Close:
Maybe we should have just skipped Leap Day this year. It seemed to upset the market’s “vibe.” Traders usually react with the Fed Chairman says something unexpected, but traders today went temporarily insane because of what he didn’t say. Bernanke’s sin of omission in using the QE word set off a wave of volatility. After falling from +50 to -75 the Dow did come back to even to slightly positive late in the morning, but stocks fell again in the last hour. The Dow fell back to near the day’s low before rallying a bit to close down 53 points at 12,952. Wonder if the nation’s newspapers will report tomorrow on the fall below 13,000. The S&P lost .5%, and the NASDAQ dropped .7%.
Bond prices closed lower on the day but well off the lows. The 2-year ended at .29%, the 5-year .87%, and the 10-year fell 9/32s to yield 1.97%. The 30-year bond fell 7/32s to yield 3.09%.
Gold was the really big story of the day as it fell $94 an ounce – down 5%! But the entire commodity complex was routed (except for oil). That tells you right there how much pure speculative activity there is in commodities. It’s pretty much out of control with trading accounts controlling 70% of the commodities markets and producers/users only 30%. Oil did buck the trend and rose a few cents as the focus in more on Iran than on Bernanke.
Tomorrow’s economic calendar highlights will be Weekly Jobless Claims and the National ISM index. Claims are expected to remain close to 350k, and the ISM index is expected to improve one point. But the focus is likely to be on Ben Bernanke. As is the custom, Bernanke will deliver the same testimony he gave the House today to the Senate tomorrow. If he is at all concerned about what the markets did today, simply because he didn’t specifically say there could be another QE, he will have a chance to correct that. He should just leave well enough alone, but he has proven to be overly sensitive to the markets.
Hope you celebrate Leap Day in style tonight. I don’t know what an appropriate celebration would be, but wine or the beverage of your choice would probably suit the occasion.
Update 11:50 a.m.:
The first couple of hours today saw the most excitement we’ve seen all year. But, heading into the last hour the quiet has returned. The Dow is down 15 points. Gold is still down more than $70 an ounce.
Bond prices remain down on the day, but there are few signs the selling this morning was anything more than the usual speculative traders. The 2-year is .30%, the 5-year .88%, and the 10-year is lower by 12/32s to yield 1.99%. The 30-year bond is trading quietly at down 19/32s to yield 3.10%.
I’ll be back with the close and a look ahead.
Update 10:25 a.m.:
Only dollar bulls are happy with Ben Bernanke today. (see below). The dollar is up across the board. Stocks are trading quietly again with the Dow down 15 points. The S&P and NASDAQ are both down a few points as well. Volume, which spiked in the selloff, has since abated. Gold traders are especially unhappy. Gold is down $73 an ounce.
Bond prices continue to drift lower. The 2-year is .30%, the 5-year .88%, and the 10-year is down 12/32s to yield 1.99%. The 30-year bond is off by 21/32s to yield 3.11%.
Update 9:15 a.m.:
After the earlier freak-out, Dow from +50 to -75, stocks have quieted. The Dow is now down only 11 points and volume has abated. The euro has bounced a bit, and gold is down $58 instead of $75. Apparently, it was Bernanke’s non-reference to another QE program that was responsible for the shake up. This market is supposed to trade on fundamentals like a better economy and better earnings. Yet traders still seem to want to know the security blanket of the Fed is at the ready with any sign of slippage. Pathetic. The lack of need for another QE would be a good thing not a bad thing. No wonder individual investors have given up on stocks.
Bond prices are back to the lows of the day. The 2-year is .30%, the 5-year .88%, and the 10-year is now off by 12/32s to yield 1.99%. The 30-year bond is down 18/32s to yield 3.10%. No more QE scares bond traders too.
Update 8:35 a.m.:
What the heck happened? Stocks were cruising along. The Dow was up 50 points after an okay Chicago ISM. Then some strange stuff started to happen. Some are blaming Bernanke. He did not change his economic or interest rate view, but he did not say anything about QEIII. He didn’t say yes or no, but traders apparently wanted to hear those sweet words again. The Dow is now down 60 points. I said yesterday I wouldn’t mention volume again unless it rose, and volume has jumped today.There are some complex rumors behind this, but they are still rumors.
There was also a huge drop in gold. Gold is off by $75 dollars. Frankly none of these sharp moves in the markets make any sense at all. If the markets react this much to Bernanke just failing to mention another QEIII, can you imagine what would happen if he ever surprises us and talks about tightening?
Bond prices were higher earlier on month-end buyers, but then prices slumped as the buyers got done and stocks rallied. The 10-year moved from 1.93% to 1.99%. Prices are still lower but well off of the lows. The 2-year is .30%, the 5-year .87%, and the 10-year is down 8/32s to yield 1.97%. The 30-year bond is down 10/32s to yield 3.09%.
Update 6:40 a.m.:
Stocks aren’t exactly on fire as the headline said (see below), but the Dow is up 25 points in early trading. Given the lack of reaction to the the ECB money auction, this should be another very slow day.
Bond prices remain higher as those bond index fund managers finish out their buying for the month. The 2-year is .29%, the 5-year .83%, and the 10-year is up 3/32s to yield 1.93%. The 30-year bond is up 12/32s to yield 3.05%. Bond prices could sag later this morning.
Up next will be the Chicago ISM index and Bernanke’s House testimony. I’ll be back with comments and updates later.
Morning Comment:
While those of us who follow the markets daily were unimpressed by Dow 13,000 after two weeks of flirting with the level, the nation’s newspapers are all carrying front page stories on the “achievement.” One leading paper screamed “Stock market on fire.” Another said “Stock market in frenzy of buying.” (Really? The Dow is up just over 200 points since January 25) Still another story said “Investors Flock to stocks as Dow surges past 13,000.” Yesterday I talked about junk statistics. This is a classic case of junk journalism.
The few stories I read don’t point out how bad the equity markets have actually performed relative to other assets, and maybe that’s for the better. If you are in the markets, you know the truth. But, unfortunately the majority of readers have no exposure to stocks or any other investments. To the extent these headlines trumpeting Dow 13,000 lifts optimism and spending, that’s all to the good I suppose.
The first revision to 4th quarter GDP showed an increase from 2.8% to 3.0%. This was in line with expectations. While the number is higher, the witch’s brew that creates GDP was not good. The “improvement” was mostly due to an increase in inventories. Demand was actually revised downward. But this number is ancient history and irrelevant to today’s market.
Later this morning Ben Bernanke will give his semi-annual economic testimony before the House. We won’t hear anything new, but the headlines will still be watched closely. Bernanke’s testimony and the Q&A following is supposed to be about the economy, but the House Banking Chairman seems to have other ideas. He appeared on CNBC early this morning and gave a list of questions he intended to ask. They were all about fiscal policy, and all couched in political terms. In other words, he intends to box Bernanke into giving answers that are opposed to White House policy. Waste of time.
The big banks of Europe took down 530 billion euros in cheap 3-year money from the European Central Bank. Traders have been salivating about this money auction for two weeks. The amount taken down was in line with expectations, though some traders were looking for more. In theory the money will be used for liquidity and to fund business loans. In reality, the banks will hoard some of the money, buy sovereign debt at a big spread with some, and then loan the rest mostly to big leveraged investment accounts. The latter is what has traders excited.
Since the first ECB auction in December, the German market is up about 16% and the French index is roughly 11% better off. Of course our market is better as well. The conservative ECB says this action is a liquidity necessity. They do not want to admit what it really is; it is simply a version of our Fed’s QE programs. It’s meant to jack-up prices of riskier assets. The ECB hopes the lift in prices will somehow lift the economies of Europe. All it did here was lead to a surge of commodity prices. Good luck ECB.
The world’s biggest central banks are on a mission to boost inflation. They obviously see this is the answer to debt problems – inflate our way out of them. This could work if wages accelerate. But, if this produces nothing more than another temporary asset price bubble, followed by another price plunge, the risk is that this will cement a deflationary environment. There will be a lot of money in the system still, but it will be scared money. This is the lesson from Japan that no one seems to want to recognize. Somehow Bernanke and now the ECB’s Draghi think it will be different this time. Historically central banks have served as the inflation fighters and the brake pedal on overheating economies. This is the first time since the Great Depression that central banks are in the role of trying to be deflation fighters. I’m not sure it’s a role they are ready for.
The reaction to the ECB auction was muted given it merely met expectations, but it did lift European stock indexes and resulted in Dow trading 15 points higher in the early going. Surprisingly, bond prices are slightly higher. This is likely mostly due to month-end purchases by bond fund managers. The 2-year is .29%, the 5-year .83%, and the 10-year is up 5/32s to yield 1.93%. The 30-year bond is higher by 12/32s to yield 3.05%.