John Paulson’s Scary Speech: Double Digit Inflation By 2012, Gold At $4,000

John Paulson scared the pants off of a packed audience at New York’s University Club recently as he warned them of huge changes in the economic environment in the years to come.

Forbes’ Bob Lenzer reports Paulson’s saying:

“If you don’t own a home buy one.”

”If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home.”

Paulson has been bullish on housing for a while now (he runs a housing recovery fund), but this is him hitting super-bull territory. His reasoning is that home prices are great, the bond market is dead, and commodities like gold, which he also has a big prediction for, are on the rise.

According to InfoWars, he told the audience that he thinks the price of gold will hit $2400-$4000. And a whopping 80% of his assets are in gold.

Given his expectation for further money printing by the Fed – and that in 1980 the gold price rose by 100% more than the correlation implied – Paulson noted that the price of gold could hit $2,400 based only on monetary expansion, and as high as $4,000 per ounce based on a projected overshoot.

Lastly, he noted that 80% of his assets are denominated in gold.

We rarely get to hear Paulson’s opinion on the market unless it’s filtered through his stiffer research reports. As a result, he has never been so extreme in his predictions as he seems to be now.

Here’s what Paulson sees coming:

• Low double-digit inflation by 2012, killing the bond market, and restoring strength to equities and gold.
• 2% GDP growth for 2011 and 2012
• Gold hitting $2,400 to $4,000

It’s worth noting that if gold goes to $4,000, Paulson will be a top contender for the richest man in the world.

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Fed Relative Value Model for Treasuries Showing Diminishing Market Returns

Fed Model for Treasuries Shows Diminishing Returns

Sept. 27 (Bloomberg) –

This year’s rally in Treasuries has pushed yields so low that a Federal Reserve measure of risk shows U.S. government securities are too expensive.

The financial model created by economists at the central bank that includes expectations for interest rates, growth and inflation shows Treasuries are the most overvalued since the financial crisis in December 2008, just before 10-year note yields almost doubled in the following six months. Investors who held 10-year notes through that period lost 13 percent, according to Bank of America Merrill Lynch index data.

While Treasuries have returned 8.2 percent this year on average, they are down 0.5 percent this month even though Fed Chairman Ben S. Bernanke and fellow policy makers hinted last week they are willing to embark on another round of so-called quantitative easing asset purchases to spur growth and support prices. Investors are concerned yields can’t fall much further without another recession.

Falling Yields

The benchmark 10-year note yield fell 14 basis points last week, or 0.14 percentage point, to 2.61 percent, according to BGCantor Market Data. The yield on the 2.625 percent note due August 2020 fell 7 basis points to 2.54 percent at 10:15 a.m. in New York. The two-year yield was little changed at 0.43 percent.

The Treasury plans to sell $36 billion of two-year debt today, the first of three sales this week. It’s also scheduled to auction $35 billion of five-year notes tomorrow and $29 billion in seven-year securities the following day.

The difference between short- and long-term yields signals less than a 20 percent chance of the economy slipping into another recession, according to research from economists the Federal Reserve Bank of Cleveland.

Projections of the three-month Treasury bill to 10-year note curve, using past values of the spread and gross domestic product growth, suggest the economy will expand about 1 percent, Joseph Haubrich, head of banking and financial institutions research at the Cleveland Fed, and Timothy Bianco, a researcher, wrote in a report last week.

‘Bottom End’

“There might be room for Treasury yields to move lower in the near term, but our view is that valuations are moving towards the bottom end of what is likely,” said John Stopford, head of fixed income in London at Investec Asset Management, which invests $65 billion. “Growth is in the process of slowing down, but the bond market is pricing in a 50 or 60 percent chance of a double-dip and deflation. That’s far too high.”

Investec had bought put options on U.S. interest-rate futures, Stopford said. A put option is the right to sell a security at a specific time and price.

The model created by Fed economists Don Kim and Jonathan Wright in 2005 uses forward expectations for the federal funds rate, the 10-year yield, short-term interest rates, inflation and real economic growth rate to calculate the risk of holding longer-duration securities. It is designed to separate basic money-market interest returns from additional yield for longer- term investment. Bernanke cited the model in a 2006 speech in New York as a useful guide in setting monetary policy.

‘Extremely Rare’

Zach Pandl, an economist at Nomura Holdings Inc., has used the model and made changes for the firm to figure out if the rally in Treasuries had run its course.

After hitting a low in December 2008, at the height of the financial crisis following the bankruptcy of Lehman Brothers Holdings Inc., Nomura’s version rose from negative numbers as speculation about a market collapse faded. Yields on 10-year notes then climbed from a record low of 2.035 percent on Dec. 18, 2008 to an eight-month high of 4 percent on June 11, 2009. The gauge rose to about 100 basis points before yields reached their highs and has since fallen to about zero, Pandl said.

“It’s the first time we’ve seen a negative term premium since the early part of 2009, post-Lehman bankruptcy,” he said. “Other than that time, it was extremely rare.”

Ending Bullish Call

The model recorded a reading of negative 0.18 percent for 10-year debt on Sept. 22, a day after the Fed indicated it may implement additional quantitative easing. It was the lowest on an intraday basis since January 2009.

The drop was one reason Nomura bond strategists changed their forecast on Treasury yields to “neutral,” ending a six- month bullish call.

“Yields have gone too low,” said George Goncalves, head of interest-rate strategy at Nomura, one of the 18 primary dealers of U.S. government securities that trade directly with the Fed. “Incremental easing will not push yields that much lower. It will just keep them at a lower range.”

In March the Fed completed a program of buying $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The Fed was the biggest buyer of Treasuries when it purchased $300 billion of U.S. debt in 2009.

The first round of quantitative easing lowered the 10-year yield between 50 and 60 basis points since November 2008, said Joseph Gagnon, a former Fed official who is a senior fellow at the Peterson Institute for International Economics in Washington. He estimated a second round would “likely be at least $1 trillion,” and have a smaller market reaction.

‘Go Back Up’

“If they do $1 trillion, the 10-year yield could move 10 to 20 basis points on top of what’s already been done,” Gagnon said. “If they don’t do it, yields will go back up.”

The Federal Open Market Committee’s Sept. 21 statement said it “will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery.”

The Fed’s statement indicates it’s focused on inflation that’s below the preferred long-term range as the main reason to provide additional stimulus. Consumer prices excluding food and fuel costs rose 0.9 percent in August from a year earlier, matching the smallest increase since the 1960s.

The Fed retained its policy, begun last month, of reinvesting proceeds from mortgage debt repayments into long- term Treasuries. It has bought $34 billion since it began the program on Aug. 17. Policy makers also kept the benchmark federal funds rate in a range of zero to 0.25 percent, where it’s been since December 2008, and reiterated the rate will stay “exceptionally low” for an “extended period.”

“Quantitative easing on the basis of past records caused a large decline in yields,” said Wright, co-author of the 2005 Fed paper and a professor at Johns Hopkins University in Baltimore. “If QE is used on a large scale, yields will probably drop even further, and the term premium will decline. If they are just keeping options open, then the term premium will move back up.”

To contact the reporters on this story: Susanne Walker in New York at swalker33 Anchalee Worrachate in London at aworrachate .

To contact the editors responsible for this story: Dave Liedtka at dliedtka Daniel Tilles at dtilles

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Stocks in U.S. Fluctuate as House Prices Fall, Commodity Producers Rally

U.S. Stocks Fluctuate as House-Prices Drop, Commodities Rally

Sept. 22 (Bloomberg) — U.S. stocks fluctuated, with benchmark indexes hovering near four-month highs, as a drop in home prices and forecasts at technology companies that disappointed investors offset a rally in commodity producers.

Adobe Systems Inc., the top maker of graphic-design software, tumbled 21 percent. PMC-Sierra Inc. slumped 7.6 percent as the chipmaker reduced its third-quarter sales forecast. Newmont Mining Corp. gained 2.1 percent as gold rose to a record. Exxon Mobil Corp. and Chevron Corp. added as much as 0.8 percent as oil prices advanced before a report forecast to show U.S. inventories dropped for a third week.

The Standard & Poor’s 500 Index slipped less than 0.1 percent to 1,139.45 at 10:26 a.m. in New York, a day after the Fed said it’s willing to ease monetary policy further to spur growth. The Dow Jones Industrial Average rose 0.1 percent to 10,769.74.

“We’re navigating the slow-growth economy and trying to avoid pitfalls,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $55 billion. “The Fed will do whatever it can to avoid a double dip, but it can’t keep on buying debt forever.

This is a ‘reflation’ story of weaker dollar, higher commodities and lower interest rates. This is not an environment that suggests a huge rally for stocks.”

The S&P 500 has surged 12 percent from this year’s low on July 2 as concern eased that U.S. unemployment and less spending from indebted European nations would stall the global economic recovery. The gauge has gained 2.5 percent so far this year, leaving it 6.1 percent below its peak for 2010.

Treasuries Rally

Treasuries rose for a fourth day. The gains drove the yield on the 10-year note to as low as 2.52 percent, the least since Sept. 1. Two-year yields fell to 0.4074 percent, the lowest ever, after the Fed said that it’s “prepared to provide additional accommodation if needed to support the economic recovery.” The central bank is scheduled to buy Treasuries due from March 2013 to August 2014 today as part of its effort to keep borrowing costs low.

Adobe, PMC

Adobe tumbled 21 percent to $26.20 after the company yesterday said fourth-quarter revenue will be $950 million to $1 billion, citing slower demand from back-to-school shoppers and Japanese buyers. Analysts surveyed by Bloomberg had projected sales of $1.03 billion on average for the period, which lasts through November.

PMC-Sierra lost 7.6 percent to $7.20. The chipmaker reduced its third-quarter sales forecast, saying it expects $163 million at most. That trails the average analyst estimate of $173.5 million in a Bloomberg survey.

Newmont Mining, the largest U.S. gold producer, gained 2.1 percent to $65.48. Gold climbed to a record in London and New York as the Fed’s willingness to increase its balance sheet triggered a slump in the dollar. The U.S. currency declined as much as 1 percent to $1.3396 against the euro.

Goldman Sachs’ Cohen: New bull market has begun

U.S. stocks have entered a new bull market, and the S&P 500 index could rise as much as 10 percent from current levels by the end of this year, Goldman Sachs strategist Abby Joseph Cohen said on CNBC on Thursday.

Goldman Sachs sees the benchmark Standard & Poor’s 500 index in a range of 1,050-1,100 toward year-end, said Cohen, the firm’s senior investment strategist and president of its Global Markets Institute.

That range, she said, “is where we should be toward the end of this year. “We do think the new bull market has begun,” Cohen said. “It may prove it began in March of this year.” Stocks have recovered sharply since hitting 12-year lows in early March, with the S&P 500 index now up 47 percent since trading as low as 666.79 points in March. In early afternoon trade on Thursday, the S&P was off 0.53 percent at 997.44 points.

Cohen also said she expects the labor market to improve, but in “an erratic way. “It appears job losses are slowing, and there is some job creation going on,” she said. But “we have many more months of difficult labor situation ahead, even if the recession, using GDP or industrial production, is almost over.” The U.S. labor market has remained weak even as other parts of the economy have improved, with the unemployment rate at just under 10 percent.

Friday’s July employment report from the Labor Department is forecast to show the jobless rate at 9.6 percent, its highest since June 1983, and 320,000 monthly job losses, according to a Reuters survey.

Cohen said sectors tied to economic improvement are likely to be the best stock picks for right now, including energy, technology and financial companies. “Many of us have lost track of the fact that most of these (financial) stocks do follow economic growth, so when the GDP is doing well, financial services tend to do well,” she said.

Goldman Sachs on Wednesday raised its gross domestic product forecast for this year’s second half to an annualized rate of 3 percent, from a prior outlook of 1 percent, citing an expected increase in production by companies. “Many companies trying to be very cautious over last year really squeezed inventories down to levels that are unsustainable,”

Cohen said on CNBC. “Even without any notable improvement in current demand, companies just need to have more stuff in the back room to get their business done.”

Dow Sends Buy Signal That’s Worked Since 1921

The Dow Jones Industrial Average is sending a buy signal that has foreshadowed gains of 18 percent during the past nine decades.

 

The 30-stock gauge climbed to more than 10 percent above its mean level from the previous 200 days, rebounding from 34 percent below the so-called 200-day moving average in November, according to data compiled by Bloomberg. Eighteen of the last 21 times the Dow rallied from at least 10 percent below the 200-day level to 10 percent above, it posted gains during the next 12 months, Bloomberg data since 1921 show.

The CHART OF THE DAY tracks the difference between the Dow’s last price and its 200-day average since 1989. The lower panel displays the measure’s price, along with the buy signals it sent near the start of rallies in 1991, 1999 and 2003.

“This rally, while it will have its fits and starts, is the beginning of a new trend, not just a bounce,” said Michael Williams, managing director of New York-based Genesis Asset Management, which oversees about $2 billion. “It is a significant opportunity.”

The Dow posted an average advance of 18 percent during the 12-month period following buy signals since 1921, Bloomberg data show. In the six-month period, there were 17 advances for an average gain of 8.2 percent. In three months, it climbed 18 times, averaging an increase of 5.7 percent.

Returns by the Dow Jones Industrial Average 12, 6 and 3 months after the buy signal.

Buy Signal            12 Months         6 Months      3 Months
June 11, 2003          13.36%             8.98%         3.01%
Jan 8, 1999            19.49%            15.38%         5.75%
March 5, 1991           9.05%             1.21%         1.11%
Jan  27, 1989          10.18%            13.46%         4.14%
Sept. 3, 1982          31.38%            23.02%        11.67%
July 18, 1980           3.78%             5.34%         3.48%
Aug. 9, 1978           -3.74%            -7.76%        -9.83%
March 7, 1975          26.43%             8.63%         9.11%
Dec. 7, 1970            4.73%            12.75%         9.69%
May 8, 1967             1.02%            -6.60%         1.41%
Jan. 25, 1963          15.20%             1.18%         5.68%
July 24, 1958          33.51%            19.91%         8.53%
Dec. 13, 1949          16.26%            15.04%         3.15%
Nov. 6, 1942           16.66%            18.21%         8.29%
Sept. 11, 1939        -16.61%            -4.49%        -5.20%
July 6, 1938           -3.05%            10.95%         7.49%
Feb. 18, 1935          43.10%            19.09%         8.06%
Apr. 19, 1933          54.47%            23.53%        51.63%
Aug. 29, 1932          37.72%           -31.68%       -21.87%
Aug. 18, 1924          35.82%            14.36%         5.46%
Dec. 12, 1921          21.89%            12.53%         8.12%

Average                17.65%             8.24%         5.66%

New Zealand Leaves Key Rate Unchanged a Second Month

New Zealand’s central bank kept its benchmark interest rate unchanged for a second month and said it may cut borrowing costs further as a rising currency threatens a recovery from the worst recession in three decades.

“The forecast recovery is based on a further easing in financial conditions,” Reserve Bank Governor Alan Bollard said in a statement in Wellington today after leaving the official cash rate at 2.5 percent. “If this easing does not occur, the recovery could be put at risk. In these circumstances we would reassess policy settings.”

New Zealand’s dollar fell the most in three weeks after Bollard said rates may fall further and won’t rise until late next year。The central bank cut borrowing costs by 5.75 percentage points between July 2008 and April to buoy an economy that began contracting in the first quarter of last year.

“We continue to expect the dollar to be strong over the next year, which does reinforce the prospect of the Reserve Bank having to cut the cash rate further,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. He expects quarter-point cuts in September and October.

New Zealand’s dollar tumbled to 65.01 U.S. cents at 10 a.m. in Wellington from 65.74 cents immediately before the statement. The two-year swap rate, a fixed payment made to receive floating rates, fell to 3.94 percent from 4.07 yesterday.

More to Come

“We expect to see a patchy recovery get under way toward the end of the year, but it will be some time before growth returns to healthy levels,” Bollard said. The cash rate “could still move modestly lower over the coming quarters.”

Bollard said inflation is expected to remain comfortably within the 1 percent-to-3 percent range he targets.

Wholesale interest rates and the currency are higher than the central bank assumed, which “is not helping the sustainability of future growth and brings with it additional risks,” he said.

Finance Minister Bill English said this month the currency was “higher than fundamentals warrant” and may hamper his desire for the nation’s recovery to be based around exports and investment rather than consumption led by borrowing.

Exports fell 5.4 percent in the second quarter from the previous three months, the government reported this week.

“We need to see the Reserve Bank indicate a commitment to lowering the currency,” John Walley, chief executive of the New Zealand Manufacturers & Exporters Association, said this week in an e-mailed statement. He wanted Bollard to cut the cash rate.

Export Threat

Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, yesterday reiterated that its payment to New Zealand farmers will be 12 percent lower this year because of falling prices and the currency.

The payment would have been revised lower were it not for “encouraging signs” in some international dairy markets, the Auckland-based company said.

Bollard reiterated he “expects to keep the cash rate at or below the current level through until the latter part of 2010.” By contrast, traders expected 86 basis points of increase within a year, according to a Credit Suisse index. A basis point is 0.01 percentage point.

All 10 economists surveyed last week by Bloomberg News forecast today’s move. All expected the rate will also be unchanged at the next review on Sept. 10.

New Zealand’s economy is probably in its seventh quarter of recession, according to the central bank’s June 11 forecasts. Today’s statement contains no new forecasts.

“Overall economic growth is evolving broadly in line with our forecasts in June” Bollard said. “The outlook remains highly uncertain.”

Housing Market

New Zealand’s exports are heavily weighted to soft commodities such as butter, cheese and wool and haven’t benefited from recent gains in hard commodity prices, he said.

The housing market may lead a recovery after second-quarter home prices rose for the first time since late 2007. There were 40 percent more property sales in June than a year earlier, the Real Estate Institute said on July 9.

Consumers are less pessimistic and business confidence is recovering, recent polls show.

The proportion of consumers who expect the economy will deteriorate over the next year fell to 41 percent in early July, the lowest level since March last year, according to a survey of 1,039 people by Melbourne-based Roy Morgan Research.

Business confidence rose to a 10-month high in July, ANZ National Bank Ltd. said yesterday, citing a survey of 402 companies. Firms were less pessimistic about profits and fewer expected to fire workers over the next year.

The jobless rate rose to a five-year high of 5 percent in the first quarter and may increase to 7.2 percent by mid-2010, the central bank forecast last month.

Winstone Pulp International Ltd. this week said it would close a North Island saw mill and fire 65 workers. Earlier this month, New Zealand Post, the state-owned postal service said it had cut 380 jobs since the start of the year.

Pimco’s Gross Favors ‘Strong’ Company Bonds, Stocks

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said investors should favor debt and stocks of “strong” companies, and assets in emerging markets with improving economic growth.

Investors in riskier assets will get “haircuts” because U.S. economic growth will be closer to 3 percent than the range of 5 percent to 7 percent for the past 15 years, Gross said. The U.S. economy will begin to recover in the second half of 2009, he wrote in his August investment outlook on Pimco’s Web site.

U.S. corporate bonds are outperforming Treasuries in 2009, the first time in three years, as signs of improvement in the economy led investors to seek higher-yielding assets. Franklin Templeton Investments, a mutual fund company that oversees $450 billion, and JPMorgan Chase & Co., the second-largest U.S. bank, are also recommending company bonds.

“There is no investment potion for this new environment other than steady income-producing bond and equity investments in companies with strong balance sheets and high dividend yields,” Gross wrote. “A journey to 3 percent nominal GDP means default/haircuts for assets on the upper end of the risk spectrum, as well as extremely low yielding returns for government and government-guaranteed assets at the bottom end.”

Gross also favors emerging markets where growth prospects are “tilted upward,” according to the report.

‘Tangible Earnings’

“Stock prices will ultimately depend on tangible earnings growth in the form of increased dividends, not green shoots hope,” Gross wrote. High-risk bonds, commercial real estate and lower-quality municipal bonds “may suffer,” the report said.

Federal Reserve Chairman Ben S. Bernanke used the term “green shoots” in an interview aired March 15 on CBS Corp.’s “60 Minutes” to describe signs of improvement in the economy.

U.S. corporate bonds rated A to AAA by Standard & Poor’s returned 7.3 percent this year, according to indexes compiled by Merrill Lynch & Co. The U.S. Treasury Master Index handed investors a 4.9 percent loss, according to Merrill. MSCI’s World Index of stocks has returned 13 percent so far in 2009.

The Templeton Global Bond Fund is avoiding debt issued by the U.S., the U.K., and Germany and has sold Japanese yen it purchased last year, said John Beck, the company’s co-director of international bonds.

‘Bullish View’

Templeton is favoring U.S. bank debt and municipal bonds, Beck, who is based in London, told reporters on July 27 during a trip to Singapore. The company, which is in San Mateo, California, is also investing in a mix of local-currency and dollar-denominated securities in emerging markets, he said.

JPMorgan has a “bullish view” on high-grade corporate bonds, it said in a report July 24.

“Money continues to be allocated to the high-grade bond asset class,” said the report by JPMorgan analysts including Eric Beinstein, co-head of U.S. credit strategy, in New York.

For the week ended July 22, high-grade bond funds drew $1.4 billion, above the 13-week average of $1 billion, the report said.

The Federal Reserve said yesterday that most of its 12 regional banks detected a slower pace of economic decline in June and July, further signs the worst U.S. downturn in at least five decades is closer to an end.

U.S. Contraction

The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered $1.52 trillion of writedowns and credit losses at banks and other institutions and sent the global economy into its first recession since World War II.

The U.S. economy shrank 1.5 percent in the second quarter according to the median forecast in a Bloomberg News survey of economists before the Commerce Department reports the figure tomorrow. The first-quarter contraction was 5.5 percent.

Gross’ $161 billion Total Return Fund returned 10.9 percent in the past year, beating 96 percent of its peers, according to data compiled by Bloomberg. Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.

Oil “Well Overpriced” and Will Keep Falling; Gasoline to Follow, Energy Trader Says

After rallying nearly 50% this year, crude prices hit a major speed bump this week as the dollar has firmed up and inventories have risen.
Oil prices were “well overpriced” in the $70s and will continue to weaken in the weeks and months ahead, says James Cordier, President of Liberty Trading Group and co-author of The Complete Guide to Option Selling.

Rather than increased demand, the recent rally was based mainly on speculative demand driven by government stimulus packages, Cordier says. Most notably, a flood of liquidity in China found its way into commodities and China’s economy now “looks like a bubble,” he says, joining a growing chorus.

More evidence the rally was not demand driven emerged Wednesday, when the Energy Department said inventories surged by 5.15 million barrels in the week ended July 24, the biggest weekly increase since April and vs. forecasts for a decline if 1.5 million barrels, according to Bloomberg.

In reaction, crude futures were recently down more than 5%, on track for their biggest decline in three months.

Cordier, who made a well-timed call on a coming oil rally here in February, now expects crude to fall $10 to $15 from recent levels. In anticipation of that drop, Liberty is making a bearish trade — “selling calls with both hands,” Cordier says.

If and when that happens, he also predicts prices at the pump will fall 10 to 15 cents from current levels, which would be welcomed news for cash-strapped Americans.

Viacom Posts Lower Profit; Advertising Hurts

Viacom reported a steep fall in quarterly earnings, hit by poor advertising revenue and a dropoff in sales of its “Rock Band” video game.

The owner of MTV Networks and Paramount film studios reported second quarter profit of $277 million, or 46 cents a share, down from $406 million, or 64 cents a share, in the same period a year ago.

Excluding 3 cents a share in severance charges, adjusted earnings per share were 49 cents, which was slightly ahead of average analyst estimates of 48 cents, according to Reuters Estimates.

Revenue declined 14 percent to $3.3 billion, the company said, and short of analyst estimates calling for revenue of $3.49 billion in the quarter. Revenue was hit from several sides.

The prolonged slump in advertising spending continued to undercut Viacom’s earnings, as did lower sales of the video game “Rock Band” and DVDs.

While Viacom [VIA 24.49 -0.66 (-2.62%) ] is not as dependent on advertising as some other media companies — such as corporate sibling CBS Corp [CBS 7.65 -0.34 (-4.26%) ] — the company still gets about 30 percent of annual revenue from ads.

As a result, its results have been hampered by the prolonged downturn in ad spending, with sectors like automotive cutting way back on their marketing budgets over the past year.

Viacom Chief Executive Officer Philippe Dauman predicted several months ago that advertising was finally stabilizing, and noted on Tuesday that U.S. advertising revenue had actually increased from the first to the second quarters of this year.

Meanwhile, Viacom’s Paramount Pictures pulled out two big hits during the quarter — “Star Trek and “Transformers: Revenge of the Fallen.”

Still, the combination of the two films could not surpass the results of “Iron Man” and “Indiana Jones and the Kingdom of the Crystal Skull” in the same period a year earlier, so Viacom’s theatrical revenue dropped 27 percent.

Home entertainment revenues also declined, dropping 29 percent and underscoring the industry’s broader struggles with a depressed DVD

5-Year Auction Generates Weak Response; Treasurys Fall

Treasurys fell after an auction of 5-year government debt saw another tepid response, with investors getting a yield of 2.689 percent on a swell of $39 billion in supply.

The results come a day after a similarly weak auction of 2-year notes showing a reticence for government debt as a record supply of $115 billion comes on line this week.

The bid gathered a bid-to-call ratio of 1.92 against the recent normal of 2.20.

The Federal Reserve will be buying longer-dated Treasurys on the open market Wednesday as part of its $300-billion, six-month program intended to free up lending and reduce longer-term interest rates such as those on mortgages.

Later Wednesday the Fed—the U.S. central bank—will release its Beige Book of anecdotal information on current economic conditions.