Friends,
Well, the euphoria of last week’s election and Fed announcement sure did wear off this week. Both stocks and bonds have had a difficult week, and as has been the case in recent times, the direction of the dollar is the determining factor. Last night we got news that China wants to try to slow down their economy and coupled with the continuing concerns about European debt, the dollar has seen some strength this week. The result has been a pause in the commodity explosion and both stocks and bonds have struggled. It didn’t help that Cisco, the large tech entity, had a very disappointing forecast for the next few quarters, which sent its stock price down and dragged much of the market with it. When the very respected John Chambers (Cisco’s CEO) has concerns about the future, the market takes notice. Lack of any positive news from the G20 meetings this week has not helped either.
The S&P 500 is hovering right above the 1200 level in pre-market futures trading this morning and as we said last week, that is a level that we will keep an eye on. To this point, a pullback after the rise that we have had lately, is not of major concern to the bulls, but the re-emergence of the European debt problem and sloppy earnings reports this week has given the bears some hope. The Fed is still our major focus point and we will be watching to see how the QE II process affects stocks over the next several weeks. The Fed’s liquidity push, coupled with money managers lust for performance, leads us to believe that stocks still will find support for the balance of the year.
You know we have been keeping a keen eye on bonds, and to that end it has been a very interesting week. We have seen weakness in municipal bond prices as fears of defaulting municipalities continues to rise. Federal austerity measures (if ever enacted) would be very difficult on the States, and fixed income investors are starting to take notice. Government bonds have had an interesting week also. On Wednesday, we had a lousy 30-year auction as investors showed little demand for the paper. We have seen the 30-year bond’s yield rise to above 4.20% from 3.53% back in late August. That represents a decline in the price of those bonds of around 12%. The Fed’s focus on the shorter end of the yield curve (for their asset purchases) has left the long end having to fend for itself. On the short end, the Fed will be doing a lot of buying, so short-term interest rates should remain quite low for some time to come. Basically, the Fed is going to be buying most of the upcoming treasury auctions, therefore providing a floor for prices.
This week’s hangover from last week’s party is not a huge surprise, but we will be watching to see if stocks can find firm support in here. As news cycle slows, traders will be watching the Fed over the next several weeks and monitoring the rhetoric from Congress as they return to session. We will be on the lookout for opportunities that arise as the holidays approach and the end of the year is near.
Have a nice weekend everyone.
