Markets turn attention to Fed tapering expectations

Overview and Observation;

Friday the 13th" came and went without even an honorary mention. Markets seem to concentrate on other "criteria" that normally would have had an effect on investor psychology. For one thing "be careful what you ask for." In 2010 the head of the AFL-CIO, the largest union in the country, promoted Obamacare and pushed for it without knowing what it would mean eventually for its membership. Now top members of that union have visited with President Obama to demand an exemption to the program. Too bad individuals have no "clout" to do the same. It seems for now the union has failed to gain such exemption from their White House visit.

On another front the Syrian situation may have been set aside for now. Russian President Vladimir Putin and U.S. President Obama shook hands on an agreement to push Syria’s President Assad into turning over his chemical weapons to the U.N. Unfortunately that will take probably a year, if all goes well, to complete such a turnover. The threat still exists for "someone" to use chemical weapons against the Syrian public and so far there has been no determination as to who was originally responsible. The recent U.S. economic data, including the failure to correctly identify the first time unemployment figure on Thursday due to two states not reporting, lower than expected retail sales, the "exclusion" from the Press on the continuing Eurozone debt crisis among its members appear to have been placed on a "back burner" for now. We will try to "digest" as much as possible to bring "order" to our own analysis and comments. Now for some actual information…

Interest Rates:

The December 30-year Treasury bond (CBOT:ZBZ13) closed Friday at 129 and 30/32nds, up 9/32nds and only slightly higher than the 129 and 06/32nds of last Friday. Bond prices improved after the preliminary reading on the Thomson Reuters/University of Michigan’s consumer sentiment index was reported as 76.8, which was below the 82 consensus forecast. In addition, a report from the Commerce Department that retail sales rose 0.2% in August, below expectations also provided support for Treasuries. The decline in consumer confidence came after recent increases in interest rates and weak job creation. Higher mortgage rates negatively affected the housing market rebound and talk of the U.S. Federal Reserve reducing its key stimulus program when they meet this week also had an impact on confidence. We do not believe the rhetoric from Washington that the labor situation is improving because two factors remain of concern: The effect on small companies of Obamacare, which could cause employers to cut back on hirings, or hiring of part time workers over full time, and the "adjustments" by the Labor Department of unemployed whereas the 7.4% unemployment rate is in our opinion, fictitious. The true rate based on factoring in the number of workers who left the workforce and the "underemployed" is probably upward of 15%. We look for bonds to remain in a range with an upward price bias. Our program of "strangle spreads" should be put in perspective for traders.

Stock Indices:

The Dow Jones industrial average closed Friday at 15,376.06 up 75.42 points and for the week gained 3.04%. The S&P 500 (CME:SPU13)closed at 1,687.99, up 4.57 and for the week gained 1.98%. The tech heavy Nadaq closed at 3,722.18 (CME:NQZ13), up 6.22 and for the week managed a gain of 1.70%. Investors lent more credibility to the U.S. Federal Reserve possibility of "tapering" its stimulus program, which they believe showed the Fed’s confidence in the economic gains. However, the fact remains that disappointing economic data, the revisions in the unemployment data and ongoing concerns over Egypt, and Iran’s participation with Russia related to the "fragile" agreement on Syria’s chemical weapons remain problematic. After the Obama "red line" that passed with no action by the President, the term "Paper Tiger" emerged and lent concern as to what the U.S. would do in the event of an attack on its greatest ally in the area, Israel. As President Ronald Reagan once said, "Trust but verify." That remains excellent advice. We remain convinced that a market "shakeout" is due and suggest once again that investors with large equity holdings implement strategic hedging programs.

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