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Sense on Cents Navigates the Markets

Posted by Larry Doyle on June 5, 2009 12:41 PM |

Navigating the markets on the day in which the employment report is released is always fascinating. Why? Typically the release of new and meaningful information generates very heavy volume; as such, the market moves can be measured with greater weight. Let’s take our equipment and head out along the trail . . .

Equities: major market equity averages opened very firm after the positive tone embedded in the non-farm payroll component of this morning’s report.

As the day has moved along, though, these indices have all faded.  The DJIA is up approximately .4% as of this writing. The S&P 500 and tech heavy Nasdaq are unchanged relative to Thursday’s closing levels.

Particular industry groups that have had outsized moves are mortgage finance (-2.2%) and industrials (+.93%). What’s going on here? The mortgage finance companies are negatively impacted by higher interest rates (more on that in a moment). The industrials are likely benefitting from the perception that the economy may be slowly turning the corner.

Bonds: this is where the real action is occuring!! Various sectors of the bond market are down anywhere from .25% to 1%. It appears the only bond sector improving on the day is the high yield space (+1-1.5%) as it is benefitting from the perception of lessened credit risk.

The biggest loser on the day is the front end of the U.S. Treasury market which has backed up an EYE-POPPING 25 basis points. The intermediate to long end of the Treasury yield curve has backed off by 5 to 15 basis points.

Bonds are faced with 3 major hurdles:

1. massive supply: as global governments, corporations, municipalities, and individuals all look for credit.

2. inflation : as much as analysts will point to the lack of any wage pressures, the fact is that the U.S. has so much liquidity in the system that any hint of an economic spark will be akin to dropping a match on dry hay. The Fed can only dampen the “hay field” by withdrawing liquidity from the economy. How? Increase the Fed Funds rate or sell Treasury or mortgage assets currently on its books. What would that mean? Push interest rates even higher, especially on the front end of the yield curve. What would that do? Slow the economy.

3. the Fed: Big Ben, (Turbo-Tim as well) and team may find themselves between the proverbial rock (a fragile economy) and a hard place (fears of increasing inflation) sooner than they think.

Currencies: the greenback is doing better on the day. This seems counterintuitive to an economy regaining its footing with investors taking on a greater risk appetite. What’s happening? In my opinion, the greenback is anticipating that Bernanke and the Fed may have to “think” about increasing the Fed Funds rate.

Commodities: slightly weaker on the day.

Other news of note . . . Bloomberg releases a story highlighting the charade being played by banks in “generating” earnings. The fact is banks have benefitted tremendously by “accounting” maneuvers and as such are “masking” sizable losses. Regular readers of Sense on Cents have witnessed my addressing these issues.  That said, I recommend: Bank Profits From Accounting Rules Mask Looming Loan Losses.

In summary, we are clearly entering the next stage of the Brave New World of the Uncle Sam Economy.  The key attribute of this phase will be higher interest rates.


  • bonddadddy
  • Dadddy….wow!! Thanks for sharing. When the Fed is hiring a PR person you know we have sunk to new lows. Whatever happened to keeping the Fed totally independent and above the fray.

    Not in the Brave New World of the Uncle Sam economy.

    Thanks for sharing.

  • Mountainaires

    Via Panzner at Financial Armageddon:

    Insiders selling like crazy, and they’re not buying.

    The Pragmatic Capitalist reveals: “Despite “Green Shoots” Insider Sales Spike”

    The latest data on insider selling shows little relief in the relentless unloading of company stock by corporate insiders. In the last two weeks insiders sold over $335MM in stock vs listed insider purchases of just over $12MM. As has been the trend over the course of the last few weeks the list of insider selling has been long and the amounts have been staggering. The buy side, on the other hand, is represented by low rated, low priced stocks whose insiders rarely purchase over $500K.

    One might think that with all of these “green shoots” the insiders at major U.S. corporations would begin buying up their own shares voraciously. Especially after a nice little run like we’ve seen lately. After all, with stocks still 35% off their highs and a full blown economic recovery (supposedly) on the horizon it would make nothing but sense than to buy your own shares, right?

    Although there were signs of life in early May the overall trend in buying remains very low. As we’ve noted before it’s not the mountain of selling that most concerns us, but the total lack of buying. Insiders sell for many reasons, but they only buy their own stock when they are confident that the price will rise. As of now, insider buying remains incredibly weak which is more than likely a vote of (no) confidence in future business operations.

  • MPC

    LD- Any thoughts on the charges against the top dogs at Countrywide? If I’m not mistaken, you’ve mentioned more than a couple times the connections between Chris Dodd and his “buddy” at Countrywide. Think any of the media discussion will follow that lead?


  • MPC,

    No surprise here. May be a tough case to prove but the SEC needs some scalps to hang.

    Mozilo had Chris as one of “his” friends and gave him a special deal on the mortgage that saved Chris 75k. I would bet that the WSJ, Fox, and Sense on Cents makes more than a passing mention of this topic.

    Back to Mozilo. He can probably make life more than a little uncomfortable for Dodd and others on the Hill. I would bet that he ends up getting a BIG fine which for him amounts to pocket change.

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