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Bernanke Does it Again

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     07-23-2003         High     Low     Volume Advance/Decline
DJIA     9194.24 + 35.79  9203.48  9102.28 1.59 bln    738/ 815
NASDAQ   1719.18 + 13.08  1720.04  1695.20 1.91 bln   1117/ 483
S&P 100   497.79 +  0.15   498.61   493.36   Totals   1855/1298
S&P 500   988.61 +  0.50   989.86   979.79
RUS 2000  466.14 +  2.14   466.15   460.52
DJ TRANS 2572.16 -  4.21  2578.82  2561.51
VIX        20.44 -  0.54    21.82    20.37
VXN        30.78 -  1.67    33.51    30.52
Total Volume 3,767M
Total UpVol  2,071M
Total DnVol  1,625M
52wk Highs     340
52wk Lows       37
TRIN          1.17
PUT/CALL      0.85

Bernanke Does it Again
By Jonathan Levinson
Click here to email Jonathan

Today's session spent a great deal of energy determining what traders believed the Fed will seek to do next, and closed on a question mark. That indecision caused a ferocious rally in precious metal, with stocks and bonds adding tentative gains.

One year daily candle chart of the INDU

I've zoomed out to the yearly view of the indices to seek perspective. The Dow has clearly stalled out within its up-phase, the oscillators on sell signals from lower highs, while the Nasdaq appears to be completing a healthy pullback within its bullish uptrend. The Stochastic and Macd oscillators are in mid-downphases, however, and seem to imply that the 22 day EMA (green line), which has supported each pullback, may not hold on the current test.

For a more detailed view of the daily and thirty minute charts of the index futures, see tonight's Futures Wrap.

One year daily candle chart of the COMPX

The Energy Department announced today that crude inventories dropped by 2.3 million barrels for the week ended July 18. Total inventories are down year-over-year to 276.3 million barrels, an 11 percent decline. Gasoline inventories fell by 1.6 million barrels to 207.8 million barrels in the latest week. Surprisingly, analysts got it right for a change, with many calling for the decline based on Hurricane Claudette's disruption to oil production in the Gulf of Mexico. The American Petroleum Institute reported a drop of 700,000 barrels in crude stocks for the week, considerably lower than the Energy Department's 2.3 million barrel decline. The API reported a 1.1 million barrel drop in gasoline supplies to 208.4 million barrels. Crude futures finished above their lows but under $30 per barrel.

The Mortgage Bankers Association (MBA) announced that seasonally- adjusted demand for mortgage refinancings, the MBA refinancing index, dropped 7.2% for the week ended July 17 following a 1.6% drop the previous week. Demand for loans with which to buy homes, the Purchase index, dropped 1.1%. The average interest rate for a 30-year fixed rate mortgage rose to 5.72% from 5.33%. Given the sharp jump in treasury yields over the past week, it was expected that refinancings would drop, but I find it surprising that there wasn't more activity from late-comers who might have been procrasting and jumped to get in when rates began to climb. This implies that the market for home loans may be maxxed out.

I've updated the macro charts we've been following during the past weeks. The changes are minute for this past week, with the MBA mortgage and refi indices giving the first and, I believe, leading indication of a possible pullback in the money supply as the origination of loans begins to recede. As treasury bonds continue to get sold, this trend should strengthen. Mr. Bernanke's speech, discussed below, asserts that the Fed will fight this contractionary trend, much as it has been doing for the past several years.

MZM chart

The zero-maturity money supply and the Fed's open market activity maintained their steeply rising trends as the Fed continued to add bank reserves, freeing up capital with which to purchase securities in the open market. Note that an increase in the supply of anything lowers its per unit value, and so the expansion of the money supply is at the expense of the value of each dollar. In this light, inflation may be seen as a "hidden" tax.

Chart of overnight and term repurchase agreements (repos)

Bank prime loan rate

The effect of the inflation of the money supply and the purchase by the Fed's member banks of treasury bonds has helped lower the time-value of money, with the prime rate at a multidecade low, although this 13 year time series doesn't fully capture it.

Chart of Total Consumer Credit

Consumer credit outstanding appears to have ticked up this week, and it too remains at multi-decade highs, fueled by the record low rates. I find it disconcerting that consumers have been encouraged to take advantage of these low rates by taking on more debt instead of refinancing and paying down their existing debt. This legacy of the President and Mr. Greenspan may well come back to haunt them.

The overall effectiveness of Mr. Greenspan's war against the Kondratieff Winter and inflationary stimulation policies is measured by the following charts, those which constitute the bottom line for the broad citizenry subject to the Federal Reserve's policies:

Chart of Unemployment Rate

Chart of US Bankruptcy Filings, unchanged from last week

Chart of State and Local Surplus or Deficit

Against this backdrop, Federal Reserve governor Ben Bernanke addressed a speech at UCSD this morning. True to form, Bernanke broadcast what appear to me to be panic-type comments on the Fed's part, and a wanton disregard for the US currency and all those who save and invest prudently with it. As mentioned in last week's Wednesday market wrap, the effective rate of return on short term treasuries is more than 1 percent below the CPI, forcing our elderly and savers to put their capital at risk just break even with cost of living increases. Bernanke took it a step further, saying that "We should be willing to cut the funds rate to zero, should that prove necessary to provide the required support to the economy." Once again, the "pushing on a string" analogy comes to mind.

A highlight:

"In any case, I hope we can agree that a substantial fall in inflation at this stage has the potential to interfere with the ongoing U.S. recovery, and that in conceivable--though remote- circumstances, a serious deflation could do significant economic harm. Thus, avoiding a further substantial fall in inflation should be a priority of monetary policy. To my mind, the central import of the May 6 statement is that the Fed stands ready and able to resist further declines in inflation; and--if inflation does fall further--to ensure that the decline does not impede the recovery in output and employment."

The full text of the speech is available at http://www.federalreserve.gov/boarddocs/speeches/2003/20030723/default.htm

The Fed added a larger-than-usual 7B overnight repo, and for the second time this week failed to announce it through its website until several hours later than usual. The number announced in this morning's Market Monitor was obtained by calling the New York Fed and asking for it. This large open market operation, with no expiries today, indicates a certain trepidation on the part of the Fed. However, the inflationary words of Bernanke's speech are ultimately bullish for paper assets, as he's implying an increase in the supply of money with which to chase those assets, and both bonds and stocks remained firm following his speech. Gold rallied explosively on the comments, as investors fled to commodities which are not subject to arbitrary inflation or proliferation, unlike dollars, treasuries, stocks and other paper.

There was a plethora of corporate data released today. AOL Time Warner (AOL) reported $0.12 per share, beating expectations by 2 cents. Boeing (BA) lost $0.24 per share vs. expectations of a 0.43 per share loss. Bell South (BLS) earned $0.52 per share, beating by 2 cents. Lucent (LU) met expectations, losing 7 cents per share. Eastman Kodak (EK) earned 60 cents, clobbering expectations of 27 cents per share. Kimberly Clark (KMB) beat by a penny, earning $.82 per share.

After the bell, Qualcomm (QCOM) beat by 3 cents at 33 cents per share. AFLAC (AFL) earned 48 cents per share, beating by 3 cents. Overture (OVER) beat by 6 cents, coming in at 12 cents per share, and Veritas (VTAS) beat by 5 cents per share, reporting revenues of 19 cents per share. Electronic Arts (ERTS) blew out estimates of 2 cents per share, earning 13 cents and increasing y-o-y profits by 148%. Symantec (SYMC) earned $0.45 per share, beating estimates by 6 cents.

We have the following economic data due tomorrow:

               Report                   Briefing  Market  Prior
                                        Expects   Expects
Jul 24 8:30 AM Initial Claims 07/19 -   415K      415K    412K

For tomorrow, with a very light slate of economic data due, the question mark on which today's equity session closed will continue. The comments made by Bernanke are obviously not bullish for companies or the broader economy. However, the spring rallies in bonds and stocks were the result of a surge in liquidity. The big moves up in gold and silver were obvious, as was the move down in the dollar. The big unanswered question is whether stocks have it in them to rally again from current levels, and whether the Fed will do as much as Mr. Bernanke implied today. The mixed trading throughout the day will likely carry over to tomorrow as the markets struggle to choose a direction.

See you at the bell!



 
 



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