TRADE Focus

05/28/2009

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The Trade Focus commentary was written Wednesday, May 27th and the market analysis section was written Thursday, May 28th.

Last week we skipped any review of economic news if for no other reason just for a change of pace. Since we last wrote the amount of news has been light to moderate up to this point but there has been at least one report of particular note that seemed to catch the stock market's interest. That was the release Tuesday morning of the Consumer Confidence Index. The reading was reported to be at 54.8 pct which beat consensus estimates of 42.6 by a landslide and compared with 40.8 the previous month. This was the shocker of the day and the week and catapulted the US stock indices higher with the Dow reaching just more than 200 points higher on the day. The Case/Schiller Home Price Index was another report released, notching another month of price declines, but only slightly more than what had been anticipated. Existing Home Sales were out on Tuesday as well and were not as moving as the confidence number but did not hurt matters as it showed monthly sales of 4.68 million versus the expected 4.66 million and was above the previous month's 4.55 million units. Still to come the remainder of the week will be Durable Goods Orders with mixed expectations but follows a poor previous month, New Home Sales and then GDP numbers on Friday where it is expected to show an additional 5.5 pct contraction. This is still a preliminary estimate of the economy's 1 st quarter performance and is an improvement over the previous estimate predicting the 1 st quarter shrank by 6.1 per cent. There will be a final revision released next month. As is usual there are other factors that are of importance to markets and market direction. Coming back after the Memorial Day Holiday we were wondering if the news of North Korea 's under ground nuclear test, not to mention its threat toward South Korea might be an issue but it was not. The gold market actually probed considerably lower prices during the course of the early hours in particular. The Treasury auctions conducted this week we feel are well worth mentioning. 101 billion in 2yr, 5-yr and 7-yr notes are in the process of being auctioned this week alone. The first two are out of the way and surprising to us, the demand was aggressive with very good bid to cover ratios reported. Tomorrow will be the third auction of the week which is $26 billion 7-yr notes. But that's just this week. Next week there will be 3yr, 10-yr and 30-yr note auctions. We are relatively in awe of these numbers. We understand that the money is needed to fund the ambitious budget and special economic recovery packages. But this is quite a supply and the subsequent market reaction - sharp decline - to the favorable results must be an indication of the fixed income market's impression of what it faces ahead. There is in our opinion just an overwhelming supply not only from the billions upon billions in recent auctions but with what is still to come. We would believe that higher rates are needed to attract interest for the funding operations. And at some point that will not be good for the government or the economy, we think, because higher borrowing costs are an even larger burden to repay and with government becoming an ever larger segment of the economy chances increase for it all to crumble under its own weight. We have already found ourselves asking the question, "who is buying all this stuff?" Either there is a gun being held to the heads of our Treasury customers or perhaps the Fed either is or is expected to become a more active participant than what we know. The strong demand has been at least partly explained however, by narrow spreads afforded in the Agency and Mortgage Backed Securities markets. Nevertheless, Treasury yields have been going up and therefore prices have been falling. Increasing yields often spell inflation and with the massive increase in supply the picture doesn't appear to be a pretty one for the not too distant future even though realistically we cannot join the inflation camp. We simply do not see a level of economic activity currently or in the near future that suggests inflation. We may be wrong or we may not see something that we are missing or perhaps inflation will be self-induced and become of the stagflation variety. Assessing the picture before us, however, we see a Treasury market that had been driven dramatically higher (lower yields) by economic fears to never seen before highs. The remedies being employed for the economic crisis may eventually bring them to considerably lower levels and possibly lower than what have been seen in a decade or more. The levels to which the market is receding to now, though, may in reality be a normalization of treasury yields. We remain concerned over the tremendous supply coming to market and its implications but until further notice we can not ignore what may be a correction to an over done flight to quality situation and the fact that these price levels are reaching an area of some support and are near their jumping off point from November of 2008. We are not suggesting or recommending it is time to buy or sell any of the Treasury markets, but here again we see what has been an opportunity and what may develop into still another.

Note: We are archiving the Traders Focus from here on so that those interested can follow more easily.

Due to technical difficulties we had to redo the charts for this week's Trade Focus on Friday after the markets had been trading for in some cases several hours from the time the market analysis text was written. We are sorry if ths causes any confusion.

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