Overview and Observation;
U.S. Federal Reserve Chairman Ben Bernanke, in his speech this week, intimated that quantitative easing through the purchase of Treasury instruments would come to an end possibly as soon as the end of the year. That statement sent global markets reeling and U.S. interest rates climbing. The resulting selloff in equities, Treasuries and global currencies as well as commodities was disconcerting to the marketplace. The only beneficiary of the "meltdown" was the U.S. dollar, where higher U.S. rates attract dollar investment. The margin calls generated by the declines in commodities and equities prompted the liquidation of many positions to meet those calls and the selloff "fed on itself." The "house of cards" I suggested in my weekly market letters has come to fruition and the loss in values will take some time to mitigate. My suggestion to clients in the past has always been to not meet margin calls with money, but with liquidation. A margin call is an indication that you are on "the wrong side of the market," and liquidation offers the opportunity to "get out and take another look." Now for some actual information to hopefully guide my readers through the maze of analyses...
September U.S. 30-year Treasury bonds closed at 134 21/32nds, down 1 15/32nds losing nearly 5 points since last week on expectations of the U.S. Federal Reserve announced scaling back of its bond purchase program later this year. The yield on the 30-year bond rose to 3.585% sending prices sharply lower and negatively impacting the long call positions we have for clients. We expect the markets to stabilize and the damage that could be done at these rates to the housing and mortgage markets would be severe, so we expect bond yields to recede over the coming days. On Friday, the St. Louis Federal Reserve Chief James Bullard issued a statement calling the Fed’s plan to outline its pullback of asset purchases "badly timed." He stated that the Central bank should have awaited more "tangible signs" of the economic recovery before considering such a move. We agree since we do not see a sustainable "economic recovery" that those with "rose colored glasses" see. Once again the "concept" of a jobless recovery is a fallacy in our opinion. Hold current call positions but do not add just yet.
The Dow Jones industrials closed Friday at 14,799.40, up 41.08 but after the over 330 point loss on Friday posted a weekly loss of 1.8%. The S&P 500 closed at 1,592.43, up 4.24 points but for the week lost 2.10%. The tech heavy Nasdaq closed at 3,357.25, down 0.22% and for the week lost 1.94%. Concern that the U.S. Fed would phase out its bond purchase program by the end of the year thereby prompting an increase in rates was the main reason for the Thursday selloff. Investors suffered the resulting margin calls and were forced to either put up more money or liquidate marginal positions thereby extending the Thursday loss. While our "crystal ball" offered no warning about the Fed action, our overall opinion, as my readers know, is for a sharp equity market selloff based on our thesis that there is no such thing as a "jobless recovery." We also indicated that the markets had gotten ahead of the basic economic evidence and was due for a major correction. We do not feel the "correction" is over and once again warn investors that the prudent avenue to preserve capital would be the implementation of strategic hedging programs.