Wednesday, January 26, 2011

Dow could not hold above 12,000 after FOMC meeting

The markets didn't know what to make of what has become a routine announcement by the Federal Reserve.  Dow was hovering near 12K but lacked conviction to hold above this key level.  Dow inched up 8, advancers over decliners 5-2 & NAZ rose almost 1% (20).  Banks, the traditional market leaders, were a little weaker following the announcement.  The Financial Index was off a modest 0.25 to 220.73.

The Alerian MLP Index rose 4 to 271, just 2 away from setting a new record high.  The Dow Jones REIT Index was up a fraction to the 229s & junk bond funds were little changed, having traded sideways for a few months. .

Alerian MLP Index   ---   YTD

Dow Jones REIT Index   ---   YTD

10-Years Treasury Yield Index   ---   YTD

Oil climbed as new-home sales in the US. beat forecasts & Federal Reserve policy makers agreed to keep stimulus measures to bolster the US economy.  Gold finally attracted bargain hunters after falling 100 from its record reached last month.

CLH11.NYM...Crude Oil Mar 11...87.45 ...Up 1.26  (1.5%)

GCF11.CMX....Gold Jan 11......1,339.80 ....Up 7.50  (0.6%)

$$$ Gold Super Cycle $$$  

The Federal Reserve (FED) said that the economy isn't growing fast enough to lower unemployment & must press ahead with its $600B Treasury bond-purchase program.  It  made no changes to the program.  The decision was unanimous after including a new lineup of voting members that includes 2 officials who have criticized the bond purchases.  The tax-cut package that took effect this month is easing pressure on the FED to stimulate growth through its bond purchases.  The FED noted that the economy continues to face risks (the biggest: that high unemployment will damp consumer spending, which accounts for 70% of economic activity).  The FED noted a recent increase in the prices of commodities, such as oil & gasoline, but said it isn't likely to spark high inflation. The prospect that inflation will remain tame gives leeway to stick with its program, announced last Nov.  As expected, the FED also kept a pledge to hold a key interest rate at a record low near zero for an "extended period." The rates have been ultra-low levels for 2 years to try to encourage people & businesses to spend more. Treasuries fell sharply after the announcement.  The yield on the 10 year Treasury bond soared 11 basis points to 3.43% (a lack of vote of confidence in this market).

Treasuries Decline as Fed Cites Insufficient Pace of Economic Recovery

Treasury yields:

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

Boeing (BA), a Dow stock, offered a weaker-than-expected 2011 earnings outlook as higher pension costs exacerbated the impact of potential defense spending cuts & delays to the 787 Dreamliner, sending its shares down $2.22. Earnings were largely in line with expectations, although revenue came in lower than expected.  BA is recovering from an economic downturn that weakened aircraft orders & concerns about weakening defense spending has clouded the outlook.  BA 2011 guidance for EPS was $3.80-4.00 (below the average forecast of $4.55).  The 2011 outlook includes 58¢ for additional pension expense compared with 2010. Without that increased cost, the forecast would have been in line with expectations.  2011 revenue was guided between $68-71B, reflecting initial deliveries of the Boeing 787 & 747-8 planes.  The commercial airplanes division is expected to deliver 485-500 airplanes in 2011 (including 25-40 787 & 747-8 airplanes).  Q4 EPS was $1.56, compared with $1.75 last year.  Excluding one-time items, Boeing earned $1.11 (in line with expectations).

Boeing Drops the Most in Five Months After 2011 Forecast Trails Estimates

Boeing   ---   1 year

Markets were disappointed with the announcement from the FED.  Treasuries had a major sell-off & this market is most directly impacted by the FED's decision.  Dow's failure to top 12K, which did not take a lot of buying, is discouraging.  United Tech (UTX) , another Dow stock, fell a fraction after a decent earnings report but it gave guidance for 2011 that suggests earnings could come in below current expectations.  Tomorrow's markets, after they have a chance to reflect on the FOMC meeting, should give an indication of where they want to go.  However, MLPs are on the rise again.  The index was up more than 1% today (big by its standards).  If it hits a new record, its yield will fall to 6% (extremely low by historical standards). 

Dow Jones Industrials   ---   YTD

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