Daily Insight: Warsh says, "I'm Outta Here"

U.S. stocks didn’t quite welcome the best jobless claims figure since job destruction began in late 2008, as the major indices spent most of the session in negative territory. The broad market did manage a slight rally in the final minutes of trading that pushed the S&P 500 to positive territory, but the day was essentially a wash.

So why the lack of euphoria? Maybe it’s because the jobless claims news reminds traders that the Fed must eventually unwind its unprecedented level of monetary easing (although fat chance of that happening anytime soon); maybe it’s because traders believed the decline had more to do with the weather (if government employees don’t report to work they can’t file the claims); maybe it was yet another corporate announcement that higher commodity prices are eating into margins – this latest coming from PepsiCo.

Energy, telecom and industrial shares led the broad market to its slight gain. Technology, consumer staples and financials were the day’s losers.

Treasury yields began the day lower (those prices rose as stock-index futures were meaningfully negative in pre-market trading), but reversed to end the session higher and pretty much match very recent highs. There are a lot of people talking about interest rates moving higher in a secular manner. I’m not really buying it as this economy has become conditioned to ultra-low rates and many challenges remain. And first rates have to break their April 2010 levels (the 10-year Treasury yield remains 33 basis points below that mark). Then, even if yields do break out the economy – which means the housing market, household and government debt servicing and the stock market – would have to be able to withstand those higher rates. I think that’s highly unlikely, which means any spike in rates will prove transitory. In addition, we’re seeing that geopolitical risks remain heightened, which makes a durable increase in rates even more doubtful. And speaking of geopolitics, that address by Muburak yesterday was super strange – and he doesn’t do himself any good by looking like Nosferatu.

But back to the topic, at some point rates will normalize but I can’t see how that occurs in the near future.

Yesterday Kevin Warsh announced he’d resign from the Federal Reserve Board of Governors effective March 31. In my opinion, Warsh was one of the more responsible members of the FOMC (the governors have permanent status on the policymaking committee). While he hadn’t actually dissented to QE measures, he’s written a couple of Op/Eds explaining that such “non-traditional” tools carry huge risks and that when the Fed must unwind, they’ll have to do so with “greater force” than in the past. Therefore he was viewed as one of the future dissenters to current policy.

Of course, we can’t know the true reason behind the resignation, but based upon past statements one expects he would rather not be around for the other side of this policy stance. He’ll undoubtedly be followed by the addition of yet another dove (an advocate of keeping policy loose), which will carry meaningful consequences -- history has shown financial turmoil follows long periods of reckless monetary policy. Pimco’s Tony Crescenzi recently commented that we may see a mutiny within the FOMC, meaning we’ll soon have three dissenters to current policy. Well, that mutiny has now become much less likely as the potential opposing force has now been reduced to just two (Fischer and Plosser).

Click here to read the full Daily Insight.

Brent Vondera, Senior Analyst

St. Louis, MO

http://www.acrinv.com/

Daily Insight: Reality Bites

Well, I guess the way stocks ended the day yesterday was apropos for the quarter. A decline in the back-half of the session turned into a slide in the final hour, despite a momentary rally from the day’s low. For the quarter, stocks also fell in the back-half, sliding at the end despite a mid-June rally. The difference is for the quarter the final session recorded the period’s nadir.

Stocks actually began yesterday’s session up a bit as traders were feeling a little juice in pre-market trading after hearing European banks borrowed $161.5 billion via the ECB’s three-month lending facility, below the roughly $200 billion expected. This was all part of the refunding we talked about in Tuesday’s letter due to the ECB’s one-year refinancing facility being closed out. Although, an interest-rate strategist at BNP Paribas did mention that many of the banks that borrowed $540 billion via the one-year funding program from the European central bank did so not because they needed it but as an arbitrage opportunity – and much less arbitrage is to be had now that the facility is for a term of three months rather than one year. So it’s possible that the lower-than-expected borrowing from the ECB may not be as positive as it seems -- yet another example of premature excitement I’m afraid.

It is inconceivable that the EU financial system has suddenly begun to heal, as the headlines suggested, when it is likely to get worse. Nothing but solid-to-strong economic activity will heal the loans on their books, the bonds they hold and inter-bank lending rates.

Anyway, the feel-good sensation didn’t last as a much weaker-than-expected ADP employment report later weighed on sentiment -- we’ll touch on that below. Offsetting the bad preliminary jobs report was another strong regional factory survey, but the market appears to be looking forward, concerning itself with what may unfold over the next several months rather than manufacturing activity for a month that has now ended. Reality appears to have overcome easy money.
Click here for the full Daily Insight.

Brent Vondera, Senior Analyst
www.acrinv.com

Daily Insight: Aimless

U.S. stocks wandered aimlessly the entire day…up, down, up, down -- you know the drill, eventually erasing the final rally in the waning 10 minutes of the session. There is zero conviction right now as short-term traders just wait to see which direction we go -- headed to test that 1040 level on the S&P 500 or higher to the top end of the most recent range, about 1118.

The economic data was not a help really. Personal income and spending was offsetting as incomes came in a bit below expectations, while spending a bit higher. Overall, I thought the report was a good one, as the gain in income outpace spending; it would be nice to see this play out for a while, but as we elude to below this is probably not the type of stuff traders would like to see – spend baby, spend.

Energy and basic material stocks were the worst hit groups yesterday, It was a divided session as five of the top 10 industry groups fell with five gaining ground. Consumer staple and telecom shares were the out-performers.

Treasury securities continued to rally, making it four of the past five sessions, as the yield on the 10-year fell to 3.02% -- again – and the two-year looks headed below 0.60% -- a record low yield, even below the 2008 and 2009 lows. And the rally continues today as the 10-year yield is down another five bps to 2.97% and the two-year just barely above that 0.60% mark at 0.617%...continued after the jump.
Click here to read the full Daily Insight.

Brent Vondera, Senior Analyst
www.acrinv.com