Tuesday, December 7, 2010

Markets decline after growing uncertainty about tax extension

Stocks slumped in the PM after what were supposed to be reassuring words about the tax & unemployment extensions agreed to last night.  Dow had been up 90 in early trading, but ended down 3, decliners were barely ahead of advancers & NAZ was up 3.  Bank stocks also pulled back in late day trading. 


Value 203.46 One-Year Chart for S&P 500 FINANCIALS INDEX (S5FINL:IND)
Change   0.07  (0.0%)

The Alerian MLP Index had been higher but fell back along with market averages.  The index was off a fraction in the 357s.  But the REIT index ended up fractionally in the 221s.  Junk bond funds were mixed.  Treasuries had a huge sell-off.  The yield on the 10 year Treasury bond rose a massive (repeat "massive") 22+ basis points to 3.16½%.  Treasuries lost their safe haven appeal even though the Federal Reserve is buying Treasuries.  The chart below shows the enormous 80 basis point advance in the yield in the last 2 months.

Treasury yields:

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

Alerian MLP Index   ---   2 months

Dow Jones REIT Index   ---   2 months

10-Year Treasury Index   ---   YTD

Oil & gas took easy after the big gains yesterday. Both charts have been in a solid uptrend in the last 6 months, shown below.

CLF11.NYM...Crude Oil Jan 11...88.60 ....Down 0.78 (0.9%)

GCZ10.CMX...Gold Dec 10....1,403.90 ...Down 11.40  (0.8%)

$$ Gold Super Cycle $$  

OIL  (ETF)  --  6 months

GLD  (ETF)  ---  6 months

President Obama defended concessions made to Reps as part of a tax-cut compromise.  Facing strong Democratic criticism, he spoke at a news conference when top Dems in Congress signaled they will seek changes in the agreement.  Senate Majority Leader Harry Reid said the deal is not yet completed & that "more work" needs to be done after meeting with Vice President Biden & members along with other Dems.  House Speaker Pelosi issued a statement saying that discussions with the president & Dems will continue in the days ahead.  This is not a done deal even after Obama gave reassurances, markets pulled back.

Obama defends tax deal while Reid seeks changes- AP

The Energy Dept forecast for 2011 that oil will average $86.08 a barrel from higher global economic growth, up from last month’s forecast of $85.17. Prices in 2010 will average $78.98.  It raised the outlook for global oil consumption next year to 87.78M barrels a day from 87.77M last month. Demand for 2010 is projected to 86.35M, up from 86.33M last month.  US consumption is projected to average 19.24M barrels, up 80K barrels from last month’s forecast.  At the pump, gas should average $3 a gallon in 2011, up 1% from the Nov report. Oil will average $2.77 this year, up 18% from $2.35 last year.  Higher demand suggests more economic growth, although the increased numbers are muted. 

U.S. Raises 2011 Oil Price Estimate to $86.08, Bolsters Outlook for Demand

Markets liked what the heard overnight but were hit with a dose of reality today.  The deal for taxes & unemployment was not a done deal & markets found that out the hard way today.  Discussions means, "you haven't sold me."  Potentially, if a compromise can not be agreed, legislation may have to be put off until the new Congress begins next year.  Dow failed again trying to establish a new high for 2010.  Income investors should take speacial not of the increase in Treasury rates.  Today's would rank among the highest ever for one day.  When these rates rise, rates on competitive securities (such as MLPs, REITs & junk bonds), will have to feel the pressure.

Dow Jones Industrials   ---   2 months

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