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After listening to the Fed Chairman’s remarks the last two days, what I consider the most disappointing is his uncanny way of confusing the markets with his “Fed-Speak” rhetoric. My wife commented yesterday that she tried to listen and understand what he was trying to say, but later said it was a waste of time because he was talking in circles. When I tuned in to CNBC this morning the commentators were saying that the headlines this morning were all over the place. Economists were saying you can read Greenspan’s comments any way you want. The messages in the headlines were so mixed from the Fed, CNBC decided to make it their “Power Poll” question of the day. On CNBC’s website they begin with, “What did Greenspan say?” “The nation’s newspapers were listening… What they heard varied, however.” They go on to have you select one of the following:
The New York Times: “Greenspan says rates could rise
quickly.” My take is that CNBC is using the market survey of investor perception to get a read on inflation expectations. I have read many analysts that suggest it is more important for the Fed to manage the public’s perception of inflation rather than inflation itself. He has now removed any doubts that there will be a 25 basis point increase to the Fed Funds Rate at the upcoming meeting in August. Recently interest rates have been moving lower because of reports pointing toward a weakening economy. Maybe today is the delayed reaction to the horrible report we got on housing starts yesterday, with a drop of 8.5% in June while the forecasts called for an increase in starts. Any way you cut it, Greenspan’s comments point toward concerns of inflation heating up and higher rates to come which will undoubtedly work to push bond prices lower. I am firmly convinced that was his intended goal. Yesterday he cited our two biggest problems as the trade deficit, and the bigger problem of the Federal Budget deficit. He said at some point in the future foreigners will be plugged to the gills with U.S. dollars and demand for dollars will wane as foreign central banks will have to diversify their foreign exchange reserves to other currencies. The U.S. Treasury still has an increasing need to borrow more money, so they have to do all they can to make the debt attractive…they need to offer a better rate of return to bond buyers in order to attract the needed capital. We have another quarterly refunding of U.S. Treasury debt coming up in just 14 trading days and they need to make sure the debt sells, so bring Treasury prices down to help increase demand for the debt auctions. On Monday, August 9th the Treasury will auction three-year notes, two days later is a five-year auction and Thursday the same week 10-year notes will be sold. The total dollars of debt to be sold hasn’t been announced yet, but I’m expecting a number somewhere around the $60 billion area. That’s a lot of paper to sell, and it’s imperative that the government accomplish its borrowing needs. For the next paragraph I did a copy and paste from the Wrap-Up I wrote on May 26, shortly after the last quarterly refunding. I’ll make some good money if the pattern is the same again this quarter. I just went short on Treasuries, and intend to flip it and go long once the debt auctions are complete for the third quarter. Watch the Pattern & the Spin Since I usually write every Wednesday, which happens to be the most common day for auctions, I have made a consistent observation. It seems more obvious when the bigger auctions take place such as the quarterly refunding that usually take place on a Tuesday, Wednesday and Thursday right in the middle of the quarter. The last one happened Tuesday 5/11 through Thursday 5/13. In the weeks prior to the auction we seem to get really positive economic news with new jobs, good sales numbers, and strong growth overall along with worries of inflation. This would cause bond prices to drop making them more desirable as the auction approaches. The markets go into a coma during the debt sales, and then voila!! Like magic we start getting negative economic reports such as weaker job numbers, poor sales for durable goods, bad housing numbers, and threats of potential terrorist attacks that would all be good for bonds, pushing prices higher. The lower yields also work to weaken the dollar. The spin we should start to hear is all about how a lower dollar along with lower interest rates will be good for stocks by improving exports and adding to corporate earnings. Stocks and Interest Rates Wow, I just checked back on the close for stocks today, and they really went skidding out on the lows. The Dow Industrials closed down by 102 to 10,046, the NASDAQ was nailed for 42 points or 2.2% to close at 1,874 led by the Semiconductor Index which was down nearly 4%, and the S&P 500 lost over 14 points to close at 1,093. I don’t believe this is what Uncle Al intended to happen with his report of a self-sustaining economic recovery. If stocks get too bloody, the hot money will continue to run…and possibly to the relative safety in U.S. Treasuries making it more difficult to bring Treasury prices lower. It’s a real mixed bag we have on our hands! Bond prices dropped lower again today with the yield on the 30-year bond increasing to 5.2%, the 10-year note yield moved up to 4.49% and the five-year note yield increased to 3.72%. It doesn’t matter if you are in stocks or bonds today, because you probably lost money in both places. Like I said, the Greenspan magic didn’t last very long! Though rates are now rising again, they didn’t change much with regard to mortgage rates last week. The Mortgage Bankers Association said the 30-year fixed mortgage rate rose by only one basis point to 5.96%, for a third week in a row hovering just below 6%. The MBA Application Index fell 4.0% with the Purchase Index falling 6.1% and the Refinance Index dropping by 0.7%. This data combined with the poor housing starts reported on Monday should be a strong warning that home prices have seen the best days of rapid appreciation. In fact, while Mr. Greenspan was giving his testimony, one of the Senators cited a recent Fed study that forecast home prices will only rise by 2.5% over the next three years!!! That’s a far cry from the double-digit increases we have seen over the last few years. Be careful if you are getting over-extended on real estate. Black Gold and Gold The price of crude oil began the day higher by climbing over $41 per barrel with the Energy Department’s announcement that crude inventories fell by 3.6 million barrels. In a contradictory report the API said inventories for crude actually increased slightly (go figure) sending crude to its low for the day at $40.25 with a subsequent recovery to close at 40.58 for a gain of fourteen cents. Even though crude was higher, gold was tagged for a loss of $5.50 to close at $396.60 due to the stronger dollar. The current uptrend for gold is still intact…likewise for silver with strong support at $6.25 per ounce. The HUI Gold Index held up quite well for most of the day, but finally caved by almost five points to close at 184.47. The broad sell-off in the stock market affected all sectors today. I’m still expecting this brief dollar rally, and especially the big move today to be a short squeeze before the U.S. Dollar Index continues its decline. As stocks and bonds both move lower in price, I’m still waiting for investors to see the precious metals sector (and especially the metals themselves) as a final safe haven to preserve wealth. After hours trading in the Access Market has both gold and silver higher, so we’ll just have to see what tomorrow brings! Have a Great Evening! Mike Hartman Chart courtesy of StockCharts.com
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Federal
Reserve Chairman Alan Greenspan concluded his obligatory, semi-annual
testimony to the Senate and House Committees today, but it doesn’t
look like the markets are buying his entire story for a continued
self-sustaining economic recovery and benign inflation. The bond market
is taking him seriously that interest rates will continue to rise,
albeit at a slow pace.
