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January 17, 2010: Week in Review

Posted by Larry Doyle on January 17, 2010 2:05 PM |

While many analysts and pundits would like to highlight a variety of Fed induced or government supported programs as evidence of an improving economy, the only real story worthy of attention this week is JP Morgan’s earnings release from Friday morning. What was in that release? JP Morgan’s massive exposure to the mortgage and housing market is a huge drag on earnings. The outlook for these mortgages, primarily prime Jumbo and adjustable rate product, remains challenging.

The market can gyrate all it wants, but without progress on housing and employment the real economy continues to huff and puff along while climbing a very steep slope.

Welcome to our Sense on Cents Week in Review where I provide a streamlined recap of the major economic news and the month-to-date market moves. Let’s navigate.

Aside from the news embedded in the JPM earnings, the Federal Reserve did indicate it plans to stick to its plan to withdraw support for the mortgage market by the end of March. How will our housing market deal with the inevitable increase in mortgage rates? Inflation year over year registered a mild 2.7% increase, but that is less sanguine for consumers as wages overall declined.

The following market statistics provided are the weekly close and the month-to-date returns:


$/Yen: 90.74 vs 93.00, -2.4%
Euro/Dollar: 1.4387 vs 1.4323, +.4%
U.S. Dollar Index: 77.17 vs 77.86, -.9%

Commentary: the overall U.S. Dollar Index continued to weaken given the generally weak domestic economic data, capped by consumer concerns highlighted in the earnings release from JP Morgan.


Oil: $77.95/barrel vs $79.62, -2.1%
Gold: $1131/oz. vs $1098, +3.0%
DJ-UBS Commodity Index:
138.1 vs 139.2, -.8%

Commentary: Commodities, in general, weakened in sympathy to the general weakness experienced in the equity market this week. Additionally, the muted inflation report this week also played a factor in reducing the firm tone in the commodity space.


DJIA: 10,609 vs 10, 428, +1.7%%
Nasdaq: 2288 vs 2269, +.8%
S&P 500: 1136 vs 1115, +1.9%
MSCI Emerging Mkt Index:
1013 vs 989, +2.4%
DJ Global ex U.S.:
206.9 vs 201.09, +2.9%

Commentary: equities were flat to down 1% on the week with the decline concentrated in Friday’s trading after the release of JP Morgan’s earnings. The earnings release highlighted the fact that while Wall Street prints dough, the economy on Main Street remains mired with problems.


2yr Treasury: .87% vs 1.14%, -27 basis points or .27% (rates down, bondprices up)
10yr Treasury: 3.68% vs 3.84%, -16 basis points or .16%

COY (High Yield ETF): 7.01 vs 6.89 +1.7%
FMY (Mortgage ETF): 18.50 vs 18.24, +1.4%
ITE (Government ETF):
57.67 vs 57.07, +1.0%
NXR (Municipal ETF):
14.47 vs 14.64, -1.2%

Commentary: interest rates on government bonds dropped by 10-15 basis points given the generally sluggish economic reports and the report of muted inflation. Municipal bonds did lag, highlighted by specific concerns relating to California’s fiscal disaster. The steepening of the yield curve remains very much in place given the certainty that the Fed will leave rates unchanged .The Fed is compelling investors to put cash to work in the market.


The calendar may have changed, but little else in terms of the economic challenges facing us. Wall Street and Main Street are in different worlds. Where and when will these two worlds meet?

When and how will the Fed withdraw stimulus and support for the market? How will that play out? How will it be executed? Are we in a bubble? Can we gently ease the air out of the balloon? All these questions are historic in nature.

Sense on Cents will be monitoring closely.

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Have a great day and weekend.


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