Financial Professionals


The Quarter is coming to a close, some thoughts

Wow, basically we have two weeks left in the quarter. From a market action perspective it feels like it is still January 10th. Over the next two weeks I think the market will have support underneath it. That support comes from the bullish expectations for the Labor Departments Job Report for March, to be released in early April. Quietly economists are looking for an increase of over 300,000 jobs. The census, weather and a naturally recovering job market should collectively provide us with the best number we have had since early 2006.

Source: Bloomberg

Consumer Spending continues to surprise. The XLY (Consumer Discretionary ETF) is outperforming the SP 500 Index year to date (+8.196 vs.+3.129). Of the 9 major SPDR ETF's, only the XLI (Industrials) +9.284 is outperforming the XLY. Further improvement in Consumer Spending will encourage economists to increase their expectations for 2010 GDP. However, recently disappointing Consumer Confidence is not consistent with further improvement in Consumer spending, so standby on this economic talking point.

China Yuan Apppreciation. Clearly policy makers in China are attempting to slow inflation. Historically, their economic efforts to adjust monetary policy have been very proactive. However, I do not expect a "slamming on the brakes". Rather, I expect the Chinese to ease into the necessary monetary policy tightening measures. Therefore, on a risky asset pullback induced by Chinese monetary policy tightening fears, be ready to do some dollar cost averaging buying. Also keep in mind a Chinese Yuan appreciation, in my opinion, is bullish for US Equities.

Bullish chatter regarding the US Dollar has been a constant theme over the past few months. I myself do not believe the US Dollar has established a secular bottom similar to 1974 or 1992. That is counter to the prevailing opinion this year. I am becoming even more confident in my assertion. Think about this: for all the bullish news on CNBC, the Dollar Index is +2.5% this year, the S&P +3.129.

Energy prices are in the seasonal sweet spot. Historically buying Oil futures between Martin Luther King Day and Presidents Day has been a profitable strategy. Continued rising global demand continues to tighten supply as represented by contango coming out of the market. My $90 before $60 is getting close.

Tuesday March 16th we have another FOMC meeting. I do not expect much change from the prior meeting's language with a continued emphasis on "low private sector borrowing costs for an extended period of time." Below is the statement from the January 27th meeting:

Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private Credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit will be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset- Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

Voting for the FOMC monetary policy action were:
Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.

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