Yesterday I wrote, “Today is starting in better shape, but then again the lead story appears to be about (debt-market related) bail-out problems at Bear Stearns.” The debt market issue is far, far greater than anything to do with Bear Stearns (a high-quality company in my books), and will not be quickly resolved.
Interest rates, in the interim, will have to rise because (i) capital risk must be re-priced, and (ii) global economic growth driven by BRIC economies will demand liquidity at a time that central banks have a need to contract credit. Interest rates are today at historically relatively low levels, but, unfortunately, credit quality is also very, very low.
The answer to market direction lies with the Fed, which today reports on their decision and statement as to policy. The policy statement is, for the most part, useless as a guide to the market, and something I call a sham. Regretably, the Fed is not required to release their strategy and tactical plan, which is released to the banks via buy and sell orders from the FOMC trading desk.
The public is not privy to this Fed-HB&B insider trading, and so we have to wait for (i) the market action, and (ii) the spin from the bankers, to try to figure out for ourselves what’s happening. This juvenile process makes for difficult decision-making by the independent owners and managers of capital, and leads to accusations that the system is rigged.
Yesterday, Treasury Secretary Paulson said that he intends to change the system. I say Hank Paulson is the last person on earth that we need to fix anything on our behalf. He, as much as anybody, through his direct actions of past years is the culprit.
Let’s take a look at yesterday’s trading. It seems that almost always when the FOMC meets the market turns bullish and the usual bullish suspects are the banks and technology. That was the case yesterday as the Dow turned around the sour notes into almost triple-digit music.
What can the FOMC trading desk do when action is needed? They can buy back some bonds from HB&B, which floods capital into the banks, which is then multiplied several times under the reserve banking rules, in the form of more loans. Bonds are then purchased in the public market, pushing up prices and lowering yields.
Yesterday, the 30-year Treasury Bond ($USB) lifted +0.32 pct to 107.12, and the yield dropped -0.61 pct to 5.189 pct. The yield on the US 10-year dropped to 5.07 pct. Happy days, the banks are smiling.
Crude oil ($WTIC) jumped +1.77 pct, however, partly because OPEC leaders are not prepared to take USD comprised of twenty wooden nickels for their valuable natural resource.
Gold ($GOLD), unfortunately, remained flat (for the day anyway), losing 50 cents (ten wooden nickels) to 644.80. The misfortune, of course, is ours since the Fed also sold gold. We have to guess at that of course because transparency in capital markets, preached from on high, is merely pretence.
So, within this arcade, or shall I say charade, the usual suspects lifted. REITs ($DJR) jumped +2.10 pct and Broker-Dealers ($XBD) went higher too (+1.51 pct). There were no losers on the session because even the goldminer traders figured out what was going down, and pushed the $XAU index up by +1.74 pct.
The day’s big industry winners were the Semi-conductors ($SOX) and Biotechs ($BTK), each up +2.19 pct. For the ten GICS sectors, the winner was Energy (XLE +1.55 pct), although Financials (XLF +1.50 pct) and Utilities (XLU +1.47 pct) were not far behind. The laggards were the defensives, Consumer Staples (XLP +0.78 pct) and Healthcare (IYH, XLV +0.83 pct).
All around, a pretty good day for Messrs Bernanke and Paulson. The rest of us were herded like lambs to the slaughter.
But, I cannot complain. Precious metals cannot be held down in this environment.
June 28, 2007
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