Wednesday, May 6, 2015

Lower markets after Janet Yellen comments

Dow dropped 86 (but off the lows), decliners over advancers more than 2-1 & NAZ lost 19.  The MLP index plunged 7+ to the 444s & the REIT index slid a fraction to the 314s.  Junk bond funds were lower & Treasuries saw more selling.  Oil eased back in the PM & is now under 61 while treads water near 1190.

AMJ (Alerian MLP Index tracking fund)

CLM15.NYM....Crude Oil Jun 15....60.80 Up ...0.40 (0.7%)

Live 24 hours gold chart [Kitco Inc.]

Janet Yellen, surveying the financial landscape for signs of bubbles after more than 6 years of near-zero rates, warned that both stocks & bonds are richly valued.  “I would highlight that equity-market valuations at this point generally are quite high,” Yellen said in response to a question at a forum on finance.  “Now, they’re not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there.”  Yellen said bond yields “could see a sharp jump” when the Fed raises its benchmark interest rate.  Most Fed officials predict that will happen this year for the first time since 2006.  She said that after holding rates near zero since Dec 2008, the Fed must be on the lookout for threats to financial stability.  She sees signs of “reach for yield” in the market for leveraged loans, & that bond yields could jump when the central bank raises its benchmark rate.  “Long-term interest rates are at very low levels,” Yellen said.  “We could see a sharp jump in long-term rates” after liftoff.  “We saw this in the case of the taper tantrum in 2013, where there was a very sharp upward movement in rates,” she said in reference to the episode in the middle of that year, when then-Chairman Ben S. Bernanke suggested that the Fed could start tapering its bond purchases in the next few meetings.

Federal Reserve Bank of Atlanta pres Dennis Lockhart said that while Q1 weakness is probably transitory, he is concerned tepid US consumer spending could hinder a resumption of more robust growth in Q2.  “Consumers seem to be behaving cautiously in most categories of spending,” Lockhart said.  “Recent consumer behavior is something of a puzzle,” & “the outlook I’ve laid out depends heavily on the health of consumer spending.”  The Fed last month repeated it plans to raise interest rates when it sees further labor-market improvement & is “reasonably confident” inflation will rise back to its 2% goal over time.  Answering a question, Lockhart said he’d rather be too late with a rate increase than run the risk of of tightening too early, which “could snuff out momentum.”  “I am more prepared to take the risks of waiting than the risks of being too early, particularly in light of what we saw in the first quarter,” he said.  “Early estimates of the current quarter’s rate of growth are disappointing,” he said.  “I’m not overly concerned, however” because it’s too early to read too much into the data, he added.  “The underlying fundamentals are strong enough to propel the economy along a growth path that delivers a bounce-back in the second quarter followed by a resumption of a pace of growth between 2.5 and 3 percent,” he said.  The Atlanta Fed leader said Q1 weakness has been common in the past 5 years. “Since 2010, the first quarter has averaged 0.6 percent annualized growth while growth over the remainder of the year has averaged closer to 3 percent,” he said.

Lockhart Says Weak Consumer Spending Clouds U.S. Outlook

Pro-Russian rebels fighting gov forces in eastern Ukraine said they’d scored a “breakthrough” in talks after the country suffered its deadliest day since mid-Apr.  Ukraine agreed with Russia & the Organization for Security & Cooperation (OSCE) in Europe to establish 4 groups to hammer out a diplomatic solution to the war that has killed more than 6K & devastated Ukraine’s economy.  The groups met for the first time yesterday, the OSCE said.  With both Ukraine & the separatists accusing each other of violating a Feb truce, the talks represented the first direct contact between the separatists & Ukraine gov.  They were “serious step toward a political resolution,” a Russian special envoy said.  Former Ukrainian pres Leonid Kuchma said both sides “need to seek compromises.”  “A breakthrough happened today,” said a representative of the separatist self-proclaimed Donetsk People’s Republic.  “The main thing is that a dialog between Ukraine and the Donetsk and Luhansk republics has begun.”  “We laid the foundation to solve all issues at the negotiating table, not on the battlefield,” the representative said.  5 servicemen were killed in the past 24 hours &12 were injured, while the separatists target a town near the Mariupol port.

Rebels Hail Talks Breakthrough on Deadly Day for Ukraine Troops 

Problems are growing in the financial markets.  Bonds have been selling off in Europe on liquidity worries & that selling bled over to the American market.  The yield on the 10 year Treasury is up 40 basis points in the last month.  That is one BIG move!  So far, junk bonds have held up fairly well.  Now that oil has rebounded from its lows of 45, investors have to rethink how that affects business around the world.  New talks about settling Ukraine is a good sign, but the MidEast continues to be a confusing mess.  And that affects the price of oil.  Worse, good economic news seems to be distant & Janet Yellen comments did not warm the hearts of investors.  Dow is near its low over the last 3 months (as is NAZ).

Dow Jones Industrials

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