Overview and Observation;
Surprise, Surprise. U.S. Fed Chairman Bernanke "shocked" the markets on Wednesday announcing the Fed is maintaining the stimulus program when the investing world was expecting a taper. Expectations were for the Fed to reduce the $85 billion monthly bond program by $10 billion. Obviously the Fed did not see in the U.S. data, the recovery the administration has been seeing. We concur since the all-important jobs data is not reflective of a strong economy. The unemployed and just as importantly the "underemployed" data are problematic for various reasons. For one, the tax base is reduced and that implies reduced income to the U.S. government while spending continues unabated. Also, the underemployed are also paying "less tax" since they took jobs paying less than the jobs they lost. Another factor to consider is the lower participation index which distorts the final jobs numbers. The possibility of a government shutdown looms as the two parties and the President are stubbornly maintaining their respective positions. The head of the AFL-CIO recently met with the White House to get its membership "exempted" but were turned down. It is hard to believe that the major supporters of the Democratic Party have now turned. We will have to wait and see how many of the Obamacare elements are delayed, exempted and for whom. Now for some actual information.
December Treasury bonds (CBOT:ZBZ13) closed at 131 19/32nds up 12/32nds spurred by the Wednesday Fed statement maintaining the stimulus program. The investment community was taken by surprise having already decided which segment of the stimulus program would be reduced. Now the expectation is for the tapering to occur in October, assuming the Fed views the economic data in a more positive way. We see continued economic stagnation and with the budget battle brewing, we prefer a neutral stance.
The Dow Jones Industrials closed Friday at 15,451.09, down 185.46 or 1.19% but for the week managed a gain of 0.49%. The S&P 500 (CME:SPZ13) closed at 1,709.91, down 12.43 or 0.72% lower but for the week gained 1.30%. The Nasdaq closed at 3,774.73, down 14.66 or 0.39% but for the week gained 1.41%. Much of the gains took place prior to the Wednesday announcement by the U.S. Federal Reserve of maintaining the stimulus program against expectations of tapering. The Fed maintaining the stimulus program was evidence that they did not see the reason for the U.S. Administration’s optimism. Neither do I for that matter.