Insights

The Fed Presidents and The G20 Clear the Way

Low interest rates may percolate some future inflation for us, but one other thing they bring is higher asset prices.  This Week on Wall Street saw gold trade a new all time high and all three major indexes, the Dow Jones Industrial Average, the S&P 500 and the Nasdaq 100, traded new 2009 highs.  On the week, gold gained 1.96% even while the  dollar gained ground slightly and on Friday news out of Vietnam was that they were lifting restrictions on import of the precious metal.  The Nasdaq 100 was the strongest index of the week gaining 3.34% with the Dow Jones Industrial Average up 2.46% and the S$&P 500 turning in a 2.26% performance.  The loser of the week was oil as weak economic reports for the U.S. tempered expected demand.

On Saturday the G20 met with the world’s central bankers agreeing to keep the mountains of economic stimulus in place, meaning low interest rates had clear sailing ahead.  This agreement powered stocks higher Monday with the Nasdaq and the Dow steaming ahead and setting 2009 highs, while the S&P 500 closed just 4 points short of its high.

On Tuesday microphones were turned on all over the country for the regional Fed Presidents.  Janet Yellen (San Francisco), Dennis Lockhart (Atlanta), Jeffrey Lacker (Richmond) and Richard Fisher (Dallas) all spoke to different venues opining that they saw, among other things, a jobless recovery and low interest rates ahead.  With the official unemployment rate at 10.2% and rising, there is a lot of pressure from both Washington D.C. and across the United States to keep interest rates low for job creation.  Telling the carry trade cowboys that interest rates are staying low is like sounding the all clear bell for shorting the dollar and buying ‘risky assets’.  When you can short the dollar at 0-0.25% and take that money to buy stocks and commodities the ‘free money’ bell goes off in these players heads and the buying starts.

Wednesday started with a bang in the gold market as Goldman upped their estimates for the precious metal to $1,200 citing their observation that the world’s central banks are becoming net buyers of gold.  China reported that their industrial production jumped 16% and the Chinese Government seems to be signaling a willingness to appreciate their currency.  This seems to be very generous of the Chinese as an appreciation of their currency means that the trillion dollar plus they are holding of the dollar is worth relatively less, but it is just good business.

It seems the Chinese have finally realized it is not all about building foreign reserves and holding dollars, but that if they have all that dollar money tied up there, it is not flowing around over here.  By appreciating the yuan and making U.S. products cheaper in China, we can export more which creates jobs here.  This causes dollars to flow back to the United States strengthening the dollar itself, jobs are created and the greatest consumers of Chinese goods get back to work.  It is called ‘international trade’ as trade means back and forth, and the imbalance that was dollars heading there and goods here is unsustainable.  Sooner or later the correcting mechanism of currency valuation is supposed to kick in and shift the flow of goods so that imbalances are corrected.  The long time pegging of the yuan to the dollar has distorted the trade balance, sucking our jobs and dollars to China.  Good business, long term sustainable business, means it is time to reverse this flow.  No good businessman puts his customers out of business and the Chinese are starting to recognize this.

Thursday saw a settlement between Intel Corp. (NSDQ: INTC) and Advanced Micro Devices (NYSE: AMD) bury the legal hatchet and strike up a cross-licensing deal.  This gives AMD $1.25 billion to lighten their debt load and might get regulators off Intel’s back.  Wal-Mart Stores Inc. (NYSE: WMT) posted strong earnings but warned about the purchasing patterns they see with their customers in front of the holiday buying season.

Friday was a day all about gold and retail, with two IPOs (Dollar General and Rue 21) and earnings beats posted by J.C. Penney (NYSE: JCP) and Abercrombie & Fitch (NYSE: ANF).  New York Spot Gold traded a record $1,120.30 an ounce as the dollar traded off its intra-week spike high.  Merrill Lynch upped their estimates for copper for 2010 and 2011, making the mining sector, especially the gold miners with significant copper operations, very attractive.

On Thursday after the close Walt Disney Co. (NYSE: DIS), a Dow Jones Industrial component, posted 46 cents a share which was a surprising jump in quarterly profit of 18%.  This performance pushed Disney to a 2009 high with the week closing out at 2009 highs for the indexes and many other stocks.

The index numbers are looking a lot healthier with the Dow Jones Industrial Average 2.7% above five digit 10,000 and the S&P 500 in shouting distance of 1,100.  A solid week next weak could see the Nasdaq 100 pushing 2,000 as the tech market continues its strong march higher.

For those holding gold and other commodities, the dollar weakness and the carry trade are supercharging returns.  As market players, Fed Presidents, politicians and central bankers argue about economic policy and whether or not Fed Chairman Bernanke should raise rates, the numbers in peoples stock accounts are going up.  The inflation boogeyman is hiding on the horizon somewhere and I leave you with this last link to comments by legendary investor Jim Rogers.

Enjoy your weekend.