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ACTIONS SPEAK LOUDER THAN WORDS

Markets are mixed and choppy in today’s trading following the meeting of the Federal Reserve yesterday and the State of the Union Address. The Dow Industrial Index is slightly higher, the NASDAQ Composite lower, Treasury notes and bonds are lower, and the dollar is up against all major currencies. Markets are working to digest the changes in the wording from the Federal Reserve from “measured” rate increases to, “Some further tightening may be needed.” Some analysts may also be looking for a clue as to where the cuts will come in government spending based on the President's speech last night.

Fed Fund futures are indicating an 82% probability the Fed will raise interest rates another 25 basis points when they meet again on March 28th. Notes and bonds are selling lower which pushes interest rates/yields higher. Bond investors are looking at the enormous supply of new debt scheduled to hit the market next week with the quarterly debt refunding from the federal government. The Treasury announced today they intend to sell $21 billion of three-year notes on Tuesday, $13 billion ten-year notes on Wednesday and have resurrected the 30-year bond to auction $14 billion on Thursday. The new supply will total $48 billion next week, and the Treasury also said the new debt needed for this quarter has been bumped-up from the estimated $171 billion to $188 billion. The Congress will have to raise our country’s legal debt limit by the middle of this month or else the federal government will not be allowed to auction the proposed debt. Could this be an opportunity for Congress to play a little hardball with the Executive Branch? We shall see.

Watching bond prices move lower in the week prior to big debt auctions is common, as it makes the debt more attractive to potential buyers. Just to stay afloat, we need to borrow more than $2 billion per day from foreign countries. For me it is no wonder the Federal Reserve is going to stop reporting the M-3 money supply by the end of March. If foreigners decide to stop buying our government’s new debt, the Federal Reserve will have the ability to create new “digital” money out of thin air to loan it to the government themselves. This process is called “monetizing” the debt and is considered highly inflationary. They will use U.S. banks with offshore offices in the financial centers such as London and the Caribbean Islands to make it appear that foreigners are buying the debt paper. China has already stated that these practices are not “honorable” conduct in the financial markets.

The Federal Reserve said economic activity has been uneven, but solid. They also said inflation is still well contained, but today the ISM data shows inflation is increasing. The prices-paid index rose from 63 to 65, while the overall manufacturing index fell from 55.6 to 54.8. The slowdown in manufacturing should be anticipated with the continued flattening of the yield curve which indicates a slowing economy. The last time I looked, two-year notes were yielding 4.58%, five-year notes had a yield of 4.50% and ten-year notes only paid a yield of 4.57%. Yesterday’s rate increase by the Fed has inverted the curve on the short end, but 30-year bonds are yielding just north of 4.7%...not much to write home about for those who need fixed-income securities to provide income!

Higher interest rates and oversupply are taking their toll on the housing sector as pending sales for existing homes fell 3% in December, the fourth consecutive monthly decline. Also confirming the slowdown in housing, the Mortgage Bankers Association said its application index fell 5.1% with the purchase index down by 8.0% and the re-finance index down by 1.5%. Mortgage rates moved higher last week with the average one-year ARM higher by four basis points to 5.48% and the 30-year fixed rate moving 16 basis points higher to 6.20%. The chief economist for the National Association of Realtors is forecasting 30-year fixed rates in the neighborhood of 6.6% for the balance of this year and roughly 7.0% in 2007. Be on the lookout for excess inventory of both new and existing homes for sale. As the numbers above indicate, home sales are slowing but construction spending in December rose by 1.0%.

Frustrations to Solutions

When I last wrote on January 18th, I became rather frustrated and heavy-handed about the garbage reporting from the mainstream media. The main topic that irritated me was the complete lack of reporting about the Iranian Oil Bourse (exchange) that will be selling oil for euros rather than dollars beginning March 20th. As I said then, the threat to the dollar is much bigger than the threat of a nuclear-armed Iran, but you won’t hear about it on the evening news or in your local newspaper. The mainstream media has become a massive propaganda machine for the powers that be.

Rather than ranting on and on about the lack of truth in the sound bites on TV, I decided to be proactive in helping the Financial Sense readers find a great source of information on geopolitical developments around the globe. I requested permission from Mr. Joel Skousen to have his latest update of the World Affairs Brief posted in its entirety on the Financial Sense website. Mr. Skousen graciously granted his permission for all of you to get a taste of the things that are really going on in different parts of the world.

I have absolutely nothing to gain personally by recommending the World Affairs Brief, except that I will not be covering as much detail in geopolitical developments unless I believe they will have a major impact on the financial markets. Mr. Skousen is far more knowledgeable in global politics than me and has tremendous resources in gathering information. He offers his weekly newsletter with a new issue every Friday at a very modest cost. I recently paid my $36 to continue receiving his briefings for the rest of the year. I especially wanted all of you to get a look at the most recent issue because it covers a broad range of topics and is titled, “OVERVIEW: WHAT’S COMING IN 2006.”

Back to the Closing Numbers

The NASDAQ Composite struggled in negative territory for most of the session on the heels of a big hiccup from Google after the bell yesterday, but not to worry! In the last few hours of trading the index moved 14 points higher to climb out of negative territory posting a gain of four points on the day at 2,310. It was interesting to watch the intra-day movement in the stock index futures and the stock index cash prices. The S&P 500 futures closed with no change for the day at 1,281, but the cash index rose two points to close at 1,282.

The Dow Industrials however were a different story. In the last hour of trading someone lit a fire under the Dow futures and they climbed higher to close the session at 10,985, a gain of 125 points or 1.15%. The DJIA cash index closed at 10,953 an increase of 89 points or 0.82%. Bill Buckler who writes the Privateer newsletter out of Australia has said for many years that Dow 10,000 is a matter of national security in order to continue attracting foreign investors and to keep Americans fully invested in the stock market. Soon the magic number for the Dow will be 11,000 as a matter of national security. When I watch the action between the futures and the cash market, I have to believe Mr. Buckler is clearly on his game! (Try a Google search on the Plunge Protection Team.)

In similar fashion, the energy complex was trending higher in the first half of today’s trading, but high energy prices are not politically expedient. Heating costs are a big topic in the context of consuming disposable income. I found the action in natural gas of particular interest today, especially since the inventory data is not due out until tomorrow morning. In the first hours of trading nat-gas was roughly between $9.50 and $9.85. In the last two hours natural gas for March delivery was absolutely crushed from $9.73 to $8.70, and we don’t even get the inventory data until 8:30 a.m. tomorrow. I would sure like to know who the aggressive sellers were. Crude oil moved higher to $69 a barrel after the inventory data was released, but reversed hard to the downside to close at $66.40 for the session. If I sound a bit cynical, do a Google search on the Working Group on Financial Markets and you will probably begin to question the strange behavior of our managed media and rigged markets. They started in 1987, but moved into high-gear in 1995 when Clinton/Rubin initiated the “Strong Dollar Policy.”

As I mentioned at the top of the Wrap-Up, bonds closed modestly lower which moved both interest rates and the dollar higher. I believe the big boys are preparing for the Treasury debt auctions next week. Gold and silver were slightly lower today with gold down $0.90 at $574.60 and silver down nine cents at $9.79 per ounce. It will be interesting to see how the precious metals prices fare as we move through the Treasury auctions. Clear the decks to buy all those government IOU’s!

Final Thoughts

Since I have now provided you with a great source of information with the World Affairs Brief to look at geopolitical developments, I don’t intend to say much about what I heard last night in the State of the Union Address. I only want to make one key point. In his speech the President said, “America’s prosperity requires restraining the spending appetite of the federal government.” The line sounds good, but reality is a far cry away! Under President Bush, the federal government has borrowed more money than all previous Presidents combined! Last year the government borrowed $319 billion and they are now expected to borrow somewhere near $400 billion in 2006. As I said in the title to this Wrap-Up, actions speak louder than words!

Have a thoughtful and restful evening!

Mike Hartman

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