencing as much distress relative to 12 months ago, when we were just heading into 2009 and most markets and economies around the world were still in deep turmoil,”

“We expect less of a bloodbath in fundamentals in 2010 versus 2009, but rents will still decline and vacancies will still continue to rise… This is bad news for loans supported by office properties that have to contend with at least six to eight more quarters of falling income.” (Via Reuters)

The hope is that the slowing rate of deterioration (‘second-derivative’ improvement) could eventually lead to an outright recovery. Problem is, we might have to wait until 2011 before seeing evidence of this.

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Larry Summers expressed substantial optimism about future U.S. employment growth in a new interview with ABC.

ABC:

SUMMERS: They’re starting to. We’re in a very different place than we were a year ago. A year ago, we were losing 600,000 jobs a month. Now the process of job creation has started. We expect that it will accelerate.

…

You know, the — the good news is that, if you look at what’s happened in the first quarter of this year, it’s hardly satisfactory, but it is running somewhat ahead of what the administration was forecasting, because our forecasts were conservative. And I’d expect continued progress in job creation.

Furthermore, we thought it was interesting how he explained that as economic prospects brighten, the discouraged unemployed start to look for work again, which increases the size of the labor force and makes it harder for the headline unemployment number to fall:

As you see progress in job creation, you tend to see unemployment go down. It’s not quite as simple as some people think, Jake, because as conditions get better, more people decide to look for work and are counted as in the labor force. So sometimes it’s frustrating and the progress doesn’t show up immediately in the unemployment rate, but it’s progress nonetheless in giving jobs to people who need them.

Read the full interview transcript at ABC >

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See Also:

• And Now What We’re Seeing Now Is The Real Revenge Of The Housing Bubble
• Jobs Were Supposed To Grow.. But ADP’s Employment Report Shows A Shock Drop
• Oops, Jobs Didn’t Grow Enough

We’re now at the point whereby 90% of the S&P 500 has rallied above its 50-day moving average. Which means you simply had to own stocks, any stocks, to feel like a genius lately. As shown below courtesy of Bespoke, this metric spiked hard over the last two months:

Looking at individual sectors, Bespoke has found that 97% of financial stocks are now above their 50-day moving averages, while only 75% of energy stocks are. Industrial stocks, which tend to lead recoveries, are all above their moving averages (100% of those within the S&P 500).

Perhaps it’s time for this S&P 500 run to take a breather:

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Bond markets continue to price-in increased risk into Greek bonds.

Despite both European and IMF implied support for Greece, bond yields approached 6.53% recently, compared to just 6.33% a week ago. Spreads against German bonds, another measure of perceived Greece-specific risk, have hit 342 basis points, after being 321 basis points at the beginning of last week.

Markets still aren’t buying Europe’s smoke and mirrors, and are demanding yields from Greek debt which many believe are simply unsustainable for the country:

AFP:

“If the money we economise from tax proceeds and spending cuts is to be spent on interest, it’s clear that the country can neither carry out a fiscal adjustment nor have any benefit,” Deputy Finance Minister Filippos Sachinidis said.

Greece may pay about 13 billion euros more in interest on its debt this year and analysts say the country can ill afford to continue borrowing at rates over six percent.

Others suggest the climate will improve once markets perceive that the government means business on ending decades of waste and mismanagement in the civil service, state hospitals and public-owned companies.

“It’s clear that Greece cannot sustain borrowing at six percent for long,” said Athens Economic University professor George Pagoulatos.

So let’s be clear — the situation has not even stabilized, since the current status quo can’t be maintained by Greece for too long.

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See Also:

• The Surge In Inflation-Protected Bonds Is A Huge Middle Finger To Decades Of Government Abuse
• Britain’s Ugly Capitalism Will Work
• Markets Will Be Terrified Of Treasuries This Week

So 162,000 jobs were created in March, but unemployment didn’t budge, holding at 9.7%.

Here’s why.

As visualized by Econompic below, while the economy added 162,000 jobs, the average monthly U.S. population growth over the last ten years has been 211,000. Thus the U.S. economy has to create jobs at a higher rate than its population growth, or more precisely its workforce growth, in order to see an improvement in the unemployment rate.

Just don’t think that a growing population is a bad thing the U.S. should be happy it’s not Japan for example. There’s always enough problems to be met in an economy (ie. ‘jobs’), it’s just a matter of connecting the jobless with problems they can solve.

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See Also:

• And Now What We’re Seeing Now Is The Real Revenge Of The Housing Bubble
• Initial Jobless Claims: 439k vs 440k Estimate (But Prior Claims Revised Higher)
• Feels Like A Holiday, But Here Come Those Jobs Numbers (8:30 AM ET)