Are Interest Rate Derivatives a Ticking Time Bomb?

Derivatives are the world's largest market, dwarfing the size of the bond market and world's real economy.

The derivatives market is currently at around $600 trillion or so (in gross notional value).

In contrast, the size of the worldwide bond market (total debt outstanding) as of 2009 was an estimated $82.2 trillion.

And the CIA Fact Book puts the world economy at $58.07 trillion in 2009 (at official exchange rates).

Interest rate derivatives, in turn, are by far the most popular type of derivative. (more)

How Goldman Sachs Survived

Chart of the Day

Food costs jump most in 26 years...

Wholesale prices rose more than expected last month as food prices surged by the most in 26 years. But excluding food and energy, prices were nearly flat.

The Labor Department said the Producer Price Index rose by 0.7 percent in March, compared to analysts' forecasts of a 0.4 percent rise. A rise in gas prices also helped push up the index.

Still, there was little sign of budding inflation in the report. Excluding volatile food and energy costs, wholesale prices rose by 0.1 percent, matching analysts' expectations. (more)

Federal Reserve Made $47.4 Billion in 2009

The Federal Reserve transferred $47.4 billion, a record sum, to the Treasury Department last year, a result of the central bank’s actions to support the fragile housing market.

The transfer to the public coffers rose roughly 50 percent, or $15.7 billion, from $31.7 billion transferred in 2008, the Fed announced on Wednesday in releasing its annual financial statements, which were audited by Deloitte.

“Central banking is a great business,” joked Vincent R. Reinhart, a former director of monetary affairs at the Fed.

Unlike private banks, the Fed does not exist for the purpose of making a profit, though it inevitably does so. Historically, it paid no interest on the currency and bank reserves that represent its liabilities, while it made interest on the Treasury securities that make up its assets. (more)

A Look at REITs

“Haven't heard much chatter about the health of REITs lately,” a reader writes. “Do you folks have any prognostications on the pros and cons of investing in some now?”

The 5: Look for the REITs to start issuing a boatload of new shares, says Dan Amoss, who follows the sector even more closely than hard-core football fans will follow the NFL draft tonight.

“REITs will have to divide up their shrinking rental cash flow among lots of new shareholders,” says Dan, “most of whom invested capital just to delever balance sheets. This capital staved off bankruptcies. It’s defensive capital; it won’t be deployed as growth capital.

“The flood of new REIT shares will act as strong resistance against further rallies in the REIT sector and has permanently diluted the sector’s per share earnings power.

Too, “there’s still a huge wall of ‘un-refinanceable’ commercial mortgage maturities over the next several years. These maturities will occur at a time when property values and rents will remain weak.

“Yet REIT investors aren’t expecting this type of chronic weakness; most REITs have priced in a typical cyclical rebound in rents. REITs are now almost as expensive as they were near the 2007 peak, and will only become cheaper if rents quickly return to their peak levels.” Agora Financial.

Indicator with good long-term record has flashed a buy signal

If the trend is your friend, as the Wall Street cliché goes, then the stock market has been an incredibly friendly place of late.

I say this not just because the stock market, with seemingly little effort, was able to shrug off last Friday's news about Goldman Sachs' legal troubles, with the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 11,135, +9.68, +0.09%) gaining 73 points on Monday and another 25 on Tuesday.

What I have in mind is a rare buy signal that was generated a couple of weeks ago by a trend-following indicator with a good long-term record. Prior to the recent buy signal, there had been only 12 of them since 1967.

And two of those 12 prior buy signals occurred in the last 12 months alone. In other words, between 1967 and March 2009, this indicator gave just 10 buy signals -- an average of just one every 4.3 years. Since March 2009, in contrast, they have averaged once every four months or so. (more)