Range Bound Markets Await Direction

Over the last six sessions the Dow traded in a narrow 200 point range and the S&P followed suit, trading within a 25 point spread; not surprising due to the number of people on vacation this time of year resulting in low daily volume and a lack of direction.

The economic news did not help this week, which was mixed and lackluster. On Monday there was a bright spot as consumer personal income in July posted a 0.2 percent gain, following no change at all in June. More importantly, the wages and salaries component rebounded 0.3 percent after slipping 0.1 percent in June. The Fed is depending on the consumer to counter a faltering housing sector - Bernanke and Company got its wish at least for July. Overall personal consumption increased 0.4 percent, following a flat number in June. How did the market react? The Dow sold off by over 140 points anyway; obviously traders didn’t think the numbers were good enough. Since the PCE (Personal Consumption Price Index) rose by .02, which is slightly inflationary, that should have been looked at as a good thing, since there has been so much worry about deflation. But no – it had no affect.

Today was a roller coaster, affected by reports showing an increase in home prices for June, a weak consumer confidence index and a mixed picture from the Fed minutes released at 2:00 PM. The result was a close with little change in the markets.

Interestingly, the Fed minutes pointed to the widespread differences between the Fed governors on what should be done to affect the state of the economy. Some feel we are doing just fine, while others are ready to take more stimulus action and still others are sounding the alarm for disinflation – a slow deflationary decline in prices. No wonder the public is confused. They can’t decide amongst themselves what the next course of action should be.

Anyway, let’s see if the ADP employment report, jobless claims and the national unemployment report on Friday will have better luck in moving the markets.

C. Cohn

Cohn-Reilly Report

America to Obama:Time Is a Luxury We do Not have

The country couldn’t be more divided on the key issues like finance reform, and healthcare. Could it be the media, or the tea party rallies, or could it be the voters, who overwhelmingly voted President Obama into the White House on the platform of Healthcare and finance reform, are having a change of heart? Something just does not add up, there has got to me more to this crusade than meets the eye. There is one camp that feels that Obama can do no wrong (with ever declining members) and another camp that feels that Obama can do nothing right. Either side of the fence seems a bit extreme. The fiscal policy, bailouts and stimulus measures implemented by the previous and current administrations have had some impact on stabilizing the economy and avoiding catastrophic collapse of the markets, but we are now faced with slow growth and high unemployment some 18 months later. Patience is what is needed, given the breadth of the problems the President had sitting on his desk on his first day in office. Nevertheless, time is not on his side, with midterm elections around the corner, it seems almost destined to be an upset. The Democratic majority is in serious jeopardy of swinging back to the Republicans.

From my perspective, the fullness of time is required before evidence of the wise and unwise movements of the administration is ultimately revealed. In the meantime, we are hearing from the "so called" experts Obama’s popularity is swiftly eroding, and his administration, though productive in many respects, not in the areas of concern. The wars, new jobs, and now the BP oil disaster. It will take a high profile republican scandal to damper the outcome of the upcoming elections.

K. Reilly
Cohn-Reilly Report

SEC: Keeping the Bond Market Churning

To beat the potential stand-still in bond offerings, the SEC opted to temporarily allow bonds sales to proceed without providing credit ratings in Official Statements, which are deal documents distributed to brokers, and investors that provide full disclosure of issuers' financials - particularly, balance sheet, cash flow, total debt outstanding, credit rating, use of funds and debt service.
It appears that the SEC is intent on keeping the flow of deals moving to help financial “supply chain” generate money including, investment banks, issuers of debt, lawyers and financial advisors. Perhaps their mindset is that this will trickle down to impact the economy as a whole. And so it goes....the SEC is bending the rules to indirectly help keep the Economy moving in the right direction, by way of the Bond sales.

On the heels of the securitized mortgage and subprime housing debacle, the last thing we need are credit raters that are gun shy about rating bond offerings. Okay, let's break this down.... credit rating agencies, are in fear of rating?. You're thinking, "Isn’t that like a Chef being afraid of cooking?" Nevertheless, this comes as an unintended backlash from the Financial Reform Bill. It was reported in the Wall Street Journal that raters’ want to avoid exposure to liability, therefore the top three rating agencies; Moody, S&P and Fitch, won’t allow their ratings to be included in the public disclosure documents (Official Statement) that would normally accompany bond sales. To be clear, they will continue to rate bonds, but apparently do not want their rating to be the basis of any investors’ decision to purchase the bonds - thereby eliminating liability in the event of default.

Well I know many of us market watchers, analyst and economists were all prepared for backlash from the tightened regulations handed down by lawmakers. As the smoke clears, and the dust settles on the Reform Bill, more and more instances of backlash will emerge. Capital Hill will be compelled to press the “reset” button, and then it’s back to the drawing board with revisions and addendums until they get it right.

K. Reilly
Cohn-Reilly Report

___________Comments

John T. said......
I am very very concerned that the bond market is the next bubble. We have basically been in a 25+ year bond bull market, and rates are darn close to zero. Every scared person out there is jumping at bonds and bond fund managers are holding their noses and scooping up everything they can......with the exception of Bill Gross who knows this is coming and is probably already clearing out his offices.......

As soon as we get a couple of good jobs numbers and confirmation that yes, we are in recovery.......and the Fed says "ok, let's raise 1/4 pt".....it's over....and everyone who has bond funds is going to watch the NAV deteriorate, perhaps for many years to come. And those who bought long term bonds for yield will find the prices will erode and they will be forced to hold to maturity........and maybe even watch a 1 year 5% CD float by as they can't do a darn thing about it.

I feel bad for the elderly. They're going to get hit from this when it comes.

Katherine said...
You make a very good point John T. It seems that investors now have the responsibility (self preservation)to project into the future and decipher whether or not the worst case scenario is something they can bare. In today's market there is no such thing as a secure investment. Bonds were always a good bet for long term, but there are so may unusual factors playing into the market that it's next to impossible to anticipate. Veteran analysts and fund managers may have the benefit of experience to navigate through these times, but what about the fund managers who have only 3-5 years experience.