Tuesday, December 14, 2010

Markets drift lower after FOMC meeting

Dow finally achieved another new yearly high but that looks shaky.  Dow gained 47, decliners over advancers 5-4 & NAZ ended up 2.  Bank stocks have been leaders, especially this month, & led the mild sell-off after the meeting. There needs to be more assessment about QE2 & how that could interact with a possible extension of lower federal tax rates. 


Value209.43One-Year Chart for S&P 500 FINANCIALS INDEX (S5FINL:IND)
Change  -1.98  (-0.9%)

The MLP index fell 1½ to the 358s & the REIT index was down 2½ to 215.  Junk bond funds were mixed because they still offer the best yields in town.

Alerian MLP Index   ---   2 months

Dow Jones REIT Index   ---   2 months

Oil wants go over 90 & gold returned above 1400.  Both have strong following winds with higher objectives.

CLF11.NYM...Crude Oil Jan 11...88.23 ...Down 0.38  (0.4%)

GCZ10.CMX...Gold Dec 10....1,404.50 ...Up 7.20   (0.5%)

*** Gold Super Cycle ***  

Federal Reserve Chairman Ben S. Bernanke

Photo:  Bloomberg

The Federal Reserve (FED) said that the economic recovery was still too slow to bring down unemployment, reaffirming its commitment to purchase $600B in bonds to stimulate growth & create jobs.  But there was little acknowledgment of a recent uptick in the economic data.  Instead it focused squarely on high unemployment, the FED characterized the US expansion as "continuing," a modest upgrade from its Nov description of the recovery as "slow."  While the meeting likely involved some reevaluation of the economic outlook to account for the effects of a proposed extension of tax cuts, the FED noted measures of underlying inflation had continued to trend lower since its last meeting.  The FED said, "The economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment."  The steady emphasis by the FED on economic weakness surprised some  who expected clearer acknowledgment of recent signs the recovery has gained momentum.  The dollar fell against major currencies & Treasuries extended losses on the announcement, which suggested the FED has little inclination to waver from its bond-buying program.  A link is provided below for the FED statement.  The € is less than $1.34 & the yield on the 10 year Treasury bond shot up 14 basis points to 3.44½%, one enormous gain for the yield!  The chart below shows the yield YTD & its rise of over 1 percentage point in less than 2 months.  

Fed Retains $600 Billion Bond-Buying Plan to Boost Economy

Federal Open Market Committee Dec. 14 Statement: Full Text

Treasury yields:

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

10-Year Treasury Yield Index   ---   YTD

General Electric (GE), a Dow stock, expects solid earnings growth in 2011.  Revenue should be flat to up 5%.  Analysts are forecasting EPS of $1.27, up 13% from 2010 levels on revenue of $145.4B (down 3%).  The stock was up 7¢ after working its way higher this year & offers a 3.2% yield.  The P/E, on next year's earnings, is a modest 14X.

General Electric   ---   YTD

The Federal Reserve will stay its course.  Some say for the better, others for the worse.  One thing is clear, high yielders are feeling selling pressure.  The yield spread for the MLP index over the 10 year Treasury is under 200 basis points, the lowest it has been in a long time.  Many REITs provide lower yields when compared with the Treasury bond, partially because dividends have been cut in the last 2 years.  These changing numbers can move markets & it looks like tomorrow the move will be lower.  

Dow Jones Industrials   ---   2 months

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