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%

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.

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. (Dictionary.com)

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;

Market Data: Week Ending, December 17, 2010

Market Index	2009  Close	12/17  Close	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		12/17  Close	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%

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
percent.

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

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.

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%

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.

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%

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.

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:

Market Data: Week Ending November 19, 2010

Market Index	2009   Close	11/26  Close	Week Change	Simple YTD %
Dow Industrials Avg	10428.05	11,092.00	-1.00%	6.37%
S&P 500	1115.1	1,189.40	-0.86%	6.25%
Fed Funds Rate	0.25%	0.20%	0.00%	0%
10 yr T-note Yld	3.85%	2.87%	0.00%	-0.98%
5 yr T-note Yld		1.53%	0.01%
5 yr TIPS - 'Real' Yld		-0.21%	-0.01%
Implied 5 yr Inflation %		1.74%	0.02%
2 yr T-note Yld	1.14%	0.51%	0.01%	-0.63%
2-10 Yr Slope	2.70%	2.36%	-0.01%	-0.34%
90 day T-bill Yld		0.15%	0.02%
Gold ($/oz)	$1,096.95	$1,364.30	0.88%	24.37%
WTI Oil ($/brl)	$79.36	$83.76	2.17%	5.54%
VIX "Worry Index"	21.68	22.22	23.17%	2.49%
Credit Spreads		11/26  Close	Week Change
Inv Grade Credit Idx		4.64%	0.03%
Low Grade Credit Idx		8.44%	0.26%
Markit CDX Inv Grd Idx		93	2.20%
Markit CDX Mid Grd Idx		146	3.55%

Economic Condition Review, 3Q 2010

So far, the consumer is missing-in-action in the US economy, placing all the pressure on both commercial and government balance sheets. Commercial balance sheets are doing everything possible to restore financial health, including cutting expenses, mainly by laying off workers and paying off debt. Banks, the primary source of credit for consumers and commercial borrowers, are lending only to prime customers, letting growth of credit remain below trend. Most businesses do not have pricing power, so prices are holding the line. Exceptions are businesses with pricing power such as health care, food and energy. Interesting to include that food inflation is widely recognized in China too. Online newspaper Caixin reports that: A rise in food prices, driven by too much bank credit, quantitative easing measures in the United States, speculation in commodities and natural disasters, was mainly responsible for the worse-than-expected inflation, according to the National Bureau of Statistics.

The government is using it's balance sheet (Federal Reserve as proxy) with the QE2 strategy, with the goals of increasing inflation in assets and stimulating job recovery, by creating new money with serial quantitative easing. John Hussman describes, in his Nov 15, 2010 letter, the financial recovery seen in 2010 as "an "economic recovery" that requires a tripling in the Fed's balance sheet, continues to average 450,000 new unemployment claims weekly, and relies on fiscal stimulus to counter utterly stagnant personal income, is ipso facto (by the fact itself) not a "standard" economic recovery. We have swept an enormous volume of bad debt under rugs, behind dams, and in back of curtains (not to mention in off-balance sheet vehicles such as Maiden Lane that were created by the Federal Reserve). But it is all effectively still there, festering. Meanwhile, our policy makers are trying to reignite financial bubbles in order to create an illusory "wealth effect" to propagate spending patterns that were inappropriate in the first place." These are conditions that are almost identical to a year ago, not overlooking isolated and significant price inflation over the year.

GDP (second estimate) and Corporate Profits (preliminary), 3rd Qtr 2010

The U.S. Bureau of Economic Analysis (BEA) has issued the following news release today:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.5 percent in the third quarter of 2010, (that is, from the second quarter to the third quarter), according to the "second" estimate released by the Bureau of Economic Analysis.  In the second quarter, real GDP increased 1.7 percent.
The full text of the release on BEA's Web site can be found at
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

 

---

U.S. Bureau of Economic Analysis · 1441 L Street NW · Washington DC 20230 · 202-606-9900

Market Data: Week Ending November 19, 2010

Market Index	2009 Close	11/19 Close	Week Change	Simple YTD %
Dow Industrials Avg	10428.05	11,203.50	0.10%	7.44%
S&P 500	1115.1	1,199.73	0.04%	7.05%
Fed Funds Rate	0.25%	0.20%	-0.02%	0%
10 yr T-note Yld	3.85%	2.87%	0.08%	-0.98%
5 yr T-note Yld		1.52%	0.16%
5 yr TIPS - 'Real' Yld		-0.20%	0.13%
Implied 5 yr Inflation %		1.72%	0.03%
2 yr T-note Yld	1.14%	0.50%	0.00%	-0.64%
2-10 Yr Slope	2.70%	2.37%	0.08%	-0.33%
90 day T-bill Yld		0.13%	0.01%
Gold ($/oz)	$1,096.95	$1,352.30	-0.98%	23.28%
WTI Oil ($/brl)	$79.36	$81.98	-3.42%	3.30%
VIX "Worry Index"	21.68	18.04	-12.47%	-16.79%
Credit Spreads		11/19 Close	Week Change
Inv Grade Credit Idx		4.61%	0.09%
Low Grade Credit Idx		8.18%	0.12%
Markit CDX Inv Grd Idx		91	1.11%
Markit CDX Mid Grd Idx		141	0.71%

Fundamentally Speaking, Now is a Confusing Time

Quantitative easing (QE 2) has begun and the markets are pretty confused, based on volatility of commodity prices and daily currency exchange swings, and the VIX. It's a terrible time to try forecasting a market's direction amidst all the financial situations around the world (Ireland banks, China inflation, Yen direction, euro direction, US$ direction) as well as the economic influence of QE 2 operations. There is also speculation about the process the Fed has chosen for it's QE 2 plan and whether it will be successful soon, if ever. An interesting observation of the plan is described in "They Just Don't Get It", written by Paul Kasriel.

Kasriel observes that the Fed is targeting the middle-term sections of the maturity spectrum, avoiding the bill's, or short-term issues. He contends that the Fed may have to deliver more easing until they can move the needle of credit outstanding up. He writes "The Federal Reserve has the unique ability to be able to create credit figuratively "out of thin air." So does the commercial banking system, if the Fed provides the "seed money." The ability to create credit out of thin air implies that the recipients of that credit can increase their current spending without any other entity in the economy having to cut back on its current spending. 

Leading Economic Indicator

Economic indications have been strengthening going into QE2 (Nov 3, 2010), gains reflected by two strong back-to-back 0.5 percent gains for the Conference Board's index of leading economic indicators (September revised from plus 0.3 percent). A wide yield spread continues to be the biggest positive though to a smaller degree given declines underway in long rates, declines triggered and furthered by QE2. A rise in money supply, also related to QE2, is an increasingly significant plus. Another central positive is the factory workweek, strength that is likely to continue given the uplift underway in the manufacturing sector.

Other readings in today's report include a 0.1 percent uptick in the coincident index, a small gain that follows two unchanged readings in a reminder of the economy's mid-year soft patch and the contrasting acceleration now underway.

Market Data: Week Ending November 12, 2010

Market Index	2009   Close	11/12  Close	Week Change	Simple YTD %
Dow Industrials Avg	10428.05	11,192.60	0.67%	7.33%
S&P 500	1115.1	1,199.21	1.35%	7.01%
Fed Funds Rate	0.25%	0.22%	0.00%	0%
10 yr T-note Yld	3.85%	2.79%	0.19%	-1.06%
5 yr T-note Yld		1.36%	0.19%
5 yr TIPS - 'Real' Yld		-0.33%	0.10%
Implied 5 yr Inflation %		1.69%	0.09%
2 yr T-note Yld	1.14%	0.50%	0.16%	-0.64%
2-10 Yr Slope	2.70%	2.29%	0.03%	-0.41%
90 day T-bill Yld		0.12%	0.01%
Gold ($/oz)	$1,096.95	$1,365.50	0.58%	24.48%
WTI Oil ($/brl)	$79.36	$84.88	4.24%	6.96%
VIX "Worry Index"	21.68	20.61	-2.78%	-4.94%
Credit Spreads		11/12   Close	Week Change
Inv Grade Credit Idx		4.52%	0.15%
Low Grade Credit Idx		8.06%	0.21%
Markit CDX Inv Grd Idx		90	-4.26%
Markit CDX Mid Grd Idx		140	-7.89%

Sell In May and Go Away... until Halloween

From Chart of the Day...

Market Data: Week Ending November 5, 2010

Market Index	2009   Close	11/05  Close	Week Change	Simple YTD %
Dow Industrials Avg	10428.05	11,444.10	2.93%	9.74%
S&P 500	1115.1	1,225.85	3.60%	9.03%
Fed Funds Rate	0.25%	0.20%	-0.02%	0%
10 yr T-note Yld	3.85%	2.53%	-0.07%	-1.32%
5 yr T-note Yld		1.09%	-0.08%
5 yr TIPS - 'Real' Yld		-0.60%	-0.17%
Implied 5 yr Inflation %		1.69%	0.09%
2 yr T-note Yld	1.14%	0.37%	0.03%	-0.77%
2-10 Yr Slope	2.70%	2.16%	-0.10%	-0.54%
90 day T-bill Yld		0.11%	0.00%
Gold ($/oz)	$1,096.95	$1,397.70	2.87%	27.42%
WTI Oil ($/brl)	$79.36	$86.85	6.66%	9.44%
VIX "Worry Index"	21.68	18.26	-13.87%	-15.77%
Credit Spreads		11/05  Close	Week Change
Inv Grade Credit Idx		4.35%	-0.02%
Low Grade Credit Idx		7.82%	-0.03%
Markit CDX Inv Grd Idx		86	-8.51%
Markit CDX Mid Grd Idx		142	-6.58%

Sitting on a Signal: What Happened

The FOMC meeting held earlier this week resulted in the QE2 announcement. They will use the Fed's balance sheet to enable the additional purchase of $600 billion of Treasury securities using a monthly purchase plan until the end of 2Q2011. This is in addition to the reinvestment of principal payments on their MBS portfolio, estimated to average $35 billion per month, that they announced at their meeting in August.
The following comments on the plan from foreign government official's are from Bloomberg News articles found on November 5. Obviously concern about the plan is global because the US$ is a reserve currency and also the denomination of trade of many commodities.

Bernanke came under fire today from officials in Germany, China, and Brazil, who said his plan to pump cash into the banking system may jar other economies and fail to fuel U.S. growth. Critics including Michael Burry, the former hedge-fund manager who predicted the housing market’s plunge, have said Fed policy is encouraging investors to take on too much risk and threatens to undermine the dollar.

“It’s our problem as well if the U.S. is no longer certain that the old recipes don’t work anymore,” German Finance Minister Wolfgang Schaeuble said today in Berlin. The Fed’s injection of $600 billion was “clueless” and won’t revive growth, he said.

Brazil’s central bank president, Henrique Meirelles, said “excess liquidity” in the U.S. economy is creating “risks for everyone.” In China, Vice Foreign Minister Cui Tiankai said “many countries are worried about the impact of the policy on their economies.” He also said the U.S. “owes us some explanation on their decision on quantitative easing.” 

Asked by a student if “skyrocketing” commodities prices may threaten his inflation outlook, Bernanke said rising commodities prices are “the one exception” to a broad reduction in inflationary pressures. Overall, excess slack in the economy will make it difficult for producers to push through higher prices to consumers, he said.

“Emerging markets are growing quite quickly,” Bernanke said. “Demand for those commodities is pretty strong. That is going to be a contributor to inflation in the U.S. because it will affect gas prices, for example, and so on.”

Market Data: Week Ending October 29, 2010

Market Index	2009   Close	10/29  Close	Week Change	Simple YTD %
Dow Industrials Avg	10428.05	11,118.50	-0.13%	6.62%
S&P 500	1115.1	1,183.26	0.02%	5.76%
Fed Funds Rate	0.25%	0.22%	0.02%	0%
10 yr T-note Yld	3.85%	2.60%	0.05%	-1.25%
5 yr T-note Yld		1.17%	0.02%
5 yr TIPS - 'Real' Yld		-0.43%	0.09%
Implied 5 yr Inflation %		1.60%	-0.07%
2 yr T-note Yld	1.14%	0.34%	-0.01%	-0.80%
2-10 Yr Slope	2.70%	2.26%	0.06%	-0.44%
90 day T-bill Yld		0.11%	-0.01%
Gold ($/oz)	$1,096.95	$1,357.60	2.39%	23.76%
WTI Oil ($/brl)	$79.36	$81.43	-0.32%	2.61%
VIX "Worry Index"	21.68	21.2	12.89%	-2.21%
Credit Spreads		10/29  Close	Week Change
Inv Grade Credit Idx		4.37%	0.07%
Low Grade Credit Idx		7.85%	-0.10%
Markit CDX Inv Grd Idx		94	-3.09%
Markit CDX Mid Grd Idx		152	-3.18%

Sitting on a Signal: Clear(?) Signal Expected on 11/3

The Federal Reserve Open Market Committee (FOMC) last met to discuss the condition of the economy on Sept 21. The U.S. central bankers said they were “prepared to provide additional accommodation if needed to support the economic recovery.” They also left the benchmark lending rate in a range of zero to 0.25 percent while noting that inflation measures were at levels “somewhat below” the central bank’s mandate to achieve stable prices and full employment. The Fed statement boosted speculation that the central bank will buy more Treasuries sometime later this year.

Fed observers are expecting that the FOMC will announce a new program of quantitative easing (QE) after they meet on November 2-3.

In a post on October 8, I asked myself "what are some signals to look for? A rally up to S&P 1170 might inspire some profit taking, with bargain hunters looking to test the water around 1130. Breaking through and closing below 1130 should alert investors to look for signs of a shifting mood." The thresholds were breached in stride and all in apparent anticipation of the expected new QE.

Now, look at the graphs used in that post, updated to the most recent info. There is also a new look with the US dollar index line added in these graphs to illustrate the level of correlation to the currency which has been strong since the end of May in many markets.

One Eye on The Fed: The Other Eye on The Dollar

Here is a 9 minute video clip that is timely and helpful in understanding the currency challenges facing the major global economies. The discussion revolves around more money printing from the Fed and what Taylor believes will be the impact on the US$. Taylor then offers a high conviction trade suggestion at the very end.

John Taylor, chairman and founder of FX Concepts Inc., discusses the outlook for currency markets. Taylor, speaking with Erik Schatzker on Bloomberg Television's "InsideTrack," says another round of quantitative easing is mostly priced into the market and that the U.S. dollar will weaken through the end of November before recovering. (Source: Bloomberg)

Quantitative Easing: Pushing on a String?

John Hussman has published another in his series of weekly articles that is a must read. In the article titled "Bernanke Leaps into a Liquidity Trap" he describes his opinion of what should be expected from more expansion of the 'monetary base' or quantitative easing. One of his points is...

Certain economic equations and regularities make it tempting to assume that there are simple cause-effect relationships that would allow a policy maker to directly manipulate prices and output. While the Fed can control the monetary base, the behavior of prices and output is based on a whole range of factors outside of the Fed's control. Except at the shortest maturities, interest rates are also a function of factors well beyond monetary policy. 

Market Data: Week Ending October 22, 2010

Market Index	2009   Close	10/22  Close	Week Change	Simple YTD %
Dow Industrials Avg	10428.05	11,132.78	0.63%	6.76%
S&P 500	1115.1	1,183.08	0.59%	5.75%
Fed Funds Rate	0.25%	0.20%	-0.02%	0%
10 yr T-note Yld	3.85%	2.55%	-0.01%	-1.30%
5 yr T-note Yld		1.15%	-0.04%
5 yr infl adj Note		-0.52%	-0.02%
Implied 5 yr Inflation %		1.67%	-0.02%
2 yr T-note Yld	1.14%	0.35%	-0.01%	-0.79%
2-10 Yr Slope	2.70%	2.20%	0.00%	-0.50%
90 day T-bill Yld		0.12%	-0.01%
Gold ($/oz)	$1,096.95	$1,325.10	-3.54%	20.80%
WTI Oil ($/brl)	$79.36	$81.69	0.54%	2.94%
VIX "Worry Index"	21.68	18.78	-1.31%	-13.38%
Credit Spreads		10/22  Close	Week Change
Inv Grade Credit Idx		4.30%	-0.04%
Low Grade Credit Idx		7.95%	0.01%
Markit CDX Inv Grd Idx		97	-1.02%
Markit CDX Mid Grd Idx		157	1.29%