July 20, 2009
July 20, 2009 by admin
The month of July has been great for stocks. The march up to the 9000 point level is fast approach as investors are gaining confidence by the day. Stocks surged again on Monday as the dow finished at 8848. The market started the morning on a positive note as CIT, one of the nations largest mid market lenders announced that they were able to successfully renegotiate three billion dollars of financing with their leading bond holders. The companies fate has been greatly debated, as recently as last week their was sentiment that the company would be forced to file for bankruptcy after the government announced that they would not be offering a direct financial bail out.
This week will be light on key economic reports, but the market will gain insight from Ben Bernanke and the FOMC as to the health of the U.S. economy. The Fed is likely to continue a status quo pattern and with oil prices trading in a pretty consistent pattern this summer, the threat of any inflationary pressure in the market is all but non existent. The fed is likely to be under pressure from key members in the government who want to know what the exit plan is for all of the debt that is being accumulated. The likelihood that the housing market will find its bottom in 2009 is no longer a reality. The number of home foreclosures and declining home values will continue to pressure housing, which is feeling added pressure by the job market. The Feds ever growing balance sheet is the main concern of the government and investors. The ability to continue to finance future projects and the current debt levels will become more difficult without the Fed putting an exit plan into place.
The market that is most effected by the Fed’s actions and policies is the bond market. Earlier this year, as concerns over the Fed’s balance sheet became more apparent, investors in the bond market began to require higher yields, quickly driving long term rates up by almost one full percent. The Fed was instrumental in helping to drive down long term rates earlier in the year when the committed to supporting the mortgage backed bond market to the tune of five hundred billion dollars. The Fed is not likely to move in this direction again, even if the housing market is slow to rebound. Its more likely the government is now hoping that the free market system will bring more balanced pricing into the marketplace and as investors take money out of cash positions, both the equity market and bond market could benefit. The key action the Fed will likely move forward with is language indicating a timetable to begin raising short term rates (late 2010 at the earliest) and reducing their balance sheet by bringing more private investors back into the market. The run up with stocks over the last two weeks has pushed long term mortgage rates slightly higher (mid 5.5% range for thirty year loan terms) as the ten year bond is now approaching the 3.7% level (closing at 3.61% on Monday).