Wednesday, June 24, 2009

Fed Comments Don't Help

As expected, the FOMC of the Federal Reserve left interest rates alone, but, in the press release accompanying the non-event said that economic conditions had improved slightly since April, though the Fed's policy statement was peppered with pejoratives and qualifiers, lending to an overall uneasy feeling on Wall Street.

Possibly the most annoying part of the release was the comment on commodities and inflation: "The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time."

At least the Fed is being honest about future prospects, but, on Wall Street as well as on Main Street, no inflation means no or a slow recovery. Collapsing pricing power means that business will have to deal with margins as they are, or lower, and sales volume also at or close to current levels. Overall, it's a picture of stagnation, though not as bad as conditions might have been six months ago.

After the 2:15 announcement, stocks gyrated in both directions briefly before taking a slight nose-dive. Especially hard hit was the Dow, which had been sporting solid gains, but ended up as the only major index in the red. All of the other indices finished the session off their highs, though only marginally.

What did boost the market was the positive reading on durable goods orders, which spiked to a gain of 1.8% in May, the second straight gain of that size, lending some credence to the bottom of the recession having already passed. Naturally, there are skeptics still, and even more who wonder whether the gains of recent months hadn't already priced in such positive developments. After watching the economy write while the market soared, investors may be facing a complete reversal of fortune: watching stocks slip as the economy actually improves.

Dow 8,299.86, -23.05 (0.28%)
NASDAQ 1,792.34. +27.42 (1.55%)
S&P 500 900.94, +5.84 (0.65%)
NYSE Composite 5,795.72, +36.23 (0.63%)

Advancing issues far outpaced decliners, 4251-2184, but new lows finished ahead of new highs for the ninth straight session, 67-50. Volume was roughly the same as yesterday, due primarily to the Fed announcement. Without that catalyst, it would have been one of the slowest sessions of the year.

NYSE Volume 1,101,553,000
NASDAQ Volume 2,171,782,000

Crude oil slipped on gasoline supply data, down 57 cents, to $68.67, a positive sign for motorists, as gas prices are almost certain to decline after the July 4 weekend. Gold posted a gain of $10.10, to $934.40. Silver added 7 cents, closing at $13.94 the ounce. The metals remain in no-man's land, stuck between interim lows and all-time highs reached last year. There's some doubt about gold and silver entering the picture of late. Failing to retest the highs may signal a breakdown and turn from the 7-year bull market. If that's the case, it presents an incredible buying opportunity, as the price of both gold and silver should rise significantly once the world economies are back on track.

When that is going to happen, however, is anybody's guess. Even the Fed is now couching its comments, and if they don't know, who does? Best guess at this point is that recovery occurs some time next year, but is relatively weak. GDP growth may not exceed 3% until late 2011 or later.

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