Market Commentary

Stock and bonds both came under pressure while the dollar rallied.
October 27, 2009

Stock and bonds both came under pressure while the dollar rallied.  The accepted reason for the treasury drubbing was the record $123 billion auction of notes to fund the stimulus program and record deficits.  Stocks came under pressure on concern lawmakers will phase out a tax credit for homebuyers and Bank of America will have to sell shares to repay the government.  The dollar advanced from 14 month lows because it was oversold?

I think the markets are discounting a stronger than expected third quarter GDP, a report announced in Thursday.  What is the odds growth will indeed be stronger than expected, an event that would be consistent with the majority of recent data releases?

At casual glance during the past two weeks there have been at least four Federal Reserve officials, including the Chairman, stating if growth resumes at pace faster than expected, The Committee would be prepared to radically alter monetary policy.

Last week there was an article in the Financial Times suggesting the American Central Bank will significantly tweak its post meeting statement.  As of Friday the markets as indicated by Fed Funds futures are not expecting any change until the second half of 2010.

Returning back to yesterday’s market activity, higher interest rates will protect the dollar, hence a dollar rally.  Equities are mortified at the thought of losing the high power government money that has assisted a rebound.  Can the economy survive without massive quantitative easing policies?  And then there is the deficit.

Even though this statement supports higher bond prices, I think the Administration is in trouble.  As per a recent Gallup Poll, The President’s approval rating is at the lowest for any president at this juncture of any presidency in the last 50 years.  A major reason…deficits.  Wow!

Most will agree the global financial system literally cannot fund trillion dollar deficits for many years.  There are not just enough of global funds.   I think the poor polling numbers are potentially reflected in the stronger dollar; a relief rally.

I also believe treasuries fell because of growth concerns.  The incipient recovery is gaining momentum.

As noted several times opinions vary greatly about the strength and durability of the recovery.  Several Primary Dealers are suggesting 1H10 growth will be between 4% and 5%, vastly higher than the consensus view of around 2%.  Who will be correct?  All must remember the consensus has been substantially wrong since February 2007.

What will happen today?  Consumer Confidence, the Richmond Fed and the S & P/CaseShiller Index are on tap.  All data points can impact trading.

Last night the foreign markets were mixed. London was up 0.55%, Paris up 0.33% and Frankfurt up 0.31%.  Japan was down 1.45% and Hang Sang down 1.86%.

The Dow should open flat.  The 10-year is up 4/32 to yield 3.54%