Fed Chairman Bernake Will Speak On The Economic Outlook Tonight

Bernake Speaks6/07/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

The Nitty Gritty Details:

U.S. stocks opened higher this morning as bargain hunters stepped in to stem the recent tide of market retreats.  Helping sentiment this morning are reports of potential acquisition activity in the online banking and packaging industries, as well as comments from ECB head Trichet signaling that he may back a Greek debt exchange.  Tonight, Fed Chairman Bernake will speak on his economic outlook, something that is sure to be a focus for traders tomorrow (Wednesday) morning.  European markets are higher in mid-day trading overseas, helped by a rebound in banks and resource stocks.  Asian markets closed mixed with the Nikkei snapping a three-day losing streak while the Hang Seng fell.  Despite a weaker dollar, most key metals except silver are flat-to-lower this morning, while crude is down slightly due to expectations that OPEC might raise output at its Wednesday meeting.

Looking back at Monday, the four-day market losing streak continued as growth concerns persisted.  This has brought the nearly six-week pullback to over 5% and left the S&P 500 at its lowest level since March 23rd.  The sell-off was broad-based as all 10 S&P sectors fell, but the selling pressure was particularly acute in the Energy and Financial sectors.  Crude fell about a dollar to near $99, while regulatory concerns continued to weigh on the banks, in addition to the downshifting U.S. economy.  Elsewhere in commodities, key metals and natural gas rose, while agriculture prices fell.  Currently, the S&P is up just 3% on the year.

Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:

The Markets Broken Down:

  1. Municipal defaults increased in May. Year-to-date municipal defaults increased to over $600 million in May from $250 million at the end of March.  The increase was due to Florida housing related issuers failing to make interest payments.  Non-rated Florida housing related issuers lead defaults by a wide margin and speculative issuers continue to dominate municipal defaults with high-quality defaults extremely rare.  Even with the May increase, defaults are running 40% below the 2010 pace.
  2. China has divested 97% of their Treasury-Bill holdings, but still owns a large portion of U.S. Treasury debt. Simply put, China is rolling their T-Bill positions over into other types of Treasury issuance.  Analyzing changes in foreign purchases requires “looking under the hood” to see how T-Bill holdings changed relative to more significant note and bond holdings.  Part of the T-Bill reduction is simply a reflection of a shrinking T-Bill market as the Treasury seeks to extend the average maturity profile of debt by issuing more notes and bonds at the expense of T-Bill supply.
  3. OPEC is expected to raise output targets to make up for the loss of Libyan crude. OPEC is expected to make this announcement tomorrow at its regularly scheduled meeting in Vienna.  The increase in announced production will simply move that metric in line with what is actually being produced today by OPEC.  Counter intuitively, over the last 10 years or so, OPEC’s production targets have moved in tandem with oil prices.  That is when OPEC raised production in 2007 and 2008 as oil moved from $60 to $150 per barrel.  As OPEC cut production in mid-2008, oil fell from $140 to $40 per barrel.  OPEC’s latest move comes amid concern among OPEC nations that oil over $100 per barrel for a sustained period could crush global demand, sending oil consumers to alternative fuels.
  4. Treasury valuations are near “double-dip” highs. Inflation-adjusted, or real yields, are near their lowest levels since last August and late September when double-dip recession fears dominated market psychology.  The lower the real yield, the more expensive Treasuries are, and vice versa.  It appears that it might take several better- than- expected economic reports to lead to higher yields and lower valuations among Treasuries.

As always, email me here with your questions or comments.  I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.

Greg Powell, CIMA
Wealth Consultant

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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