Sense on Cents

Do as I say, not as I do. Why? What do I mean?

The markets in general and equities in particular were once again supported by talk rather than actual economic actions. Who was talking? What were they saying? Very simply, communication from G-20 ministers last weekend indicated strong support for ongoing fiscal stimulus. That talk drove the equity markets 2% higher on Monday of this week. On the heels of that, during the midweek we experienced Fed-speak once again indicating a strong likelihood of keeping rates at very low levels for an extended period. Markets immediately reacted by once again ratcheting higher.

I have never been fully inspired by talkers versus doers, but these are unique times . . . so let’s collectively navigate the economic landscape. If you have any questions, please do not hesitate to ask.

ECONOMIC DATA

Economic reports and developments are carrying less and less weight currently. Why? Fed policies are not going to change. That comfort level has solidified the case for those who have sold and continue to sell the U.S. dollar short and use the proceeds to buy risk-based assets, primarily equities. That said, I am compelled to report significant data as I view my mission in helping people navigate the economic landscape, not strictly trade the markets.

Of note this week, the Federal Housing Administration is likely in need of an imminent bailout from Uncle Sam as defaults on FHA-insured loans show no signs of diminishing. This potential bailout has been discounted by FHA officials ad nauseam. They have no credibility.

The University of Michigan Survey of  Consumer Confidence plummeted to a level of 66% from 70. Consensus opinion had this survey bouncing back toward 72%. With no legitimate bounce or improvement in the housing or labor markets, I do not know why the survey would improve.

Let’s move along to market performance. The figures I provide are the weekly close and the month-to-date returns on a percentage basis:

U.S. DOLLAR

$/Yen: 89.65 versus 89.99, -.4%
Euro/Dollar: 1.4916 versus 1.4717, +1.3%
U.S. Dollar Index: 75.24 versus 76.39, -1.5%

Commentary: different week, but same story as the U.S. Dollar Index retreated once again on the heels of the Fed announcement regarding keeping rates low for an extended period. The greenback continues to act as the cheapest source of funding for speculators, investors, and other market participants looking to put cash to work. Although the greenback suffered this week, we do remain in the same range of the last month while equity markets are 5-6% higher.

I continue to reiterate my comment from previous weeks: 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.

Although Fed officials play up the lack of inflation as a positive and an overriding reason for its easy money policy, they provide no commentary on deflationary pressures at work in large segments of the economy. I firmly believe these deflationary pressures are the Fed’s gravest concerns and they hope the weak dollar creates hints of inflation to offset these deflationary pressures. Can rising asset valuations support underlying economic fundamentals which provide little to no pricing power for many companies?

COMMODITIES

Oil: $76.41/barrel versus $76.95, -.7%
Gold: $1119.1/oz. versus $1045.7, +7.0%
DJ-UBS Commodity Index: 131.675 versus 131.862, -.14%

Commentary: while oil has declined by approximately 5% over the last few weeks, gold continues to attract interests from market speculators and foreign central banks concerned about the long term prospects for the dollar. Gold is viewed as a safe haven.

We once again experienced a divergence between equities moving sharply higher while commodities ran in place.

The  Baltic Dry Index continues to move gradually higher with indications of increased shipping activity, primarily in Asia. That said, it remains within the range going back to this past summer.

Summary/Conclusion

I repeat, the gap between the markets and economy grows ever wider. Please join me tomorrow night as I discuss this gap and how people should look to invest during these extremely challenging times. I am very excited about tomorrow evening’s show when No Quarter Radio’s Sense on Cents with Larry Doyle Welcomes Danielle Park . Ms. Park resides in Ontario, Canada and possesses wisdom and insights not typically heard on Wall Street. How refreshing. You will not want to miss this show.

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.

Have a great day and weekend.

LD

This entry was posted on Saturday, November 14th, 2009 at 7:32 AM and is filed under bond market, commodities, Economy, Equity Markets, General, investments, markets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.