"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Wednesday, September 21, 2011

Markets Digest FOMC Statement - develop a case of Nausea

The long anticipated prognostication finally arrived today as the markets, with bated breath, eagerly poured over the entrails of the FOMC press release to scour for clues to the future. The oracles of Delphi, descended from their lofty tower, uttered their prophecy, and then returned to their temples to observe their handiwork. Meanwhile, the stock markets having digested the contents, soon began to experience an uncomfortable sensation which worsened as the meal settled. Down collapsed the equity markets and then down went the commodity markets and up went the Dollar.

The Fed announced $400 billion worth of purchases of longer dated Treasury debt. One would think that hte markets would be pleased but alas, 'twas not meant to be. What stuck in their craw was the fact that these purchases were sterilized and not fresh purchases. In other words, there would be no increase in the Fed's balance sheet but rather a rolling from their current holdings of shorter-dated maturities into longer dated ones. Apparently the markets were not impressed and were looking for either:

1.) a larger sum than $400 billion
2.) non-sterilized purchases (another dose of QE)
3.) some combination of the above

This is a rather sad commentary on the current state of our nation where a sum as enormous as $400 billion dollars is met with a gigantic yawn followed by an upchuck.  One would think that after having learned that the exorbitant sum of $2.5 TRILLION DOLLARS in QE actually ended up giving us a month in which ZERO NEW JOBS were created, the proponents of more stimulus would have begun to look elsewhere for a cure to what ails the economy. Apparently not.

Either way, when the dust settled, it brought on the risk aversion trades. The thinking is that the sum of $400 billion is too small, especially seeing that it is not fresh purchases of US Treasury debt but rather sterilized purchases to do much in the way of harming the US Dollar. That combined with the fact that non one wants to buy the Euro, or the Swiss FRanc or the British Pound or the Japanese Yen saw the "safe haven" money rush into Treasuries and the Dollar. Imagine locking up your money at the rate of 1.9% or less for TEN LONG YEARS in the securities of a nation which cannot stop spending money or increasing the overall size of its debt load? And this is supposed to qualify as safe haven investing???

The rising Dollar then brought out the algorithm selling across the entire commodity sector as the hedgies did their thing once again and dumped everything tangible. With the Fed telling the world that it foresaw more weakness in the sluggish economy, crude oil and energy were dumped. So was copper. Basically the markets were looking at the absense of inflationary pressures once the Dollar starting rising.

Gold which had initially moved higher when the news first hit, then succumbed to the selling pressure across the commodity sector and moved below $1795 where it hit a few stops which took it into the region just above the $1780 level.

Asia has been buying heavily into this zone so we will see whether these buyers make an appearance again this evening.

I am a bit pressed for time so I have to cut this commentary short for now but perhaps can add to it later if time permits.

The mining shares, which had been performing remarkably well all day long, fell lower when the broader stock market imploded and were thus kept from taking out overhead resistance near the 640 level. I want to see the price action in this sector the next day and especially how it ends the week before drawing any further conclusions at this point but I do want to point out, that even with their weakness today, the sector outperformed the broader markets once again. It could well be that the miners might be evolving into the defensive sector trade which would give them a decent bid even on days of overall equity weakness.

At this point in the game, one has to wonder what tricks the Fed has left in their magic bag because it is evident that this one did not perform.