Wednesday, July 31, 2013

Mixed markets after Federal Resrve maintains stimulus

Dow slipped 21 in what turned out to be choppy trading after the meeting, advancers over decliners 4-3 & NAZ added 9. The MLP index was fractionally lower in the 451s & the REIT index fell 4+ to 280.  Junk bond funds were mixed & Treasuries rallied to about break even in the PM.  Oil rocketed ahead 2, back into the 96s, with buying in the PM while gold hardly budged.

AMJ (Alerian MLP Index tracking fund)

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Treasury yields:

U.S. 3-month

0.04%

U.S. 2-year

0.31%

U.S. 10-year

2.60%

CLU13.NYM....Crude Oil Sep 13....105.03 Up ...1.95 (1.9%)

Live 24 hours gold chart [Kitco Inc.]




Fed Keeps $85 Billion Bond Buying Pace, Sees Disinflation Risk

Photo:   Bloomberg

The Federal Reserve (FED) said that the US economy is growing only modestly, a downgrade from its Jun assessment, & it expects growth will pick up in H2.  The more cautious message may be a signal that it's not ready to slow its bond purchases soon.  The FED says it will keep buying $85B a month in bonds to help lower long-term interest rates & plans to hold its key short-term rate at a record low near zero at least as long as the unemployment rate stays above 6.5% & the inflation outlook remains mild.  At the last meeting, the FED described economic growth as "moderate," & forecast that growth could be at least 2.3% for the year.  Big Ben said after that meeting that the FED could slow the bond purchases later this year if the economy & job market continued to strengthen.  But now the FED described the economy as expanding only at a "modest pace" as growth remained sluggish below 2% for 3 straight qtrs.  It's expected that growth will strengthen in H2 because businesses should spend more, stronger job growth can fuel more consumer spending & gov spending cuts will weigh less on overall growth.



German Unemployment Declined in July in Sign Economy Advancing

Photo:   Bloomberg

Germany's unemployment rate held near a 2-decade low, potentially buoying support for the gov before Sep elections (while the rate in the euro area stayed at a record high).  The number out of work decreased 7K to 2.93M in Jul & the adjusted jobless rate was unchanged at 6.8%, according to the Federal Labor Agency.  But the rate in the 17-nation euro area was 12.1% in Jun, unchanged from a revised figure for May, according to the EU statistics office.  Chancellor Merkel is seeking a 3rd term as German leader on Sep 22 on the strength of shielding Europe’s biggest economy from the worst effects of the region’s debt crisis.  Her Christian Democratic bloc has a support level of 40%, with the Social Democrats at 25%.  Germany’s Ifo business confidence rose for a 3rd month in Jul & consumer confidence is expected to climb to the highest level in almost 6 years in Aug.

German Jobless Rate Holds Near Two-Decade Low in July


Dell Buyout Group Said Unlikely to Pursue Deal at $13.75

Photo:   Bloomberg

Michael Dell & Silver Lake Management are unlikely to stick with a sweetened bid of $13.75 a share for Dell after the board committee refused to change the rules to make it easier for them to win shareholder support.  While the committee is willing to change the record date to let more recent shareholders vote on the proposal, the buyout group doesn’t anticipate that this alone will be enough for them to win approval for their transaction.  This comes from a leaker.  A different person said the committee believes extending the record date could get the deal done.  The buyers haven’t made a final decision on whether to accept the committee’s concession.  The special committee said today that it’s unwilling to change rules that now count absentees as “no” ballots, instead offering to change the record date if the buyout group keeps their bid at $13.75.  Otherwise, the committee said, it’s prepared to proceed with a vote on Aug 2 on the $13.65-a-share bid Michael Dell initially made with partner Silver Lake.  This confusing situation will drag on.  The stock was off 20¢ to $12.66.


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Following the FED announcement after the meeting, Dow shot up & than sank in the last hour of trading.  Nothing really new was announced.  But maybe traders realize that we are already one month into H2 (when the Federal Reserve has talked about reducing its bond purchases).  Dow had a range of 140 today & closed essentially at the lows.  These gyrations are a reminder that continuing low interest rates are the real driver of the stock market, not economic fundamentals.  Nevertheless, Dow rose 600 (4%) in Jul.

Dow Jones Industrials

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Higher markets on favorable economic data

Dow jumped 95, advancers just ahead of decliners & NAZ gained 20.  The MLP index was off 1 to 451 & the REIT index fell 3+ to below 281.  Junk bond funds were weak & Treasuries sold off.  Oil was up fractionally & gold retreated. 

AMJ (Alerian MLP Index tracking fund)

stock chart

Treasury Yields:

U.S. 3-month

0.04%

U.S. 2-year

0.33%

U.S. 10-year

2.67%

CLU13.NYM....Crude Oil Sep 13...103.32 Up ....0.24 (0.2%)

GCQ13.CMX...Gold Aug 13.......1,313.40 Down ...10.60  (0.8%)









Photo:   Bloomberg

US economic growth unexpectedly accelerated in Q2, laying a firmer foundation for the rest of the year that could bring the Federal Reserve a step closer to cutting back its monetary stimulus.  GDP grew at a 1.7% annual rate, according to the Commerce Dept, stepping up from the Q1 downwardly revised 1.1% expansion pace.  Economists forecasted the economy grew at a 1.0% pace after a previously reported 1.8% advance in Q1.  A rebound in business spending, export growth & a sharp moderation in the pace of decline in gov outlays boosted economic growth, offsetting a slowdown in consumer spending & a steady rate of inventory accumulation.  Still, the report marked a 3rd straight quarter of GDP growth below 2%, a pace that normally would be too soft to bring down unemployment.  But growth was poised to gain even more momentum in H2 as the fiscal burden brought on by DC belt-tightening eases.  The FOMC is looking at this data  at their meeting today.

Economy in U.S. Expands More Than Forecast on Inventories


A man walks past job seekers as they fill out job applications for recruiters during a job fair in New York, June 11, 2013. REUTERS/Lucas Jackson

Photo:   Yahoo

US private employers added 200K jobs in Jul, topping expectations in an encouraging sign for the labor market recovery.  Economists had forecasted the ADP National Employment Report would show a gain of 180K jobs.  Private payrolls in Jun were revised up to an increase of 198K from the previously reported 188K.  The report is jointly developed with Moody's Analytics.  Manufacturers, construction companies & other goods-producing industries increased payrolls by 22K.  Construction employment grew by 22K & factory payrolls decreased by 5K while payrolls at service providers climbed 177K (lower paying jobs).  Companies employing 500 or more workers added 57K jobs.  Employment at businesses with 50-499 employees increased 60K & the smallest companies boosted payrolls by 82K.

Companies in U.S. Added More Workers in July Than Forecast


<p> A handcuffed protester, arrested during an anti-government demonstration on the outskirts of Athens where TV transmitters are located, flashes a V sign upon his arrival at the court in Greek capital on Tuesday, July 30, 2013. It was latest protest in the wake of a decision by Greece's conservative-led government to shut down state broadcaster ERT in June, to open a new public TV and radio station with fewer staff later this year. (AP Photo/Angeliki Panagiotou, FOSPHOTOS)

Photo:   Yahoo

The IMF said Greece had made "exceptional" progress in stabilizing its economy & remains on course to emerge from a near 6-year recession in 2014, despite missing targets to cut state jobs & the threat of an €11B ($14.6B) gap in bailout financing.  Its report also cautioned that Greece needs to make major structural reforms so its economy can grow in the long-term.  Greece's coalition gov is struggling to meet staff reduction targets in the large public sector, & is due to announce details later today of its plan to suspend up to 25K employees on reduced pay by the end of the year.  The IMF described the country's privatization program as being "painfully slow" & expressed concern that mass staff transfers & layoffs planned in the public sector may not have the desired effect.  "The (IMF) is concerned that the focus is shifting significantly away from ensuring the exit of redundant and unqualified staff to relocation of such staff within the public sector," it said.  Poul Thomsen, the IMF's mission chief in Greece, said he was confident the recession would end soon & that eurozone countries would make good on their pledge to provide Greece with additional debt relief after Athens balances its state budget.  The IMF also predicted the bailout program would fall short of Greece's needs by €4.4B ($5.8B) next year & €6.5B ($8.6B) in 2015.

IMF praise for Greece despite $14bn cash gap Associated Press


Buyers returned after the news was good on the economic front.  Of course that same news could give the FOMC encouragement to more forward on paring its bond buying program.  With the Dow at another record level, a lot of good news has already been baked into this market.  This reminds me of the old adage, buy on the rumor & sell on the news (later today when the announcement from the meeting is made).

Dow Jones Industrials

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