WEEKLY UPDATE
September 26, 2009It turned out to be a rough week for stock and commodity investors but it was a good week for bond holders.
Muted Economic Conditions:
The FED made it clear with the comments they released this Wednesday that they don't believe a strong recovery is in the cards. A month earlier the FED was concerned about inflationary pressures but on Wednesday they made it clear that they are more concerned that weak consumer demand will lead to deflation. Stock markets worldwide fell on the news as did oil prices, but government bonds and the dollar rallied on the muted economic comments.
Disappointing housing and durable goods reports added to the bleak FED comments. Existing home sales fell in August and orders for durable goods tumbled - this added to concerns that the underlying health of the U.S. Economy, particularly as government stimulus programs including the "cash for clunkers" program and housing market support for first time home buyers wind down.
Stocks:
According to Robert Prechter of the Elliott Wave Forecast it appears that our stock market has completed its bear market rally and should begin to work back to the levels we faced in March. The market has now rallied to typical bear market rally levels while technical indicators have continued to weaken. Now that the FED has signaled a move to pull back stimulus it would make perfect sense to expect the beginning of the long awaited correction. Still, I expect some buying support from fund managers until the end of the month. In our quarterly report I will go into deeper detail about the other factors signaling a correction such as the bear market conditions now in China and overwhelming insider selling going on here in the States.
Bonds and Interest Rates:
The big winner this week was the bond market. Treasury yields fell and bond prices rose on the muted economic news this week. Two-year government yields fell 7 basis points. Five-year Treasuries sank 12 basis points, and Ten-year yields fell 14 basis points to 3.32%. This was certainly good news for investors who are over-weighted in Treasury bonds during this uncertain time.
One concern of Treasury investors has been whether foreign investors such as China and Japan would continue to buy our growing supply of Treasury bonds? The answer turns out to be a surprising and resounding YES. According to Bloomberg reports foreigners have purchased over 43% of the $1.4 trillion of Treasury notes and bonds issued so far this year, compared with 27% of the $527 billion issued at this point in 2008. This is a good sign that foreign investors still have confidence that we will get our fiscal problems under control.
Dollar turns a corner?
While nearly everyone expects the dollar to head lower the dollar fought back and bottomed out, at least for now. Large institutions started buying dollars this week and some analysts are looking for a rally in the dollar to the March highs. This would give investors hungry for overseas investments a timely opportunity to increase their allocation of non-dollar-denominated investments. So far the rally is in its infancy; we will have to wait and see if it will build into something more.
When will the Stimulus End?
Not anytime soon. Granted the FED announced on Wednesday that they will be pulling back some forms of stimulus directly to banks, but they also said that they are extending their purchase programs of mortgage-backed bonds well into next spring; this should help support government bond prices and keep mortgage rates down.
Meanwhile the Treasury Department has until October 3rd to decide if they are going to request an extension of the $700 billion TARP program from Congress. Congress seems to have little appetite to throw more taxpayer money to Wall Street.
The FDIC is currently searching for the best way to bolster their reserves. With more than 90 banks now closed and with prospects of several hundred more still to close the FDIC is considering options such as tapping into a $500 billion dollar line of credit at the Treasury, or to possibly charge healthy banks higher premiums to pay for those they must close.
More political trouble at the FED?
A battle is brewing between the House of Representatives and the FED over secrecy. Legislation in the house to audit the FED has attracted 295 co-sponsors; sponsors from both sides of the aisle. The FED is against the audit arguing that their independence could become politicized thus inhibiting their mission of setting interest rates to foster economic growth, employment and low inflation.
Have a good week!
Greg
September 19, 2009
It was a surprisingly quiet week for the financial markets. Growing fear that the bear market rally in stocks would suddenly fail after Labor Day has, as yet, failed to materialize and treasury bond prices were largely unchanged. Meanwhile positive comments from FED Chairman Ben Bernanke gave investors another douse of confidence and the markets ended mildly higher.
Stocks:
It appears that on a short-term basis the U.S. Equities markets have a bit more upside potential. Trading this past week was a bit listless but momentum remains slightly to the buy side. On a longer-term basis the outlook is different; it appears that the market is firmly in the grip of a bear market rally. Folks such as David Rosenberg (Chief Economist, Gluskin Sheff & Associates and former Chief North American Economist at Merrill Lynch, recently said that “we're halfway through a secular bear market in equities... which means you can't really be a buy and hold investor”. Others such as Dr. Robert Prechter of The Elliott Wave Theorist agree believing that a correction to at least re-test the March lows is on our horizon. These views are shared by many. Never before have we seen the stock market rise so much over such a short period of time without a corresponding bounce in the economy. Normally we would see more than a million new jobs created by this time – yet during the time of this rally the market has shed 2.5 million jobs (as many as were lost in the entire 2001 recession). So why is the stock market recovering while the economy is not? The answer appears to be government stimulus.
Following the March collapse the Federal Reserve created a $300 Billion quantitative easing program to flood our nation's biggest banks with capital. The program seemingly worked to restore confidence in our system but one of the unintended consequences was a premature and overdone rally in stocks as newly formed banks Goldman Sachs and JP Morgan grew bold and aggressive on their trading desks. But the party may be ending. On Wednesday the Treasury announced that they would allow one of their more successful bailout programs to expire. This program shifted money from the treasury to the balance sheets of big banks (all funneled through by the FED). The very short term ramifications of the expiration of this program could be positive for stocks but that could quickly be followed by a reversal as liquidity among the banks dries up.
For the week ahead we have a two day meeting of the FED and the meeting of the G-20 to discuss regulatory reform of the world’s financial system. Investors will be on pins and needles waiting for news about interest rate policy at the FED, weekly unemployment figures and reports on new home sales. Stock investors are hoping for more signs of economic stability. Meanwhile Treasury investors are expecting weakness...
Government Bonds
Last week I mentioned an oddly timed rally simultaneously occurring in both stock and treasury prices. This rarely happens at this point in the business cycle and seems to suggest a different economic outlook for traders in both markets. Higher bond prices mean lower bond yields. Since May government bond prices have trended higher. One reason would be the FED's purchasing of treasury bonds but that is only part of the answer. Investors continue to plow money into the safest of bond investments in spite of positive comments from the government about a rebound in the economy. Bond investors are apparently doubtful of a sustained economic recovery. For example, a month before Labor Day on August 7 the 30-year treasury bond yielded 4.61%, the 10 year was yielding 3.89% and the 5-year got you 2.84%. Today we are looking at 4.18%, 3.40% and 2.38%. The bull market in government bonds remains intact for now.
Some Concerns
Our Economy: First on the list is obviously our own economic rebound. The Treasury Department and the FED have pumped enormous amounts of the money into the system but will it be enough to hold the economy up? In spite of the efforts of the government to re-inflate the economy the fact is that we have gone from a long term expansionary credit economy to a credit contraction and that spells a weaker economic outlook. Cash for clunkers and first time home buyer credits have helped the automobile and housing industry for now but as these programs end will buyers still exist? We continue to see more than 500,000 folks apply for new unemployment benefits each week and the back to school sales were mostly flat. The economy appears to have stabilized but we are still in the process of deleveraging from all levels of debt. All forms of credit availability remain tight and the economy remains fragile. I believe a W shaped recovery remains in the cards.
Problems overseas: We tend to focus on our own economic problems but there are plenty of problems overseas. One of the greatest challenges is coming out of the Persian Gulf. A bank panic in the Persian Gulf could be a back door threat to our markets here. The construction boom/bust in the Arab world has its epicenter in Dubai which has unfortunately gone bust. This has ramifications worldwide and if not for prompt aid by Abu Dhabi bankers, a vast liquidation of Dubai could have ensued. Such a collapse could spill over to our shores.
Next week: China, the Dollar and Germany's rescue of Eastern Europe.
Take care,
Greg
September 14, 2009
On the one year anniversary of the fall of Lehman Brothers, the markets nervously opened this morning with the news over the weekend that the administration is slapping a tariff on China for allegedly dumping cheap tires into the U.S. Along with lower oil prices the Japanese market fell sharply overnight. The market is expected to remain nervous as it digests this news.
Stocks and bonds both had a good time last week but the dollar did not. The dollar continued to decline last week which in turn brought us higher oil prices and with it higher stock prices. Stocks drifted up to the August 28th high before falling back on Friday. Meanwhile government bond fund prices continued to rise all week extending the rally in treasury prices that has gone on for weeks. This is atypical. Usually what is good for bond prices is bad for stocks so this period of unified movement between stocks and bonds is expected to eventually end. Treasury investors normally expect a weaker economy while stock investors expect the opposite. Time will tell who is right but I expect that the bond market is correct. Stocks have rallied for months on artificial stimulus money creating a very strong bear market rally; meanwhile the economy continues to slowly shrink. Job losses and foreclosures continue at near record levels and now commercial property foreclosures are growing. I am still in the camp that believes that stocks will eventually correct before a sustainable rally will ensue so in the meantime treasury bonds are still favored.
As noted earlier the dollar fell last week but it did show signs of strength on Friday and this morning. If this rally continues I am looking forward to recommending that we further diversify into international bond and commodity funds with a small part of some of our portfolios.
- Greg Crawford
September 8, 2009
Labor Day was a busy one for investors as comments this weekend from two institutions affected today's markets. The first announcement came from the G20 wherein the finance ministers agreed to keep pumping stimulus into the world economies for an indefinite time in an effort to avoid a double-dip recession next year. The second came from the UN Conference on Trade and Development which called for the creation of a new currency to replace the dollar as the world's exchange currency. This is not the first time a group has come out to call for a new currency but these developments drove the dollar down against most other currencies and it strengthened prices of U.S. Treasuries, gold and oil.
Stocks rallied for the third straight day earning back half of what they had lost since August 28th but in the process they have lost momentum. Funded with an overabundance of stimulus money stocks have been on a strong bear market rally. September and October are historically the worst months for stocks so perhaps we will start to finally see the pullback we have been waiting for. In the meantime in terms of earnings the overall market is more over valued than it has been in more than one hundred years (so a pullback would be healthy).
Treasury Bonds have been gathering strength for weeks and that strength continued today as another auction of three year treasuries brought record interest from buyers. Treasuries remain the preferred safe haven investment. Although the credit risk is generally higher, foreign bonds continue to gain strength as the dollar weakens.
- Greg Crawford
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