REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED MAY 29 2009

Market Statistics 52 week

Low

High
Dow Jones +223.01points

+2.69%

to

8500.33

6,547.05 13,058.20
Nasdaq + 82.32 points

+4.87%

to

1774.33

1,268.64 2,549.94
S&P 500 + 32.14 points

+3.62%

to

919.14

676.53 1,426.63
Crude Oil +$4.64/barrel

+7.52%

to

$66.31

$33.87 $145.29
Gold +$19.90/oz

+2.08%

to

$978.80

$704.90 $1,001.80
10 Year Tsy +0.012% to

3.467%

2.04% 4.32%

.

WALL ST JOURNAL

OVERVIEW:

There are contradictory views about when we are likely to come out of the recession, how long the recovery might last and whether we will end up with big inflation problems down the road. These issues played themselves out in the past week (the market was closed for Memorial Day on Monday) as economic data that came out showed mixed results. Consumer sentiment rose; durable goods orders rose; new home sales rose less than expected ;home prices continued to decline more than 10% from a year earlier in 15 of 20 major metropolitan areas ; crude oil rose to its highest level since November and gold approached $1000/oz. Treasuries were particularly volatile during the week causing concerns about steep rises hurting mortgage rates(we shall focus on this more in the Credit  Market section.).

The end of the recession is in sight according to a panel of economists in  the National Association for Business Economics Outlook, expecting economic growth to rebound in the second half of 2009.We believe there is a difference between the consumer ‘s increasing confidence in the economy and this translating into the consumer going out and purchasing in meaningful numbers to move the economy out of the recession anytime soon. We have maintained repeatedly that with the consumer (who represents 70% of GNP) under such stress from depleted investment accounts, job loss, mortgage delinquencies, restricted credit card borrowings, declining home prices etc, the only economic expansion will come this year from Government spending.

Nevertheless, the stock markets this past week reflected the prevailing sentiment that there is light at the end of the tunnel. The major concern, shared by us, is that the light might be a fast moving train in the form of hyperinflation. You cannot pump that amount of money into financial systems globally without high inflation and interest rates, according to a hedge fund that made a lot of money last year betting against the market. The hedge fund, Universa Investments LP, in anticipation of such a scenario, is reported in the Wall St Journal as planning to invest in options tied to commodities and to also bet against Treasury Bonds .The fund is, according to the Journal, known for it’s ties to investor Nassim Nichols Taleb, author of “The Black Swan,” which describes a rare event of large impact, hard to predict and outside of normal expectations.

STOCK MARKET:

After reacting positively to the rise in the Consumer Confidence Index on Tuesday, the market gave back most of the gains the next day as long term Treasury rates rose to levels which led to serious concerns that persistent higher rates would further depress economic activity and drain consumer confidence, just as it started to improve. However the market concerns only lasted a day or so as Treasury prices soared on Friday, as bargain hunters moved in to buy back Treasuries, pushing yields down to about where they were earlier in the week.

May’s gains for the indexes were impressive with the Dow up 4.1% and S&P 5.3%.Why doesn’t it feel better? Well, there are many concerns going forward as we have seen above and as we will see below.

COMMODITY MARKET.

Commodity prices continued to rise  with oil up over 7% for the week and almost 30% for the month. Why ? A belief that the global economy is improving. But this ,if it continues is in effect a tax on all consumers of gasoline and becomes a further drag on the economy. Gold continued it’s strong advance from the previous week and is up 9.9% in May, as investors have moved into it and out of the dollar, as fears of inflation increase in the context of large domestic funding requirements.

CREDIT MARKET.

After such a volatile week, the market is looking to the Government for guidance in terms of  Bond purchases to offset the large supply coming onto the market  to fund the economic stimulus package, social programs and bank bailouts. It will need to be more proactive.Without these  Bond purchases, prices will be depressed and yields rise, affecting mortgages and corporate borrowing rates. So far, this past week the Government has left the market to it’s own devices while the Government studies the reasons for this weeks spike in yields to as high as 3.76% on the 10 year Treasury. This worked so far as yields reversed course ending only marginally higher for the week. The yield curve (charting the difference between 2 year and 10 year Treasury yields) reached a historic high of 2.75% this week.

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