FEDERAL RESERVE BOARD RAISES DISCOUNT RATE

The Federal Reserve raised the discount rate by 0.25 to 0.75. This is the lending rate the Fed uses when it makes emergency over night loans to banks. The market has taken the move in stride, in fact, the market has garnered strength from the move and continues to move higher using the increase as a vote of confidence in the economic recovery.

Early Foreboding: Foreign Holdings of Treasuries Fall

In what could be a negative foreboding for the US governments ability to continue to finance it's budget with Treasury securities, foreign holdings of US Treasuries fell, specifically holdings by China, which fell below that of Japan, leaving China as the second largest holder of US Treasuries. The obvious conundrum for the US Treasury is the threat of higher interest rates to continue to attract demand for it's securities at a time when the US's amount of outstanding debt is at an all time high. In turn, as Treasury's securities yields rise, these higher yields will ultimately be passed on to US consumers in the form of higher mortgage rates, credit card rates, auto loan rates, etc. at a time when the US consumer is continuing to strain from too much debt and must continue to deleverage.

What happens if rates start rising before the US consumer is prepared? Unfortunately, for many homeowners who have adjustable rate mortgages or two-step loans (loans that go from a fixed rate to an adjustable rate) higher rates may translate in to higher mortgage payments additionally limiting consumers discretionary income, meaning fewer car purchases and other purchases that will help sustain the US economy after the inevitable withdrawal of Federal stimulus.

Forcing the US government's hand?
The government has pledged to keep rates at exceptionally low levels for an extended period. This language has been incorporated in to the Feds policy statements for the past year. However, the Fed only controls short term rates, not long term rates. And those short term rates have been cut as low as they can go. Long term rates are moved by the market. As long term rates move higher, the yield curve steepens. While this is good for banks and financial institutions, at some point there must be a correction as depositors demand higher rates for their money, causing the yield curve to flatten.

EU Has Answer for Greece?

On Thursday, February 11, 2010, the U.S. equity markets rallied as investors looked forward to details on a Greek bailout plan. Unfortunately, no details would be forthcoming on Thursday, so the markets decided they would rally in anticipation of details that would outline a lifeline for Greece and presumably other troubled Euro nations that may find themselves in similar straits.

It appears that markets will move on any information or disinformation in the marketplace. It seems that the markets moved based more on the fact that they had sold off and were primed to be bid up by participants. Can anyone explain the recent moves by United Airlines' stock while the rest of the market (and other airlines) seemed mired in a limited trading range? Hard to explain this one. Because of the lack of retail participation in the equity markets (atleast the last 12 months), we can only assume that professional investors are picking particular stocks and bidding them up between eachother hoping for retail participation to then unload on at inflated levels. Sound paranoid? You bet it is. And why not. If you bought the S&P 500 ten years ago and held it until today, you'd be up exactly your dividends received and that's about it. Why take that chance with risk when you could have performed as well or better in a fully-insured bank ceritifcate of deposit, or better yet, AAA-insured municipal bond? Should investors be skeptical? You bet they should.

On the political front, Washington DC remains covered in snow after a historically massive snowfall and government offices remained closed for a fourth day. I think this respite from political haggling over everything from health care reform to job creation plans, is much needed. The amount of cynicism in Washington DC rivals only that of Californian's belief that the state can be saved from it's budget woes. Is there a savior for California? I saw a nice commercial with Meg Whitman this morning. Maybe she has an actual plan. I say give her a shot. Maybe the entire working population of California can go to work for eBay. Just a thought.

Market Takes Big Hit on PIGS and Jobless Claims

On February 4th the equity and commodities markets got crushed after fears of budget issues with PIGS (Portugal, Italy, Greece, and Spain) rattled investors in the Euro zone and continued to cause angst in the US markets. The dollar also weighed on commodities.
It's hard to take these moves seriously when the news of the day drives the market dramatically up and down, with the end of the world one day and an economic rebirth the next. The best thing for investors to do is keep their wits about them and evaluate their long and short term objectives and not get caught up in the capricious market undulations. Over reactions to the swings in the market can indeed ruin a portfolio. If you are in it for the long haul, it's best not to watch the market every day. If you are a short term investor or trader, it makes sense to stay defensive and hold small positions and honor your stops.
The market rally that started in March 2009 is officially over. Several technical levels have been breached. The S&P 500 closed below the technically significant level of 1,073 and closed at 1,063. The Dow fell below 10,000 for the first time in 3 months and closed just above the important psychological benchmark. I think the market will remain volatile and we will see a bounce back that reassures investors only to be followed by further declines.