Closer to bottom

This past week, economic news was positive for manufacturing and for the consumer but mixed for housing. Overall, the worst of the recession is clearly behind us and the end of the recession appears to be getting closer.

HEADLINE NEWS WEEK ENDING 6/26/09

Overview
The Federal Reserve left its key policy rate unchanged in a range between 0.0% to 0.25% at the conclusion of its June policy meeting. more...http://payden.com/library/weeklyMarketUpdateE.aspx

U.S. MARKETS
Treasury/Economics
In a week dominated by new Treasury supply in 2, 5 and 7 year maturities, Treasuries were able to rally on the back of high demand from investors for those bonds and 10 year yields trading briefly at 3.50% by the end of the week. more...
http://payden.com/library/weeklyMarketUpdateE.aspx
Large-Cap Equities
The stock market recovered from an early week pull-back to end the week only modestly lower. Higher metal prices and better than expected corporate earnings reports tempered mixed economic data. more...http://payden.com/library/weeklyMarketUpdateE.aspx

Corporate Bonds
Investment grade primary activity was fairly active prior to FOMC’s announcement on Wednesday. The marquee issuer this week was global pharmaceutical company Merck, who brought a $4.25 billion deal across the entire curve to fund their Schering-Plough merger. more...http://payden.com/library/weeklyMarketUpdateE.aspx

Mortgage-Backed Securities
Mortgages kept pace with the Treasury rally in a low volume, summer week. Mortgage originations were readily digested by steady Federal Reserve and domestic bank buying. more...
http://payden.com/library/weeklyMarketUpdateE.aspx
Municipal Bonds
While this week’s municipal bond market action was highlighted by the Fitch downgrade of California’s $60 billion in general obligation (GO) bond debt, the broad municipal bond market was strong on the week. more...http://payden.com/library/weeklyMarketUpdateE.aspx

High-Yield
High yield was a bit softer again this week as we saw spreads to treasuries move approximately 35 bps wider going into Friday. more...

INTERNATIONAL MARKETS
Western European Equities
European stocks went down this week. The sectors with the worst performance were oil & gas (-4.1%) and health care (-3.4%). more...http://payden.com/library/weeklyMarketUpdateE.aspx

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) lost -2.6% this week, while the Russian stock index RTS went down -5.5%. more...http://payden.com/library/weeklyMarketUpdateE.aspx

Global Bonds and Currencies
The major non-US government bond markets rallied for the third consecutive week as investors reassessed the likelihood and timing of potential hikes in official interest rates, and as riskier asset classes continued to stall. more...http://payden.com/library/weeklyMarketUpdateE.aspx

Emerging-Market Bonds
The major non-US government bond markets rallied for the third consecutive week as investors reassessed the likelihood and timing of potential hikes in official interest rates, and as riskier asset classes continued to stall. more...http://payden.com/library/weeklyMarketUpdateE.aspx

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Market Reflections 6/25/2009

Ben Bernanke was in the hot seat Thursday, defending the handling of Bank of America's acquisition of Merrill Lynch and denying that he threatened to oust the bank's board if they didn't go through with the deal. The Fed itself made news, extending special lending facilities and reminding the financial markets that conditions "remain impaired." Economic data included disappointing increases in the number of unemployed filing claims, results that suggest the June jobs report won't show the same degree of improvement as the May report.

The day's big event was an enormously strong 7-year Treasury auction that followed enormously strong 2- and 5-year auctions earlier in the week and left some wondering whether central bank buying is involved. The 7-year yield ended at 3.19 percent -- 14 basis points below the auction's high yield! Stocks may be getting a boost from quarter-end window dressing (money managers who don't want to look like they missed the big rally). The S&P gained 2.1 percent to end just above 920.

Market Reflections 6/24/2009

No changes in securities purchases made for disappointment in the financial markets where hopes were high for a dovish FOMC statement. The statement wasn't hawkish either, saying continued monetary stimulus is needed and that the risk of inflation is low. But between the lines, traders say the statement points to less direct buying ahead, buying that last month helped pull long rates to record lows.

Demand for Treasuries eased on the statement, pushing up the 10-year yield by 7 basis points to 3.69 percent. The move in Treasury yields drew funds to the dollar which jumped 0.9 percent on the dollar index to 80.58. The jump in the dollar made for late weakness in commodities including oil which lost about $1 to end at $68.50. Stocks held onto gains with the S&P ending 0.7 percent higher to just under 901. Gold showed little reaction, ending just over $930.

New Home Sales Disappoint

Updated: 24-Jun-09 10:21 ET

New home sales in May were at a seasonally adjusted annual rate of 342,000. That was down -0.6% from the April level, which was revised lower to 344,000 from an originally reported 352,000. It was also down -32.8% from May 2008.

Market Reflections 6/23/2009

Existing home sales improved for a second straight month, raising talk that the housing sector may finally be at the bottom. But the news didn't lift spirits which remain flat following yesterday's downbeat assessment by the World Bank. Boeing added its own bad news to the mix, once again pushing back the first flight of the 787. Boeing shares flopped, down 6% at just under $44. The S&P 500 was fractionally higher at just over 895.

Talk that tomorrow's FOMC statement will stress the need for future stimulus, not the need to remove it, pulled the dollar index down 1.2 percent to just under 80.00. The dip increased demand for commodities which regained some of yesterday's losses with oil ending $2-1/2 higher at $69.50. Money moved into Treasuries especially following a very strong auction of 2-year notes. The 2-year yield ended at 1.10 percent -- 5 basis points lower than the auction's high yield and 8 basis points from the 1:00 bid.

Quotable

“Vision without action is a daydream. Action with without vision is a nightmare.”
Japanese Proverb

Mutual Funds match Hedge Funds

from Barrons. Hedge funds may be no better than mutual funds, after all IN THE WORLD OF HIGH FINANCE, EQUITY-MUTUAL-FUND managers have the reputation of being plain-vanilla, plodding and, well, dull investors, while their hedge-fund cousins have enjoyed the image of highflying, swashbuckling marauders. It is boring "buy and hold" versus higher-turnover, more active and opaque hedging strategies. But guess what? A new study led by Prof. John Griffin of the department of finance at the University of Texas at Austin raises serious questions about the perceived superior skills of hedge-fund managers. He was "a little bit surprised" by the findings. "I expected more hedge-fund outperformance," he says, especially since mutual-fund managers charge an average 1% of assets while hedgies charge 1% to 2% of assets and take 20% of the profit. Using a sample of 300 hedge-fund firms and much of the mutual-fund universe, Griffin compared the performance of the funds' equity positions based on their filings with the Securities and Exchange Commission, both against each other and passive benchmarks. Individual hedge funds aren't required to report their positions, but their holding companies are. Previous studies have focused on reported returns, but they didn't take into account the possibility of hedgies' "smoothing" their results. A hedgie, for example, might match a 5% gain by the market in one month, yet report just a 2.5% gain -- hoarding the extra for the following month, when the broad market loses 2%, as does his fund. That month he can claim a 0.5% gain. The 0.5% gain is called alpha, the excess return a hedge fund provides over the performance of the broad market with the same risk. But it is phony alpha. A hedge fund, however, can't cook the performance of stocks in its portfolios. That is why Griffin believes his study merits attention. He found that hedge funds did better than mutual funds at picking stocks, but the gain over the average mutual-fund return was just 1.32% per year. That's before fees! Griffin also found that "hedge funds exhibit no ability to time sectors or pick better stock styles" than mutual funds. "Surprisingly," he says, his group found only weak evidence that the stars in the hedge-fund world produce greater returns than the hedgies of the hoi polloi. The lesson for potential hedge-fund investors: Don't make an alpha bet.

Market Reflections 6/22/2009

It was supposed to be a quiet day—no major economic indicators were out in the U.S. But the World Bank announced that it believed the world recession will be deeper than previously forecast. This sent equities and commodities into a tailspin while flight to safety boosted Treasuries significantly. The Dow and S&P dropped 2.4 percent and 3.1 percent, respectively. Techs, small caps, and mid-caps pulled down the overall equity market even more sharply as the Wilshire 5000 declined 3.2 percent for the day.

Treasury yields fell with the 2-year note and 10-year note decreasing 7 basis points and 9 basis points to 1.14 percent and 3.69 percent, respectively. The dollar generally firmed, up about a cent against the euro at 1.3861 and up about 1-1/2 cents against the pound sterling at 1.6347. Commodities fell sharply with oil ending at $66.93, down $2.62.

Quotable

“A few years from now, strange as it may sound, we might all find that we are hungry for more capitalism, not less. An economic crisis slows growth, and when countries need growth, they turn to markets. After the Mexican and East Asian currency crises—which were far more painful in those countries than the current downturn has been in America—we saw the pace of market-oriented reform speed up. If, in the years ahead, the American consumer remains reluctant to spend, if federal and state governments groan under their debt loads, if government-owned companies remain expensive burdens, then private-sector activity will become the only path to create jobs. The simple truth is that with all its flaws, capitalism remains the most productive economic engine we have yet invented. Like Churchill's line about democracy, it is the worst of all economic systems, except for the others. Its chief vindication today has come halfway across the world, in countries like China and India, which have been able to grow and pull hundreds of millions of people out of poverty by supporting markets and free trade. Last month India held elections during the worst of this crisis. Its powerful left-wing parties campaigned against liberalization and got their worst drubbing at the polls in 40 years.”
Fareed Zakaria