Fed Chairman Ben Bernanke was before the House Budget Committee on Tuesday. This was a perfect opportunity for pre-election grandstanding by a few House members. Some questions took all of the time allotted, and weren’t really questions, but speeches. It is what they do. What our congressional leaders don’t do was the main topic of conversation, dealing with the growing budget deficit. Senators and Representatives love to ask Bernanke if the US can keep piling up deficits without paying for them forever, knowing full well that the response is simply “no”. "Unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth." However, now is not the time to cut spending or raise taxes, according to Bernanke. The recovery faces “significant restraints”, specifically focusing on the recovery in housing and employment. The question is, what is his expectation when he says the economic recovery “appears to be on track to continue to expand”. He’s looking for inflation to remain under wraps, consumer spending to increase at a moderate pace, and business investment to trend upward. In the meantime, restoring the 8.5 million jobs lost due to the financial crisis and aftermath will take “a significant amount of time”. He usually talks about a slow steady climb through 2011, so he is not expecting to see a significant increase in the pace of the jobs recovery for another year and a half. Don’t forget, Bernanke said that rates would stay low until the economy and jobs are on a sustainable track, and it looks as though we should expect low rates for quite some time.
There continues to be a lack of significant economic news, but there were a few interesting items. MBA reported that Mortgage Applications fell 12.2% for the week of June 4th. The prior week was up 0.9%. This is one of the earliest economic reports that will track the drop in buy interest post the government’s expiration of a tax credit to new home buyers. It might have been a bit of a cliff dive off the recent pace, but in the early weeks, one should expect to see buy interest grind to a halt. Anyone with an inkling of purchasing a home had a great incentive to act early. With that incentive now gone, one should look for the housing data that postdates the stimulus to be very week. Wholesale Inventories for April rose just 0.4%, a gain of 0.5% was anticipated. March was revised to a gain of 0.7% from 0.4%. More recent data suggest a narrower build in inventories, or even a drawdown in May, as companies expect to see seasonal and confidence related weakness in the third quarter.
One positive rally was in crude. The Department of Energy released its weekly inventory report. Crude inventories fell 1.829 million barrels. The prior week was down a like amount, off 1.9 million barrels. Expectations were for a much smaller dip of 900,000 barrels, sending crude higher by nearly 3%. Gasoline inventories were off just 8,000 barrels after plunging by 2.64 million barrels the prior week. Expectations were for a decline of more, a drop of 500,000 barrels. However, refinery utilization surged by 1.6% to get us back up to 89.1%. This was a positive surprise, as refiners capitalized on the lower price of crude, previously huge inventories, and stockpiling for the summer driving season. Distillate inventories were up by 500,000, shy of the 1.8 million barrel build anticipated. What would have otherwise been good news for the Oil and Gas stocks, was not enough to overcome the negatives associated with the British Petroleum BP (-15.8%) oil spill. The more angry the “constituents”, the stronger the rhetoric grows against BP and the industry. The stock plunged further, now having lost half of its value since Deepwater Horizon sank. Politicians are calling for the company to suspend its dividend and that the White House expand BP’s exposure to claims for lost income for 6 months to a year after the spill. As investors questioned the company’s ability to fight the flood of anger, the viability of the company as an ongoing concern is also in question.
Bernanke’s comments inspired a solid rally, but it faded as we pushed into the afternoon trading. One reason may have been that the Beige Book report from the 12 Federal districts was less optimistic than some had hoped. There was concern about the European debt crisis and what it might mean for US financial institutions and for business conditions. Districts in the South reported cancellations due to the oil spill. Labor markets were said to have “improved slightly”. Consumer spending was focused on “necessities”. Credit is still being viewed as “tight” and “limiting expenditures”. Loans to businesses remained weak. Overall, the details did not seem to draw the same conclusion in investors’ minds as it did for the Fed.
The financial reform deadline is approaching and the push is on to make the bill stronger, not watered down like Wall Street would like. That proved to be a drag on Financials yesterday. If the BP spill allows the government to extend the moratorium on drilling, it will hurt the Energy sector. It sure did yesterday. Finally, the Euro had been in a slow climb throughout the European trading, pushing to 1.2075, but then faded after a flurry on our market’s opening. A weaker Euro did our attempt at a rally no favors. It sounded like the analysts were blaming the Euro for the late-day selloff. Perhaps even the S & P rebalancing, which required selling the index to buy Citigroup C (+1.4%) and Invesco IVZ (-1.1%) put pressure on the index. The market remains easily swayed, but we still like the turn and are looking forward to some follow-through action within a week.
Fed Chairman Ben Bernanke was before the House Budget Committee on Tuesday. This was a perfect opportunity for pre-election grandstanding by a few House members. Some questions took all of the time allotted, and weren’t really questions, but speeches. It is what they do. What our congressional leaders don’t do was the main topic of conversation, dealing with the growing budget deficit. Senators and Representatives love to ask Bernanke if the US can keep piling up deficits without paying for them forever, knowing full well that the response is simply “no”. "Unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth." However, now is not the time to cut spending or raise taxes, according to Bernanke. The recovery faces “significant restraints”, specifically focusing on the recovery in housing and employment. The question is, what is his expectation when he says the economic recovery “appears to be on track to continue to expand”. He’s looking for inflation to remain under wraps, consumer spending to increase at a moderate pace, and business investment to trend upward. In the meantime, restoring the 8.5 million jobs lost due to the financial crisis and aftermath will take “a significant amount of time”. He usually talks about a slow steady climb through 2011, so he is not expecting to see a significant increase in the pace of the jobs recovery for another year and a half. Don’t forget, Bernanke said that rates would stay low until the economy and jobs are on a sustainable track, and it looks as though we should expect low rates for quite some time.
There continues to be a lack of significant economic news, but there were a few interesting items. MBA reported that Mortgage Applications fell 12.2% for the week of June 4th. The prior week was up 0.9%. This is one of the earliest economic reports that will track the drop in buy interest post the government’s expiration of a tax credit to new home buyers. It might have been a bit of a cliff dive off the recent pace, but in the early weeks, one should expect to see buy interest grind to a halt. Anyone with an inkling of purchasing a home had a great incentive to act early. With that incentive now gone, one should look for the housing data that postdates the stimulus to be very week. Wholesale Inventories for April rose just 0.4%, a gain of 0.5% was anticipated. March was revised to a gain of 0.7% from 0.4%. More recent data suggest a narrower build in inventories, or even a drawdown in May, as companies expect to see seasonal and confidence related weakness in the third quarter.
One positive rally was in crude. The Department of Energy released its weekly inventory report. Crude inventories fell 1.829 million barrels. The prior week was down a like amount, off 1.9 million barrels. Expectations were for a much smaller dip of 900,000 barrels, sending crude higher by nearly 3%. Gasoline inventories were off just 8,000 barrels after plunging by 2.64 million barrels the prior week. Expectations were for a decline of more, a drop of 500,000 barrels. However, refinery utilization surged by 1.6% to get us back up to 89.1%. This was a positive surprise, as refiners capitalized on the lower price of crude, previously huge inventories, and stockpiling for the summer driving season. Distillate inventories were up by 500,000, shy of the 1.8 million barrel build anticipated. What would have otherwise been good news for the Oil and Gas stocks, was not enough to overcome the negatives associated with the British Petroleum BP (-15.8%) oil spill. The more angry the “constituents”, the stronger the rhetoric grows against BP and the industry. The stock plunged further, now having lost half of its value since Deepwater Horizon sank. Politicians are calling for the company to suspend its dividend and that the White House expand BP’s exposure to claims for lost income for 6 months to a year after the spill. As investors questioned the company’s ability to fight the flood of anger, the viability of the company as an ongoing concern is also in question.
Bernanke’s comments inspired a solid rally, but it faded as we pushed into the afternoon trading. One reason may have been that the Beige Book report from the 12 Federal districts was less optimistic than some had hoped. There was concern about the European debt crisis and what it might mean for US financial institutions and for business conditions. Districts in the South reported cancellations due to the oil spill. Labor markets were said to have “improved slightly”. Consumer spending was focused on “necessities”. Credit is still being viewed as “tight” and “limiting expenditures”. Loans to businesses remained weak. Overall, the details did not seem to draw the same conclusion in investors’ minds as it did for the Fed.
The financial reform deadline is approaching and the push is on to make the bill stronger, not watered down like Wall Street would like. That proved to be a drag on Financials yesterday. If the BP spill allows the government to extend the moratorium on drilling, it will hurt the Energy sector. It sure did yesterday. Finally, the Euro had been in a slow climb throughout the European trading, pushing to 1.2075, but then faded after a flurry on our market’s opening. A weaker Euro did our attempt at a rally no favors. It sounded like the analysts were blaming the Euro for the late-day selloff. Perhaps even the S & P rebalancing, which required selling the index to buy Citigroup C (+1.4%) and Invesco IVZ (-1.1%) put pressure on the index. The market remains easily swayed, but we still like the turn and are looking forward to some follow-through action within a week.