Overview and Observation:
"Don’t walk too close to the tall buildings on Wall Street……" was part of my admonition after the Oct. 19, 1987 stock market "collapse" of 22.61% on "Black Monday." The next day the market rallied, but without many of the investors whose accounts were liquidated as they could not meet the intraday mark-to-the-market margin calls.
We are among the group that has called for a market correction for some time. The global markets reacted after the Chinese reports of contraction, which could impact many of its trading partners as well as emerging markets that rely on China for trade. Also of some concern is the massive U.S. debt carried by the Chinese. We are monitoring closely any impact that emerges from the Chinese economic condition and will report to clients directly.
Other factors governing the activity are the U.S. economy, corporate earnings, the labor situation, and of course the ongoing European debt crisis, which has been mostly ignored by the media of late. Another factor to consider is the recent letter from U.S. Treasury Secretary Lew to congressional leaders that "so called extraordinary measures to keep the government from hitting the debt ceiling would be exhausted by the end of February." The payment of Treasury bill instruments could be impacted by the inability to borrow funds beyond the debt ceiling. Once again, the U.S. government makes money "the old fashioned way"…..they print it…. If the U.S. Administration does not reign in its spending, the situation will only grow worse.
Another of my "famous" statements "an unemployed taxpayer does not pay taxes, which impacts the federal government’s income and exacerbates the budget deficit." We will be listening intently to the President’s State of the Union address without much hope of any significant new ideas for putting people back to work. Blaming the wealthy for getting richer and the poor and middle class for getting poorer does not solve the basic problems. We feel the elimination of certain taxes, as well as the reduction of corporate taxes to compete with foreign countries could bring jobs back to the U.S. and reverse the downward economic spiral for the American people. Now for some actual information to guide my clients through the maze of data and information……
The 30-year U.S. Treasury bond (CBOT:ZBH14) closed Friday at 132 30/32nds, up 20/32nds as investor fears over global economic growth prompted the "transfer" of funds from risk assets to the relative safety of the U.S. Treasury market. The yields on the 30 year bond declined to 3.644%, down 4 basis points. Yields move conversely to prices in fixed interest rate instruments. We are nearing the high of our projected range, 135, for the 30 year bond and may decide to sell calls or buy puts on any protracted gains since interest rates are already near the lows we projected in previous commentaries.
The Dow Jones Industrials closed at 15,879.11, down 318.24 points or 2% and for the week lost 3.5%. The S&P 500 (CME:SPH14) closed below the psychologically significant 1,800 for the first time since Dec. 17 closing at 1,790.29, down 38.17 points or 2.1%. For the week the S&P lost 2.6%. The Nasdaq closed at 4,128.17, down 90.76 points or 2.2% and for the week lost 1.7%. The main impetus for the massive high volume selling was the slowdown in China’s manufacturing. However, investors have been concerned, as we have, with the continuing gains in equities in the face of a "stagnant" U.S. economy and the ongoing labor situation where the actual rate of underemployment and unemployment nears 17%. As indicated earlier in my presentation are the statements of "an unemployed consumer does not consumer," and "an unemployed taxpayer does not pay taxes" reducing the income to the Federal government while there is no change in its spending will only further investor angst. Our admonition to holders of large equity positions to implement risk hedging strategies has now proved correct. We do not know if this is the beginning of our projected 10%-15% correction or just a "bump in the road" as our President likes to call problems. We fully expect the magnitude of our correction expectation to take place with "timing" the only question.
The U.S. dollar (NYBOT:DXH14) closed at 80.555 on Friday, up 3 ticks after recent losses tied to economic reports such as the slowdown in Chinese manufacturing, and U.S. manufacturing. For the week the dollar index as measured by 6 major currencies, lost 0.9%. The March Euro lost 20 points to $1.3676, the British pound lost 1.30 points to $1.6494, the Australian dollar 59 points to 86.72c while gains were posted in the Swiss Franc 34 points to $1.1182, the Japanese yen 85 points to 0.09780, and the Canadian dollar 37 points to 90.23c. Lower U.S. interest rates detract from dollar investment and as treasury prices gain, yields decline on fixed interest rate instruments. We continue to favor the dollar on any further declines since the current low interest rate climate cannot, in our opinion, be maintained without further economic ramifications.