Overview and Observation;
The ramifications of Fed Chairman Bernanke’s speech last week are still resonating in the marketplace. Far too much attention, in our opinion, was paid to subject matters that are of no significance to global economics. The riots of millions in Egypt where the U.S. President had "supported" the removal of its President Hosni Mubarak, and "congratulated" the Muslim Brotherhood controlled government there with billions of taxpayer dollars of what I consider "tribute" to Islam. The "perpetual’ controversy over the immigration problem in the U.S. where millions of illegals remain in flux since the vote in the Senate will be challenged in the House of Representatives. The concept of asking illegals to come forward, identify themselves, wait 10 or more years to become naturalized, pay taxes or fines, and the "promise" of them going to the back "of the line" makes no sense to me or probably to them either. It is truly a problem of humanitarianism where those that "sneaked" into the country illegally, had children (who are now Americans) may be separated from them if they are caught not submitting to the new law and I see no viable solution. Another "favorite" subject of the media is the concentration on the $100 million being spent on the President’s trip to Africa with his family, which we see as having no financial or economic benefit to U.S. taxpayers at a time when the economy is "slipping back" into recession. While it is incumbent upon those of us who try to analyze the markets to make sense of the plethora of news, it is almost impossible to "throw" all of the "bits and pieces" of information into a "pot," "cook it" a while, and somehow come up with an "economically applicable and justifiable" mixture. For now I will use my 45 years of experience to "weed out" what I consider to be the "insignificant" and concentrate on what may be important to my readers and clients. Now for some actual information to accomplish that…
September Treasury bonds closed Friday at 135 24/32nds, up 5/32nds with a yield of 3.5% after it rose to over 3.6% in the aftermath of the Fed Chairman’s speech last week. Concern that the Fed may consider winding down its bond buying program later this year prompted the decline in bond prices. We do not feel the current rate of growth in the U.S. as exemplified by the less than "optimistic" GDP increase of 1.8% in the January to March period, down from the prior estimate of 2.4% is indicative an "economic recovery". The slower increase in consumer spending, the main element of the U.S. economy rose by only 2.6% against the prior estimate of 3.4% and does not support the thesis of a strong economy. Some selling of bonds resulted from the Thomson Reuters/University of Michigan’s consumer sentiment index for June coming in at 84.1 against consensus of 82.8. We wonder if the "consumers" polled were those exiting Tiffany’s with little blue bags. Since we do not agree with the assessment that the Fed will curtail quantitative easing any time soon, we favor the long side of Treasury bonds or the purchase of calls.
The Dow Jones Industrials closed Friday at 14,909.60, down 114.89 or 0.76% but for the week managed a gain of 0.74%. The S&P 500 closed at 1,606.28, down 6.92 or 0.61% but rose 0.87% for the week. The tech heavy Nasdaq closed at 3,403.25, up 1.38 or 0.04% and for the week gained 1.37%. The major impetus for the week’s trading centered around the U.S. Federal Reserve possibility of tapering of the bond buying program with the market moving back and forth in conjunction with reports by various Fed Presidents. We continue to feel the U.S. equity markets had moved far in advance of the "real" economic condition and that a continued "correction" will be forthcoming. We once again strongly suggest holders of large equity positions implement hedging strategies.