Fed printing presses push stock prices higher and higher

February 1, 2011

Thursday markets didn't seem to care about Egypt's demonstrations but Friday they reacted violently and then today they focused on the US economy. A couple of years ago this kind of behavior was not unusual but since the Fed began to pump $$ into the stock market last year most participants have profited by staying on the side of Bernanke's team. The last 10 trading days have seen 7 winners and only 3 losers but the S&P is down 0.66% due to Friday's 1.78% decline. Today is the 1st trading day of February and a strong seasonal pattern of rising prices should give us a good indication whether traders have fully discounted events in the Middle East. Most of the recent rise in the US stock market has come from overnight activity and not trading during daytime hours. Today's little know fact: Since 1993 the S&P is up 193% BUT if an investor had bought at the opening price each day and sold at the close the return would be a negative 38%. If the same investor was willing to assume overnight event risk and buy at the close of trading and sell at the next day's open the profit would have been 378%. Those willing to accept a few hours more risk were handsomely rewarded….

The Fed wants banks to extend credit but they are busy trading US stocks

The latest h.8 report from the Fed shows total bank credit at $9.147 trillion (a lot of $$$) but less than the $9.163 trillion level seen in June 2010. Despite the Fed's massive money printing it has been unable to push banks to increase credit especially in real estate where last week loans outstanding fell $33 billion (47% annual rate).   The Fed's QE2 has enabled stocks to rise and unfortunately it has also had a dramatic effect on commodity prices (grains) leading to a worsening situation for those in poorer countries and not being able to afford basic food staples. Ben's team spent $7.72 billion on Monday buying 2.5-4 year Treasury paper but dealers were more than ready offering $4.82 of notes for every $1 bought by the Fed. The Fed should consider sending the newly printed dollars directly to US citizens following the lead of the ruler of Kuwait. He recently ordered the distribution of $4 billion and free food (important) over the next 14 months to all citizens ($3,572 per person) in an effort to quell any uprisings from those lacking food and shelter.

Another reason states and municipalities can't balance budgets

The Boston Globe ran a story yesterday about the fire department and its policy of allowing firefighters to swap shifts with other workers. Nearly 70 of these city employees owe between three months and a year of workdays. The fire chief said he is working to make changes but "it is going to be done in small baby steps." Do you think a private corporation would put up with this? Of course not but when it involves the government it's not about what's right but more about how can we make sure we keep everyone employed without supervisors getting in trouble.

Apartment vacancies falling across the country

Minneapolis apartment rentals are becoming scarce and last year increased 6,400 with vacancies falling from 7.3% of inventory in 2009 to only 3.8% at the end of last year. The best news is rents did NOT increase in the Twin Cities. The Census Bureau reported on Monday the continued fall in the US home ownership rate in the fourth quarter of 2010. The 66.5% rates is the lowest since the fourth quarter of 1998 and down from a peak of 69.2% in the fourth quarter of 2004.  The overall rental vacancy rate fell sharply in the fourth quarter of 2010 (9.4%) after peaking at 11.1% in the third quarter of 2009. Until qualifying for a home loan becomes easier the rental market will continue to tighten taking vacancy rates to between 7-8%.

Refinancing of home loans = cash in

Freddie Mac reported 46% of homeowners who refinanced their first mortgage in the fourth quarter lowered their principal with cash up from 35% in the third quarter. The number represents the highest since Freddie Mac began keeping records in 1985. These borrowers probably paid down their mortgages in order to qualify for the loan with only 16% lucky enough to have excess equity to qualify for a cash out loan.  The total amount of cash out was $32 billion down from the record $318 billion during 2006. The median interest rate was 1.25% lower than in borrower’s original loan.

Before entering any investment, everyone should consult with their own investment professional and discuss the risk of possible loss of capital.