Monday, December 7, 2009

Bernanke's Remarks Quite Revealing of Future Fed Policy

Federal Reserve Chairman Ben Bernanke reiterated previous comments and provided even more clues to future policy for the nation's central bank. Throughout his prepared remarks to the Economic Club of Washington, Bernanke hinted at a tightening of policy in the future, though he was resolute in never using qualifies such as "near" or "short", keeping any anticipated federal funds rate hike at arm's length, at least. He also mentioned, at various times, that the Fed had other means for reigning in inflation, not limited to rate adjustments, such as repurchasing agreements and liquidation of some assets on the Fed balance sheet.

The improvement in financial conditions this year and the resumption of growth over the summer offer the hope and expectation of continued recovery in the new year. However, significant headwinds remain, including tight credit conditions and a weak job market. The Federal Reserve has been aggressive in its efforts to stabilize our financial system and to support economic activity. At some point, however, we will need to unwind our accommodative policies in order to avoid higher inflation in the future. I am confident we have both the tools and the commitment to make that adjustment when it is needed and in a manner consistent with our mandate to foster employment and price stability.

-- Federal Reserve Chairman Ben Bernanke addressing the Economic Club of Washington

The mopping up of excess liquidity has likely already begun, sufficiently demonstrated by recent moves in currency and commodity markets. On the first day of trading for the week, gold was hard hit early in the day while stocks held onto fractional gains all morning. Following Bernanke's remarks, the markets began to unwind, falling off their highs (up more than 50 on the Dow) to register in the negative as the day ensued.

Gold and silver managed to pare losses, and while the US Dollar was lower against most currencies, it was not by very much as the Euro continued a strong run against the greenback. Stocks continued to struggle along, as they have over the past three sessions. The indices put in hard triple tops on December 2, 3 and 4, and those intra-day high levels have been, and will continue to be, difficult levels to overcome.

Contributing to the weakness is a fairly obvious short-term overbought condition of stocks and the coming end of the calendar year. Many professionals have already locked in substantial gains prior to the month (indeed, many fund managers were through at the end of October) and trading volumes have been thin. Profit taking seems more the order of the day than actual search for value or the staking out of new positions.

Dow 10,390.11, +1.21 (0.01%)
NASDAQ 2,189.61, -4.74 (0.22%)
S&P 500 1,103.25, -2.73 (0.25%)
NYSE Composite 7,155.73, -26.98 (0.38%)

Simple indicators were slightly skewed to a positive bias, with advancing issues outperforming decliners, 3380-3103. New highs finished ahead of new lows, 352-49. Volume was at the low end of the recent range, and, in fact, among the lowest trading volume of the past two months, another sign that overall market participation is on the wane. Similar conditions are being reported on options exchanges.

NYSE Volume 4,780,842,500
NASDAQ Volume 1,894,192,500

Commodities continue to slide, with oil down to 2 1/2 month lows, down $1.54, to $73.93. Gold, which was down as much as $29 during the day, fell $5.50, to $1,164.00. Silver was down 14 cents to $18.38, though, like gold, losses were far greater earlier in the session.

Most of the indications currently in play are calling for nothing greater than sideways trade, which, by itself, puts pressure on the downside. With the general consensus that the markets are tired and trading slow, the potential for some spillage is evident. If the current short-term climb in the dollar continues, spurred along either by better US economic news or a flight to currency safety, the bet for stocks is presently neutral to lower. Chasing performance at these elevated levels goes against the most fundamental tenet of investing: buy low, sell high.

It's obvious that the professional traders are, or already have been, selling.

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