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

 

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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.