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October 17, 2009: Month to Date Market Review

Posted by Larry Doyle on October 17, 2009 5:46 AM |

The dynamics at work in the economy, markets, on Wall Street, in Washington, and around the world continue to be very much the same. Economic signals are decidedly mixed. The consumer and savers remain challenged. Markets remain firm. The greenback remains weak. Commodities remain firm.

While many of the Washington wizards and market mavens focus on the positives and many bloggers and naysayers focus on the negatives, I hope readers at Sense on Cents feel they can get a full and honest assessment on all these topics. Please do not hesitate to tell me when you think I’m not being objective.

I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents.

ECONOMIC DATA

> Retail Sales: declined 1.5% but less than the expected decline of 2.1%. The media gave no credence to the fact that the prior month’s figures were revised lower by .5 %. Over the last two months, retail sales are marginally positive but the coming holiday sales will be very challenging with heavy discounting still expected.

> Consumer Price Index: rose .2 versus an expectation of .1. While prices are currently well behaved with the recent weakening of the dollar and sharp move higher in commodities, we should expect food and gas prices to move higher.

Jobless Claims: overall claims declined marginally again, but nobody is willing to bet that the employment situation is improving rapidly. The claims data is a sign that perhaps unemployment is stabilizing, albeit at very elevated levels.

> Philadelphia Fed Manufacturing Report: registered at 11.5 versus an expectation of 12.5 and a prior month 14.1 reading. Not a sign of a robust rebound in activity.

>Industrial Production: posted a surprisingly strong reading of a .7 increase against an expectation of a .2 increase.

> Consumer Confidence: against an expected reading of 74.0, this report registered a significant disappointment of 69.4. What happened? Consumers are very nervous about the overall economic outlook.

Add all of this economic data up and I focus on the last comment about consumer confidence. The consumer, which represents 70% of our economy, is nervous and the economy as a whole is as well.

Let’s move along to market performance. I would typically lead my review with focus on the equity and bond markets, but those sectors are actually following developments in the currency and commodity markets so let’s shift our focus accordingly.

The figures I provide are the weekly close and the month-to-date returns on a percentage basis:

U.S. DOLLAR

$/Yen: 90.87 versus 89.68, +1.3%
Euro/Dollar: 1.4894 versus 1.4635, +1.8%
U.S. Dollar Index: 75.58 versus 76.72, -1.5% !!!

Commentary: the overall U.S. Dollar Index continues to decline as the U.S. budget deficit for 2009 exploded to an astronomical $1.42 trillion. That figure is more than triple the 2008 level.  The decline in the dollar continues to support the equity and commodity markets, while raising some concerns on the long end of the yield curve as a continuing decline in the dollar is inflationary which would push long maturity interest rates higher. The dollar actually did improve versus the Japanese yen while weakening versus the Euro. I recommend that readers focus on the dollar index which is why I link to it above. Track it and expect the index to move inversely to equities and commodities.

I reiterate my comments from last week. While I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade.

COMMODITIES

Oil: $78.67/barrel versus $70.39, +11.8% THE BIG MOVER THIS WEEK
Gold: $1055/oz. versus $1008.2, +4.6%
DJ-UBS Commodity Index: 134.32 versus 127.683, +5.2%

Commentary: Unless you grow your own crops or have your own source of energy, you should expect to get increasingly squeezed as prices at the supermarket and gas station are likely to head higher. While Washington will not address this development, these price moves are directly correlated with Washington’s weak dollar policy. The banks and others able to borrow cheap money for trading and investing benefit from the weak dollar. American consumers and savers get stuck with the bill.

The  Baltic Dry Index did move higher this week following the upward moves in commodities, though, rather then leading the move.

I read these commodity tea leaves as a sign of inflationary expectations in these ‘inputs’ while we encounter deflationary pressures in wages and real estate.

EQUITIES

DJIA: 9996, +2.9%
Nasdaq: 212157, +1.6%
S&P 500: 1088, +2.9%
MSCI Emerging Mkt Index: 966, +5.8%
DJ Global ex U.S.: 200.56, +3.0%

Commentary: while the move by the Dow over 10, 000 did get a lot of attention and deservedly so, the number represents a psychological level more than any sort of meaningful fundamental development.

How about 3rd quarter earnings? More of the same. That is, generally speaking bottom line numbers are being generated to a greater extent by cost cutting than a real growth in sales and top line revenue. The weak dollar has supported those companies with a greater degree of international sales. Companies with pricing power should be able to benefit from the weaker dollar and improve their earnings. Those companies should outperform. Companies without pricing power will get squeezed and will continue to be forced to cut costs.

BONDS/INTEREST RATES

2yr Treasury: .96%, an increase of 1 basis point or .01% 
10yr Treasury: 3.41%,
an increase of 11 basis points

The yield curve steepened (longer maturities underperformed shorter maturities) a touch further again this week. I addressed my line of reasoning in the Currency Commentary. I continue to believe that we will have growing deflationary pressures (wages and real estate) offset by inflationary pressures (food, gas, health care). What’s an individual to do? Save, grow your own food, ride a bike, and don’t get sick!!  

COY (High Yield ETF): 6.53, +2.0%
FMY (Mortgage ETF): 17.63, -1.0%
ITE (Government ETF): 57.80, -0.3%
NXR (Municipal ETF): 14.17, -1.9%

Commentary: while interest rates did move marginally higher over the week, overall they remain at remarkably low levels. The high-yield market remains very well bid while other sectors of the bond market have started to give ground as interest rates have started to ‘inch’ higher. Of note, the municipal bond market gave considerable ground as the reality of pressures in municipal finance increase.

Summary/Conclusion

I reiterate, the game continues. The disconnect between the overall domestic economy and the price action in the markets presents what one noted investor described as ‘the greatest experiment’ in modern finance. To the extent that people are putting money to work, I would focus on buying quality and utilizing ‘dollar cost averaging’ techniques.

Thanks for your support. If you like what you see here, please subscribe via e-mail, Twitter, Facebook, or an RSS feed.

Thoughts, comments, questions always appreciated.

Please join me this Sunday evening on BlogTalkRadio (8-9pm EDT) for what will assuredly be a fascinating dialogue with a high profile attorney, Richard Greenfield, who has three complaints ongoing versus the Wall Street regulatory organization, FINRA.

Have a great day and weekend.

LD

  • fiscalliberal

    The other factor causing the drag is Real Estate. The redefault rate after mortgage modifications is high and defaults are now creeping into the prime mortgage market. Probably because of high unemployment rate and real wage depressions.

    I am also wondering if people are not walking away from their real estate because they are so far under water they feel they will never recover. Especially in the high end housing and people have to move to get jobs.

    That said, we are seeing some improvement in real estate sales in low and middle housing. In my own area (north of Detroit) we are seeing a few sales after being dormant for about 18 months. Detroit remains to be a disaster.

  • Mark G.

    You missed the NY Fed manuf. index which came in stronger than the Philly index. LD, have you seen the bizzare TV commercials FINRA is running? They show people working on farms, families together as the voice over touts FINRA’s efforts on behalf of americans to protect their investments. Very strange. Me thinks FINRA is feeling the heat and attempting to sway opinions.






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