The battle lines: lots of underinvested institutions vs mounting inflation fears
Steve Cook on Disciplined Investing

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Economics

   This Week’s Data

    The US April trade deficit rose to $29.2 billion versus expectations of $29.0 billion.

    The May US budget deficit came in at $189.5 billion versus estimates of $180 billion and April’s deficit of $165.9 billion.
    http://www.economist.com/world/unitedstates/displayStory.cfm?story_id=13812470&source=features_box1

   Other

    Obama’s phony jobs claims:
    http://online.wsj.com/article/SB124451592762396883.html

    Art Laffer on monetary policy:
    http://online.wsj.com/article/SB124458888993599879.html

    More on the looming problems in commercial real estate:
    http://www.ritholtz.com/blog/2009/06/io-mortgages-hit-commercial-real-estate/

    Though some relief is possible:
    http://www.calculatedriskblog.com/2009/06/wsj-relief-for-cre-debt.html

    And it may not be over in the residential real estate market:
    http://www.calculatedriskblog.com/2009/06/realtytrac-foreclosure-activity-may-hit.html

    The endless bid for oil:
    http://www.nakedcapitalism.com/2009/06/on-endless-bid-for-oil.html

    The latest move in oil prices in perspective (graph):
    http://bespokeinvest.typepad.com/bespoke/2009/06/oil-bull-market-fast-and-furious.html

    Ken Lewis is in Washington today testifying on the Merrill Lynch transaction.  His battle with Bernanke is about to get really ugly:   
    http://www.bloomberg.com/apps/news?pid=20601110&sid=a5A4F5W_PygQ
   
Politics

  Domestic

The House Democrats give the first version of healthcare:
http://thehill.com/leading-the-news/house-dems-show-caucus-first-draft-of-health-reform-bill-2009-06-09.html

    And ‘cap and trade’:
    http://gregmankiw.blogspot.com/2009/06/cap-and-trade-looks-worse-and-worse.html

  International War Against Radical Islam

The Market
    
    Technical

    The indices (DJIA 8739, S&P 939) closed once again between the rising up trend off their March lows (8559, 930) and their January high resistance level (9078, 947); although clearly it won’t be long before the S&P will challenge and break one of these two competing trend lines. 

   Fundamental
  
      Headlines:

(1)    see Treasury budget deficit above.  This incites rising concern about the      inflationary impact of out of control government spending.

(2)    the Treasury brought its 10 year note offering and it didn’t go well.  Why? Concerns about inflation.  [two asides: {a} the Treasury is auctioning its 30 year bonds today--watch how that goes, {b} the Russian government said that it would no longer buy US Treasuries]

(3)    see mortgage applications above.  They are down because interest rates are up.

(4)    Oil prices broke above the $70 resistance level.  Why”  Concerns about inflation

Do you see the pattern here?  Big deficit, higher interest rates, lower activity in housing (a very interest sensitive industry), higher inflationary expectations.

(5)    the Treasury announced a compensation czar that will oversee the salaries of the 100 executives of those companies that have received TARP funds.    Congress is also starting to flex its muscles in this arena.

(6)    the Fed released its latest beige book in which it said (a) overall demand remains weak, (b) downward pressure continues on wages and prices, (c) 5 of 12 districts did show some moderation in the rate of economic decline [that means 7 didn’t], (d) housing has improved in some districts due primarily to declining interest rates.  In sum, growth is weak and inflationary pressures non existent. [see (1) thru (4) above--Houston we have cognitive dissonance].
http://www.calculatedriskblog.com/2009/06/feds-beige-book-econditions-remained.html

Frankly, I am surprised that all the above wasn’t enough to push stock prices dramatically lower; and while equities did close down on the day, it was not by much.  Most of traders I talk to continue to point at the huge cash reserves still on the side lines and the increasingly nervous portfolio managers that are anxious about being underinvested as the primary reason.

It is probably not a stretch to speculate that the fundamental basis behind the dual  technical trends that I have been dwelling on for the last couple of weeks are institutional investors panicking into stocks (the March low to present uptrend) and the falling dollar, rising interest rates and oil prices (January resistance level).  It doesn’t tell me which way the Market will break; but it tells me to watch how the Market reacts to certain news events.





Posted 06-11-2009 7:47 AM by Steve Cook