Monday, December 27, 2010

Market Data: Week Ending December 24, 2010

Market Index 2009   Close 12/24  Close Week Change Simple YTD %
Dow Industrials Avg 10428.05 11,573.50 0.71% 10.98%
S&P 500 1115.1 1,256.77 1.03% 11.27%
Fed Funds Rate 0.25% 0.21% -0.01% -19.05%
10 yr T-note Yld 3.85% 3.39% 0.06% -13.57%
5 yr T-note Yld
2.06% 0.11%
5 yr TIPS - 'Real' Yld
-0.01% -0.02%
Implied 5 yr Inflation %
2.07% 0.13%
2 yr T-note Yld 1.14% 0.65% 0.04% -0.49%
2-10 Yr Slope 2.70% 2.74% 0.02% 0.04%
90 day T-bill Yld
0.13% 0.03%
Gold ($/oz) $1,096.95 $1,380.50 0.09% 25.85%
WTI Oil ($/brl) $79.36 $91.51 3.97% 15.31%
VIX "Worry Index" 21.68 16.47 2.23% -24.03%

Credit Spreads
12/24  Close Week Change
Inv Grade Credit Idx
4.83% -0.03%
Low Grade Credit Idx
8.36% -0.03%
Markit CDX Inv Grd Idx
86 0.00%
Markit CDX Mid Grd Idx
132 -2.22%

Wednesday, December 22, 2010

Inflation Forecasting

Two economic analysts at the Cleveland Fed published their article earlier this month on the Banks web site. Brent H. Meyer and Mehmet Pasaogullari wrote Simple Ways to Forecast Inflation: What Works Best?. For this article, they investigate a few simple statistical models to forecast Consumer Price Index (CPI) inflation, along with some even-simpler rules of thumb. They investigate two readily available survey measures of one-year-ahead inflation expectations, the median expectation from the University of Michigan’s Survey of Consumers (UM) and the median expectation for CPI inflation from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters (SPF).
These measures are intriguing as forecasting tools, as it is highly plausible that, given wage and price stickiness, individuals embed expectations of future inflation into their price-setting and decision-making behavior today. In fact, if you’ve read or listened to a Federal Reserve official lately, chances are you’ve probably heard something to the effect of “inflation expectations matter.” Indeed, central bankers’ sensitivity to inflation expectations seems warranted, as it is theoretically possible that expectations can be self-fulfilling prophecies. However, we are mainly interested in the forecasting properties of these measures here.

They conclude that there is no standout method. They were impressed with the ability of 'inflation expectations' to accurately anticipate the correct level of inflation. Specifically, they noticed that measurements of inflation expectation such as the UM survey and the Philly Fed's SPF, mentioned earlier, produced forecasts that were more accurate than most of the statistically based models they investigated.

Tuesday, December 21, 2010

Please, Just Lie to Me! A Lesson on Financial Cognitive Dissonance

First contributed by: Anonymous, aka: Curious George on 12/1/2009

What is cognitive dissonance?
Anxiety that results from simultaneously holding contradictory or otherwise incompatible attitudes, beliefs, or the like, as when one likes a person but disapproves strongly of one of his or her habits. (

It’s not so much the definition of cognitive dissonance but rather how we respond to it that is important. If investment decisions are built on untruths, results will suffer. Every day we are presented with conflicting information and we are conflicted in what to believe. If one wants good investment results then good information really does matter. So, where is the truth?

Social psychologist Leon Festinger says “Dissonance and consonance are relations among cognitions that is, among opinions, beliefs, knowledge of the environment, and knowledge of one's own actions and feelings. Two opinions, or beliefs, or items of knowledge are dissonant with each other if they do not fit together; that is, if they are inconsistent, or if, considering only the particular two items, one does not follow from the other” (Leon Festinger 1956: 25).

His three ways of dealing with cognitive dissonance
1. One may try to change one or more of the beliefs, opinions, or behaviors involved in the dissonance;

Monday, December 20, 2010

Market Data: Week Ending, December 17, 2010

Market Index 2009 
Week Change Simple YTD %
Dow Industrials Avg 10428.05 11,491.90 0.72% 10.20%
S&P 500 1115.1 1,243.91 0.28% 10.36%
Fed Funds Rate 0.25% 0.22% 0.04% -13.64%
10 yr T-note Yld 3.85% 3.33% 0.01% -15.62%
5 yr T-note Yld
1.95% -0.03%
5 yr TIPS - 'Real' Yld
0.01% -0.13%
Implied 5 yr Inflation %
1.94% 0.10%
2 yr T-note Yld 1.14% 0.61% -0.03% -0.53%
2-10 Yr Slope 2.70% 2.72% 0.04% 0.02%
90 day T-bill Yld
0.10% -0.02%
Gold ($/oz) $1,096.95 $1,379.20 -1.14% 25.73%
WTI Oil ($/brl) $79.36 $88.02 0.26% 10.91%
VIX "Worry Index" 21.68 16.11 -8.52% -25.69%

Credit Spreads
Week Change
Inv Grade Credit Idx
4.86% 0.06%
Low Grade Credit Idx
8.39% 0.08%
Markit CDX Inv Grd Idx
86 -2.27%
Markit CDX Mid Grd Idx
135 -1.46%

Thursday, December 16, 2010

November 2010 Consumer Price Index

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in November on a
seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months,
the all items index increased 1.1 percent before seasonal adjustment.

The indexes for food, energy, and all items less food and energy all increased slightly in November. The
index for food at home rose in November after being unchanged in October, with the indexes for eggs
and nonalcoholic beverages both rising notably. Although the index for gasoline rose, the index for
household energy declined and the increase in the energy index was the smallest in five months.

The index for all items less food and energy rose in November after being unchanged the previous three
months. Increases in the indexes for shelter and airline fares accounted for most of the rise, while the
indexes for new vehicles, used cars and trucks, and household furnishings and operations all declined.

Over the last 12 months, the index for all items less food and energy has risen 0.8 percent. The energy
index has risen 3.9 percent over that span with the gasoline index up 7.3 percent but the household
energy index down 0.2 percent. The food index has risen 1.5 percent, with the food at home index up 1.7

Here is a link to the entire release from the BLS.

Tuesday, December 14, 2010

One Eye on the Fed: QE 2 Affirmed

This from Econoday/Bloomberg today in summary of the FOMC Meeting and their message to the public.

"Basically, the Fed still sees the need to continue with its plans for balance sheet expansion. In turn, the Fed maintained its position regarding continuing with $600 billion in QE2.

"To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month."

Kansas City Fed President Thomas Hoenig continued to dissent.

"Mr. Hoenig was concerned that a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy." The vote for the statement was 10 to 1.

The bottom line is that QE2 continues much as expected. This will continue to support economic recovery, eventual lower unemployment, and a more acceptable rate of inflation. On the news, markets were little changed as the statement largely met expectations in terms of rates and commentary."

The statement affirms the Committee's commitment to doing everything they can to reflate assets and reduce unemployment levels. Call this what you want, it is still bullish for assets in the short term.

Monday, December 13, 2010

Market Data: Week Ending December 10, 2010

Market Index 2009    Close 12/10   Close Week Change Simple YTD %
Dow Industrials Avg 10428.05 11,410.30 0.25% 9.42%
S&P 500 1115.1 1,240.40 1.28% 10.10%
Fed Funds Rate 0.25% 0.18% -0.02% -38.89%
10 yr T-note Yld 3.85% 3.32% 0.31% -15.96%
5 yr T-note Yld
1.98% 0.37%
5 yr TIPS - 'Real' Yld
0.14% 0.29%
Implied 5 yr Inflation %
1.84% 0.08%
2 yr T-note Yld 1.14% 0.64% 0.17% -0.50%
2-10 Yr Slope 2.70% 2.68% 0.14% -0.02%
90 day T-bill Yld
0.12% -0.01%
Gold ($/oz) $1,096.95 $1,394.90 -0.81% 27.16%
WTI Oil ($/brl) $79.36 $87.79 -1.57% 10.62%
VIX "Worry Index" 21.68 17.61 -2.22% -18.77%

Credit Spreads
12/10   Close Week Change
Inv Grade Credit Idx
4.80% 0.12%
Low Grade Credit Idx
8.31% 0.08%
Markit CDX Inv Grd Idx
88 -4.35%
Markit CDX Mid Grd Idx
137 -6.80%

Wednesday, December 8, 2010

Ten Year Demand is Weaker, Yields Rising

From Bloomberg/Econoday: Results for the $21 billion 10-year note auction (a reopening of the 2.625 percent November issue) are no better than average. Coverage of 2.92 is up slightly from the prior auction yet is still the second lowest since the February auction. Buyside participation is right at averages with the group taking down 56 percent of the auction. At 3.340 percent, the auction stopped out right at the 1:00 p.m. ET deadline. Tomorrow the Treasury auctions $13 billion of 30-year bonds. Treasury prices moved slightly higher following the results.

Monday, December 6, 2010

One Eye on The Fed: Now An Ally?

Bernanke has gotten a lot of resistance about the latest round of quantitative easing (QE2) since it was formalized on November 3. This weekend he has talked about the FOMC commitment to their strategy. Here are some statements attributed to the Fed Chairman from the transcript of his appearance on "60 Minutes". On the current condition of the mandated concerns of the Fed he said U.S. unemployment may take five years to fall to a normal level and that Fed purchases of Treasury securities beyond the $600 billion announced last month are possible (emphasis added).

We knew that unemployment has grown to be such a deep problem that it will be several years to recover to more normal levels. What is a more enlightening message is that the Fed does not have a ceiling on the amount of the current QE program. In other words, there is no backing away from, or hesitation to use as much new currency as is necessary to reflate the economy.

“Because the Fed is acting, I would say the risk is pretty low” of deflation, Bernanke said. “But if the Fed did not act, then given how much inflation has come down since the beginning of the recession, I think it would be a more serious concern.”
Bernanke said he is “100 percent” confident that, when necessary, the central bank can control inflation and reverse its accommodative monetary policy.
“We’ve been very, very clear that we will not allow inflation to rise above 2 percent,” he said.
“We could raise interest rates in 15 minutes if we have to,” he said. “So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time.”
“That time is not now,” he said.

Market Data: Week Ending Dec. 3, 2010

Market Index 2009   Close 12/3    Close Week Change Simple YTD %
Dow Industrials Avg 10428.05 11,382.11 2.62% 9.15%
S&P 500 1115.1 1,224.71 2.97% 8.95%
Fed Funds Rate 0.25% 0.20% 0.00% 0%
10 yr T-note Yld 3.85% 3.01% 0.14% -0.84%
5 yr T-note Yld
1.61% 0.08%
5 yr TIPS - 'Real' Yld
-0.15% 0.06%
Implied 5 yr Inflation %
1.76% 0.02%
2 yr T-note Yld 1.14% 0.47% -0.04% -0.67%
2-10 Yr Slope 2.70% 2.54% 0.18% -0.16%
90 day T-bill Yld
0.13% -0.02%
Gold ($/oz) $1,096.95 $1,406.20 2.98% 28.19%
WTI Oil ($/brl) $79.36 $89.19 6.48% 12.39%
VIX "Worry Index" 21.68 18.01 -18.95% -16.93%

Credit Spreads
12/3    Close Week Change
Inv Grade Credit Idx
4.68% 0.04%
Low Grade Credit Idx
8.23% -0.21%
Markit CDX Inv Grd Idx
92 -1.08%
Markit CDX Mid Grd Idx
147 0.68%

Saturday, December 4, 2010

The Gold Express

Today's chart (provided by Chart of the Day) provides some long-term perspective in regards to the gold market. As today's chart illustrates, gold has been in a strong bull market since 2001. The pace of that upward trend increased beginning in mid-2005. Following the financial crisis of late 2008, gold surged back up to resistance of its accelerated uptrend (see red line) -- a 100% gain in just over two years. After having tested the upper bounds of its accelerated uptrend, gold has pulled back -- another failed test of resistance. Over the past week, however, gold has resumed its upward trend and is once again approaching/testing resistance.

Wednesday, December 1, 2010

Open Thread Comments

Barry Ritholtz posted an invitaion to readers today. The invitation asked for comments about the advance of stock indexes today. He attracted some comments that I find informative and worthy of capturing for my future reference. He posted a chart like this one and then got some great comments.

Here are the comments referred to: