Wednesday, June 11, 2014

Lower markets on proffit taking.

Dow fell 75, decliners over advancers 2-1 & NAZ lost 4.  The MLP index fell 1+ to 503 & the REIT index lost 1 to the 299s.  Junk bond funds rose & Treasuries also went up.  Oil & golf inched higher.

AMJ (Alerian MLP Index tracking fund)

CLN14.NYM....Crude Oil Jul 14...104.45 Up ...0.10 (0.1%)

GCM14.CMX...Gold Jun 14.......1,262.60 Up ...2.80 (0.2%)

Treasury Sec Jacob Lew said the US needs to boost the economy’s capacity to grow so the benefits are shared more widely, as unemployment is “still too high” & wages are lagging.  Focused on broad challenges facing the economy, Lew said he expects “a much stronger second quarter and second half of this year. Nevertheless, we cannot escape the fact that millions of Americans continue to struggle.”  The labor market has improved this year as payrolls pushed past their pre-recession peak for the first time in May.  It was the 4th consecutive month employment increased by more than 200K, the first time that’s happened since early 2000 & the jobless rate held at an almost 6-year low of 6.3%. Lew said the expansion needs to be stronger to reach more Americans.  “While corporate profits and non-farm productivity have risen, hourly compensation only just started rising, and not by enough to make up for lost ground,” he added.  “As our economy grows and our workers become more productive, this progress needs to reach the lives of more hardworking Americans.”  The policy debate over the “long-term challenges stemming from an aging population and the cost of health care” should revolve around “building a firm foundation for future economic growth,” Lew said.  “The crisis we face today is the need to make sure the economy is expanding fast enough to support a growing middle class and greater opportunity for all Americans,” he said.  “Investments that boost growth & job creation today, tomorrow, & 25 years from now will put us in a stronger position to address our future fiscal challenges.”  Lew also urged lawmakers to approve increased spending on infrastructure “to make investing in America even more appealing.”

Lew Says U.S. Needs to Pursue Policies to Boost Growth Potential

The Federal Reserve (FED), concerned that selling bonds from the $4.3T portfolio could crush the US recovery, is preparing to keep the balance sheet close to record levels for years.  Central bankers are stepping back from a 3-year-old strategy for an exit from the unprecedented easing deployed to battle the worst recession in decades.  Minutes of their last meeting in Apr made no mention of asset sales.  Officials worry that such sales would spark an abrupt increase in long-term interest rates, making it more expensive for consumers to buy goods on credit & companies to invest.  The FED is testing new tools that would allow it to keep a large balance sheet even after it raises short-term interest rates, a step policy makers anticipate taking next year.  They would use these tools to drain excess reserves temporarily from the banking system.  The strategy, which would make the FED one of the biggest players in money markets, carries risks.  In a time of crisis, investors could flock to safe short-term instruments created by the FED, potentially starving the rest of the financial system of funding.  Maintaining a large balance sheet in a tightening period would mark a strategic shift for the FED & reverse much of central banking doctrine from the 1990s & early 2000s, which favored minimal interference in the economy.

Fed Prepares to Keep Record Balance Sheet for Years to Come

Not even investors fleeing mutual funds that buy junk-rated US corp loans is enough to keep Cerberus Capital Management from tapping the market to finance its $9.2B bid for Safeway.  Cerberus will begin raising $6.7B in loans today to fund its buyout of the grocer & merge it with Albertsons.  Less than a week ago, mutual funds that invest in the debt posted their biggest withdrawals in almost 3 years, bringing redemptions since mid-Apr to more than $3B.  While small investors flee & US regulators are stepping up pressure on banks to refrain from underwriting deals deemed too risky, those with the most at stake are plowing ahead in a market that has delivered returns of almost 100% since the end of 2008.  The outflows have been dwarfed by a surge in new collateralized loan obligations that have helped push prices on the debt to a 5-month high.  Last week, Apollo Global Management raised $1.5B in the biggest CLO this year, & JPMorgan Chase forecasts a record $100B will be raised this year.  The average price of the S&P/LSTA 100 index, which tracks the largest first-lien loans (such as Dell & Hilton Worldwide Holdings), climbed to 98.82¢ on the dollar, the most in 5 months & not far from a 7-year high of 98.9¢ reached earlier this year.  In the aftermath of the financial of 2009, loan prices fell as low as 59.2¢ in Dec 2008.  Loan mutual funds and exchange-traded funds expanded 137% since the end of 2011 to $171B as retail investors sought to get in on the recovery, according to the Loan Syndications & Trading Association.  That’s about 25%% of the buyer base in the market, according to the trade group.  Risk appetite is large today.

Junk Loan Gains Show Mutual Fund Redemptions No Deterrent

The markets have had a significant advance in recent weeks, profit taking was long overdue.  Macro economic data has been favorable & investors have been buying.  The threat of low interest rates lasting for years is also bringing out new buyers.  Dow remains near its record & is up 300 YTD after a dreary start to 2014.

Dow Jones Industrials

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