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November 7, 2009: Month to Date Market Review

Posted by Larry Doyle on November 7, 2009 8:39 AM |

Unemployment hits 10.2% and every self-respecting economist knows it is heading higher.

Does anybody want to ask Tim Geithner if he wants to review the rigor and integrity of the Bank Stress Tests conducted last Spring? What were the assumptions used for the Unemployment Rate? For those who care to review the premises of the long ago but now forgotten Bank Stress tests, I submit from the FDIC, FAQs-Supervisory Capital Assessment Program. In regard to the assumptions used for unemployment:

2009 Base Case 8.4%
2009 Adverse Case 8.9%

2010 Base Case 8.8%
2010 Adverse Case 10.3%

Garbage in, garbage out. We are now within .1% of the more adverse unemployment case for NEXT year. Not that it might matter given the fact that the liquidity experiment undertaken by the Fed and Treasury is bubbling up in asset valuations while neglecting Main Street’s economic plight. That said, I would once again question as I did last April, “Bank Stress Tests: Major Sham??”

What are the implications for sham transactions? Subsequent misallocation of funds in order to cover and disguise the initial sham. I am not stating that government officials are stealing, although I’m not stating that they’re not. I am stating that there is little doubt that future funds continue to get redirected into organizations (banks, Freddie, Fannie) and programs the health of which were not accurately represented to the American public.

Now, let’s collectively navigate the economic landscape. If you have any questions, please do not hesitate to ask.

ECONOMIC DATA

On Thursday, Initial Jobless Claims were reported to have surprisingly declined by 20k and the market rallied by more than 2%. With that report, clearly we are making progress on the employment front, no?

Tell that to the 17.5% of the American population factored into the underemployment rate. For all details on the extremely adverse (no pun intended) jobs situation, please review my “Unemployment Report: November 6, 2009.”

Washington had better quickly figure out how to redirect the excessive liquidity currently being pumped into the financial system. Wall Street loves that liquidity, but Main Street needs that liquidity.

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: 89.92 versus 89.99, -.01%
Euro/Dollar: 1.4846 versus 1.4717, +0.9%
U.S. Dollar Index: 75.75 versus 76.39, -.84%

Commentary: the U.S. Dollar Index retreated once again this week 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.

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: $77.67/barrel versus $80.3, -3.3%
Gold: $1097.8/oz. versus $1045.7, +5.0%
DJ-UBS Commodity Index:
131.419 versus 131.862, -.3%

Commentary: Interesting price action in the commodity sector overall relative to equities. While the equity markets rebounded this week, commodities in general, and oil specifically, gave ground. Gold had a fabulous performance highlighted by a major multi-billion purchase of the shiny yellow stuff by India’s central bank from the IMF. Think India is concerned about the long term viability of the greenback? I do.

The  Baltic Dry Index remains in the range of the last few weeks with no appreciable move.

EQUITIES

DJIA: 10,023 versus 9712, +3.2%
Nasdaq: 2112 versus 2045, +3.3%
S&P 500: 1080, +3.2%
MSCI Emerging Mkt Index: 930 versus 921, +1.0%
DJ Global ex U.S.:
195.3 versus 192.0, +1.7%

Commentary: A solid rebound in the equity markets supported by Berkshire Hathaway’s purchase of Burlington Northern and the Fed’s continuation of keeping the ‘pedal to the metal.’ Additionally, auto sales and assorted retail sales were spun in a positive fashion this week but if anybody truly believes the American consumer is ready to buy, buy, buy then . . . I’m speechless.

Can the equity markets defy gravity forever? Don’t fight the Fed. That said, I am concerned the higher the markets go, the harder they will ultimately fall.

BONDS/INTEREST RATES

2yr Treasury: .85% versus .90%, -5 basis points or .05% (rates down, prices up)
10yr Treasury: 3.50% versus 3.40%, +10
basis points or .10% (rates up, prices down)

COY (High Yield ETF): 6.34 versus 6.20, +2.3%
FMY (Mortgage ETF): 17.49 versus 17.90, -2.3%
ITE (Government ETF): 57.86 vs 57.96,
-0.2%
NXR (Municipal ETF):
14.67 versus 14.79, -.8%

Commentary: The yield curve continues to steepen dramatically (longer maturities underperform shorter maturities) again this week. Why? What is going on here? The Fed is clearly leaving its Fed Funds rate at 0-.25% and short term maturity Treasury notes are most influenced by that. What about interest rates on longer maturity notes and bonds? The market is concerned that the Fed and Treasury will forsake the dollar for purposes of creating inflation. Additionally, the Treasury is planning on extending the average maturity of its debt issuance. That extension will further pressure interest rates on the longer end of the Treasury yield curve. Lastly, the market is faced with the prospects of underwriting $81 billion in Treasury supply this week ($40 billion 3yr, $25 billion 10yr, $16 billion 30yr).

The deficit is the big, bad bogeyman which nobody wants to discuss . . . BUT it is not going away, it’s not getting better, and will continue to weigh on our markets, economy, currency, and country. Do we need to broach this topic? It’s not going away . . . and it’s only getting worse.

Summary/Conclusion

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 as No Quarter Radio’s Sense on Cents with Larry Doyle Welcomes Keith Fitz-Gerald. Mr. Fitz-Gerald is one of the foremost experts in the markets today on investing in the Asian markets. 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

  • Larry,

    Thanks for the site. You are doing a good job.

    Just a quick comment. From the moment mark to market was abandoned it was clear US authorities would bend the rules of economic commonsense to reflate the stock market to remove the damage of negative wealth effect on consumer spending and destroy the dollar’s value to increase exports while consumers deleverage.

    It is experimental and dangerous but it will work for a while. So I have ridden the ride up but ‘I dance by the door’ ready to leave the party should there be another ‘wobble’ that makes the market risk averse again and those short dollars and in the carry trade reverse their strategies.

    What confuses me are the gold buyers. Inflation is not the problem…yet. While they have had a 25% rise I have had a 65% rise in the share market. If they worked for me I would be giving these traders their marching orders and they would be swelling the ranks of the unemployed for completely misreading the situation.

    Anyway keep up your good work with the site.






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