Stock markets waver on QE2 worries

Stocks began the day lower.  In the first hour, Dow was down over 100 on worries about discord at tomorrow's G-20 meeting in Korea.  Buyers returned & brought the averages into the black.  Dow was up 10, advancers ahead of decliners 3-2 & NAZ gained 15.  Banks led the way giving the Financial Index a solid gain.  The Financial Index is near its 6 month highs.

S&P 500 FINANCIALS INDEX

Value	206.02
Change	2.75  (1.4%)

The Alerian MLP Index fell back 2½ to the 363s, its first serious setback in 2 weeks.  The Dow Jones REIT Index rose 2¾ to 223 as bargain hunters bid up prices.  Junk bond funds had a rare bad day, down around 1% each.

Alerian MLP Index   ---   YTD



Dow Jones REIT Index   ---   YTD



10-Years Treasury Yield Index   ---   YTD




Oil continues in a rally mode at 2 year highs.  The  implications for high oil prices on the struggling US economic recovery are not good.  The dollar gained to a 1 month high causing selling in gold taking it back below record levels above 1400.

CLZ10.NYM

...Crude Oil Dec 10

...87.75

..... 1.03  (1.2%)

GCX10.CMX

...Gold Nov 10....

1,394.90

... 14.90

(1.1%)

$$$Gold Super Cycle$$$  

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The gov deficit totaled $140.4B last month versus $176.4B in last Oct. Even though the economic recovery started in Jun 2009 which has helped generate additional revenue for the Treasury, the Congressional Budget Office estimates the deficit this fiscal year will exceed $1T for a 3rd time.  Gov spending dropped 8.1% in Oct to $286.4B which compares with a 7.9% increase for income to $146B.  Department of Defense spending fell 3.5% from last Oct. Outlays by the Social Security decreased 2.3% to $63.7B. The Department of Health & Human Services (which administers the Medicare & Medicaid programs) decreased 17% to $71.6B.  Corporate income tax receipts last month were a negative $4.4B. Individual income tax collections climbed 17% over the same period.  Multiplying $140B by 12 equals about $1.7T, the prediction of another $1T annual deficit makes sense unfortunately.  The graphs below tell an ugly story over the last year.

Budget Deficit in U.S. Narrowed to $140.4 Billion in October


Monthly deficits - 1 year



Gov spending - 1 year



Gov revenue - 1 year

 

Photo:  Bloomberg

The Federal Reserve (FED) will purchase $105B of Treasuries in the next month as part of its QE2 program.  It will conduct 18 open-market operations from Nov 12-Dec 9.  This is the 2nd round of unconventional monetary stimulus after an earlier program to buy $1.7T of securities failed to bring down an unemployment rate stuck near a 26-year high. The transactions will be comprised of $75B of new purchases & $30B of reinvestment proceeds. The monthly purchases by the FED of 10-year notes between now & next Jun should exceed the Treasury’s average gross issuance of new 10-year notes.  But the 10 year note yield fell only 1 basis point to 2.65% today as it remains near its 3 month high.

Crude Oil Increases to Two-Year High on Unexpected Drop in U.S. Supplies

Treasury yields:

U.S. 3-month		0.12%
U.S. 2-year		0.42%
U.S. 10-year		2.65%

Oils were strong when oil prices shot up gain to new 2 year highs & banks rose despite the many problems they face. Yields on Treasuries have been backing up in the last month despite plans by the FED to buy more Treasuries.  For example, the yield on the 2 year note is up 10 basis points off its abysmal lows last month.  If rates start sinking again, which they should, buyers could continue bidding up prices of MLPs (& junk bonds) which are offering modest yields. Dow held up well today when AM selling pressure did not last.  Tomorrow's meetings in Asia should set the tone of trading at the open tomorrow.

Dow Jones Industrials   ---   YTD

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