U.S. stocks started the session up strong, but gradually lost ground as pictures were released showing TEPCO’s managing director in tears after admitting that the radiation leak is worse than previously admitted and Mideast tensions began grabbing headlines again.   Still, the major indices held onto some of the early gains and managed to close higher. 

Financials, telecoms, industrials and consumer staples led the broad market’s gain.  Utilities and tech underperformed, but did close higher.  Energy and consumer discretionary shares closed lower.

Oil was moving higher after the UN Security Council authorized a no-fly zone for Libya, then quickly retreated after it was reported that Gadhafi halted all military operations. But apparently that was a lie – imagine that – as reports stated his assault was still on.  Crude bounced back as a result to close slightly higher at $101.58/barrel – up to $103 this morning on the Libya bombing.

For the week, the Dow Industrials closed down 1.54%; the S&P 500 slipped 1.92%; and the NASDAQ Composite gave back 2.65%.  This marks the first back-to-back weekly losses since the market was in trouble back in the summer before Bernanke came to the rescue with his now famous August 27 more-QE-to-come speech. 

Exogenous risks are prevalent (the Japanese disaster and escalating Mideast troubles – the bombing of Libya has begun, increased tensions near Saudi Arabia, and Hamas firing mortar shells into Israel again), so we’ll see how the Bernanke-backed market responds this week.  Futures are pointing to a strong open, probably mostly driven by the AT&T’s announced purchases of T-Mobile USA, but the M&A boost is usually only good for a day.  Within a couple of sessions we’ll see how traders respond to these risks. 

Market Activity for March 18, 2011

Sector Activity for March 18, 2011

Intervention All Around

So the G-7 convened on Thursday night to intervene Friday morning in order to halt the Japanese yen’s surge to record strength.  The action certainly had an effect on the currency markets as the yen slid back to 81.40 in terms of the $/yen pair (higher number means lower yen value) from the 79 handle directly before the intervention.  It appears the group will intervene as necessary as talk is their target is to keep the yen from strengthening below 80 $/yen. 

I certainly understand the need for intervention on occasion (sparingly and with reluctance), particularly when a major crisis sends a currency surging (anticipating yen repatriation) to possibly troublesome levels as traders jump on the momentum trade.  But some of this move is due to a long stance of policy itself as the Bank of Japan (BOJ) has held interest rates near zero for 12 years.  That is, there’s a carry trade here as people borrow in yen and invest in something/anything with a higher return; when the risk trade comes off, then of course we get yen strength – thus it’s not all about the repatriation trade. 

But intervention is not being used sparing or with reluctance these days, it’s coming from so many directions one wonders if there’s really much of a true market in anything anymore.  For example, the several iterations of U.S. fiscal stimulus, our Fed in continual QE mode, foreclosure moratoria and tax credits for homebuyers, the ECB and EU governments backstopping banking system troubles and bailing out (or attempting to) sovereign-debt crushed peripheral economies, massive Chinese stimulus, and don’t forget the BOJ’s own attempt to weaken the yen back in September – and I’m sure I’m missing a few others. 

What we’re seeing is that intervention begets more intervention as it’s no longer seen as a big deal and is even expected by the markets these days.  If intervention drives the market higher, does it make for a sound reason to rally?  No reason to answer that question because it rhetorical.  There’s a belief right now among traders that they must buy this market on 5% dips as they’ve taken the normal correction of 10-20% off the table.  This mentality is all a result of governments continually stepping in to halt prices from properly discounting realities. 

Remember that 16% correction in the spring of 2010, which most people apparently have forgotten?   The market slid as the economy weakened and it appeared the Fed was done doing QE.  Stocks remained on the mat, until late August when the Fed signaled the next round of money printing was coming.   That spring/summer activity was a major sign that one could either take note of or ignore. 

Intervention must eventually come to an end and when it does the market will begin to properly price in current realities.  And the more market manipulation government and central banks engage in, it’s not going to be the typical and benign correction we saw nearly a year ago, but something significantly worse.  If the extraordinarily easing monetary policies of the 1970s and 2000s (the FOMC holding real fed funds negative for several years, but at least without QE) led to serious financial troubles, what will we have to deal with when current policy (which is even easier as real fed funds is negative once again, but this time it’s combined with QE) must end?  

Sign up to receive the Daily Insight and other Acropolis publications here.

Spring has arrived; have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900