The market likes this, for now at least, as it moves us closer to finding a solution to the problem. Banks jumped nearly 13%, although it isn’t totally clear current shareholders will benefit. There has been talk that the government will take common equity stakes in some cases, which will further dilute shareholders.
Consumer discretionary, technology, basic materials, industrials and energy shares also performed well. Energy and tech is up 7% over the last three sessions.
The market in general has bounced nicely, up 9% over the last week, after hitting 800 on the S&P 500 on Inauguration Day. It’s important from a psychological perspective to stay above the 700 handle.
Market Activity for January 28, 2009
Crude-Oil
Oil prices for March delivery rose 1.6% yesterday, ending the 10% slide of the previous two sessions. A large reduction in gasoline supplies offset a larger-than-expected increase in crude supplies.
The Energy Department, in its weekly report, stated crude supplies jumped 6.22 million to 338.9 million barrels – over the past couple of weeks supply has moved meaningfully above the five-year average of $305 million barrels. Analysts expected crude supplies to build by 2.9 million.
However, gasoline supplies fell 121,000 barrels – a two million barrel build was expected – and this interrupted a bearish trend that looked to be setting up over prior two sessions.
Refinery runs have been very light over the past few weeks, so the pick up in demand due to the plunge in pump prices is showing increased production may be in order. Refinery margins have been on the rise from the very low levels of November, which should incentive higher refinery run rates.
The crack spread measures the relationship between crude-oil futures and oil product futures, per barrel. When it rises refining profitability is likely to increase and when it falls… you get the point.
Mortgage Applications
The Mortgage Banker’s Association index of applications fell 38.8% in the week ended January 23 – this marks the largest drop in 16 years as refinancing activity plunged. The 30-year mortgage rate rose to 5.22% on average after hitting 4.89% in the week ended January 9. There are a lot of people waiting to refi, but not at this level. They’ve got things set to hit somewhere in the 4% handle.
Purchases also fell but the decline was mild, down 2.5% for the week. We’ve moved to such low levels regarding home sales let’s hope additional downside is contained.
FOMC Meeting
On Rates
The FOMC decided to keep its target range for the federal funds rate at 0%-0.25% as they anticipate the economy will continue to warrant exceptionally low levels of fed funds for some time.
On the Economy
The members stated that information received since they last met in December suggests the economy has weakened further. (No surprise there as we touch on these things daily) The FOMC noted that industrial production, housing starts and employment have continued to decline steeply as consumers and businesses cut back on spending.
Conditions in some financial markets have improved, yet credit conditions for households and firms remain extremely tight. (This is pretty much how it works when the economy is in downturn)
Policy Direction
The FOMC stated that it is “prepared to purchase” Treasuries if it believes such action would be effective in improving private-sector credit conditions. The lone dissenter was Richmond Fed Bank President Lacker as he favored purchasing Treasuries immediately. (This may suggest the Fed is not terribly close to progressing down this road)
And let’s hope so. They have done what they can to unfreeze the credit markets, some of their programs have worked very effectively and may not have longer-term consequences, but other programs will. If they are truly thinking about printing more money to buy Treasury securities in an attempt to keep market rates extremely low (and not just bluffing to push the market into doing the job for them – a long-held axiom is never fight the fed) this would be one of those decisions that have long-run consequences, namely fueling harmful levels of inflation.
We don’t need more of this printing press mentality. They have done enough. Now the fiscal side must work in cooperation with the Fed and slash tax rates on incomes, capital and corporate profits. This will not only assist the Fed currently, as they jam the monetary easing pedal to the floor, but will help them do their job of taking away this stimulus down the road (as a pro-growth tax environment will help to offset monetary tightening) so to keep inflation from totally raging out of control a year to 18 months out – this the old Reagan/Volcker model.
The markets need to see this type of response because for now investors are assuming we’ll get Fed tightening and higher tax rates 18 months out. That spells economic shutdown. Policy makers need to wake up or we’ll find economic weakness returns just when the economy is regaining its footing.
Have a great day!
Brent Vondera, Senior Analyst
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