The major indices ended mixed on Monday as the Dow Industrial Average and S&P 500 Index closed down a bit, while the NASDAQ Composite reversed early losses to close higher. 

The broad market was unable to advance as the latest round of European debt worries gathers steam.  M&A activity, two rather big buyouts fostered by Duke Energy and DuPont, did offer the market some help and kept the losses to a minimum.  Acquisition activity generally indicates more to come, so traders scurry to pick up shares as they speculate which company may be the next take out, hopefully at a significant premium, thus offering the market some support. 

Tech, industrials and basic material shares were the top-performing groups.  Telecoms, utilities and energy were the biggest losers. 

The CRB Index advanced, driven by prices within the energy complex, corn and cotton.  The Alaskan Pipeline shutdown has oil prices back on the rise, although crude remains just below the $90/barrel mark.  One assumes they’ll get the leak fixed in quick order, but a shutdown is a big deal because the pipeline, which delivers crude from Alaska’s North Slope, accounts for 10-15% of domestic production and is the major supply source for West Coast refineries. 

As we’ve returned to discuss over the past week, the European debt crisis/contagion continues to roll again as Portuguese yield spreads surge – although the ECB stemmed the damage by buying more bonds.  This moves Portugal even closer to a bailout (joining Greece and Ireland).  Last night a Portuguese finance minister stated the country  doesn’t need a bailout, which sounds like a refrain now as we also heard that from Greece and Ireland.  Besides bud, you’re already getting bailed out as the ECB purchases hold your interest rates lower than they otherwise would be. 

Next in line: Spain.  Although, the European Financial Stability Facility (EFSF) doesn’t quite have the funds to bailout out all four countries.  No fear, European governments will simply boost the EFSF by that time; it’s really that easy. 

That EU governments don’t have the money to do so without further borrowing isn’t an issue because in today’s world all that’s needed to fix a debt problem is, well, more debt.  (And that’s just it, the market doesn’t seem to worry right now about the situation, but rather the worry revolves around the EU’s unwillingness to get in front of these problems.)  Unfortunately, reality ultimately prevails and everyone finally understands that the problem is too great for government to backstop.  Debt will be restructured; it’s only a matter of time.

Market Activity for January 10, 2011

Seven Years…Really?

Federal Reserve Vice Chair Janet Yellen was out defending monetary policy over the weekend, not only the zero-interest rate policy but of course the monetary easing (outright bond purchases) that is the next step when you’ve already pushed short-term rates to virtual zero.  During that Saturday speech she cited a Fed model (in fact their main economic forecast model known as FRB/US) that has QE2 coming to a close within a year (currently scheduled to run its course by June) and the ultimate unwind of the policy coming in seven years.  Considering policymakers focus intensely on the unemployment rate, and Yellen herself explains that we wouldn’t return to a 6% jobless rate until 2020 at the current pace of job growth, I guess it’s not all that surprising they’d so delay the unwind of current policy. 

So here’s what we have:  Either this is a normal recovery, as some continue to argue, and prolonging the unwind of this unprecedented monetary stance creates the greatest bout of inflation this country has ever seen.  Or, the economy really is in deep straits and the policy is at least arguably necessary (while I side with the latter economic assessment, the Fed still needs to cease and desist and allow the market to adjust on its own at this point for fear of creating even greater problems).  Regardless the side one takes, we’ve got quite the challenge ahead.

Week’s Data

There were no economic releases yesterday, but we get back to it today with the NFIB’s survey on small-business optimism and wholesale inventories.  Both of these are key releases as small business is a major job engine and inventories have been such a huge driver for this recovery. 

The NFIB’s figure had finally begun to pull away from the 90 level -- a recessionary reading, and the survey was stuck there for longer than any time in its 36-year history.  The November reading came in at 93.2 and expectations were for the measure to improve another point or so to 94.5.  Unfortunately, the number for December was just releases and it fell back to 92.6.   We’ll touch on the specifics tomorrow.

And on wholesale inventories, they’ve been on a tear over the past two reporting months so we watch to see if they tail off as we get past the holiday shopping season.  The inventory cycle has been a major contributor to GDP during this now six-quarter recovery.  While the rebuilding of stockpiles is always a big contributor in the early stages of economic rebound, this one has been hugely dependent on the segment as illustrated by the real final sales figure within the GDP report (GDP minus inventories). 

Later in the week we get the typical releases such as mortgage apps and initial jobless claims, along with the Fed’s Beige Book report (latest economic conditions within each of the Fed’s 12 districts), the trade figures for November and December CPI. 

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Have a great day!

Brent Vondera, Senior Analyst