Wednesday, April 13, 2011

Markets tread water after presidential speech

Dow didn't stray far from break-even, ending up 7. Advancers were ahead of decliners 5-4 & NAZ gained a more impressive 16. Bank stocks were under pressure after a mediocre earnings report from JPMorgan (JPM) & new gov regulations on confusion over issuing home mortgages in recent years.

S&P 500 FINANCIALS INDEX

Value	218.13
Change	-1.88 (-0.5%)

The MLP index recouped some of yesterday's losses but finished below its highs & the REIT index was off a fraction in the 231s. Junk bond funds were up a penny or 2 & Treasuries were stronger. The yield on the 10 year Treasury bond fell 3 basis points to 3.47%. Treasuries rose for a 2nd day as the pres vowed to cut record budget deficits with a combination of spending cuts & tax increases. In addition, the Treasury sold $21B of 10-year notes. Bargain hunters took oil higher while gold traded sideways in the high 1450s (green line in the graph below).

ALERIAN MLP INDEX

Value	377.97
Change	1.72 (0.5%)

Treasury yields:

U.S. 3-month		0.05%
U.S. 2-year		0.73%
U.S. 10-year		3.47%

CLK11.NYM

...Crude Oil May 11

...107.08

...

0.83

(0.8%)

The pres articulated his most ambitious plan yet for reining in the nation's debt by laying down a series of spending & deficit targets for lawmakers to adhere to & summoned congressional leaders to take part in a budget summit in early May. He also laid out additional savings by freezing non-security discretionary spending in his 2012 budget request (at record levels!). As predicted, he called for the Bush-era tax cuts to expire for the wealthy & more broadly called for the individual tax code to be overhauled. "By 2025, the amount of taxes we currently pay will only be enough to finance our health care programs, Social Security, and the interest we owe on our debt. That's it," he said. "Every other national priority -- education, transportation, even national security -- will have to be paid for with borrowed money." To tackle the debt he wants to cut deficits by $4T over 12 years & estimates that spending would account for the bulk of deficit reduction ($3 in spending cuts for every $1 in additional tax revenue). But it's not clear where debt held by the public as a share of GDP would end up by 2023 (currently on track to top 100%, up from 62%). It was more than the naysayers were expecting, but likely less than what many deficit hawks had hoped for.

Obama Embraces Individual U.S. Tax Code Rewrite to Raise Revenue

The US economy improved in every region of the country this spring, but higher oil prices remain a concern, according to a survey released by the Federal Reserve (FED) in its Beige Book. Factories were busier, consumers spent more & companies boosted hiring in all 12 of the regions surveyed by the FED. But high energy prices are putting pressure on businesses to raise their prices & workers are seeing limited, if any, pay increases because they lack leverage in market where jobs are still hard to find. The report found that manufacturers are having an easier time increasing their prices to other businesses. Retailers have been more limited, fearing they might lose customers. A majority of FED officials also predict that the surge in oil prices will lead only to a modest & short-lived increase in consumer prices. Businesses remain mostly upbeat about future sales prospects. Still, some officials said the earthquake in Japan could disrupt production & this crisis could temporarily limit Japanese imports of US goods. Watchers were looking for hints about winding down QE2 & maybe adding to it with a QE3, but that was not mentioned.

U.S. Economy Expands as Labor Markets Improve, Fed Report Says U.S. Economy Expands as Labor Markets Improve, Fed Report Says

The federal gov ordered 16 of the nation's largest mortgage lenders & servicers to reimburse homeowners who were improperly foreclosed upon. Gov regulators also directed the financial firms to hire auditors to determine how many homeowners could have avoided foreclosure in 2009 & 2010. Citibank (C), Bank of America (BAC), JPMorgan Chase (JPM) & Wells Fargo (WFC), the 4 largest banks, were among the financial firms cited, The FED said it believed financial penalties were "appropriate" & planned to levy fines. In the 4 years since the housing bust, about 5M homes have been foreclosed upon, 2.4M primary mortgages were in foreclosure. Another 2M were 90 days or more past due, putting them at serious risk of foreclosure. Without identifying instances of bad foreclosures, the gov agencies noted that the "deficiencies in foreclosure processing observed among these major servicers may have widespread consequences for the housing market & borrowers." This looming threat has been partly responsible for the Financial Index languishing in 2011 while Dow has been rising.

Gov't orders 15 lenders to reimburse homeowners- AP

Little was decided after yesterday's sell off in the markets. Brown-Forman (BF-B), maker of Jack Daniel's, has been doing well in recent weeks, perhaps on anticipation of higher alcoholic sales going forward (I recently wrote a report on BF-B for SeekingAlpha). The presidential speech about reducing deficits OVER THE LONG TERM got a mildly negative response from the stock markets. While there are no simple answers, lower spending growth (forget the idea of less spending) will put another crimp in the economy at a time higher gas prices are making their presence known. Dow is 180 below its highs last week, hardly a major pullback. But as earnings season begins, Dow may have tough going in the next few weeks (during earnings season). Corrections are always possibe in markets that are overbought.