U.S. stocks traded lower, following international bourses, but rebounded from the session lows – at its worst the S&P 500 was down 1.4%, ending the day off by just 0.6%.

Energy was the only sector to close higher for the session, basic materials and tech also outperformed the market.  Utilities and consumer discretionary shares were the worst hits groups.  The S&P 500 index that tracks utility shares was dragged lower by its members that have the largest nuclear-energy units. 

The USD got smacked back to a 14-month low as the Dollar Index looks ready to test the 75 handle again – euro/$ hit 1.40 and $/yen fell to 81.66 (down to 80.60 at its weakest of the day – or strongest of the day in terms of yen).  If the yen hits that 80 handle again (all-time yen strength of 79.75 was hit in 1995), the Bank of Japan will intervene (even beyond the latest massive liquidity injections) as this extreme yen strength adversely affects that export-dependent economy – an economy that had already fallen back to contraction before the quake hit. 

The EU finance ministers got together this weekend in yet another attempt to defuse the debt concerns (officials are clearly concerned now that the Japanese government will surely have to abandon their Spanish bond-buying program now that resources must be diverted to the rebuilding effort).  The latest plan offers to ease borrowing terms to the peripheral economies by lower the interest rate and doubling the duration of the loans.  They ran into a little trouble with Ireland though when the ministers demanded the Irish raise their corporate tax rate (the only thing that country has going for it right now) or they wouldn’t enjoy the new lending terms.  But so long as the stronger EU countries are going to bail the troubled ones out, the weak are in control (the EU will cede to Irish demands) because deterioration means Germany and France are on the hook for even more.  

This morning U.S. stock-index futures are down big, more than I recall seeing since the financial crisis was in play, as the Japanese struggle with yet another explosion at that nuclear plant.  The Nikkei 225 (Japanese market) slid 10.55% last night, and that’s with their government engaging in outright purchases of stock ETFs. 

Now, I don’t know jack about nuclear physics but based on what I’ve read from scientists writing about the issue it appears that the market is overreacting to this specific subject.  From what I read, when the quake hit the nuclear chain reaction was shut down, so the residual radioactivity is all that’s occurring – and that residual radiation has a very short life, losing its radioactivity within seconds.  Further, I haven’t seen a report that the third containment vessel – known as the “core catcher” – has been damaged.  As a result, if the core does meltdown then this “core catcher” contains that material until it cools and can be cleaned up.  Again, from what I read there is no reason to believe that this will deteriorate to a Chernobyl-type event, but for a stock market that hasn’t corrected in substantial manner for a while one never knows where this goes. 

Market Activity for March 14, 2011

Sector Activity for March 14, 2011

Delusional

I’ve heard for a couple of days now that Bernanke & Co. are watching the price of crude as a sign to keep monetary policy floored rather than a signal that their policy path is doing more harm than good. 

It appears our Fed, unable to accept blame for their mistakes, views the higher price of oil only through the lens of slower consumer activity rather than a direct result of their unprecedented money-pumping endeavors – they can’t control where this money goes, much of which chases speculative returns within the commodities market. 

Before the latest pullback to $100/barrel, I realize that the most recent spike was due to Mideast tensions.  However, I’ll point out that crude was up 30% over the five months ended Jan. 28 – a move that was driven by the August 27 Bernanke speech that signaled QE2 was coming.   (And while there have been several events to blame on the surge in oil prices higher over the past decade – such as Iraq, domestic drilling restrictions and hurricane activity – unprecedentedly aggressive monetary policy has been a key driver. 

On several occasions we’ve talked about how current monetary policy may actually keep job creation weaker than it otherwise would be due to the higher costs firms must absorb via rising commodity prices.  Along these same lines, it appears that the Fed’s choices may also curtail consumer activity over the next few months – the price of energy may just overwhelm their spectacular manipulation of stock prices, and thus the transitory boost to household net worth. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900