Note: Due to the three-day holiday in honor of Dr. Martin Luther King Jr., our comments are limited to financials.
"When will the music stop and who will be left without a seat?" The euphoria associated with the data emanating from Washington relating to the U.S. economy continues. The Federal Reserve announced on Friday that industrial production increased at a 0.8% rate last month, the biggest increase in over five months. The Commerce Department announced that December retail sales in December was up for the sixth month in a row. Auto manufacturing slowed but that did not deter the "gleeful" response in the markets.
Of course, with all "good news" comes the inevitable caveat. U.S. debt grew to an all time high exceeding $14 trillion. Government is contemplating raising the debt ceiling to accommodate the increase in overall spending. Without the increase Congress would have to cut spending dramatically, a condition they do not like to ponder.
We expect a "battle" to ensue between the two parties but with the Republican control of the House and increased strength in the Senate, the final result is a coin toss. We favor the spending cuts before we have to sell more of the country to those holding our debt. Now for some actual information…
Interest Rates: March Treasury bonds closed at 12029, down 18/32nds on profittaking after yields touched the lows of the recent range. Not much change from last week. The U.S. data on industrial production along with the retail sales figure was a negative for prices and a positive for yield gains. We continue to favor the sidelines but with a bias to the short side. China’s raising of the reserve rate to curb inflation is the seventh in a year and could lead to constricted overseas purchases. That would not bode well for the Western economies that have counted on Chinese purchases to sustain a less than stellar recovery.
Stock Indices: The Dow Jones industrials closed at 11787, up 55 points and was 1% higher on the week. The S&P 500 closed at 1293.24, up 9.48 and gained 1.7% for the week. The Nasdaq rose by 20.01 points to close at 2755.30 and posted a 1.9% gain for the week. The main impetus to the buying was the better than expected earnings reported by J.P. Morgan/Chase with helped the banking sector lead the way for the averages. J.P. Morgan/Chase reported income 47% higher in the fourth quarter, a better than expected earnings showing for the big bank. We would implement hedging strategies since it will take more than bank profits to keep the so-called recovery going. In addition, banks holding mortgages on homes that are in default will soon have to foreclose and the glut of foreclosures will weigh heavily on the banks, who must move the mortgages from the asset column as "receivables" to the liability column as writeoffs.
Currencies: The March dollar index closed at 7927.5, down 13.1 points against gains in the Euro of 100 points to 13353, and the British pound 39 points to 15875. The march Swiss Franc lost 16 points to $1.0369 and remains premium to the dollar. The March Japanese yen lost 42 points to 12054, and the Canadian dollar lost 2 little points to 10094. Even the Australian dollar lost against the U.S. currency posting a decline of 81 points to 9824. The rating agency, Fitch, cut Greece’s dept to junk and that will continue to weigh on the Euro currencies. We favor the sidelines for now.
John L. Caiazzo
Information provided is from sources deemed to be reliable but not guaranteed. Futures and Options trading involve a high degree of risk and may not be suitable for everyone. John Caiazzo is a registered commodities broker with over 40 years experience in investments and opinions are his own and not of the Futures Commission Merchant to which he introduces his clients.