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Missing The Point?

Daily State of the Markets 
Wednesday Morning – December 15, 2010

Good morning. With speculation running rampant about what he might or might not say regarding QE2, the state of the economy, inflation, and most importantly, the sudden spike in bond yields, Ben Bernanke decided to take a page out of his predecessor's book and said very little. Instead of addressing the improvement in the economic data or the defiant behavior of bond yields, Gentle Ben stuck to the script and will likely have the Fed just keep on keepin' on in terms of buying bonds.

While Mr. Bernanke may be hearing a fair amount of cat calls from the crowd these days regarding the effectiveness of his adventures in quantitative easing, his detractors (a group that seems to be growing with each uptick in bond yields) may be missing the point.

To make my case, allow me to elaborate on not one, not two, but a total of three conversations I had with fellow market professionals yesterday. To be clear, these are not accountants, financial planners, or insurance salesman, but individuals who actually work in the business of managing money. When the discussion inevitably turned to the most powerful central banker in the word (it was a "Fed Day" after all and what else were we going to talk about while waiting for the announcement?), the topic of interest rates came up quickly. To a man, these guys all said that Bernanke must be pretty embarrassed because his QE2 was failing miserably.

The point my little trio made (and made independent of one another) was that QE2 was "supposed to push interest rates down so that the banks would lend more money." While this may be the party line of cynical investment professionals these days, I simply disagree. In my humble opinion (I have been wrong a time or thirteen over the last 25 years, so it is quite easy to stay humble), the true purpose of QE2 is to keep the good ol' USofA from succumbing to a deflationary spiral.

As I have written, I am also of the mind that the spike in interest rates isn't about bond vigilantes, fears of inflation, the retraction of risk premiums, or the bond market's "disappointment over the Fed's decision to not add to their QE2 program" (seriously, one firm's head of investment strategy offered that one up as the reason bond yields rose on Tuesday). No, I am fairly confident that it has been traders "selling the fact" on the "shake hands with the government" trade that is causing the sudden and violent rise in bond yields.

And it is for this reason that the stock market has not had an equally violent reaction to the 45% increase in the yield on the 10-year T-Note. If traders are indeed dumping bonds en masse, then some of that cash may be finding its way to the stock market after all. And whether or not you buy into this theory, you do have to admit that stocks have handled the huge rise in bond yields pretty darn well lately.

However, we must also point out that historically there has been a mid-December pullback prior to the year-end rally. And in checking the calendar...

Turning to this morning... The combination of Moody's placing Spain on review for a future downgrade and Portugal's miserable bond auction has put stocks on the defensive both here and across the pond.

On the economic front... The Consumer Price Index for November rose by +0.1%, which was below the consensus for +0.2% and October’s reading of +0.1%. When you strip out food and energy, the so-called Core CPI came in with a gain of +0.1%, which was in line with expectations and above October’s unchanged reading.

In addition, the Empire Manufacturing Index (designed to indicate the state of the manufacturing sector in the New York region) for November rose to 10.57, which was above the consensus expectations for a reading of 3.80 and above the October reading of -11.14.


Thought for the day: Never forget the first rule of life, medicine, and money management: Do no harm...

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...


  • Major Foreign Markets:
    • Australia: +0.05%
    • Shanghai: -0.54%
    • Hong Kong: -1.95%
    • Japan: -0.07%
    • France: -0.72%
    • Germany: -0.64%
    • London: -0.37%


  • Crude Oil Futures: - $1.06 to $87.22
  • Gold: - $18.50 to $1386.90
  • Dollar: lower against the Yen, higher vs. Euro and Pound
  • 10-Year Bond Yield: Currently trading lower at 3.438%


  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -3.90
    • Dow Jones Industrial Average: -23
    • NASDAQ Composite: -3.80


Wall Street Research Summary


  • Onyx Pharmaceuticals (NASDAQ:ONXX) - BofA/Merrill
  • Hertz Global (NYSE:HTZ) - Barclays
  • McKesson (NYSE:MCK) - Bernstein
  • Lincoln National (NYSE:LNC) - Goldman
  • Protective Life (NYSE:PL) - Goldman
  • T Rowe Price (NASDAQ:TROW) - Goldman
  • Janus Capital (NYSE:JNS) - Goldman
  • AmBev (ABV) - JPMorgan
  • Newell Rubbermaid (NYSE:NWL) - Morgan Stanley
  • Visa (NYSE:V) - Mentioned positively at Oppenheimer
  • Ryder Systems (NYSE:R) - RBC Capital
  • Caterpillar (NYSE:CAT) - Target and estimates increased at RBC Capital
  • PNC Bank (NYSE:PNC) - UBS



  • FMC Technologies (NYSE:FTI) - Barclays
  • UDR Inc (NYSE:UDR) - Goldman
  • Torchmark Corp (NYSE:TMK) - Goldman
  • Eaton Vance (NYSE:EV) - Goldman
  • SunTrust Banks (NYSE:STI) - Janney Capital
  • BB&T Corp (NYSE:BBT) - Janney Capital
  • Best Buy (NYSE:BBY) - Oppenheimer
  • JB Hunt Transport (NASDAQ:JBHT) - Stifel Nicolaus
  • Pacer International (NASDAQ:PACR) - Stifel Nicolaus
  • Stryker (NYSE:SYK) - UBS


    Long positions in stocks mentioned: none

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