Wednesday, June 20, 2012

Markets not encouraged by extension of Operation Twist

Dow lost 12, decliners barely ahead of advancers & NAZ was up a fraction.  The Financial Index was up a fraction in the 195s.  The MLP index was up pocket change to 269, the high point this month, & the REIT index slipped a fraction to 256.  Junk bond funds were mixed & Treasuries fell after the Federal Reserve (FED) said it will provide more monetary stimulus & German Chancellor Merkel discussed bond purchases to address the European debt crisis, reducing the refuge appeal of Treasuries.  Oil fell after the Energy Dept said crude supplies rose to the highest level in 22 years & the FED said it will expand its Operation Twist stimulus program.   While gold continues to slosh around, it has been able to hold above $1600, a key support level.

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CLN12.NYM...Crude Oil Jul 12...81.98...Down 2.05  (2.4%)

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Bernanke Says Fed `Prepared to Do What's Necessary'

Photo:   Bloomberg

The FED announced lower expectations for the job market & the broader economy, following its meeting.  It raised its forecast for the unemployment rate, predicting it will end the year between 8% & its current 8.2%.  Just 2 months ago, the FED was more optimistic, predicting the jobless rate could fall as low as 7.8%.  "Growth in employment has slowed in recent months, and the unemployment rate remains elevated," the FED said.  That's not surprising, after the latest jobs report showed employers added only 69K jobs in May, the weakest hiring in a year.  The FED also sees a broader weakness ahead, predicting the economy will grow 1.9% -2.4% this year.  When it met in Apr, it had forecasted that the economy would grow as much as 2.9%.  The weaker outlook prompted the FED to take further measures to boost the recovery, extending Operation Twist by $267B.  That program swaps short-term bonds for ones with longer durations, thereby pushing interest rates lower on mortgages & business loans with the hope that cheaper credit will reach consumers & business, who will then boost the economy by spending more.  But the effect on Main Street has been questionable.  Mortgage rates are at record lows, but even so, new home sales have been choppy & banks are still unwilling to lend to anyone with less-than-perfect credit.  Small business owners are also struggling to get loans.

The US economy may be on the cusp of a pickup in productivity that will make it more difficult for the FED to reduce unemployment.  After cooling throughout last year, worker output per hour will probably rise around 1.5%, in line with its long- run trend.  That means the lower-than-forecast payroll gains in May & Apr could be closer to the norm than the exception for the rest of the year as companies redouble efforts to improve efficiency.  Payrolls will grow 80K-120K per month, less than this year’s 165K average, even as the economy expands.  Ben Bernanke earlier this year aired his concern that hiring will subside without faster economic growth.  The continuation of Operation Twist “should put downward pressure on longer-term interest rates & help to make broader financial conditions more accommodative,” the FOMC said.

Greek Leaders Poised to Agree on Three-Way Governing Coali

Photo:   Bloomberg

Antonis Samaras, head of Greece’s New Democracy party, was sworn in as prime minister after Greek political leaders agreed on a coalition that will seek relief from austerity measures tied to intl loans.  New Democracy, which won the election on Sun with almost 30% of the vote, will join forces with the socialist Pasok party, which finished 3rd, & the 6th-place Democratic Left.  They hold 179 seats in the 300-member parliament, ending a period of political limbo that began with the May 6 election.  “We have the required outcome, which is a necessary condition for the creation of a new, long-term, government that will give stability and hope to people,” Samaras said.  European officials have held out the prospect of flexibility over fiscal austerity for Greece after the country’s election amounted to a referendum on remaining in the euro currency union.  Greece has slipped behind budget-cutting targets imposed by the EU & the IMF in exchange for €240B ($305B) in aid pledges over the past 2 years.  Samaras, Pasok head Evangelos Venizelos & Democratic Left leader Fotis Kouvelis have committed to establishing a coalition that will keep Greece in the euro & fight to loosen austerity requirements that have helped drive the country into a 5th year of recession.  That means substantial gov budget cuts along with substantial layoffs.  We'll see.

Greece’s Samaras Becomes Premier of Three-Party Coalition

The announcement by the FED to extend Operation Twist was greeted with a big yawn by the traders.  The averages hardly strayed from breakeven.  It had been expected & is not viewed as taking significant action to help an economy which is just getting by.  Greece has a new gov, bringing a sense of relief.  But now the hard part begins.  It has to get to work solving monumental financial problems.  Financial problems in Spain & Italy should not been forgotten.  Then there is the Supreme Court which should hand down its decision on Obamacare by next week.  Dow has had a nice run in Jun from oversold conditions.  Its unclear that its next move will be to the upside.

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