QE taper expectations driving markets to new highs

Overview and Observation:

The Senate confirmation hearings for the new Federal Reserve Chairman went well with the appointee, Janet Yellen stating that she agreed with the current stimulative policy. That "soothed" the markets and allowed equities to make new highs. With confirmation all but completed, the "real" problems are re-emerging. The economies of France, and Germany have slowed to the point where one wonders how further bailouts of the weaker Eurozone countries can be expected. The question of adding debt to countries that cannot service their current debt is tantamount to "throwing money down a well" in my opinion. That being said the current debt crisis in the Eurozone could only accelerate.

Another factor to consider is the U.S. economy where the labor situation remains a major concern. "An unemployed consumer does not consume," and unless the U.S. Government recognizes the need for adjusting its current attitude toward business, employers will not hire people. The current policy is punitive as far as its imposition on business related to taxes and health care and is a job "killer," not creator in our opinion. Companies are reducing their employee work hours to below the requirement for providing health care and laying off people to maintain minimum profitability levels.

With all the global negatives I see, I wonder what the next "pin to drop" will be. Now for some actual information to once again hopefully help my readers navigate the "maze" of influences to our markets…

Interest Rates:

December Treasury bonds (CBOT:ZBZ14) closed at 132 20/32nds, up 3/32nds on Friday and up 32/32nds for the week. The gain was tied to dovish comments by Fed Chairman Appointee Janet Yellen that she agrees with the current stimulative program instituted by departing Chairman Bernanke. The market "approves" of the continuation of the bond purchase programs. However, some regional presidents have indicated a December "taper" may be warranted and that may impede any upward price movement for Treasuries. Other factors providing the impetus for bond traders were the October export price decline of 0.5%, the U.S. import price decline of 0.7% and more importantly the Empire State new order minus 5.5 against the previous positive 7.8. We prefer the "strangle" spreads and look for bonds to remain in a range for now.

Stock Indexes:

The Dow Jones industrials closed at 15,961.70, up 85.48 and posted a new high on Friday. For the week the Dow gained 1.3%. The S&P 500 closed at 1,798.18, up 7.56 and for the week was up 1.6% also to a new high. The tech heavy Nasdaq closed at 3,985.97, up 13.23 but not yet at a new high which would be over 5,000. The extension of the six weeks of equity gains was tied Friday to the Yellen confirmation hearings where she indicated it was too early to end the central bank’s stimulus program. We are concerned that the markets have continually exceeded what we consider "reality" tied to economic developments and even earnings, which in some cases have not met expectations. Once again we strongly suggest the implementation of strategic hedging programs.

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