Overview and Observation;
The market action this past week clearly demonstrates the extreme sensitivity to any news related to the U.S. Federal Reserve. The historic relationship between supply/demand factors continues to play a role in price action for many of the commodities we follow including equity indexes, Treasury securities and traditional commodities. However, any reference to changes in the economic condition of the country or the "pronouncements" of the various U.S. Federal Reserve regional Presidents as related to their perception of the economy causes sharp global reaction. The basis for most financial markets is the U.S. interest rate structure as related to that of its global trading partners individually or collectively. A defacto change in rate relationships generated by either the U.S. rate adjustment or that of its global trading partners has an immediate effect on currencies, which in turn translates to specific investment instrument values. One might suggest the analysis of the basic interest rate anticipation to determine strategy as opposed solely to the application of supply/demand factors of the markets they trade. For that reason we sometimes suggest the "sidelines" simply due to the inability to forecast "philosophical" changes within those institutions whose decisions could change market direction dramatically. Corporation concerns over the impact of the implementation of "Obamacare" are prompting the huge increase of hiring of part time workers as opposed to full time workers for that reason. The reduction in "taxable income" could also cause the reduction in consumer spending and that would not bode well for economic expansion. We will have to see how corporations react once full implementation of Obamacare takes effect. Now for some actual information along with my usual spin…..
The September U.S. Treasury bond closed Friday at 134 26/32nds, up 26/32nds slipping slightly off its intraday high of 134 31/32nds after the consumer sentiment report from the Thomson Reuters/University of Michigan showed a positive reading of 85.1 for July. That was a six year high and better than the expected 84 by economists. This coming week important information includes the Wednesday Fed Open Market Committee report as well as the Friday monthly labor report. One of our concerns is the bandying about of who might be considered by President Obama to head the Fed once Chairman Bernanke steps down. The President’s consideration of Larry Summers could be problematic in our opinion. Summers was instrumental in the repeal of the Glass-Steagall Act allowing Banks to establish Brokerage entities and market "mortgage" packages through its brokerage facilities globally. I feel the single most dramatic cause of the housing and mortgage debacle was the ability for those banks to package good and bad mortgages, securitize them, and market them globally. Needless to say I would prefer Yellen to Summers but perhaps other qualified people could be considered. Compared to Summers, I would prefer "Elmer Fudd"… With our expectation for continued "weakness" in the U.S. economy, I like the long side of bonds. However, without the foresight of what the Fed feels and the Friday labor report, I would opt for the sidelines until more definitive information is available.