Market Data: Week Ending March 25, 2011

Market Index	12/31  Close	3/25    Close	Week Change	Simple YTD %
Dow Industrials Avg	11,577.50	12,220.60	3.05%	5.55%
S&P 500	1,257.64	1,313.80	2.70%	4.47%
Fed Funds Rate	0.10%	0.15%	-0.01%	50.00%
10 yr T-note Yld	3.29%	3.44%	0.17%	4.56%
5 yr T-note Yld	2.01%	2.16%	0.22%	7.46%
5 yr TIPS - 'Real' Yld	-0.06%	-0.48%	0.28%	-700.00%
Implied 5 yr Inflation %	2.07%	2.64%	-0.06%	27.54%
2 yr T-note Yld	0.59%	0.73%	0.15%	23.73%
2-10 Yr Slope	2.70%	2.71%	0.02%	0.37%
90 day T-bill Yld	0.12%	0.08%	0.02%	-33.33%
Gold ($/oz)	$1,421.40	$1,427.60	$7.90	0.44%
WTI Oil ($/brl)	$91.38	$105.40	$3.84	15.34%
VIX "Worry Index"	17.75	17.91	-6.53	0.90%
Credit Spreads	12/31  Close	3/25    Close	Week Change	Simple YTD %
Inv Grade Credit Idx	4.78%	4.62%	0.09%	-3.35%
Low Grade Credit Idx	8.32%	7.88%	0.07%	-5.29%
Markit CDX Inv Grd Idx	85	95	5.56%	11.76%
Markit CDX Mid Grd Idx	131	153	21.43%	16.79%

4Q 2010: Third GDP Report

This is a condensed version of a report from Econoday:
It turns out that the economy at the end of 2010 was about as strong as most had expected all along. Fourth quarter GDP growth was bumped back up to 3.1 percent annualized growth from the second estimate of 2.8 percent. The latest estimate came in slightly higher than the consensus forecast for 3.0 percent. As with the prior estimate, the fourth quarter was still stronger than the third quarter pace of 2.6 percent.

The upward revision to fourth quarter growth primarily reflected stronger inventory investment, nonresidential structures, equipment & software, and residential investment. Downward revisions were seen in net exports and government purchases.

The latest estimates for GDP and components indicate that the economy had moderately strong forward momentum at the end of 2010. More recent monthly numbers show overall momentum continuing but very mixed by sector with manufacturing, export, and consumer sectors leading growth and with housing, commercial real estate, and state & local government sectors weighing on growth.

For an alternative perspective, John Williams at Shadow Government Stats made this observation:
BEA’s “Third” Guesstimate on Fourth-Quarter 2010 GDP Was Weaker Though Stronger.  The second-revision to the estimate of fourth-quarter 2010 GDP, though to the upside, was largely statistical noise.  To the extent the growth was stronger (annualized 3.1% versus 2.8%), the news was not positive.  It reflected a downward revision to consumption with a more-than-offsetting upside revision to inventory change.  Unwanted inventory buildup usually is offset at some point with lower production.

He also points out that "GDP reporting remains the least meaningful and most heavily gimmicked/politicized of the major economic series, at least in the first year or so of reporting.  The next round of GDP annual benchmark revisions, which should show downside revisions to recent economic history, is due for publication on July 29th."

P/E Ratio of the S&P 500

Generally speaking, when the PE (price/earnings) ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). Notice how investors were willing to pay much more for one dollar of earnings during the dot-com boom, the dot-com bust and financial crisis. Currently, with 94% of US corporations having reported for Q4 2010, the PE ratio stands at 17 which is a relatively low level when compared to the past two decades.

Mutual Fund Flow Summary

From the Investment Company Institute (ICI)

March 23, 2011 - Total estimated inflows to long-term mutual funds were $4.68 billion for the week ended Wednesday, March 16, the Investment Company Institute reported today. Flow estimates are derived from data collected covering more than 95 percent of industry assets and are adjusted to represent industry totals.

Estimated Flows to Long-Term Mutual Funds
Millions of dollars

		2/16/2011	2/23/2011	3/2/2011	3/9/2011	3/16/2011
Total Equity		6,420	2,531	-2,112	-168	582
	Domestic	5,181	1,499	-3,203	-1,102	-1,307
	Foreign	1,239	1,031	1,091	934	1,889
Hybrid		1,979	1,489	1,178	1,492	1,220
Total Bond		95	3,871	4,071	3,253	2,875
	Taxable	1,549	4,428	4,782	3,934	3,493
	Municipal	-1,454	-557	-711	-681	-618
Total		8,494	7,891	3,137	4,577	4,677

Equity funds had estimated inflows of $582 million for the week, compared to estimated outflows of $168 million in the previous week. Domestic equity funds had estimated outflows of $1.31 billion, while estimated inflows to foreign equity funds were $1.89 billion.
Hybrid funds, which can invest in stocks and fixed income securities, had estimated inflows of $1.22 billion for the week, compared to estimated inflows of $1.49 billion in the previous week.
Bond funds had estimated inflows of $2.88 billion, compared to estimated inflows of $3.25 billion during the previous week. Taxable bond funds saw estimated inflows of $3.49 billion, while municipal bond funds had estimated outflows of $618 million.

Market Data: Week Ending March 18, 2011

Market Index	12/31  Close	3/18    Close	Week Change	Simple YTD %
Dow Industrials Avg	11,577.50	11,858.50	-1.54%	2.43%
S&P 500	1,257.64	1,279.20	-1.92%	1.71%
Fed Funds Rate	0.10%	0.16%	0.01%	60.00%
10 yr T-note Yld	3.29%	3.27%	-0.13%	-0.61%
5 yr T-note Yld	2.01%	1.94%	-0.12%	-3.48%
5 yr TIPS - 'Real' Yld	-0.06%	-0.76%	-0.19%	-1166.67%
Implied 5 yr Inflation %	2.07%	2.70%	0.07%	30.43%
2 yr T-note Yld	0.59%	0.58%	-0.06%	-1.69%
2-10 Yr Slope	2.70%	2.69%	-0.07%	-0.37%
90 day T-bill Yld	0.12%	0.06%	-0.01%	-50.00%
Gold ($/oz)	$1,421.40	$1,419.70	-$8.90	-0.12%
WTI Oil ($/brl)	$91.38	$101.56	$0.40	11.14%
VIX "Worry Index"	17.75	24.44	4.36	37.69%
Credit Spreads	12/31  Close	3/18    Close	Week Change	Simple YTD %
Inv Grade Credit Idx	4.78%	4.53%	-0.01%	-5.23%
Low Grade Credit Idx	8.32%	7.81%	0.02%	-6.13%
Markit CDX Inv Grd Idx	85	90	3.45%	5.88%
Markit CDX Mid Grd Idx	131	126	4.13%	-3.82%

One Eye on The Fed and the Other on the Yen

All eyes have been focused on The Fed and its various messages over the past several months. The FOMC met this week and said very little to change the expectation they have created for maintaining an easy money policy. Here is part of a FOMC Meeting Summary provided by Econoday.

Also reflecting a marginal upgrade to the recovery, the Fed dropped language regarding progress on unemployment as "disappointingly slow."

The FOMC decided to continue with its plans for 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. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability."

Most likely, the next (or even current) true debate at the Fed is what to do and when after QE2 concludes at the end of June. The Fed's balance sheet will top out at a little under $3 trillion and as soon as the Fed stops making additional purchases, the balance sheet will start to unwind on its own as securities mature and/or are paid down. So, the next key question is how fast does the Fed allow the unwinding to occur? The Fed may have to reinvest some pay down to keep the decline in assets at the desired pace. The next question is if this occurs, is it still QE2 or QE2.1 or QE3?

In addition, the natural disaster and follow on nuclear crisis in Japan is inspiring unexpected developments in the yen foreign exchange. As illustrated below, the yen has strengthened substantially today, in addition to the recent upward trend since the 11th of March when life turned upside down for much of Tokyo and northern Japan. A strong yen will slow exports and tourism while adding yield to government debt. The immediate issue will be the potential unwind of the yen carry. People who have borrowed at low rates in the yen are faced with suddenly more expensive costs and those will get resolved quickly. Tomorrow could be a big day down for the developed markets.

March 17, 2011: Peter Boockvar had this comment this morning. He was using a USD/Yen chart for reference. The chart below is a Yen/USD chart. "Overnight, the Nikkei started to bounce off its lows just 17 minutes into their day (still closed lower by 1.4%) and as it steadily recovered most of its losses, the S&P futures rallied too. The yen continues to rip higher vs the US$ as the repatriation process continues but is 2 yen off its overnight highs. Let’s hope we get facts from authorities today on what is going on rather than opinions of nuclear chief’s outside of Japan"

Market Data: Week Ending March 11, 2011

Market Index	12/31  Close	3/11    Close	Week Change	Simple YTD %
Dow Industrials Avg	11,577.50	12,044.40	-1.61%	4.03%
S&P 500	1,257.64	1,304.28	-1.88%	3.71%
Fed Funds Rate	0.10%	0.15%	-0.01%	50.00%
10 yr T-note Yld	3.29%	3.40%	-0.09%	3.34%
5 yr T-note Yld	2.01%	2.06%	-0.12%	2.49%
5 yr TIPS - 'Real' Yld	-0.06%	-0.57%	-0.09%	-850.00%
Implied 5 yr Inflation %	2.07%	2.63%	-0.03%	27.05%
2 yr T-note Yld	0.59%	0.64%	-0.04%	8.47%
2-10 Yr Slope	2.70%	2.76%	-0.05%	2.22%
90 day T-bill Yld	0.12%	0.07%	-0.04%	-41.67%
Gold ($/oz)	$1,421.40	$1,428.60	$0.00	0.51%
WTI Oil ($/brl)	$91.38	$101.16	-$3.26	10.70%
VIX "Worry Index"	17.75	20.08	1.02	13.13%
Credit Spreads	12/31  Close	3/11    Close	Week Change	Simple YTD %
Inv Grade Credit Idx	4.78%	4.54%	-0.10%	-5.02%
Low Grade Credit Idx	8.32%	7.79%	-0.03%	-6.37%
Markit CDX Inv Grd Idx	85	87	6.10%	2.35%
Markit CDX Mid Grd Idx	131	121	3.42%	-7.63%

Ten Year Note auction 3/2011

Todays auction was completed in strong action. Econoday reports "All readings on today's 10-year Treasury auction are strong. Coverage of 3.32 compares with a long-term average of 2.50 while the stop-out rate of 3.499 percent is nearly three basis points below the one o'clock bid. Buyside participation was strong, indicated by a smaller-than-average dealer takedown of 41 percent."

At the same time, Pimco's Total Return Fund is reported  by Reuters to have sold all its U.S. government-related securities, including U.S. Treasuries and agency debt. The article goes on that Bill Gross is saying there is going to be a loss of bids for treasuries, raising yields, if the Fed ends QE2 at the end of June. The posturing here is clear. Bill Gross is voting for more QE2.

Market Data: Week Ending March 3, 2011

Market Index	12/31  Close	3/4      Close	Week Change	Simple YTD %
Dow Industrials Avg	11,577.50	12,241.00	0.91%	5.73%
S&P 500	1,257.64	1,329.30	0.71%	5.70%
Fed Funds Rate	0.10%	0.16%	0.01%	60.00%
10 yr T-note Yld	3.29%	3.49%	0.08%	6.08%
5 yr T-note Yld	2.01%	2.18%	0.02%	8.46%
5 yr TIPS - 'Real' Yld	-0.06%	-0.48%	-0.04%	-700.00%
Implied 5 yr Inflation %	2.07%	2.66%	0.06%	28.50%
2 yr T-note Yld	0.59%	0.68%	-0.03%	15.25%
2-10 Yr Slope	2.70%	2.81%	0.11%	4.07%
90 day T-bill Yld	0.12%	0.11%	-0.01%	-8.33%
Gold ($/oz)	$1,421.40	$1,428.60	$19.30	0.51%
WTI Oil ($/brl)	$91.38	$104.42	$6.54	14.27%
VIX "Worry Index"	17.75	19.06	-0.16	7.38%
Credit Spreads	12/31  Close	3/4      Close	Week Change	Simple YTD %
Inv Grade Credit Idx	4.78%	4.64%	-0.02%	-2.93%
Low Grade Credit Idx	8.32%	7.82%	-0.01%	-6.01%
Markit CDX Inv Grd Idx	85	82	-3.53%	-3.53%
Markit CDX Mid Grd Idx	131	117	-3.31%	-10.69%

Quantitative Easing Explained

Listen to the FOMC

This week members of the Federal Reserve Open Market Committee (FOMC) were speaking around the country to different groups. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the FOMC is responsible for open market operations. Here is a summary of those who spoke this week and a brief clip from their talk as they begin showing their cards on the question of monetary policy adjustments or changes. Most of these players are not showing their cards now. There is a meeting of the FOMC on March 15 and the next one is April 26-27. My guess today is that there will not be any change to the current easy money behavior (money printing policy) until employment growth is sustained taking it well past June 2011.

From Fed Chairman Bernanke:
"FOMC participants see inflation remaining low; most project that overall inflation will be about 1-1/4 to 1-3/4 percent this year and in the range of 1 to 2 percent next year and in 2013. Private-sector forecasters generally also anticipate subdued inflation over the next few years.³ Measures of medium- and long-term inflation compensation derived from inflation-indexed Treasury bonds appear broadly consistent with these forecasts. Surveys of households suggest that the public's longer-term inflation expectations also remain stable."
"A wide range of market indicators supports the view that the Federal Reserve's recent actions have been effective. For example, since August, when we announced our policy of reinvesting principal payments on agency debt and agency MBS and indicated that we were considering more securities purchases, equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation as measured in the market for inflation-indexed securities has risen to historically more normal levels. Yields on 5- to 10-year nominal Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases.