What we lacked Wednesday in the quantity of economic reports we made up for with intensity. Take the Federal Reserve's Open Market Committee meeting, wherein it was announced, to the surprise of no one, that the Fed funds rate would stay the same for time being. As is usual on Federal Reserve meeting days, investors mostly twiddled their thumbs until word came in. Then the indexes jumped. And then they fell.


One exception was the energy sector, which fell early and stayed down in response to the morning's report of a bigger-than-expected 2.8-million-barrel rise in crude oil inventories last week, coupled with a drop in demand.


The major indexes rose steeply on the Fed report, topping 9,900 on the Dow (a gain of almost 90 points and only 82 points shy of magic 10,000), 1,080 on the S&P and 2,167 on the Nasdaq, but only for a flash. Those gains were a memory by late afternoon, leaving the Dow down 81.3 points or 0.83%, the S&P down 10.79 points or 1.01% and the Nasdaq down 14.88 or 0.69%. Losers outnumbered winners by about 3 to 2 on the New York Stock Exchange.


Telecommunications moved up nicely after a dark few days. The category had lagged this week, off 1.3% over the last two trading sessions on a shaky profit outlook, gloomy analyst remarks and especially uncertainty over how federal "net neutrality" proposals might affect the industry: those are proposed rules that would prevent Internet providers from blocking or slowing bandwidth-hogging Web traffic such as streaming video, some kinds of file-sharing and other applications that strain their networks. Telecom, wireless and cable companies like AT&T (T), Verizon (VZ) and Comcast (CMCSA) are less than wild about this idea; Google and Amazon among others are backers.


In a late earnings report, telecom Comtech (CMTL) beat profit expectations by three cents at 21 cents a share but missed on revenues; the stock stayed flat at $34.45

The main event was the Fed who, after its two-day closed-door meeting, reported that economic activity has "picked up," kept the Fed funds rate at ground level and went right on gobbling up debt. As expected, the Fed kept the federal funds rate set at a range of zero to 0.25%, and with far, far more fancy words than necessary (Who started that pompous stuff? Greenspan? Volcker?), said we can expect it to keep rates low for a while.

Also as expected, the Fed said it will stretch out its purchase of mortgage-backed securities and agency debt from December into the first quarter of next year. It has already purchased $857 billion of a scheduled $1.25 trillion in mortgage-backed securities, and has also bought $129.2 billion of a planned $200 billion in so-called agency debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks, which finance mortgage purchases. As long as this action continues, theoretically at least mortgage rates should stay low.


If the Fed hadn't extended its deadline, it would have had to buy more than $600 billion in mortgage-backed securities by December alone. A sudden pullout after such heavy purchases could have caused nasty volatility, so the move was probably well-advised.

S&P 500:

The report was an echo of comments made recently by Fed Chairman Ben Bernanke, who said he thought the recession was probably over: In a word, conditions in financial markets have improved, activity in the housing sector has increased, household spending seems to be stabilizing. Businesses have slowed the pace at which they're cutting back on fixed investment and staffing and continuing to bring inventory into better alignment with sales.

But there are ongoing job losses, invisible wage increases, reduced factory capacity, lower housing wealth and tight credit -- which can expected to keep inflation low, in any event. Bottom line, according to the Fed? Don't expect miracles any time soon because growth will stay slow, but the worst is over and things are looking up.


In perhaps a distant early indication of better times ahead, Paychex (PAYX) reported after hours that despite revenue down 6%, its earnings of 34 cents a share were in line with predictions, and added this: "While we have not seen improvement in any of our key indicators, we have not seen any significant deterioration either . . . . This is the first quarter in the last four sequential quarters that we have not had a noticeable decline in checks per client; the largest sequential decline in fiscal 2009 peaked in the third quarter at 2.2%." Up during the day, the stock fell after hours.


As for the late-afternoon plummet: With major market indicators more than 50% off their March lows, we can surmise that investors are worried that stocks are overvalued (and overbought: look at that just-under-70 relative strength index on the Nasdaq), especially with the recovery being only so-so. (Instinct tells me that at least some of today's buying was the work of individual investors and most of the selling the work of institutional investors and automated sell programs.)

As investors moved out of energy stocks, they apparently put that money to work in consumer staples, which tend to hold up during hard time. General Mills (GIS) was among the day's big winners after reporting first-quarter profits up a jaw-dropping 51% year-over-year and raising its full-year outlook. The company makes Yoplait, Cheerios and a raft of others edibles, and credited lower ingredient costs and unceasing demand for its products. Shares soared:


Crude and gasoline prices fell sharply on more evidence of a huge glut in supply, as the West Texas Crude graph (above) reveals. The Energy Information Administration shocked the audience with its report that supplies of crude, gasoline and distillate fuel used for diesel and heating oil surged well above all expectations last week. Crude supplies jumped by 2.8 million barrels and gasoline by 5.4 million barrels. Analysts had expected crude levels to decline by almost that much.

Crude prices have finally fallen, and sharply, after staying high (even with ample inventories) with the help of the low, low dollar. Benchmark crude for November delivery tumbled nearly 2.79 or nearly 4% to settle at $68.97 a barrel on the New York Mercantile Exchange. Yes, I said oil prices wouldn't drop below $68 and I still have a few more cents to go.

Natural gas, which is seeing the same buildup in supply because of still-shabby industrial production, continued to spike, with prices up nearly 7%.

Refiners that make gasoline are indeed feeling pain due to the lack of demand and thin industry margins. At the same time, however, the price they're paying for their feedstock just fell and could fall more. Here's a two-year graph of a major U.S. refiner. Notice its price a year ago, and in February of 2008.


And here's a graph of India's Tata Motors (TTM), about whose tiny car, the Nano, you may have been reading. Tata is India's largest vehicle maker. In July (Cn youell?) it started deliveries of the Nano, the world's cheapest car. Unless India is somehow different from every other developing country on record, its huge, burgeoning middle class will be snapping this car up. And that gasoline has to come from somewhere.


The Mortgage Bankers' Association purchase index rose again last week, 5.6%, thanks to applications for government-insured loans. The share of government-insured purchases, at 45.7%, is the highest since 1990. The refinance index rose 17.4 percent as mortgage rates dipped steeply, down 9 basis points for 30-year loans to 4.97%, the first under-5% percent level since mid-May. Housing stocks, backing up after a good run, continued to sell on the news:


The falling dollar was on people's minds Wednesday, or at least on mine. It was once a given that stocks and bonds would move in different directions, like those little black-and-white dog magnets that repelled each other -- you remember those. Equity prices would rise on a good outlook for the economy since investors would be willing to take on some risk . . . while bonds would rise with a weakening (or already weak) economy as investors moved to safer government debt.

Not lately. With the dollar now one of the cheapest currencies to borrow, stocks are rising and people are still bidding for Treasurys. In fact, Treasurys rose Wednesday, pushing the yield on the benchmark 10-year note down 0.03 percentage points to 3.42%. Earlier, the $40 billion 5-year auction was nothing much, possibly muted by anticipation of the Fed meeting; demand was a bit below last month's auction but still slightly above the long-term average.

With U.S. rates doing their disappearing act, many investors overseas are borrowing in dollars to buy higher-yielding assets purely to gain from the difference -- the so-called carry trade. These strategies could be one reason the U.S. market has been moving up, with the S&P 500 gaining more than 15% this quarter.

In addition, the falling dollar has been causing foreign central banks to continue buying U.S. Treasurys, either because they're comparatively cheaper or to support their own currencies. Overseas investors, particularly foreign central banks, hold more than half of all U.S. debt outstanding. It's the reason Treasury yields have stayed low, incidentally helping to keep down other borrowing costs for businesses and homebuyers.

However, the dollar did manage to rise from a one-year low today:


The dollar usually isn't the world's choice of a "borrowing currency," only when it's uncomfortably cheap. This happened in the early 1990s, under former Fed chief Greenspan: The dollar was the lowest borrowing currency in the developed world, and U.S. stocks and Treasury prices both rose, with the S&P up over 35% and 10-year Treasury yields -- then as now, central banks prefer longer investment horizons -- dropping 29% to 5.74%.

Despite a lot of bluster from Chinese and Russian officials about the need to diversify out of dollars, these countries continue to be big buyers of Treasurys. Foreign officials and private investors increased their holdings of Treasury debt by $31.4 billion in the last week, the second- highest amount ever, according to the Fed. After all, if you want to hold dollars, and you're a central bank who knows better than to risk your citizens' hard-earned money, what smarter way to do it than with securities backed by the full faith and credit of the U.S. government. You know you'll get paid one way or another.

A weak currency can certainly boost markets -- ask China about that -- but keeping your currency artificially low inevitably backfires in the long run. But it's such a nice day out, let's not trouble our heads about every action having an equal and opposite reaction, or what's likely to happen when U.S. rates inevitably rise and those carry trades start to unwind . . .

The Treasury auctions $29 billion of 7-year notes Thursday, closing out a record week of supply. Also expect reports on jobless claims, natural gas and existing home sales.