Market Commentary

Stocks declined yesterday on fears the rally has outpaced the prospects for economic growth.
November 20, 2009

Stocks declined yesterday on fears the rally has outpaced the prospects for economic growth.  Further catalysts include a downgrade of a high profile technology company and declining commodity prices.  Does this explanation have merit especially as the fourth quarter is now expected to grow by 3.0%? Last week consensus was expecting a 2.7% growth rate up from 1.5% anticipated in October.

Can I suggest another possibility?  Yesterday the House Financial Service Committee was considering how much to expand audits of the Federal Reserve.  Under a Democratic proposal, the House would maintain its ban on audits of Fed interest rate decisions.  Under the Republican proposal the House would audit such decisions.

In my view such Republican proposal would threaten the authority and independence of the Federal Reserve and would increase the probability of politicizing monetary policy.

The basis for these hearing was last year’s unprecedented Federal Reserve action where an unelected body unilaterally obligated US taxpayers to huge financial obligations.  The Constitution states only Congress—an elected body--has the authority to spend tax payers money.

While I will philosophically agree with the above view, last fall the global financial system was on the edge of the abyss.  Last year I wrote history will judge some of the Federal Reserve’s actions as incorrect but where I sit/sat decisive and dramatic action was/is needed to rescue the financial system putting off until tomorrow the task to reconcile the unintended consequences. 

I think most will agree Fed policy did indeed prevent a total catastrophe and the hearings today is nothing more than Monday morning quarterbacking attempting to increase one’s power ignoring the dire situation which was then present. 

However I do ask did not the Federal Reserve Act of 1913, an act ratified by Congress following the 1907 Panic, create the Federal Reserve, a government body whose primary purpose/objective was to provide liquidity to the financial system?

Turning briefly to yesterday’s data, the Index of Leading Economic Indicators rose for the seventh consecutive month, the longest streak since the seventeen month streak that ended July 2004.  This former tier I indicator is designed to measure economic activity 3 to six months in the future, activity based upon this statistic would be categorized as “solid.”

The Philadelphia Fed—a measure of manufacturing activity in the Philadelphia region posted its highest reading since May 2007 with the unemployment sub component posting the smallest decline since May 2008.  I caution that these regional surveys are volatile with little individual correlation back to the national ISM. 

Speaking of unemployment, initial jobless claims painted a mix picture perhaps distorted by seasonal factors and the upcoming Thanksgiving holiday.  Few substantive conclusion could be made.

What will occur today?  There are no economic releases.

Last night the foreign markets were down.  London was down 0.81%, Paris was down 0.91%  and Frankfurt down 0.90%.  Japan was down 0.54% and Hang Sang down 0.83%.

The Dow should open moderately lower following poor earnings for a technology bellwether, comments by the ECB President that it will plan to withdrawal emergency cash gradually from the financial system and overall economic concerns. 

I also ask how much of the decline is a function of the House Financial Oversight Service Committee approving a bill that will increase transparency, i.e audits, of the Federal Reserve.  Is monetary policy on the verge of becoming politicized, thus threatening the Fed’s independence?  I must write Ron Paul’s bill had over 300 co sponsors.

 It is scary to think 535 bureaucrats that have limited knowledge about the economy could potentially dictate monetary policy for political purposes.  Will history regard the potential passage of this bill in a similar fashion as the Lehman Brother’s bankruptcy, which I will add was the tipping point that forever changed Wall Street and perhaps now monetary policy?

The 10-year is up 4/32 to yield 3.32%.