Wednesday, December 18, 2013

Dow soars to a new record after the Fed extends buying bonds

The Dow surged 292 & closed at the daily high, advancers over decliners a relatively modest 7-2 & NAZ was up 46.  The MLP index few recovered a bit in the PM to finish with fractionally higher in the 437s & the REIT index jumped 4+ to the 267s.  Junk bond funds were mixed & the 10 year Treasury sold off.  Oil gained but gold slid back in the low 1200s, a 3 year low.

AMJ (Alerian MLP Index tracking fund)

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Treasury yields:

U.S. 3-month


U.S. 2-year


U.S. 10-year


CLF14.NYM....Crude Oil Jan 14....97.69 Up ...0.47 (0.5%)

Live 24 hours gold chart [Kitco Inc.]

  • Ben Bernanke
Photo:   Bloomberg

The Federal Reserve (FED) will trim its aggressive bond-buying program but sought to temper the long-awaited move by suggesting its key interest rate would stay lower for even longer than previously promised.  In what amounts to the beginning of the end of its unprecedented support for the economy, the FED said it would reduce its monthly asset purchases by $10B, bringing them down to $75B, trimming equally from mortgage & Treasury bonds.  "The (policy-setting) committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced," the FED said.  The move was a nod to better prospects for the economy & labor market & marks a historic turning point for the largest monetary policy experiment in history.  Its asset purchase program, a centerpiece of its crisis-era policy, has left it holding roughly $4T of bonds, & the path it must follow in dialing it down is rife with numerous risks, including the possibility of higher-than-targeted interest rates & a loss of investor confidence.  It raised its outlook for the job market, predicting the unemployment rate will fall as low as 6.3% by the end of next year, compared with a Sep projection of 6.4%.

Fed Cuts QE Pace to $75 Billion on Labor Market Outlook

German business confidence rose to the strongest in 20 months in a signal that the pace of recovery is quickening in the largest economy in Europe.  The Ifo institute’s business climate index increased to 109.5 in Dec from 109.3 in Nov, matching the prediction & is the highest level since Apr 2012.  Germany is relying on domestic growth as the euro area, its biggest trading partner, struggles to sustain a recovery.  Survey data this week signaled a pickup in economic activity & the Bundesbank said German GDP will rise “strongly” in the coming months after a slow start to Q4.  A measure of current conditions slipped to 111.6 in Dec from 112.2, while a gauge of expectations jumped to 107.4 from a revised 106.4.  German investor confidence surged this month to the highest level in 7 years & manufacturing output expanded at the strongest pace in 2½ years.  The nation still faces headwinds from the subdued recovery in the rest of the currency bloc as the ECB forecasts the euro-region economy will contract 0.4% this year before growing 1.1% in 2014.  Policy makers kept the benchmark interest rates at a record low of 0.25% this month after a surprise cut in Nov.

German Business Confidence Rises to Strongest in 20 Month

General Mills reported fiscal Q2 profit that trailed estimates because of higher commodity costs & unfavorable currency fluctuations.  Adjusted EPS was 83¢, below the 87¢ projection.  CEO Ken Powell said results were hurt by higher ingredient costs & slowing food & beverage industry sales.  Currency-exchange effects reduced net sales growth by 3 percentage points in the intl unit.  Gross margin, excluding the increased value of some commodity positions & grain inventories, narrowed by 1 percentage point to 35.7%.  While the company reaffirmed its forecast for fiscal 2014 adjusted EPS of $2.87-$2.90, it said foreign-currency effects will now be “a greater headwind than originally estimated” & possible devaluation of Venezuela’s currency may reduce EPS to the low end of the company’s forecast.  Venezuela is expected to make the biggest devaluation of its currency since 2010 by the end of Mar in a effort to boost revenue & narrow the budget gap.  EPS in Q2 rose to 84¢ from 82¢ last year.  Sales slid 0.1% to $4.88B & analysts estimated $4.94B.  The stock gained a few pennies in the market rally.

General Mills Profit Trails Estimates Amid Higher Input Costs

General Mills (GIS)

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Big Ben couldn't have made the bulls happier.  The reduction in bond purchases is not significant but looks like he is "getting tough" to the critics.  All indications are that interest rates will be kept low for seemingly ever.  This is not a recipe for a good market rally as shown by modest breadth.  Many stocks did not participate.  Among other changes, MLPs are no longer market leaders.  So much euphoria over Big Ben may not last when traders have a chance to relax & assess the meaning of the announcement. 

Dow Jones Industrials

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