REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED JUNE 12 2009

 

 

 

 

Market Statistics                   52 week
           

Low

High
DowJones +36.13points

+0.41%

to

8799.26

  6,547.05 13,058.20                                             
Nasdaq + 9.38 points

+0.51%

to

1858.80

  1,268.64 2,549.94                                               
S&P 500 + 6.12 points

+0.65%

to

946.21

  676.53 1,426.63
Crude Oil +$3.60/barrel

+5.26%

to

$72.04

  $33.87 $145.29
Gold ($21.60/oz)

(2.25%)

to

$940.10

  $704.90 $1,001.80
10 Year Tsy (0.078%) to

3.783%

  2.04% 4.32%
     

 

     
     

 

     

 

                                                                                                       

 

 

 

 

 

 WALL ST JOURNAL

 

 

 

 

 

 

OVERVIEW:

Who do we look to for guidance to navigate through the unpredictable economic signals? Used to be that there were “gurus” out there who, based on “proven” economic models would predict economic performance. Virtually every guru was wrong in the recent economic collapse, as was every economic model and that’s why we seem to be seeing more questions than answers about what the current economic scenario means for the future. All we can do is look at what we know and join the list of prognosticators.

This past week saw the first repayments of the Government TARP (Troubled Asset Relief Program) Funds as 10 lenders won U.S. Treasury approval to repay $68.3 billion, effectively creating winners and losers in the US Banking market. Winners  included J.P. Morgan Chase, Goldman Sachs and Morgan Stanley while the losers included Citigroup and Bank of America.

It was a relatively calm week in the stock markets, despite a continued spike in oil prices and a 10 year Treasury that reached close to 4% during the week.

The Congressional Oversight Panel for the Government’s financial rescue package reported this past week that the Federal Reserve used a “conservative and reasonable” approach during it’s stress testing of the nations 19 largest banks. Of concern was that they added that the Fed’s worst case scenario may not have gone far enough. As an example, stress tests related to unemployment  were based on average 2009 rate of 8.9%.In May it was 9.4% and likely to rise. So the question is, did they overstate the financial health of the banks under this worst case scenario, particularly since the toxic assets are still on their books?

 We are seeing the beginning of a slow, but concerted effort by Developing countries to diversify away from the US Dollar as a reserve currency. The “BRIC” nations, Brazil, Russia, India and China, generally regarded as the fastest growing Developing Countries, are planning to sell $10 billion of US Treasuries and buy IMF securities(denominated in a quasi  currency, Special Drawing Rights).This announcement raised Treasury yields to their highest level of the year.

 

We have reported about the mixed economic data coming out and this past week was no exception. Retail sales rose in May, initial claims for jobless benefits fell, but household wealth declined for the seventh straight quarter to the lowest level since 2004.

So where does all this leave us? We believe that the general market may have got ahead of itself. We are relieved that there has been movement away from financial meltdown ,but no confidence that economy is on a sustained path to recovery. We have talked in previous blogs about our reasons for this, notably the weakness of the consumer, but we are also greatly concerned about the size of the government debt and how this is going to be financed. There is just too much  drag on the economy.

 

STOCK MARKET:

A reason why the market has been doing so well recently, apart from the relief that the financial world did not collapse, is that investors risk appetite has increased away from the near zero returns on CD’s, Money Market Funds etc. Nevertheless this  cannot continue if rates increase, thus choking off any possible recovery in economic activity. Continued rises in commodity prices, particularly oil, will have a similar effect.

 

COMMODITY MARKET:

Oil continued it’s strong run as a hedge against a weakening dollar and inflation fears. It’s up 100% over the past 3 months, putting additional stress on the consumer ,although a stronger dollar at the end of the week caused a drop in gold on Friday. So it is all about the US Dollar. The stronger it gets the weaker commodity prices become and vice versa.

 

CREDIT MARKET:

It seems that not even the Federal Reserve has a clear policy on rising Treasury yields .Do they buy more aggressively to keep rates down or let the market dictate the direction? It seems they are pursuing the latter strategy for now, despite a rise in the 10 year from 3.125% as recently as May 15 to a peak of almost 4% during the week. Why the increase? It’s largely on speculation that the Fed would have to raise interest rates as the economy improves this year. The primary dealers of US Government securities say that the speculators are wrong, that there is still too much weakness in the economy to warrant it. We agree.

 

 

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