U.S. stocks rolled on wave of investor euphoria Monday, now almost completely recouping the losses of late October, as the nitrous oxide boost from global governments and central banks continues to stoke equity-market traders.
Stock-index futures showed strong investor sentiment in pre-market trading and that rushed into the official trading session. This weekend’s G-20 meeting dovetailed last week’s Fed meeting (you know, where Bernanke & Co. explicitly stated their zero interest rate policy (ZIRP) lives on) as all nations involved agreed to maintain measures of support to the global economy.
The market could have also been driven by the results of Saturday night’s health-care bill in which the House barely passed the measure 220-215. This was clearly a pyrrhic victory and it’s very likely the bill is DOA in the Senate, at least in its current form. I’m certainly not saying some wonderful common sense-based legislation is going to suddenly appear. But the most horribly harmful and foolish proposal is going down – unless they use the reconciliation process.
Financials were the top-performing sector, even as the Fed confirmed what many have been guessing -- banks are taking their basically zero-cost to borrow and using as much of these funds to buy Treasury securities as is going to loans. This should have put the screws to the banks stocks. (This is not to suggest that banks should be boosting loan originations. If they are concerned about problem loans on their books, then they shouldn’t be growing by making new loans. Too, the demand for loans is weak as well, particularly from the consumer side as households work down already heavy debt burdens. It’s kind of a dual issue for small businesses. Some need financing, but remain locked out of the credit markets. Others have no desire for additional credit, as the NFIB survey continues to show, as many see no reason to expand.) This is not the stuff that economic growth is made of. Borrowing at close to zero and investing in 1%-4% yielding Treasury securities may boost banks’ interest income in the short term, but the music stops when the Fed must eventually unwind policy, and that means Treasury yields shoot much higher as this source of government debt dries up. In addition, the lack of demand for credit also shows there is little confidence among business regarding future sales prospects.
Commodity-related basic material shares were the second-best performing group on the session as that G-20 meeting goosed the trade.
Advancers smoked decliners by an eight-to-one margin on the NYSE. Nearly 1.2 billion shares traded on the exchange, in line with the six-month daily average.
Market Activity for November 9, 2009
The Dollar
The U.S. dollar looks to make another dive for the 74 handle on the Dollar Index (and it did move to the 74 handle briefly before bouncing off the intraday low), a level that should begin to get policymaker’s attention. If the greenback cements that move it may be “Katy bar the door” time as the buck may slide back to the all-time low of 71.35 in quick order, this will surely get the Fed’s attention.
The greenback rallied in the final two weeks of October as there was some uncertain as to whether the Fed would change its statement regarding the latest meeting. Would they removed the word “exceptionally” (referring to the low levels of fed funds) and thus signal a removal of ZIRP – the emergency level of fed funds – in the near future. But when the Fed’s meeting concluded and the “exceptionally low level of the federal funds rate for an extended period” phrase remained intact, it was a clear sign the pedal to the metal stance will be with us for a while. This is damaging to the dollar and the gold trade shows it – breaking through $1110/oz. yesterday morning.
There doesn’t seem to be any policymakers (at least domestically) who currently see a falling dollar value as a problem. For sure, the conventional wisdom views this as a good thing in that it will boost U.S. export activity. If the dollar continues to decline, we’ll see yet again how flawed conventional wisdom can be.
It’s all up to the Fed from here, don’t wait for the Treasury Department to offer assistance because they are the conventional wisdom – so is the Fed for that matter, but I’m trying to give them the benefit of the doubt; although I’m not sure why. Just as the previous administration wrongly judged, this one also believes a lower dollar will benefit U.S. growth and jobs. They forget one very important reality. As capital leaves the U.S. (a falling, and unstable, currency value coupled with the very high probability that tax rates on investment are going higher does not promote capital inflows) it will create jobs in the places that that capital finds it will be best treated. My concern is the Fed will not focus on the dollar until it is already obvious we have a problem. If this occurs, the reversal of monetary policy will be quick, abrupt and very damaging.
This Week’s Data
We have a very quiet week on the data front, so the letters will be short as a result. There is not a major economic release until Thursday, which brings the usual jobless claims data.
What we’ll be watching for is a move below 500K on initial jobless claims, a level that has proven elusive since January. We saw claims fall to 488K in the first week of the year, only to deteriorate big time, jumping to 675K by February. For evidence that some net job creation is occurring, we’ll need for initial claims to at least make it back to the high 400K level.
On Friday we’ll get the trade balance (September), import prices (October) and the University of Michigan’s consumer confidence reading (November).
On trade, the market will be looking for evidence that the weak dollar condition is helping export activity.
On import prices, the data results will remain unconcerning, but this will change come the November data. This is when the year-ago comparisons become very easy and all of the inflation numbers begin to move higher.
On the confidence reading, despite the market’s focus on the easy-money trade, I think traders will still need to see a rebound from October’s drop. (It’s important to remember that the UofM confidence reading does not include a labor market component, as the more watched Conference Board’s confidence reading does. Thus, the UofM’s measure remains at a higher level, but still well below the long-term average.
Have a great day!
Brent Vondera, Senior Analyst
Stock-index futures showed strong investor sentiment in pre-market trading and that rushed into the official trading session. This weekend’s G-20 meeting dovetailed last week’s Fed meeting (you know, where Bernanke & Co. explicitly stated their zero interest rate policy (ZIRP) lives on) as all nations involved agreed to maintain measures of support to the global economy.
The market could have also been driven by the results of Saturday night’s health-care bill in which the House barely passed the measure 220-215. This was clearly a pyrrhic victory and it’s very likely the bill is DOA in the Senate, at least in its current form. I’m certainly not saying some wonderful common sense-based legislation is going to suddenly appear. But the most horribly harmful and foolish proposal is going down – unless they use the reconciliation process.
Financials were the top-performing sector, even as the Fed confirmed what many have been guessing -- banks are taking their basically zero-cost to borrow and using as much of these funds to buy Treasury securities as is going to loans. This should have put the screws to the banks stocks. (This is not to suggest that banks should be boosting loan originations. If they are concerned about problem loans on their books, then they shouldn’t be growing by making new loans. Too, the demand for loans is weak as well, particularly from the consumer side as households work down already heavy debt burdens. It’s kind of a dual issue for small businesses. Some need financing, but remain locked out of the credit markets. Others have no desire for additional credit, as the NFIB survey continues to show, as many see no reason to expand.) This is not the stuff that economic growth is made of. Borrowing at close to zero and investing in 1%-4% yielding Treasury securities may boost banks’ interest income in the short term, but the music stops when the Fed must eventually unwind policy, and that means Treasury yields shoot much higher as this source of government debt dries up. In addition, the lack of demand for credit also shows there is little confidence among business regarding future sales prospects.
Commodity-related basic material shares were the second-best performing group on the session as that G-20 meeting goosed the trade.
Advancers smoked decliners by an eight-to-one margin on the NYSE. Nearly 1.2 billion shares traded on the exchange, in line with the six-month daily average.
Market Activity for November 9, 2009
The DollarThe U.S. dollar looks to make another dive for the 74 handle on the Dollar Index (and it did move to the 74 handle briefly before bouncing off the intraday low), a level that should begin to get policymaker’s attention. If the greenback cements that move it may be “Katy bar the door” time as the buck may slide back to the all-time low of 71.35 in quick order, this will surely get the Fed’s attention.
The greenback rallied in the final two weeks of October as there was some uncertain as to whether the Fed would change its statement regarding the latest meeting. Would they removed the word “exceptionally” (referring to the low levels of fed funds) and thus signal a removal of ZIRP – the emergency level of fed funds – in the near future. But when the Fed’s meeting concluded and the “exceptionally low level of the federal funds rate for an extended period” phrase remained intact, it was a clear sign the pedal to the metal stance will be with us for a while. This is damaging to the dollar and the gold trade shows it – breaking through $1110/oz. yesterday morning.
There doesn’t seem to be any policymakers (at least domestically) who currently see a falling dollar value as a problem. For sure, the conventional wisdom views this as a good thing in that it will boost U.S. export activity. If the dollar continues to decline, we’ll see yet again how flawed conventional wisdom can be.It’s all up to the Fed from here, don’t wait for the Treasury Department to offer assistance because they are the conventional wisdom – so is the Fed for that matter, but I’m trying to give them the benefit of the doubt; although I’m not sure why. Just as the previous administration wrongly judged, this one also believes a lower dollar will benefit U.S. growth and jobs. They forget one very important reality. As capital leaves the U.S. (a falling, and unstable, currency value coupled with the very high probability that tax rates on investment are going higher does not promote capital inflows) it will create jobs in the places that that capital finds it will be best treated. My concern is the Fed will not focus on the dollar until it is already obvious we have a problem. If this occurs, the reversal of monetary policy will be quick, abrupt and very damaging.
This Week’s Data
We have a very quiet week on the data front, so the letters will be short as a result. There is not a major economic release until Thursday, which brings the usual jobless claims data.
What we’ll be watching for is a move below 500K on initial jobless claims, a level that has proven elusive since January. We saw claims fall to 488K in the first week of the year, only to deteriorate big time, jumping to 675K by February. For evidence that some net job creation is occurring, we’ll need for initial claims to at least make it back to the high 400K level.
On Friday we’ll get the trade balance (September), import prices (October) and the University of Michigan’s consumer confidence reading (November).
On trade, the market will be looking for evidence that the weak dollar condition is helping export activity.
On import prices, the data results will remain unconcerning, but this will change come the November data. This is when the year-ago comparisons become very easy and all of the inflation numbers begin to move higher.
On the confidence reading, despite the market’s focus on the easy-money trade, I think traders will still need to see a rebound from October’s drop. (It’s important to remember that the UofM confidence reading does not include a labor market component, as the more watched Conference Board’s confidence reading does. Thus, the UofM’s measure remains at a higher level, but still well below the long-term average.
Have a great day!
Brent Vondera, Senior Analyst
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