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The Fed Maintains Status Quo Continuing a Failed Monetary Policy

The Fed Maintains Status Quo Continuing a Failed Monetary Policy
  • Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions.
  • Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.
  • Business spending on equipment and software is rising, while investment in nonresidential structures is still weak.
  • Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.
Fed Policy includes the continuation of QE2, which is the purchase of $600 billion of longer-dated US Treasuries to be completed by the end of the second quarter. We are in the midst of this program, which is failing to bring down US Treasury yields as intended. The yield on the 10-Year US Treasury was at 2.334 on October 8th in anticipation of QE2 then traded as high as 3.568 on December 16th. This keeps the housing market depressed, which is a Fed concern.
Fed Policy has kept the funds rate at 0 to ¼ percent since. December 16, 2008 and expects to maintain that rate for a continued extended period. I have argued for years that the FOMC should never have pushed the funds rate below 3%. Lower rates hurt citizens living on a fixed income, and invites Wall Street speculation. Monetary Policy focuses on creating and popping asset bubbles, which has destroyed consumer confidence and leaves businesses reluctant to create jobs.
New Home Sales rose 17.5% in December to an annual rate of 329,000, but this is skewed by an unexplained 71.9% gain out West. For 2010 as a whole, single-family home sales fell 14.4% to a record low 321,000 units. The Commerce Department began tracking this statistic in 1963. The inventory of new homes is now at the lowest level in more than forty years as home builders cannot obtain the credit needed to meet potential higher demand in 2011. The National Association of Home Builders indicated that the 71.9% rise in sales in the West may have been caused by contracts signed ahead of costly new building codes going into affect in some states this month.
The Mortgage Bankers Association reported that mortgage loan applications decreased 12.9% on a seasonal basis last week. The Refinance Index decreased 15.3% and reached the lowest level since last January. The Purchase Index fell 8.7% the lowest since October, and 20.8% lower year over year.  
Markets Reaction to the Federal Reserve Statement
  • The yield on the 10-Year US Treasury moved higher by about ten basis points to 3.430. So what’s the point of QE2?
  • Comex gold and Nymex crude oil rallied as that extended period of a zero percent funds rate provides Wall Street with a license to speculate.
  • The dollar and US stocks were little changed.
Stocks will peak this week, or will confirm recent highs as a peak over the next few weeks. In Dow terms failing above 12,000 just as the Dow peaked above 14,000 in October 2007.
Stocks remain overvalued fundamentally according to ValuEngine with all 16 sectors overvalued and only 35.1% of all stocks undervalued. This follows last week’s ValuEngine Valuation Warning last week, which will renew if less than 35% of stocks are undervalued.
All major averages are extremely overbought on there weekly charts and my Proprietary Analytics show weekly risky levels at 12,162 Dow, 1333.9 S&P 500, 2805 NASDAQ, 5321 Dow Transports, and 828.86 Russell 2000. There is an 85% chance that the Dow will decline to my annual pivot at 11,491 at some point in 2011.
10-Year Note – (3.422) The yield continues to trade in a range set in December – Between 3.568 on December 16th and 3.247 set on December 20th. Today’s pivot is 3.454.
Comex Gold – ($1345.9) Gold shows daily and semiannual value levels at $1325.1 and $1300.6 with quarterly and annual pivots at $1331.3 and $1356.5. Gold is trending below its 50-day simple moving average now at $1377.9.
Nymex Crude Oil ($87.57) Crude oil is now trending below its 50-day simple moving average at $88.00 with the 200-day at $80.48. My semiannual pivot remains at $87.52.
The Euro – (1.3710) This week’s value level is 1.3398 with chart resistance at 1.3786 as the euro becomes overbought on its daily chart.
Daily Dow - (11,985) The daily chart is overbought after setting a new high for the move at 12,020.52 on Wednesday. Daily and weekly risky levels are 12,062 and12,162. My annual value level remains at 11,491.
That’s today’s Four in Four. Have a great day.
Richard Suttmeier
Chief Market Strategist, (800) 381-5576
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