Notes & Thoughts

Notes of Importance:

The Syria issue is melting into the background as Congress discusses the issue without returning to Washington. They are busy with their vacations or playing video poker even if they attend a meeting:) (John McCain) My view, after reading more than I wanted to the last twenty-four hours on this issue, is nothing happens. Simply put this is a no win situation for the White House, Congress or the American citizens. It is starting to play out that the best course of action is no action. Weighing out the impact to Israel, the US, the Middle East and the citizens of Syria it is ugly no matter how you look at it. This is a civil war and it will likely be determined we should stay out. I am sure harsh warnings will be issued, etc. etc. etc. That said, the upside is gaining strength as a result and the economic data has been steady. That puts the buyers in a position of wanting to control the trend.

Tomorrow is the Jobs Report. How important will it be to the market direction? Well, that depends, if it is too good it will assure the other silent drag on the market takes place sooner rather than later. Of course I am referring to the stimulus cuts by the Fed. Based on the continued growth in both the ISM Manufacturing and Services numbers this week, the Fed is on course anyway to cut stimulus. A solid jobs report would only serve to confirm their actions. That will bring the sellers back to the table again, potentially. Remember the markets were heading lower on the news of the stimulus cuts, prior to the Syria issues making headlines. Thus, tomorrow will be an interesting day for the markets overall. It could turn out to be one of those damned if you do, and damned it you don’t. Watch bonds move lower if the news is good. Stocks will take their cue from the Fed going forward, but would likely move higher tomorrow on the positive jobs data.

Notes of Interest:

The yield on the ten year Treasury bond hit 3% intraday on Thursday before settling at 2.98%. IEF, iShares 7-10 year Treasury bond ETF fell 0.76% closing at $98.60, a lower low than prior to the bounce last week. The thirty year yield is now at 3.87% and almost back at the 3.9% prior to the rally on the Syria news. TLT, iShares 20+ year Treasury bond ETF fell 1.4% and is testing the previous lows. All the noise about buy bonds as equities sell off didn’t really pan out. We did recommend TBT as a trade last week which has played out very well against the rise in yield on the bonds. Baring any unforeseen events, yields are rising again as the anticipation of the stimulus cuts by the Fed are back in play.

Semiconductors have been leading the bounce this week. The SOX index is up 4.2% over the last three days being led predominately by the midcap stocks. IGN, iShares Networking ETF has moved up 3.2% as well benefiting from the move in the semiconductor stocks. This is is a positive sector to show leadership for the broad markets and has produced some hope in the outlook for the major indexes in turn. The NASDAQ has been the primary benefactor with the index moving back to 3658 and looking to clear the 3660 resistance in play currently. The NASDAQ 100 index is at 3129 with 3130 the next level of resistance and the previous high at 3140. No conclusive evidence that the upside resumes, but the move has been encouraging thus far.

Note of B.S.

Higher interest rates will not hurt the economy moving forward! Say what? That is what the Federal Reserve is pushing, and that is what Wall Street is pushing, and that is what the housing industry is pushing, and just about everyone who doesn’t need to finance anything. With the 10-year bond hitting 3% today mortgage rates will push higher again. That is a direct impact on the ability to buy a house based on the current qualification standards. At the least it will impact what homeowners can sell their homes for and still have buyers qualify. The zero percent car loans will be disappearing as well, what does that do the current sales data in the auto sector? What about the no interest financing from furniture stores and other large purchase items? Yes, the move in interest rates will impact the consumer relative to free cash-flow as the cost of financing rises. That will translate into fewer purchases from the consumer. But the biggest kicker of all is all the debt the US government has put on the books since the great financial collapse in 2008. Those trillions of dollars have been financed at low yields… what happens when they come due and renew at the new and improved higher rates? The deficit will balloon higher as we borrow more money to pay the higher interest rates. That is why we need a balanced budget act now. Yes, there will be an impact from the higher rates going forward and they will be more of an impact than many are counting on. Thus, we need to find a way to deal with this issue going forward, but I am not hopeful since we haven’t dealt with Social Security and the new and improved healthcare deficit will only make matter more challenging. Don’t believe everything you hear about rising interest rates… this will get ugly!