Thursday, January 29, 2009

Market Reflections 1/28/2009

The FOMC statement wasn't a surprise but the stock market's rally may well be described that way. The Dow industrials surged 2.5% on reports that the administration is setting up a "bad bank" that will absorb bad debt from financial institutions. Bank shares posted big gains led by Wells Fargo, up 31 percent, Citigroup, up 19 percent, and Bank of America up 14 percent.

The stock market has been rallying all week, gains however that do not reflect strength in underlying earnings. Earnings in fact are proving significantly weaker than expected as weakness spills out far beyond the financial sector. Many are labeling the gains a bear market rally that could crumble on a run of bad economic news, such as for instance a big drop in durable goods orders or a big spike in jobless claims, reports to be issued tomorrow.

The FOMC statement pointed to a major risk that economic recovery may not take hold this year. The Fed said it will do everything it can to help the economy including kicking off a new program, called TALF, that will be aimed at unlocking credit for consumers and small businesses. The Fed said it may also begin buying Treasuries but it didn't commit itself, a fact that pushed money out of the Treasury market with the 3-month yield up 5 basis points at 0.18 percent and the 30-year up 17 basis points at 3.41 percent.

Huge swelling in stocks of crude oil couldn't hurt oil prices which like stock prices have proven resistant to bad news lately. February crude ended up slightly at $42.28 though talk is heavy in the oil market that prices may soon dip back to last month's $32 - $33 low for the now expired January contract. The move in stocks gave accounts confidence to sell gold which ended about $10 lower at an $889 level that is still very close to $900. The dollar ended little changed at $1.3152 against the euro.

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