Overview and Observation; We are starting to see some “cracks in the dike” and “Peter” is nowhere to be found.….The reports last week tended to show an improvement in such basics as the durable goods orders which were reportedly up 3.3% in April. That was against analyst expectations for a 1.3% increase. However analysts were correct if you take out the defense, aircraft and parts which were up 53.3%, and civilian aircraft, which was up 18.1%, leaving the actual order increase of 1.3%. So while I usually criticize analyst expectation as mostly wrong and affecting the markets until actual figures are released, I have to “compliment” them this time. Unfortunately the market reaction was muted and lent itself, across the board, to concern that the U.S. economic condition is far from “healed” after the devastating recession. Sporadic indications of a modest recovery have failed to garner the kind of support necessary after a recession and while some segment of the marketplace has shown what former Fed Chairman called “irrational exuberance,” our general view is that any semblance of a true economic recovery is not evident. Now for some actual information…….
Interest Rates: The September 30-year Treasury bond closed Friday at 142 12/32nds, up 10/32nds as funds made the “trip” from “riskier assets” to the relative safety of U.S. Treasuries. Some analysts were bandying about the idea of the “end of the Treasury bond market” with talk that the U.S. Fed would start to reduce its QE policy of buying up treasuries. Fed Chairman Bernanke, in his speech this week did not make any definitive statement to that effect. Other Fed Presidents were mixed in their assessment of the U.S. economic condition and whether or not further “assistance” was necessary. We remain convinced that recessionary overtones prevail and that Treasury bond prices will remain “range-bound” with a positive bias. We also feel that any rate increase would push the U.S. back into recession.
Stock Indexes: The Dow Jones Industrial Average closed Friday at 15,303.10 up 8.60 but for the week lost 3.3%. The S&P 500 closed at 1,649.60, down .91 and for the week lost 1.07%. The tech heavy Nasdaq closed at 3,459.14, down .27 and for the week lost 1.13%. Some shortcovering in front of the three day U.S. Memorial day holiday kept prices from continuing the downward slide. Some concern that the U.S. Federal Reserve would start winding down its bond buying program and the upward move in yields could curtail recovery expectations. Any increase in yields could negatively affect home sales and the construction industry related jobs. The Thursday jobs data showed a decrease in first time unemployment to 340,000 but bearing in mind that each benefit application means a job lost, the labor situation is not improving regardless of the “monthly” job “created” number. That number is nowhere near showing job gains when taken in context with the overall picture. Do not be lulled into complacency by the recent stock market strength. We once again warn that investors with large equity portfolios should implement risk hedging programs.
Currencies: The September U.S. Dollar Index closed at 8397 down 10.3 points on profittaking after recent gains. The Japanese yen finally staging a recovery after recent long liquidation as Japanese bonds were sold. Other currencies also reflected pre holiday weekend shortcovering with the Swiss Franc gaining 7 points to $1.0407, the Japanese yen 85 points to 9907, and the British Pound 20 points to $1.5114. The Euro lost 2 ticks to close at $1.2939, and the Canadian dollar lost 9 ticks to .9668, as well as the Australian dollar losing 80 points to .9580. We have favored the U.S. dollar not on the basis of a U.S. economic recovery, but in comparison to the economies of the Eurozone countries. Stay with the dollar.