Mel's Blog

July 09 Market News #10

July 20th, 2009 3:58 PM by Mel Samick

It was a good week for stocks and commodities but not such a good week for bonds and real estate as there were signs that the economy is reviving and the government is contemplating its eventual withdrawal from intervention programs to support the bond market. U.S. stocks rose by a generous 7 percent, while foreign stocks tagged along, rising nearly 6 percent. Bonds took it on the chin, however, with the 10-Year Treasury Note falling nearly 3 points in price, while 30 Year T-Bonds fell more than 5 points. Real estate investment trusts, whose survival right now depends critically on the availability of financing, fell more than 12 percent. Crude oil, whose price has moved in lockstep with the changing outlook for economic growth and the energy demand it spurs, rose $3.46 for the week. What prompted the tectonic shift in favor of stocks vs. bonds? First, a number of bellwether corporations reported impressive profits for the second quarter. These included Goldman Sachs, JPMorgan Chase, Citigroup, and IBM. Furthermore, we saw a 0.6 percent rise in Retail Sales last week, and this was accompanied by an unexpectedly hefty 1.8 percent rise in the month-over-month Producer Price Index, with the Consumer Price Index ringing up a higher than expected 0.7 percent increase for the month. If inflation and the consumer are waking up, those would be indications that the economy is coming out of the long recession. There was a third significant factor putting pressure on the bond market. Last Wednesday, the Federal Reserve released the minutes of the June Federal Open Market Committee meeting. Fed officials were beginning to discuss how they can systematically scale down the various intervention programs put in place through the course of the last two years to unfreeze the financial system. For example, the Fed had committed to purchase $300 billion in Treasury securities and $1.45 trillion in Agency Mortgage-Backed Securities, and it has been executing those purchases week by week. These actions have had the happy effect of pushing down interest rates, particularly mortgage rates, and sparking a very welcome boom in mortgage originations during the first half of this year. But let's "listen in" on the Fed's late-June discussion of this program (from the minutes), The Federal Reserve was already purchasing a very large fraction of new current-coupon agency MBS and agency debt, and further increasing the scale of those programs could compromise market functioning. Those of you who read last week's Capital Markets Update will recognize a further issue that was on the Fed Governors' minds in June, Others were concerned that announcements of substantial additional [Treasury] purchases could add to perceptions that the federal debt was being monetized. Finally, with regard to the alphabet soup of temporary liquidity programs it has extended to financial institutions, the Fed stated that "improved market conditions ... warranted scaling back, suspending, or tightening access" to them, and voiced its desire to let them expire by early next year. All of this implies that the Fed sees the financial system's condition improving and is looking for the bond market to stand on its own two feet in the near future. And speaking of standing on its own two feet, CIT Financial, a major lender to middle-market businesses, found itself facing a liquidity crisis last week. When it asked for help, the FDIC declined to let it tap into the Temporary Liquidity Guarantee Program (TLGP). TLGP would have allowed CIT to issue debt backed by a U.S. government guarantee. Fortunately, news reports indicate that over the weekend CIT was able to negotiate directly with its creditors and obtain a $3 billion credit extension that will keep it out of bankruptcy and give it time to restructure. It appears that in this case, a little "tough love" from the Obama Administration led to a successful private-market solution rather than a government-funded bailout. For this coming week, we have relatively little in the way of economic releases. Instead, we will be hearing a considerable amount of testimony from our public policy leaders. Federal Reserve Chairman Bernanke will provide his regular, semi-annual update to Congress, speaking with the House Financial Services Committee on Tuesday and the Senate Banking Committee on Wednesday. On Thursday, the Senate will hear testimony from the FDIC Chair, the SEC Chair, and the Federal Reserve on the topic of risk regulation. Mel Information provided by Amtrust Capital Markets
Posted in:General
Posted by Mel Samick on July 20th, 2009 3:58 PM



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