Tuesday, August 10, 2010

Markets cut losses after Federal Reserve announcement

Stocks rallied in the PM but that did not last. Dow fell 54, decliners over advancers 5-2 & NAZ dropped 28. Bank stocks also shot up after the announcement but sellers returned in the last hour & the Financial Index closed closer to its lows than its highs.


Value197.99One-Year Chart for S&P 500 FINANCIALS INDEX (S5FINL:IND)
Change-2.07 (-1.0%)

Buying in the PM helped MLPs, but only modestly. The index ended down 3½ to the 325s while the REIT index fell 2½ to the 208s. Junk bond funds were generally higher, more bond buying is considered good even it is for quality debt. The VIX was pretty much even in the 22s. Treasuries took off again. The yield on the 10 year Treasury bond fell 4 more basis points to 2.78%. Its 2 year chart is shown below to show how this compares with the abosolute lows early last year & these low rates are sending very negative signals for the stock markets. The € rose to almost $1.32, really the dollar weakened.

Alerian MLP Index --- 2 months

Dow Jones REIT Index --- 2 months

VIX --- 2 months

10-Year Treasury Yld Index --- 2 years

The dollar weakened after the FED announcement, helping commodities. Oil reduced losses, taking it back above the important 80 level. Gold also rose bringing it over 1200. After its sideways performance in recent months, it's still only 4% below the record in the 1260s.

CLU10.NYM..Crude Oil Sep 10..80.23 ..Down 1.25

GCQ10.CMX..Gold Aug 10..1,205.20 ..Up 4.50

$$$ Gold Super Cycle $$$
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Fed to Reinvest Mortgage Proceeds

Photo: Bloomberg

The Federal Reserve (FED) took a small step to bolster the economy. It will use the proceeds from its investments in mortgage bonds to buy gov debt (on a small scale). That could help nudge down long-term rates on mortgages & corp debt, but won't likely have a dramatic impact on stimulating growth. However, more importantly, the largely symbolic action sends a signal that the FED sees the recovery weakening & that it stands ready to take more aggressive action, if needed, to keep it on track. The FED now believes economic growth will be "more modest" than it had anticipated at its late June meeting. It cited "subdued" inflation & said it would keep its target for a key interest rate at zero to 0.25% for a "extended period." This is a shift from earlier this year, when it was starting to lay out its "exit strategy" for eventually boosting interest rates. The announcement brought the Dow from down 100 to break even, then sellers returned.

Fed Looks to Spur Growth by Buying Government Debt

Low yields on Treasury are getting very scary.

U.S. 3-month
U.S. 2-year
U.S. 10-year
U.S. 30-year

With the move by the FED, maybe more attention will be paid to the yields & yield spreads on the Treasuries. The 30 year bonds are hardly mentioned, but the large spread above the 10 year rate has to do with inflation expectations over the very long term & the greatest influence is massive ($1T) deficits the gov will be running for at least a decade. The stock markets could have taken off in the PM, they didn't & pulled back a bit in the last hour. Traders have a lot to think about, starting with the strength of the economic recovery. The concept of "weak recovery" is starting to take hold.

Dow Jones Industrials --- 2 months

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