Markets tossed by Fed tapering speculation

Overview and Observation: I was managing the International Division for Hayden, Stone & Co., a major New York investment firm, when my correspondent firm in Canada advised me on their direct line that our President was shot in Texas. The news came in five minutes later on the media that in fact President Kennedy had been shot. The ensuing selloff in equities resulted in the closure of the New York Stock Exchange. The next trading day saw the market recover all of the losses from that fateful day. The resilience of the U.S. markets testifies to their ability to deal with events of this magnitude. Markets tend to react “immediately” to news and exacerbate a particular direction before settling back to consideration of valuations based on what the actual results mean. We favor the sidelines during such “reactionary” moves and then make trading decisions once the markets stabilize. Our suggestions are based on a conservative approach to evaluating the markets and not on “shock” price movement. Now for some actual information to guide our readers and clients…

Interest Rates: The March U.S. 30-year Treasury bond (CBOT:ZBH14) closed Friday at 130 18/32nds, up 24/32nds recovering from selling during the week that had been tied to talk of “tapering” the bond buying stimulus program. The Federal Reserve release of its minutes from the last meeting provided the concern that it would reduce its stimulus bond buying program and that sent prices lower and yields higher. On Friday reality set in that the Fed is no where near eliminating the program to encourage consumer and investor confidence, which would be negative for the economy. We like the Treasury bond because we have no misconception that the U.S. economy is “improving” to the extent that the Federal Reserve would consider such a move. The U.S. economy is too fragile to take any such steps at this time and with rates low, prices of Treasury instruments should hold steady to higher.

Stock Indexes: The Dow Jones Industrials closed Friday at 16,064.77, up 54.78 and made a new record holding above 16,000 for the first time ever. The S&P 500 (CME:SPF14) closed also at a new high above 1800 for the first time posting a close of 1,804.76, up 8.91 on the day. The “improving” economy, low inflation and the U.S. Fed’s accommodative monetary policy prompted the heavy shortcovering and new buying of equities. For the week the Dow gained 0.7%, the S&P 500 0.4% and the Nasdaq gained 0.1%. We continue to expect the equity markets to “plummet” from these lofty highs based on our assessment of a weak labor condition, earnings predicated on productivity meaning remaining employees are expected to do the work on those laid off employees. We are entering the holiday retail season and the expectations are for sharply reduced consumer spending. Now is the time for holders of large equity positions to seriously consider implementing strategic hedging programs.

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